PART
I
Item
1. Business
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 Calabasas, California and, as of December 31, 2020, had the following wholly-owned subsidiaries, which do
not currently have operations: 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 retail outlets close
to our core audience. Our marketing includes digital marketing, print and media advertising, in store product demonstrations,
promotional giveaways, and trade show events. 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 three largest customers which are large global e-commerce and retailers, accounted for approximately
70% of our 2020 net revenue. Our three largest customers accounted for approximately 63% of our 2019 net revenue.
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.
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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2020
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% of
Total
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2019
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% of
Total
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Distribution Channel
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Specialty
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$
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26,643
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41
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%
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$
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35,812
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45
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%
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International
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17,862
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28
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%
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22,691
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28
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%
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FDM
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19,935
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31
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%
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21,164
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27
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%
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Total
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$
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64,440
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100
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%
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$
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79,667
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100
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%
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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
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 48 trademark applications in the United States, 46 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. The “MusclePharm” mark has been granted final trademark registration
effective in 37 countries, including the United States.
Seasonality
Our
business does not typically experience seasonal variations, but revenue may fluctuate based upon promotions.
Employees
As
of December 31, 2020, we had 27 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 4500 Park Granada, Suite 202 Calabasas, CA 91302 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.
Item
1A. Risk Factors
Certain
factors may have a material adverse effect on our business, financial condition and results of operations. You should carefully
consider 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
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:
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price;
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shelf
space and store placement;
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brand
and product recognition;
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new
product introductions; and
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raw
materials.
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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.
We
have a history of losses from operations, there is uncertainty as to when we may become consistently 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.
Although
the Company had a net income of $3.2 million for the year ended December 31, 2020, we have historically incurred significant losses
and experienced negative cash flows. As of December 31, 2020, we had a working capital deficit of $20.1 million, a stockholders’
deficit of $24.4 million and an accumulated deficit of $192.7 million.
As
of December 31, 2020, we had outstanding indebtedness of $11.8 million. For details of our indebtedness, see Note 8 to the accompanying
consolidated financial statements.
As
a result of our history of losses and financial condition, there is doubt about our ability to continue as a going concern. The
ability to continue as a going concern is dependent upon us maintaining profitable operations in the future and/or obtaining the
necessary financing to meet our obligations and repay our liabilities when they come due. On an ongoing basis, management evaluates
strategies to obtain financing required 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:
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make
us more vulnerable to general adverse economic and industry conditions, including effects of the ongoing COVID-19 pandemic;
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limit
our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate
requirements; and
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limit
our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.
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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:
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economic
and demand factors affecting our industry;
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pricing
pressures;
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increased
operating costs;
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competitive
conditions; and
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other
operating difficulties.
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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:
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our
loss of one or more significant customers;
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the
introduction of successful new products by our competitors;
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the
effects of the ongoing COVID-19 pandemic; and
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adverse
media reports on the use or efficacy of nutritional supplements.
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increases
in the price of raw materials
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Because
our business is changing and evolving, our historical operating results may not be useful to you in predicting our future 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.
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.
Financing
Risks
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.
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.
Risks
Related to Our Capital Stock
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 67.2% 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
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, 2020, 33,105,284 shares of our common stock were outstanding, and we did not have any outstanding shares
of preferred stock. As of March 24, 2021, 33,479,886 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
common stock is quoted on the OTC Markets, which may have an unfavorable impact on our stock price and liquidity.
Our
common stock is quoted on the OTC Markets (“OTC”). The OTC is an automated quotation service operated by OTC Markets,
LLC. The quotation of our shares on the OTC 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.
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
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, 2020, 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, 2020, 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.
Market
and Other External Risks
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
2020, our three largest customers accounted for approximately 70% 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 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;
|
|
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●
|
competitively
price our products; and
|
|
|
●
|
develop
new products.
|
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.
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.
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.
In
April 2020, we experienced a slowdown in sales to our retail customers, including our largest customer. While this decline was
primarily offset by growth in our largest online customer, 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.
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.
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.
Item
1B. Unresolved Staff comments
None.
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, 2020, 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 2019, 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 in 2018. As of December 31, 2020, the total amount accrued, including interest, was $1.8 million. In the interim, the
Company filed an appeal and posted bonds in the total amount of $0.6 million in order to stay execution on the judgment pending
appeal. Of the $0.6 million, $0.25 million (including fees) was paid by Mr. Drexler on behalf of the Company. See Note 8 to
the accompanying consolidated financial statements 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
were paid by the Company. The appeal has been fully briefed and is awaiting a decision.
For
both the years ended December 31, 2020 and 2019, interest expense recognized on the awarded damages was $89,000.
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, White Winston 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 White Winston’s request for a preliminary
injunction, finding, among other things, that White Winston did not show a likelihood of success on the merits of the underlying
action and failed to establish irreparable harm. Following the court’s decision, 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. White Winston has appealed that award.
Due
to the uncertainty associated with determining our liability, if any, and due to our inability to ascertain with any reasonable
degree of likelihood, as of the date of this report, the outcome of the trial, the Company has not recorded an estimate for its
potential liability.
On
June 17, 2019, White Winston moved for the appointment of a temporary receiver over MusclePharm, citing Plante Moran’s resignation.
The court granted White Winston’s request to hold an evidentiary hearing on the motion, but subsequently stayed the action
pending the parties’ attempts to resolve their dispute. Although the parties have been unable to reach a resolution, the
litigation has not yet resumed. On July 30, 2019, White Winston filed an action in the Superior Court of the State of California
in and for the County of Los Angeles, seeking access to MusclePharm’s books and records and requesting the appointment of
an independent auditor for the company. On February 25, 2021, the court ordered MusclePharm to produce certain documents, denied
White Winston’s request for an auditor, and ordered MusclePharm to pay a $1,500 penalty.
MusclePharm
is evaluating the court’s order and considering its appellate avenues.
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 ordered the Former
Officers to file status reports regarding progress of their settlement negotiations with the IRS on or before February 28, 2021.
The IRS and the Former Officers filed status reports with the Tax Court on February 26, 2021. After receiving the status reports,
the Tax Court issued an order directing the parties to file further status reports on or before July 9, 2021. The Tax Court has
not set a trial dates in the cases of the Former Officers.
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.
During
the time period of the IRS audit and Appeals Office consideration of the Company’s case, the Company and the IRS signed
a series of consents to extend the statutes of limitations for assessment for both the employment tax and corporation income tax
of the Corporation for 2014. The Company’s records show that the last consents that the Company signed extended the statutes
of limitations for employment tax and corporation income tax for 2014 through and including December 15, 2020. The Company has
no record of any consents being signed by the Company and the IRS extending the statutes of limitations beyond December 15, 2020.
Based on these facts, the Company believes that the statutes of limitations for assessment of additional employment tax and corporation
income tax against the Corporation for 2014 expired on December 15, 2020. The Company does not know whether the IRS agrees with
the Corporation’s statements regarding the current status of the statutes of limitations described herein.
On
August 22, 2018, Richard Estalella filed an action against us and two other defendants in the Colorado District Court for the
County of Denver, seeking damages arising out of the IRS’s assertion of tax liability and penalties relating to the 2014
restricted stock grants. We have answered Estalella’s complaint, asserted counterclaims against Estalella for his failure
to ensure that all withholding taxes were paid in connection with the 2014 restricted stock grants, and filed cross-claims against
two valuation firms named in the action (as well as their principals) for failing to properly value the 2014 restricted stock
grants for tax purposes. Trial in the matter has been scheduled for February 7, 2022. There are no amounts accrued related to
this matter.
The
Company will continue to vigorously litigate the matter.
Item
4. Mine Safety Disclosures
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.
|
Name
|
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Age
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Position
|
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Ryan
Drexler
|
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50
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|
Chief
Executive Officer, President and Chairman of the Board of Directors
|
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Allen
Sciarillo
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56
|
|
Chief
Financial Officer
|
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John
J. Desmond
|
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70
|
|
Director
|
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Michael
Heller
|
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44
|
|
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 OFFICER
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 2019. 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.
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.
MICHAEL
HELLER – DIRECTOR
Michel
Heller joined our Board of Directors as an independent director in January 2021 and is chair of the Compensation Committee, a
member of the Audit Committee and Chair of the Nominating & Corporate Governance Committee. Mr. Heller is Principal of Talent
Resources Holdings since January 2020, a global digital marketing agency recognized as a leader in developing and producing influencer
based social media campaigns, providing holistic marketing solutions to brands and full service, social platform management to
talent and businesses. Mr. Heller was the founder and has been Chief Executive Officer of Talent Resources since January 2005.
Mr. Heller holds a B.A. degree in Gallatin School of Individualized Study from New York University, and a J.D. in Entertainment
Law from the Cardozo School of Law. Because of his significant marketing perspective and experience with expanding brand awareness,
we believe that Mr. Heller is well qualified to serve on our Board of Directors.
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
Heller, 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. Heller. Mr. Bush was a member of the Audit Committee until his resignation
on December 31, 2020. 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 Heller are independent for Audit Committee purposes, as determined under Exchange Act rules. Mr. Desmond
joined the Audit Committee in July 2017; Mr. Heller joined the Audit Committee in January 2021. During 2020, the Audit Committee
held four 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 also produces an annual
report on executive compensation for inclusion in our proxy statement. The Compensation Committee is currently comprised of Mr.
Heller, as chair, and Mr. Desmond, as a member. Mr. Desmond joined the Compensation Committee in July 2017 and Mr. Heller joined
in January 2021. Mr. Bush was the chair of the Compensation Committee until his resignation on December 31, 2020. During 2020,
the Compensation Committee held one meeting.
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. Desmond as a member and Mr. Heller, as
the chair. Mr. Bush was the chair of the Nominating & Corporate Governance Committee until his resignation on December 31,
2020. During 2020, 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, 2020. 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 three individuals served as executive officers, as defined in Rule 3b-7 under the Exchange Act, during
the fiscal year ended December 31, 2020. 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. During the
fiscal year ended December 31, 2020, our NEOs were:
|
|
●
|
Ryan
Drexler – Chief Executive Officer, President and Chairman of the Board of Directors; and
|
|
|
●
|
Allen
Sciarillo – Chief Financial Officer
|
|
|
●
|
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 2020, our named executive officers’ base salaries were as
follows:
|
Name
|
|
2020
Base Salary
|
|
|
Ryan Drexler
|
|
$
|
750,000
|
|
|
Allen Sciarillo
|
|
$
|
200,000
|
|
|
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 2020, 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 2020, Mr. Sciarillo earned a cash bonus of $50,000. 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 2020, none of our named executive officers
were granted equity-based awards.
Employment
Agreements
We
maintained employment agreements with Messrs. Drexler, Sciarillo and 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 $19,000 and limits imposed by applicable law. We do not maintain any other
defined benefit, defined contribution or deferred compensation plans for our employees.
Our
named executive officers are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group
life and disability insurance, in each case on the same basis as other employees, subject to applicable law. We also provide vacation
and other paid holidays to all employees, including our executive officers. In addition, we provide certain highly-compensated
employees, including our named executive officers, with life insurance and supplemental long-term disability coverage. We also
provide certain perquisites, as described and quantified in the Summary Compensation Table below under “All Other Compensation.”
Summary
Compensation Table
The
following summary compensation tables sets forth all compensation awarded to, earned by, or paid to our named executive officers
for 2020 and 2019, in respect of their employment with the Company.
|
Name and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
All
Other
Compensation (4)
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ryan Drexler (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman of the Board,
|
|
2020
|
|
|
|
750,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
984
|
|
|
|
750,984
|
|
|
Chief Executive Officer and President
|
|
2019
|
|
|
|
700,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
600
|
|
|
|
700,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allen Sciarillo (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
2020
|
|
|
|
194,167
|
|
|
|
50,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,501
|
|
|
|
250,668
|
|
|
|
|
2019
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian Casutto (3)
|
|
2020
|
|
|
|
151,587
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
162,384
|
|
|
|
313,971
|
|
|
Executive Vice President of Sales and Operations
|
|
2019
|
|
|
|
400,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
61,000
|
|
|
|
461,000
|
|
|
|
(1)
|
For
information regarding certain transactions between Mr. Drexler and the Company, see Note 8 to the consolidated financial statements
below.
|
|
|
(2)
|
Allen
Sciarillo was appointed to serve as Chief Financial Officer on April 20, 2020.
|
|
|
(3)
|
On
May 1, 2020, Mr. Casutto resigned from all of his current roles with the Company.
|
|
|
(4)
|
Amounts
under All Other Compensation for 2020 include the following:
|
|
|
|
Drexler
|
|
|
Casutto
|
|
|
Sciarillo
|
|
|
Insurance Premiums
|
|
$
|
984
|
|
|
$
|
6,865
|
|
|
$
|
6,501
|
|
|
Relocation Costs
|
|
|
—
|
|
|
|
9,367
|
|
|
|
—
|
|
|
Severance
|
|
|
—
|
|
|
|
100,000
|
|
|
|
—
|
|
|
Accrued Vacation Payout
|
|
|
—
|
|
|
|
46,152
|
|
|
|
—
|
|
|
TOTAL
|
|
$
|
984
|
|
|
$
|
162,384
|
|
|
$
|
6,501
|
|
Amounts
under All Other Compensation for 2019 include the following:
|
|
|
Drexler
|
|
|
Casutto
|
|
|
Automobile Expenses (a)
|
|
$
|
—
|
|
|
$
|
12,000
|
|
|
Housing Costs(b)
|
|
|
—
|
|
|
|
38,500
|
|
|
Insurance Premiums
|
|
|
600
|
|
|
|
10,500
|
|
|
TOTAL
|
|
$
|
600
|
|
|
$
|
61,000
|
|
|
|
(a)
|
We
provided an automobile allowance for 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.
|
|
|
(b)
|
We
paid for temporary 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
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, 2019. 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 for 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. There was
no specified performance goal in 2020. 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 was 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 would 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 $16,667 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, 2020, there were no outstanding equity awards made to our named executive officers.
Director
Compensation
Non-Employee
Director Compensation Arrangements
During
the year ended December 31, 2020, Mr. Bush and Mr. Desmond earned annual cash retainer fees of $140,000 and $100,000, respectively. Our
non-employee directors also received an additional cash payment to compensate them for taxes payable in respect of their restricted share
grants, described below. There were no restricted shares issued to the directors in 2020, however the directors earned an additional
cash fee of $60,000 each, in lieu of equity awards.
All
cash retainers are prorated for partial years of service. We pay annual cash retainer fees to our non-employee directors quarterly. We
also reimburse our non-employee directors for their travel and out of pocket expenses. Members of the Board of Directors who also are
our employees do not receive any compensation for their service as directors. Our directors do not receive Board meeting fees. For 2020,
our non-employee directors received additional cash payments to compensate them for taxes payable in respect of their restricted share
awards.
On
December 31, 2020, William Bush submitted his resignation from the Board of Directors of MusclePharm Corporation and all committees on
which he served, effective the date thereof.
2020
Director Compensation.
The
table below sets forth the compensation paid to each non-employee member of the Board of Directors during the fiscal year ended December
31, 2020. Messrs. Drexler, Sciarillo and Casutto received no additional compensation for their service as a director, and, consequently,
are not included in this table. The compensation received by Messrs. Drexler, Sciarillo and Casutto in respect of their employment is
set forth in the “Summary Compensation Table” above.
|
Name
|
|
Fees Earned
or Paid
in Cash
($)
|
|
|
Stock
Awards(1)
($)
|
|
|
All Other
Compensation(2)
($)
|
|
|
Total
($)
|
|
|
John J. Desmond
|
|
$
|
100,000
|
|
|
$
|
—
|
|
|
$
|
122,402
|
|
|
$
|
222,402
|
|
|
William J. Bush(3)
|
|
|
140,000
|
|
|
|
—
|
|
|
|
141,689
|
|
|
|
281,689
|
|
|
|
(1)
|
There
was no restricted stock unit awarded to directors in 2020. During 2019, Mr. Desmond was awarded 357,143 restricted stock units and
Mr. Bush was awarded 238,095 restricted stock units. 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.
|
|
|
(2)
|
Amounts
under “All Other Compensation” for 2020 include tax gross-up adjustments related to vested restricted stock units and
cash earned in lieu of all equity awards otherwise due.
|
|
|
(3)
|
On
December 31, 2020, William Bush submitted his resignation from the Board of Directors of MusclePharm Corporation and all committees
on which he served, effective the date thereof.
|
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 March 24, 2021.
|
|
|
Shares Beneficially Owned
|
|
|
|
|
Common Stock (1)
|
|
|
Name of Beneficial Owner
|
|
Shares
|
|
|
%
|
|
|
Named Executive Officers:
|
|
|
|
|
|
|
|
|
|
Ryan Drexler(2)
|
|
|
31,002,836
|
|
|
|
67.2
|
%
|
|
Allen Sciarillo
|
|
|
—
|
|
|
|
—
|
|
|
Non-Employee Directors:
|
|
|
|
|
|
|
|
|
|
John J. Desmond(3)
|
|
|
587,357
|
|
|
|
1.8
|
%
|
|
Michael Heller
|
|
|
—
|
|
|
|
—
|
|
|
Officers and Directors as a Group
|
|
|
31,590,193
|
|
|
|
69.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Other Beneficial Owners:
|
|
|
|
|
|
|
|
|
|
Wynnefield Capital (4)
|
|
|
2,111,874
|
|
|
|
6.3
|
%
|
|
Amerop Holdings, Inc. (5)
|
|
|
3,648,355
|
|
|
|
10.9
|
%
|
|
*
|
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 March 24, 2021. 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)
|
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. Percent of total voting power represents
voting power with respect to 33,479,886 shares of common stock outstanding as of March 24, 2021, plus 137,362 options to purchase
common shares as if these options were exercised, plus the 12,486,813 refinanced convertible notes issued to Mr. Drexler on November
29, 2020, as if the notes were converted into shares as of March 24, 2021 (46,104,061 common shares).
|
|
(3)
|
Percent
of total voting power represents voting power with respect to 33,479,886 shares of common stock outstanding as of March 24, 2021.
|
|
|
|
|
(4)
|
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 November 3, 2020 with the SEC.
|
|
|
|
|
(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, 2020:
|
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
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 $18.0 million, 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 $6.0 million 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 $11.0 million 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 $1.0 million 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.
Interest
rate on the $18.0 million Refinanced Convertible Note was 12% per annum, and interest payments were due on the last day of each quarter.
At the Company’s option (as determined by its independent directors), the Company could 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 would 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 could 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 could 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 contained 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 would 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 would be at a premium of 105%.
The Refinanced Convertible Note also contained 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.
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 delivered a notice to the Company and its independent directors of his election to convert, effective
as of September 16, 2019 (the “Notice Date”), $18.0 million 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 $19.3 million. Pursuant to the terms
of the Note, the Company instructed the transfer agent to issue to Mr. Drexler 16,216,216 shares (the “Shares”) of its Common
Stock in respect of the Partial Conversion.
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. 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.
On
December 27, 2019, the Company entered into a collateral receipt and security agreement with Mr. Drexler, pursuant to which Mr. Drexler
agreed to post bond relating to the judgment ruled against the Company in connection with the litigation between the Company and ThermoLife
International LLC (“ThermoLife”), pending the appeal. The amount paid by Mr. Drexler on behalf of the Company, including
fees, was $0.3 million.
On
August 21, 2020, the Company entered into a refinancing agreement with Mr. Ryan Drexler, the Company’s Chairman of the Board of
Directors, Chief Executive Officer and President (the “2020 Refinancing”), with an effective date of July 1, 2020. As part
of the 2020 Refinancing, the Company issued to Mr. Drexler an amended and restated convertible secured promissory note (the 2020 “Refinanced
Convertible Note”) in the original principal amount of $2,735,199, which amended and restated (i) a convertible secured promissory
note dated as of November 8, 2017, $1,134,483 of which was outstanding as of July 1, 2020 (ii) a collateral receipt and security agreement
with Mr. Drexler dated as of December 27, 2019, $252,500 of which was outstanding as of July 1, 2020, and (iii) a secured revolving promissory
note dated as of October 4, 2019, $1,348,216 of which was outstanding as of July 1, 2020. The $2.7 million 2020 Refinanced Convertible
Note bears interest at the rate of 12% per annum.
The
2020 Refinanced Convertible Note contains customary restrictions on the ability of the Company to, among other things, grant liens or
incur indebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain
additional qualifications and carveouts, as set forth in the 2020 Refinanced Convertible Note. The 2020 Refinanced Convertible Note is
subordinated to certain other indebtedness of the Company held by Prestige Capital Corporation (“Prestige”) and Crossroads
Financial Group, LLC (“Crossroads”). The Company may prepay the 2020 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. Mr. Drexler
may convert the outstanding principal and accrued interest into shares of the Company’s common stock at a conversion price equal
to or greater than (i) the closing price per share of the common stock on the last business day immediately preceding November 1, 2020
or (ii) $0.17. All outstanding principal and accrued but unpaid interest under the 2020 Refinanced Convertible Note were due and payable
on November 1, 2020. The Note was in default on that date and the Company agreed with Mr. Drexler to amend the 2020 Refinancing by the
end of November 2020. Interest accrued but unpaid, totaling $26,000 was capitalized on the due date and added to the principal amount
of the 2020 Refinanced Convertible Note.
On
November 29, 2020, the Company entered into a refinancing agreement with Mr. Ryan Drexler, (the “November 2020 Refinancing”),
in which the Company issued to Mr. Drexler a convertible secured promissory note (the November 2020 “Convertible Note”) in
the original principal amount of $2,871,967, which amended and restated a convertible secured promissory note dated as of August 21,
2020. The $2.9 million November 2020 Convertible Note bears interest at the rate of 12% per annum. Unless earlier converted or repaid,
all outstanding principal and any accrued but unpaid interest under the November 2020 Convertible Note shall be due and payable on July
1, 2021. Any interest not paid when due shall be capitalized and added to the principal amount of the Convertible Note and bear interest
on the applicable interest payment date along with all other unpaid principal, capitalized interest, and other capitalized obligations.
Mr.
Drexler may, at any time, and from time to time, upon written notice to the Company, convert the outstanding principal and accrued interest
into shares of Common Stock, at a conversion price of $0.23 per share. At the election of the Company, one-sixth of the interest may
be paid in kind (“PIK Interest”) by adding such amount to the principal amount of the note, or through the issuance of shares
of the Company’s common stock to Mr. Drexler. The PIK Interest is convertible to common stock at the closing price per share on
the last business day of each calendar quarter. In no event will the conversion price of such PIK Interest be less than $0.10. The Company
may prepay the Note by giving Mr. Drexler between 15- and 60-days’ notice depending upon the specific circumstances, subject to
Mr. Drexler’s conversion right. The Company intends to pay all interest due on the Convertible Note to Mr. Drexler at the end of
each calendar quarter.
The
November 2020 Convertible Note contains customary restrictions on the ability of the Company to, among other things, grant liens or incur
indebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain
additional qualifications and carveouts, as set forth in the November 2020 Convertible Note. The November 2020 Convertible Note is subordinated
to certain other indebtedness of the Company held by Prestige Capital Corporation (“Prestige”) and Crossroads Financial Group,
LLC (“Crossroads”).
For
the years ended December 31, 2020 and 2019, interest expense related to the related party convertible secured promissory notes was $0.3
million and $1.7 million, respectively. During the years ended December 31, 2020 and 2019, interest paid in cash to Mr. Drexler was $31,000
and $0.8 million, respectively.
Related
Party Secured Revolving Promissory Note
On
October 15, 2020, 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% per
annum. The use of funds will be used for the purchase of whey protein and other general corporate purposes. Both the outstanding principal,
if any, and all accrued interest under the Revolving Note are due on March 31, 2021. The Company may prepay the Revolving Note by giving
Mr. Drexler one days’ advance 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, as set forth in the Revolving Note.
The Revolving Note is subordinated to certain other indebtedness of the Company held by Prestige and Crossroads. In connection with the
Revolving Note, the Company and Mr. Drexler entered into a fifth amended and restated security agreement dated October 15, 2020 (the
“Security Agreement”) 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, 2020, the outstanding balance on the revolving note was $0.7 million. During the year ended December 31, 2020,
interest paid in cash to Mr. Drexler was $24,000.
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 director 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, 2020 and 2019:
|
|
|
2020
|
|
|
2019
|
|
|
Audit Fees(1)
|
|
$
|
447,700
|
|
|
|
438,000
|
|
|
(1)
|
Represents
the aggregate fees billed for the audit of the Company’s financial statements and review of the Company’s quarterly financial
information.
|
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 2020 and 2019, were pre-approved by the Audit Committee in accordance with the pre-approval policy described above.
Notes
to Consolidated Financial Statements
Note
1. Description of Business
Description
of Business
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 Calabasas, California and, as of December 31,
2020 had the following wholly-owned subsidiaries which do not currently have operations: MusclePharm Canada Enterprises Corp., MusclePharm
Ireland Limited and MusclePharm Australia Pty Limited.
Although
the Company has historically incurred significant losses and experienced negative cash flows since inception, we generated net income
of $3.2 million for the year ended December 31, 2020. As of December 31, 2020, the Company had cash of $2.0 million, an increase of $0.5
million from the December 31, 2019 balance of $1.5 million. This increase is due to cash provided by investing activities of $0.2 million
and cash provided by financing activities of $1.1 million, offset by cash used in operating activities of $0.9 million.
Our
working capital was a deficit of $20.1 million as of December 31, 2020, and we had a stockholders’ deficit of $24.4 million and
recurring losses from operations resulting in an accumulated deficit of $192.7 million. As a result of our history of losses and financial
condition, there is substantial doubt about our ability to continue as a going concern. For financial information concerning more recent
periods, see our reports for such periods filed with the SEC.
The
ability to continue as a going concern is dependent upon us generating profits in the future and/or obtaining the necessary financing
to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management is evaluating
different 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.
During
the fourth quarter of 2019, management implemented the following measures to improve gross margin:
|
|
1)
|
reduced
or eliminated sales to low or negative margin customers;
|
|
|
2)
|
reduced
product discounts and promotional activity;
|
|
|
3)
|
implemented
a more aggressive SKU reduction; and
|
|
|
4)
|
negotiated
and purchased certain raw materials directly from the manufacturers lowering the costs of goods sold
|
As
a result of these measures, as well as a reduction in protein prices, the Company realized increased gross profit in the fourth quarter
of 2019, a trend which continued throughout 2020. In April 2020, the Company experienced a slowdown in sales from its retail customers,
including its largest customer. This decline was partially offset by a growth in sales to its largest online customers, 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 these customers. In 2020, the Company also negotiated lower costs of goods sold with our co-manufacturers. Management
believes reductions in operating costs and continued focus on gross profit will allow us to ultimately achieve sustained profitability,
however, the Company can give no assurances that this will occur. In particular, the cost of protein may have a material impact on the
Company’s profitability, and the ability of our third-party manufacturers to meet our customer’s demands. To manage cash
flow, the Company has entered into multiple financing arrangements. See additional information in “Note 8. Debt.”
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. We are actively managing our business to respond to the impact.
There were no adjustments recorded in the financial statements that might result from the outcome of these uncertainties.
Note
2. Summary of Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements are prepared using the accrual method of accounting in accordance with 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 consolidated financial statements include the accounts of MusclePharm Corporation and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been
conformed to the current period’s presentation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Such estimates include, but are not
limited to, allowance for doubtful accounts, revenue discounts and allowances, the valuation of inventory and deferred tax assets, the
assessment of useful lives, recoverability and valuation of long-lived assets, likelihood and range of possible losses on contingencies,
restructuring liabilities, valuations of equity securities and intangible assets, fair value of derivatives, warrants and options, present
value of lease liabilities, among others. Actual results could differ from those estimates.
Cash
The
Company considers all highly liquid investments purchased with an original maturity of three months or less at the date of purchase and
money market accounts to be cash equivalents. As of December 31, 2020 and 2019, the Company had no cash equivalents and all cash amounts
consisted of cash on deposit.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable represents trade obligations from customers that are subject to normal trade collection terms and are recorded at the invoiced
amount, net of any sales discounts and allowance for doubtful accounts, and do not typically bear interest. The Company assesses the
collectability of the accounts by taking into consideration the aging of accounts receivable, changes in customer credit worthiness,
general market and economic conditions, and historical experience. Bad debt expenses are recorded as part of “Selling, general
and administrative” expenses in the consolidated statements of operations. The Company writes off the receivable balance against
the allowance when management determines a balance is uncollectible. The Company also reviews its customer discounts and an accrual is
made for discounts earned but not yet utilized at each period end.
The
Company performs ongoing evaluations of its customers’ financial condition and generally does not require collateral. Some international
customers are required to pay for their orders in advance of shipment. Accounts receivable consisted of the following as of December
31, 2020 and 2019 (in thousands):
|
|
|
As of December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Accounts receivable
|
|
$
|
10,895
|
|
|
$
|
8,419
|
|
|
Less: allowance for discounts and returns
|
|
|
(2,525
|
)
|
|
|
(2,901
|
)
|
|
Less: allowance for doubtful accounts
|
|
|
(882
|
)
|
|
|
(711
|
)
|
|
Accounts receivable, net
|
|
$
|
7,488
|
|
|
$
|
4,807
|
|
The
allowance for discounts and returns consisted of the following activity for the years ended December 31, 2020 and 2019 (in thousands):
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Allowance for discounts and returns, beginning balance
|
|
$
|
2,901
|
|
|
$
|
5,574
|
|
|
Charges against revenues
|
|
|
17,703
|
|
|
|
26,941
|
|
|
Utilization of reserve
|
|
|
(18,079
|
)
|
|
|
(29,614
|
)
|
|
Allowance for discounts and returns, ending balance
|
|
$
|
2,525
|
|
|
$
|
2,901
|
|
Revenue
Recognition
Revenue
is recognized when control of the promised goods or services 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.
|
|
a.
|
Nature
of Goods and Services
|
The
Company sells a variety of protein products through a broad distribution platform that includes supermarkets, mass merchandisers, wholesale
clubs, drugstores, convenience stores, home stores, specialty stores and websites and other e-commerce channels, all of which sell our
products to consumers.
|
|
b.
|
When
Performance Obligations are Satisfied
|
For
performance obligations related to the shipping and invoicing of products, control transfers at the point in time upon which finished
goods are delivered to the Company’s customers or when finished goods are picked up by a customer or a customer’s carrier,
depending on shipping terms. Once a product has been delivered or picked up by the customer, the customer is able to direct the use of,
and obtain substantially all of the remaining benefits from, the asset. The Company considers control to have transferred upon delivery
or customer receipt because the Company has an enforceable right to payment at that time, the customer has legal title to the asset,
the Company has transferred physical possession of the asset, and the customer has significant risk and rewards of ownership of the asset.
|
|
c.
|
Variable
Consideration
|
The
Company conducts extensive promotional activities, primarily through the use of off-list discounts, slotting, coupons, cooperative advertising,
periodic price reduction arrangements, and end-aisle and other in-store displays. The costs of such activities are netted against sales
and are recorded when the related sale takes place. The reserves for sales returns and consumer and trade promotion liabilities are established
based on the Company’s best estimate of the amounts necessary to settle future and existing obligations for products sold as of
the balance sheet date. 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.
The
Company expenses incremental direct costs of obtaining a contract (broker commissions) when the related sale takes place, since the amortization
period of the commissions paid for the sale of products is less than a year. These costs are recorded in “Selling, general and
administrative” expenses in the accompanying consolidated statements of operations. The Company accounts for shipping and handling
costs as fulfillment activities which are therefore recognized upon shipment of the goods.
Shipping
and handling costs related to inbound purchases of raw material and finished goods are included in cost of revenues in our consolidated
statements of operations. For the years ended December 31, 2020 and 2019, the Company incurred $1.3 million and $1.2 million, respectively,
of inbound shipping and handling costs. Shipping and handling costs related to shipments to our customers is included in “Selling,
general and administrative” expense in our consolidated statements of operations. For the years ended December 31, 2020 and 2019,
the Company incurred $2.5 million and $3.8 million, respectively, of shipping and handling costs related to shipments to our customers.
The
Company excludes from its revenue any amounts collected from customers for sales (and similar) taxes. During the years ended December
31, 2020 and 2019, the Company recorded discounts, and to a lesser degree, sales returns, totaling $17.7 million and $26.9 million, respectively,
which accounted for 22% and 25% of gross revenue in each period, respectively.
Concentrations
Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution.
The cash balance at times may exceed federally insured limits. Management believes the financial risk associated with these balances
is minimal and has not experienced any losses to date. Significant customers are those that represent more than 10% of the Company’s
net revenue or accounts receivable for each period presented.
During
the year ended December 31, 2020, the Company had three customers who individually accounted for 41%, 17% and 12% of our net revenue,
and one customer that accounted for 61% of our accounts receivable, net as of December 31, 2020. During the year ended December 31, 2019,
the Company had three customers who individually accounted for approximately 33%, 17% and 13% of our net revenue and one customer that
accounted for 35% of our accounts receivable, net as of December 31, 2019.
The
Company uses a limited number of non-affiliated suppliers for contract manufacturing its products. The Company has quality control and
manufacturing agreements in place with its primary manufacturers to ensure consistency in production and quality. The agreements ensure
products are manufactured to the Company’s specifications and the contract manufacturers will bear the costs of recalled product
due to defective manufacturing.
The
Company had the following concentration of purchases with contract manufacturers for years ended December 31, 2020 and 2019:
|
|
|
For the Years
Ended December 31,
|
|
|
Vendor
|
|
2020
|
|
|
2019
|
|
|
Nutrablend
|
|
|
*
|
|
|
|
22
|
%
|
|
S.K. Laboratories
|
|
|
24
|
%
|
|
|
34
|
%
|
|
Mill Haven Foods LLC
|
|
|
25
|
%
|
|
|
*
|
|
|
Innovations in Nutrition and Wellness
|
|
|
13
|
%
|
|
|
*
|
|
*
Represents less than 10% of purchases.
Inventory
Inventory
consisted solely of finished goods and raw materials, used to manufacture our products by one of our co-manufacturers as of December
31, 2020 and 2019. The Company records charges for obsolete and slow-moving inventory based on the age of the product as determined by
the expiration date or otherwise determined to be obsolete. Products within one year of their expiration dates are considered for write-off
purposes. Inventory write-downs, once established, are not reversed as they establish a new cost basis for the inventory. Historically,
the Company has had minimal returns with established customers. The Company incurred insignificant inventory write-offs during the years
ended December 31, 2020 and 2019.
Prepaid
Expenses and Other Current Assets
Prepaid
expenses and other current assets consist of various payments the Company has made in advance for goods or services to be received in
the future. These prepaid expenses include legal retainers, giveaways, print advertising, insurance and service contracts requiring up-front
payments.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed on a straight-line
basis over the estimated useful lives of the respective assets or, in the case of leasehold improvements, the remaining lease term, if
shorter. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed, and the resulting
gains or losses are recorded in the statements of operations. Repairs and maintenance costs are expensed as incurred.
The
estimated useful lives of the property and equipment are as follows:
|
Property
and Equipment
|
|
Estimated
Useful Life
|
|
Furniture,
fixtures and equipment
|
|
3
- 7 years
|
|
Manufacturing
and lab equipment
|
|
3
- 5 years
|
|
Vehicles
|
|
3
- 5 years
|
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.
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. The estimated useful life of the intangible assets is 7 years.
Impairment
of Long-Lived Assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances exist that indicate the carrying amount of an asset may
not be recoverable. When indicators of impairment exist, an estimate of undiscounted future cash flows is used in measuring whether the
carrying amount of the asset or related asset group is recoverable. Measurement of the amount of impairment, if any, is based upon the
difference between the asset’s carrying value and estimated fair value. There were no impairments for the years ended December
31, 2020 and 2019.
Fair
Value
GAAP
defines fair value as the exchange price that would be received from selling an asset or paid to transfer a liability in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company measures its financial assets and liabilities at fair value at each reporting period using an estimated fair value hierarchy
which requires the Company to use observable inputs and minimize the use of unobservable inputs when measuring fair value.
A
financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant
to the fair value measurement. Three levels of inputs may be used to measure fair value:
|
|
●
|
Level
1 — Observable inputs are unadjusted quoted prices in active markets for identical assets or liabilities;
|
|
|
●
|
Level
2 — Observable inputs are quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices
which are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially
the full term of the financial instruments; and
|
|
|
●
|
Level
3 — Unobservable inputs which are supported by little or no market activity and which are significant to the fair value of
the assets or liabilities. These inputs are based on our own assumptions used to measure assets and liabilities at fair value and
require significant management judgment or estimation
|
The
determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant
to the fair value measurement.
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.
Cost
of Revenue
Cost
of revenue for MusclePharm and its subsidiaries represents costs directly related to the production, manufacturing and freight-in of
the Company’s products purchased from third-party manufacturers.
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 retail partners, and are expensed as incurred.
Some
of the contracts provide for contingent payments to endorsers or athletes based upon specific achievement in their sports, such as winning
a championship. The Company records expense for these payments if and when the endorser achieves the specific achievement.
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 applicable awards’
grant date, based on the estimated number of awards 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 the Company’s 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. Due to the Company’s limited experience with the expected term of options, the simplified method was utilized in determining
the expected option term as prescribed in Staff Accounting Bulletin No. 110.
The
Company recognizes stock-based compensation expense over the requisite service period, which is generally consistent with the vesting
of the awards, based on the estimated fair value of all stock-based payments issued to employees and directors that are expected to vest.
Foreign
Currency
The
functional currency of the Company’s foreign subsidiaries, MusclePharm Canada, MusclePharm Australia, and MusclePharm Ireland,
is the local currency. The assets and liabilities of the foreign subsidiaries are translated into U.S. dollars at exchange rates in effect
at each balance sheet date. Revenue and expenses are translated at average exchange rates in effect during the year. Equity transactions
are translated using historical exchange rates. The resulting translation adjustments are recorded to a separate component of “Accumulated
other comprehensive income (loss)” in the consolidated balance sheets and are also included in the consolidated statements of comprehensive
income (loss).
Foreign
currency gains and losses resulting from transactions denominated in a currency other than the functional currency are included in “Interest
and other expense, net” in the consolidated statements of operations.
Comprehensive
Income (Loss)
Comprehensive
income (loss) is composed of two components: net income (loss) and other comprehensive income (loss). Other comprehensive income (loss)
refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of stockholders’ deficit and are excluded
from the Company’s net income (loss). The Company’s other comprehensive income (loss) is made up of foreign currency translation
adjustments. There was no foreign currency translation adjustment for the year ended December 31, 2020.
Segments
Management
has determined that it currently operates in one segment. The Company’s chief operating decision maker reviews financial information
on a consolidated basis, together with certain operating and performance measures principally to make decisions about how to allocate
resources and to measure the Company’s performance.
Income
Taxes
Income
taxes are accounted for using the asset and liability method. Income tax expense includes the current tax liability from
operations and the change in deferred income taxes during the year. Interest income, interest expense and penalties
associated with income taxes are reflected in “Income tax expense” on the consolidated statements of income.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases,
operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
A
valuation allowance is required to be established unless management determines that it is more likely than not that we will ultimately
realize the tax benefit associated with a deferred tax asset. We
recognize the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax
positions are measured at the largest amount that is greater than 50% likely to be realized. Changes in recognition or measurement are
reflected in the period in which the change in judgment occurs.
Recent
Accounting Pronouncements
In
July 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments (“ASU 2016-13”), which among other things, these amendments require the measurement of all expected
credit losses of financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable
forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss
estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial
assets with credit deterioration. ASU 2016-13 is effective for periods beginning after December 15, 2022, and interim periods within
those fiscal years. The Company will evaluate the impact of the pronouncement closer to the effective date.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, expected to
reduce cost and complexity related to the accounting for income taxes. The ASU removes specific exceptions to the general principles
in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception
to the incremental approach for intra-period tax allocation; exceptions to accounting for basis differences when there are ownership
changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated
losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for:
franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill;
separate financial statements of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods. This
guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2020 with early adoption permitted.
Amendments are to be applied prospectively, except for certain amendments that are to be applied either retrospectively or with a modified
retrospective approach through a cumulative effect adjustment recorded to retained earnings. The Company is evaluating the impact of
the pronouncement.
On
August 5, 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU eliminates the beneficial conversion and cash
conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own
equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies
how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation.
This
guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early
adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal
years. The FASB also specified that an entity should adopt the guidance as of the beginning of its annual fiscal year and is not permitted
to adopt the guidance in an interim period. The Company
will evaluate the impact of the pronouncement closer to the effective date.
Note
3. Fair Value of Financial Instruments
As
of December 31, 2020 and 2019, the Company held no assets or liabilities that required re-measurement at fair value on a recurring basis.
Cash balances as of December 31, 2020 and 2019 were $2.0 million and $1.5 million, respectively. The carrying amounts of the cash balances
reported in the consolidated balance sheets approximate the fair value.
Note
4. Balance Sheet Components
Inventory
Inventory
consisted of raw materials and finished goods, which were located either at one of our co-manufacturers or our warehouse as of December
31, 2020 and December 31, 2019.
The
Company records charges for obsolete and slow-moving inventory based on the age of the product as determined by the expiration date or
if otherwise determined to be obsolete. Products within one year of their expiration dates are considered for write-off purposes. Historically,
the Company has had minimal returns with established customers. The Company incurred insignificant inventory write-offs during the years
ended December 31, 2020 and 2019. Inventory write-downs, once established, are not reversed as they establish a new cost basis for the
inventory.
Property
and Equipment
Property
and equipment consisted of the following as of December 31, 2020 and 2019 (in thousands):
|
|
|
As of December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Furniture, fixtures and equipment
|
|
$
|
167
|
|
|
$
|
2,592
|
|
|
Leasehold improvements
|
|
|
—
|
|
|
|
236
|
|
|
Vehicles
|
|
|
39
|
|
|
|
39
|
|
|
Displays
|
|
|
—
|
|
|
|
453
|
|
|
Website
|
|
|
—
|
|
|
|
497
|
|
|
Property and equipment, gross
|
|
|
206
|
|
|
|
3,817
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(193
|
)
|
|
|
(3,601
|
)
|
|
Property and equipment, net
|
|
$
|
13
|
|
|
$
|
216
|
|
Depreciation
and amortization expense related to property and equipment was $0.1 million and $0.3 million for the years ended December 31, 2020 and
2019, respectively, which is included in “Selling, general, and administrative” expense in the accompanying consolidated
statements of operations. During the year ended December 31, 2020, the Company wrote off $2.6 million of fixed assets with a net book
value of $45,000.
Intangible
Assets
Intangible
assets consisted of the following (in thousands):
|
|
|
As of December 31, 2020
|
|
|
|
|
Gross Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Value
|
|
|
Remaining Weighted-
Average
Useful Lives
(years)
|
|
|
Amortized Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand (apparel rights)
|
|
$
|
2,244
|
|
|
$
|
(1,888
|
)
|
|
$
|
356
|
|
|
|
1.1
|
|
|
Total intangible assets
|
|
$
|
2,244
|
|
|
$
|
(1,888
|
)
|
|
$
|
356
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
Gross Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Value
|
|
|
Remaining Weighted-
Average
Useful Lives
(years)
|
|
|
Amortized Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand (apparel rights)
|
|
$
|
2,244
|
|
|
$
|
(1,568
|
)
|
|
$
|
676
|
|
|
|
2.1
|
|
|
Total intangible assets
|
|
$
|
2,244
|
|
|
$
|
(1,568
|
)
|
|
$
|
676
|
|
|
|
|
|
Intangible
assets amortization expense was $0.3 million for each of the years ended December 31, 2020 and 2019, which is included in “Selling,
general, and administrative” expense in the accompanying consolidated statements of operations. As of December 31, 2020, the estimated
future amortization expense of intangible assets is as follows (in thousands):
|
For the Year Ending December 31,
|
|
|
|
|
2021
|
|
$
|
320
|
|
|
2022
|
|
|
36
|
|
|
Total amortization expense
|
|
$
|
356
|
|
Note
5. Accrued and Other Liabilities
As
of December 31, 2020 and 2019, the Company’s accrued and other liabilities consisted of the following (in thousands):
|
|
|
As of December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Accrued professional fees
|
|
$
|
242
|
|
|
$
|
378
|
|
|
Accrued interest
|
|
|
644
|
|
|
|
803
|
|
|
Accrued payroll and bonus
|
|
|
738
|
|
|
|
495
|
|
|
Settlements – short term (Nutrablend and 4Excelsior)
|
|
|
2,005
|
|
|
|
—
|
|
|
Accrued expenses – ThermoLife
|
|
|
1,364
|
|
|
|
1,364
|
|
|
Accrued and other short-term liabilities
|
|
|
1,201
|
|
|
|
1,765
|
|
|
Accrued and other liabilities
|
|
$
|
6,194
|
|
|
$
|
4,805
|
|
Note
6. Leases
The
Company elected not to apply ASC 842 to arrangements with lease terms of 12 month or less. The Company determines if a contract contains
a lease when the contract conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange
for consideration. Upon identification and commencement of a lease, we establish a ROU asset and a lease liability. ROU assets and lease
liabilities are measured and recognized based on the present value of the future minimum lease payments over the lease term at the commencement
date. At adoption, the Company reduced the ROU asset through a derecognition of the restructuring liability for its abandoned lease facilities.
Subsequent to adoption, the Company no longer recognized lease expense on a straight-line basis, as the impact of the derecognition resulted
in a front-loading of the lease expenses.
The
Company has operating leases for warehouse facilities and office spaces across the U.S. The remaining lease terms for these leases range
from 1 to 2 years. The Company also leased manufacturing and warehouse equipment under finance lease arrangements, which expired at various
dates through July 2020. The Company did not extend any lease that expired in 2020. The lease rental agreement, in which the Company
leased a Tennessee warehouse, expired on June 30, 2020. Subsequent to the expiration of the lease, the Company utilized the warehouse
and made payments to the landlord on a month-to-month basis between July and August 2020. After August 2020, we moved our warehouse in
Tennessee to a third-party logistics provider.
On
July 24, 2020, the Company entered into a Sublease Agreement with a third-party cosmetics company, to sublease the office building at
Burbank. The sublease commenced on September 15, 2020 and would be in effect through the remainder of the Company’s lease term
(September 15, 2020 through September 30, 2022). Rent was abated between November 1, 2020 and December 31, 2020 for a total of one and
a half months.
In
September 2020, the Company assessed its existing leases for impairment as the remaining lease costs exceeded the anticipated sublease
income on these leases. As a result of the impairment analysis, the Company recorded an impairment charge of $0.2 million.
Supplemental
balance sheet information related to leases was as follows (in thousands):
|
Assets
|
|
Balance Sheet Classification
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Operating
|
|
ROU assets, net
|
|
$
|
474
|
|
|
$
|
1,175
|
|
|
Finance
|
|
Property and equipment, net
|
|
|
—
|
|
|
|
57
|
|
|
Total Assets
|
|
|
|
|
474
|
|
|
|
1,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Operating lease liability - current
|
|
$
|
381
|
|
|
$
|
624
|
|
|
Finance
|
|
Current accrued liability
|
|
|
—
|
|
|
|
54
|
|
|
Total current liabilities
|
|
|
|
|
381
|
|
|
|
678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Operating lease liability - long term
|
|
|
343
|
|
|
|
723
|
|
|
Total non-current liabilities
|
|
|
|
|
343
|
|
|
|
723
|
|
|
Total lease liabilities
|
|
|
|
$
|
724
|
|
|
$
|
1,401
|
|
The
Company has elected the practical expedient to combine lease and non-lease components into a single component for all of its leases.
Fixed lease costs represent the explicitly quantified lease payments prescribed by the lease agreement and are included in the measurement
of the ROU asset and corresponding lease liability.
Some
leasing arrangements require variable payments that are dependent on usage, output, or may vary for other reasons, such as insurance
and tax payments. The variable lease payments are not presented as part of the initial ROU asset or lease liability. The Company’s
lease agreements do not contain any material restrictive covenants.
The
components of lease cost for operating and finance leases for the year ended December 31, 2020 were as follows (in thousands):
|
|
|
Income Statement Classification
|
|
Year Ended December 31, 2020
|
|
|
Year Ended December 31, 2019
|
|
|
Operating lease cost
|
|
Selling, general and administrative
|
|
$
|
718
|
|
|
$
|
1,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use asset
|
|
Selling, general and administrative
|
|
|
61
|
|
|
|
119
|
|
|
Interest on lease liabilities
|
|
Selling, general and administrative
|
|
|
1
|
|
|
|
6
|
|
|
Total finance lease cost
|
|
|
|
|
62
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable lease payments
|
|
Selling, general and administrative
|
|
|
318
|
|
|
|
219
|
|
|
Sublease income
|
|
Other income
|
|
|
(315
|
)
|
|
|
(380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease cost
|
|
|
|
$
|
783
|
|
|
$
|
1,005
|
|
The
Company had no short-term leases as of December 31, 2020. The Company’s leases do not provide an implicit rate; therefore, the
Company uses its incremental borrowing rate based on the information available at the effective date in determining the present value
of future payments for those leases.
Supplemental
cash flow information related to leases was as follows:
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
Cash paid for amounts included in the measurement of lease liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
624
|
|
|
$
|
770
|
|
|
Operating cash flows from finance leases
|
|
|
1
|
|
|
|
6
|
|
|
Financing cash flows from finance leases
|
|
|
54
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average remaining lease term was as follows:
|
|
|
|
|
|
|
|
|
|
Operating leases (in years)
|
|
|
1.7
|
|
|
|
2.3
|
|
|
Finance leases (in years)
|
|
|
—
|
|
|
|
0.5
|
|
The
weighted average discount rate was as follows:
|
Operating leases
|
|
|
18
|
%
|
|
|
18
|
%
|
|
Finance leases
|
|
|
5
|
%
|
|
|
5
|
%
|
The
maturities of lease liabilities at December 31, 2020 were as follows (in thousands):
|
|
|
Operating Lease
|
|
|
|
|
|
|
|
2021
|
|
$
|
481
|
|
|
2022
|
|
|
369
|
|
|
Thereafter
|
|
|
—
|
|
|
Total future undiscounted lease payments
|
|
|
850
|
|
|
Less amounts representing interest
|
|
|
(126
|
)
|
|
Present value of lease liabilities
|
|
$
|
724
|
|
Note
7. Interest and other expense, net
For
the years ended December 31, 2020 and 2019, “Interest and other expense, net” consisted of the following (in thousands):
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Interest expense, related party
|
|
$
|
(329
|
)
|
|
$
|
(1,597
|
)
|
|
Interest expense, related party debt discount
|
|
|
—
|
|
|
|
(60
|
)
|
|
Interest expense, other
|
|
|
202
|
|
|
|
(894
|
)
|
|
Interest expense, secured borrowing arrangement
|
|
|
(1,366
|
)
|
|
|
(1,205
|
)
|
|
Foreign currency transaction loss
|
|
|
(8
|
)
|
|
|
(236
|
)
|
|
Other
|
|
|
473
|
|
|
|
383
|
|
|
Total interest and other expense, net
|
|
$
|
(1,028
|
)
|
|
$
|
(3,609
|
)
|
“Other”
for 2020 includes sublease income and interest income.
Note
8. Debt
As
of December 31, 2020 and 2019, the Company’s debt consisted of the following (in thousands):
|
|
|
As of December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Refinanced convertible note, related party
|
|
$
|
2,872
|
|
|
$
|
1,287
|
|
|
Revolving line of credit, related party
|
|
|
743
|
|
|
|
1,239
|
|
|
Obligations under secured borrowing arrangement
|
|
|
7,098
|
|
|
|
4,443
|
|
|
Line of credit – inventory financing
|
|
|
—
|
|
|
|
2,965
|
|
|
Notes payable
|
|
|
167
|
|
|
|
247
|
|
|
Paycheck Protection Program loan
|
|
|
965
|
|
|
|
—
|
|
|
Total debt
|
|
|
11,845
|
|
|
|
10,181
|
|
|
Less: current portion
|
|
|
(10,881
|
)
|
|
|
(10,130
|
)
|
|
Long term debt
|
|
$
|
965
|
|
|
$
|
51
|
|
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 $18.0 million, 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 $6.0 million 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 $11.0 million 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 $1.0 million 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.
Interest
rate on the $18.0 million Refinanced Convertible Note was 12% per annum, and interest payments were due on the last day of each quarter.
At the Company’s option (as determined by its independent directors), the Company could 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 would 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 could 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 could 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 contained 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 would 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 would be at a premium of 105%.
The Refinanced Convertible Note also contained 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.
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 delivered a notice to the Company and its independent directors of his election to convert, effective
as of September 16, 2019 (the “Notice Date”), $18.0 million 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 $19.3 million. Pursuant to the terms
of the Note, the Company instructed the transfer agent to issue to Mr. Drexler 16,216,216 shares (the “Shares”) of its Common
Stock in respect of the Partial Conversion.
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. 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.
On
December 27, 2019, the Company entered into a collateral receipt and security agreement with Mr. Drexler, pursuant to which Mr. Drexler
agreed to post bond relating to the judgment ruled against the Company in connection with the litigation between the Company and ThermoLife
International LLC (“ThermoLife”), pending the appeal. The amount paid by Mr. Drexler on behalf of the Company, including
fees, was $0.3 million.
On
August 21, 2020, the Company entered into a refinancing agreement with Mr. Ryan Drexler, the Company’s Chairman of the Board of
Directors, Chief Executive Officer and President (the “2020 Refinancing”), with an effective date of July 1, 2020. As part
of the 2020 Refinancing, the Company issued to Mr. Drexler an amended and restated convertible secured promissory note (the 2020 “Refinanced
Convertible Note”) in the original principal amount of $2,735,199, which amended and restated (i) a convertible secured promissory
note dated as of November 8, 2017, $1,134,483 of which was outstanding as of July 1, 2020 (ii) a collateral receipt and security agreement
with Mr. Drexler dated as of December 27, 2019, $252,500 of which was outstanding as of July 1, 2020, and (iii) a secured revolving promissory
note dated as of October 4, 2019, $1,348,216 of which was outstanding as of July 1, 2020. The $2.7 million 2020 Refinanced Convertible
Note bears interest at the rate of 12% per annum.
The
2020 Refinanced Convertible Note contains customary restrictions on the ability of the Company to, among other things, grant liens or
incur indebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain
additional qualifications and carveouts, as set forth in the 2020 Refinanced Convertible Note. The 2020 Refinanced Convertible Note is
subordinated to certain other indebtedness of the Company held by Prestige Capital Corporation (“Prestige”) and Crossroads
Financial Group, LLC (“Crossroads”). The Company may prepay the 2020 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. Mr. Drexler
may convert the outstanding principal and accrued interest into shares of the Company’s common stock at a conversion price equal
to or greater than (i) the closing price per share of the common stock on the last business day immediately preceding November 1, 2020
or (ii) $0.17.
All
outstanding principal and accrued but unpaid interest under the 2020 Refinanced Convertible Note were due and payable on November 1,
2020. The Note was in default on that date and the Company agreed with Mr. Drexler to amend the 2020 Refinancing by the end of November
2020. Interest accrued but unpaid, totaling $26,000 was capitalized on the due date and added to the principal amount of the 2020 Refinanced
Convertible Note.
On
November 29, 2020, the Company entered into a refinancing agreement with Mr. Ryan Drexler, (the “November 2020 Refinancing”),
in which the Company issued to Mr. Drexler a convertible secured promissory note (the November 2020 “Convertible Note”) in
the original principal amount of $2,871,967, which amended and restated a convertible secured promissory note dated as of August 21,
2020. The $2.9 million November 2020 Convertible Note bears interest at the rate of 12% per annum. Unless earlier converted or repaid,
all outstanding principal and any accrued but unpaid interest under the November 2020 Convertible Note shall be due and payable on July
1, 2021. Any interest not paid when due shall be capitalized and added to the principal amount of the November 2020 Convertible Note
and bear interest on the applicable interest payment date along with all other unpaid principal, capitalized interest, and other capitalized
obligations.
Mr.
Drexler may, at any time, and from time to time, upon written notice to the Company, convert the outstanding principal and accrued interest
into shares of Common Stock, at a conversion price of $0.23 per share. At the election of the Company, one-sixth of the interest may
be paid in kind (“PIK Interest”) by adding such amount to the principal amount of the note, or through the issuance of shares
of the Company’s common stock to Mr. Drexler. The PIK Interest is convertible to common stock at the closing price per share on
the last business day of each calendar quarter. In no event will the conversion price of such PIK Interest be less than $0.10. The Company
may prepay the Note by giving Mr. Drexler between 15- and 60-days’ notice depending upon the specific circumstances, subject to
Mr. Drexler’s conversion right. The Company intends to pay all interest due on the Convertible Note to Mr. Drexler at the end of
each calendar quarter.
The
November 2020 Convertible Note contains customary restrictions on the ability of the Company to, among other things, grant liens or incur
indebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain
additional qualifications and carveouts, as set forth in the November 2020 Convertible Note. The November 2020 Convertible Note is subordinated
to certain other indebtedness of the Company held by Prestige Capital Corporation (“Prestige”) and Crossroads Financial Group,
LLC (“Crossroads”).
For
the years ended December 31, 2020 and 2019, interest expense related to the related party convertible secured promissory notes was $0.3
million and $1.7 million, respectively. During the years ended December 31, 2020 and 2019, interest paid in cash to Mr. Drexler was $31,000
and $0.8 million, respectively.
Related
Party Secured Revolving Promissory Note
On
October 15, 2020, the Company entered into a secured revolving promissory note (the “Revolving Note”) with Ryan Drexler.
Under the terms of the Revolving Note, the Company can borrow up to $3.0 million. The Revolving Note bears interest at the rate of 12%
per annum. The use of funds will be used for the purchase of whey protein and other general corporate purposes. Both the outstanding
principal, if any, and all accrued interest under the Revolving Note are due on March 31, 2021. The Company may prepay the Revolving
Note by giving Mr. Drexler one days’ advance 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, as set forth in the Revolving
Note. The Revolving Note is subordinated to certain other indebtedness of the Company held by Prestige and Crossroads. In connection
with the Revolving Note, the Company and Mr. Drexler entered into a fifth amended and restated security agreement dated October 15, 2020
(the “Security Agreement”) 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, 2020, the outstanding balance on the revolving note was $0.7 million. During the year ended December 31, 2020,
interest paid in cash to Mr. Drexler was $24,000.
Line
of Credit - Inventory Financing
On
October 6, 2017, the Company entered into a Loan and Security Agreement (“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. Subsequent to the end of 2017, the maximum amount was increased to $4.0 million. The term of the Security Agreement
automatically extends in one-year increments, unless earlier terminated pursuant to the terms of the Security Agreement. 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
agreed to grant Crossroads a security interest in all of the Company’s 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. The Security Agreement has second
priority lien on the Company’s assets and is subordinated to the Company’s indebtedness held by Prestige.
During
the year, the Company made payments of $3.0 million to Crossroads and had no outstanding liability as of December 31, 2020. As of December
31, 2019, we owed Crossroads $3.0 million, 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.
On
October 30, 2020, the Company paid off the loan, including an early termination fee of $0.1 million.
Secured
Borrowing Arrangement
In
January 2016, the Company entered into a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) with Prestige, pursuant
to which the Company agreed to sell and assign and Prestige agreed to buy and accept, certain accounts receivable owed to the Company
(“Accounts”). Under the terms of the Purchase and Sale Agreement, upon the receipt and acceptance of each assignment of Accounts,
Prestige will pay the Company 80% of the net face amount of the assigned Accounts, up to a maximum total borrowing of $12.5 million subject
to sufficient amounts of accounts receivable to secure the loan. The remaining 20% will be paid to the Company upon collection of the
assigned Accounts, less any chargebacks (including chargebacks for any customer amounts that remain outstanding for over 90 days), disputes,
or other amounts due to Prestige. Prestige’s purchase of the assigned Accounts from the Company will be at a discount fee which
varies from 0.7% to 4%, based on the number of days outstanding from the assignment of Accounts to collection of the assigned Accounts.
In addition, the Company granted Prestige a continuing security interest in and first priority lien upon all accounts receivable, inventory,
fixed assets, general intangibles, and other assets. Prestige will have no recourse against the Company if payments are not made due
to the insolvency of an account debtor within 90 days of invoice date, with the exception of international
and certain domestic customers.
At
December 31, 2020 and 2019, we had outstanding borrowings of approximately $7.1 million and $4.4 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.
For
the years ended December 31, 2020 and 2019, the Company assigned to Prestige, accounts with an aggregate face amount of approximately
$58.0 million and $55.1 million, respectively, for which Prestige paid to the Company approximately $46.4 million and $44.1 million,
respectively, in cash. During the years ended December 31, 2020 and 2019, $43.8 million and $40.9 million, respectively, was repaid to
Prestige, including fees and interest.
Paycheck
Protection Program Loan
Due
to economic uncertainty as a result of the ongoing pandemic (COVID-19), on May 14, 2020, the Company received an aggregate principal
amount of $964,910 pursuant to the borrowing arrangement (“Note”) with Harvest Small Business Finance, LLC (“HSBF”)
and agreed to pay the principal amount plus interest at a 1% fixed interest rate per year, on the unpaid principal balance. The Note
includes forgiveness provisions in accordance with the requirements of the Paycheck Protection Program, Section 1106 of the CARES Act.
The
Note is expected to mature on May 16, 2022. Payments were due by November 16, 2020 (the “Deferment Period”) and interest
was accrued during the Deferment Period. However, the Flexibility Act, which was signed into law on June 5, 2020, extended the Deferment
Period to the date that the forgiven amount is remitted by the United States Small Business Administration (“SBA”) to HSBF.
The Company is in the process of filling out the forgiveness application form. As of December 31, 2020, the Company owed approximately
$1.0 million (principal plus accrued interest), and the amount is recorded in “Other long-term liabilities” in the consolidated
balance sheets.
Note
9. Commitments and Contingencies
Settlements
Manchester
City Football Group
The
Company was engaged in a dispute with City Football Group Limited (“CFG”), the owner of Manchester City Football Group, concerning
amounts allegedly owed by the Company under a sponsorship agreement with CFG (the “Sponsorship Agreement”). In August 2016,
CFG commenced arbitration in the United Kingdom against the Company, seeking approximately $8.3 million for the Company’s purported
breach of the Sponsorship Agreement.
On
July 28, 2017, the Company approved a Settlement Agreement (the “CFG Settlement Agreement”) with CFG effective July 7, 2017.
The CFG Settlement Agreement represents a full and final settlement of all litigation between the parties. Under the terms of the agreement,
the Company agreed to pay CFG a sum of $3 million, which was recorded as accrued expenses in 2017. The settlement consists of a $1 million
payment that was advanced by a related party on July 7, 2017, a $1 million installment paid on July 7, 2018 and a subsequent $1 million
installment payment to be paid by July 7, 2019. Of this amount, the Company has remitted $0.3 million.
During
the years ended December 31, 2020 and 2019, the Company recorded a charge of $75,000 and $38,000, respectively, included in “Interest
and other expense, net” in the Company’s consolidated statements of operations, representing imputed interest.
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. These invoices relate
to the third and fourth quarter of 2019, and a liability has been recorded in the books for the related periods.
On
September 25, 2020, the parties successfully mediated the case to a settlement and the Company agreed to (i) pay approximately $3.1 million
(“Owed Amount”) in monthly payments (“Monthly Payments”) from September 1, 2020 through June 30, 2023 and (ii)
issue monthly purchase orders (“Purchase Orders”) at minimum amounts accepted by Nutrablend.
MusclePharm
agreed to issue Purchase Orders in a combined total amount of at least (i) $1,500,000 from September 1, 2020 through November 30, 2020;
(ii) $1,800,000 from December 1, 2020 through February 28, 2021; (iii) $2,100,000 from March 31, 2021 through May 31, 2021; (iv) $2,100,000
from June 1, 2021 through August 31, 2021; and (v) $1,400,000 from September 1, 2021 through October 30, 2021. Beginning on November
1, 2021, MusclePharm will be required to issue monthly Purchase Orders to Nutrablend in a minimum amount of $700,000 until the Owed Amount
is paid in full to Nutrablend. In the event that MusclePharm pays the Owed Amount in full before September 1, 2021, MusclePharm is entitled
to a rebate on all completed Purchase Orders. Further, once the monthly payments, and any additional payments that MusclePharm has made
on the Owed Amount, reduce the outstanding balance of the Owed Amount to below $2.0 million, MusclePharm is eligible for an extension
of a line of credit from Nutrablend in an amount of up to $3.0 million.
The
Company determined that approximately $1.0 million dollars of the Owed Amount was due within a year, and this amount was recorded in
“Accrued and other liabilities” in the consolidated balance sheets. The present value of the remaining Owed Amount that was
due after a year was $1.4 million, and the amount was recorded in “Other long-term liabilities” in the consolidated balance
sheets. The Company made payments of $0.3 million as of December 31, 2020.
During
the year ended December 31, 2020, the Company recorded $0.5 million as a gain on the settlement of the liability, and interest expense
of $66,000, in the consolidated statements of operations.
4Excelsior
Matter
On
March 18, 2019, Excelsior Nutrition, Inc. (“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 proceeded to discovery.
On
November 16, 2020, the Company and 4Excelsior entered into a stipulation of settlement that provided that the Company would pay to 4Excelsior
a total of $4.75 million in four monthly payments of $70,000, beginning January 5, 2021, and thereafter in monthly payments of $0.1 million.
On
December 16, 2020, MusclePharm and 4Excelsior entered into a Settlement Agreement and Mutual Release (“the Agreement”), pursuant
to which the parties resolved and settled the civil action pending in the Superior Court of the State of California for the County of
Los Angeles (the “Litigation”). The parties agreed to a mutual general release of claims and to jointly file within 10 business
days of the effective date of the Agreement a stipulation and proposed order of dismissal, dismissing with prejudice all claims and counterclaims
asserted in the Litigation. MusclePharm agreed to pay $4.75 million (the “Settlement Amount”) in four monthly payments of
$70,000, beginning January 5, 2021, and thereafter in monthly payments of $0.1 million until the Settlement Amount is fully paid. MusclePharm
may prepay all or any portion of the Settlement Amount at any time without penalty or premium. The Agreement provides that, in the event
of a Default (as defined in the Agreement) by MusclePharm, the entire outstanding balance of the Settlement Amount will become immediately
due and payable, plus accrued interest at a rate of 18% per annum, commencing from the date of default.
The
Company determined that approximately $1.1 million dollars of the Settlement Amount was due within a year, and this amount was recorded
in “Accrued and other liabilities” in the consolidated balance sheets. The present value of the remaining Settlement Amount
that was due after a year was $2.5 million, and the amount was recorded in “Other long-term liabilities” in the consolidated
balance sheets. During the year ended December 31, 2020, the Company recorded $1.2 million as a gain on the settlement of the liability,
and interest expense of $16,000, in the consolidated statements of operations.
Contingencies
In
the normal course of business or otherwise, the Company may become involved in legal proceedings. The Company will accrue a liability
for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range
of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate
than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might
include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred. The
Company provides disclosures for material contingencies when there is a reasonable possibility that a loss or an additional loss may
be incurred. In assessing whether a loss is a reasonable possibility, the Company may consider the following factors, among others: the
nature of the litigation, claim or assessment, available information, opinions or views of legal counsel and other advisors, and the
experience gained from similar cases. As of December 31, 2020, the Company was involved in the following material legal proceedings described
below.
ThermoLife
International
In
January 2016, ThermoLife International LLC (“ThermoLife”), a supplier of nitrates to 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 2019, 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 in 2018. As of December
31, 2020, the total amount accrued, including interest, was $1.8 million. In the interim, the Company filed an appeal and posted bonds
in the total amount of $0.6 million in order to stay execution on the judgment pending appeal. Of the $0.6 million, $0.25 million (including
fees) was paid by Mr. Drexler on behalf of the Company. See “Note 8. Debt” for additional information. The balance of $0.35
million was secured by a personal guaranty from Mr. Drexler, while the associated fees of $12,500 were paid by the Company. The appeal
has been fully briefed and is awaiting a decision.
For
both the years ended December 31, 2020 and 2019, interest expense recognized on the awarded damages was $89,000.
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, White Winston 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 White Winston’s request for a preliminary injunction,
finding, among other things, that White Winston did not show a likelihood of success on the merits of the underlying action and failed
to establish irreparable harm. Following the court’s decision, 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. White Winston has appealed that award.
Due
to the uncertainty associated with determining our liability, if any, and due to our inability to ascertain with any reasonable degree
of likelihood, as of the date of this report, the outcome of the trial, the Company has not recorded an estimate for its potential liability.
On
June 17, 2019, White Winston moved for the appointment of a temporary receiver over MusclePharm, citing Plante Moran’s resignation.
The court granted White Winston’s request to hold an evidentiary hearing on the motion, but subsequently stayed the action pending
the parties’ attempts to resolve their dispute. Although the parties have been unable to reach a resolution, the litigation has
not yet resumed. On July 30, 2019, White Winston filed an action in the Superior Court of the State of California in and for the County
of Los Angeles, seeking access to MusclePharm’s books and records and requesting the appointment of an independent auditor for
the company. On February 25, 2021, the court ordered MusclePharm to produce certain documents, denied White Winston’s request for
an auditor, and ordered MusclePharm to pay a $1,500 penalty.
MusclePharm
is evaluating the court’s order and considering its appellate avenues.
IRS
Audit
On
April 6, 2016, the Internal Revenue Service (“IRS”) selected our 2014 Federal Income Tax Return for audit. As a result of
the audit, the IRS proposed certain adjustments with respect to the tax reporting of our former executives’ 2014 restricted stock
grants. Due to the Company’s current and historical loss position, the proposed adjustments would have no material impact on the
Company’s Federal income tax. On October 5, 2016, the IRS commenced an audit of our employment and withholding tax liability for
2014. The IRS contends that the Company inaccurately reported the value of the restricted stock grants and improperly failed to provide
for employment taxes and Federal tax withholding on these grants. In addition, the IRS is proposing certain penalties associated with
the Company’s filings. On April 4, 2017, the Company received a “30-day letter” from the IRS asserting back taxes and
penalties of approximately $5.3 million, of which $4.4 million related to withholding taxes, specifically, income withholding and Social
Security taxes, and $0.9 million related to penalties. Additionally, the IRS asserts that the Company owes information reporting penalties
of approximately $2.0 million.
The
Company’s counsel has submitted a formal protest to the IRS disputing on several grounds all of the proposed adjustments and penalties
on the Company’s behalf, and the Company has 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 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
former officers (the “Former Officers”) of the Company 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 ordered the
Former Officers to file status reports regarding progress of their settlement negotiations with the IRS on or before February 28, 2021.
The IRS and the Former Officers filed status reports with the Tax Court on February 26, 2021. After receiving the status reports, the
Tax Court issued an order directing the parties to file further status reports on or before July 9, 2021. The Tax Court has not set a
trial dates in the cases of the Former Officers.
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, the Company has not
recorded an estimate for its potential liability, if any, associated with these taxes.
During
the time period of the IRS audit and Appeals Office consideration of the Company’s case, the Company and the IRS signed a series
of consents to extend the statutes of limitations for assessment for both the employment tax and corporation income tax of the Corporation
for 2014. The Company’s records show that the last consents that the Company signed extended the statutes of limitations for employment
tax and corporation income tax for 2014 through and including December 15, 2020. The Company has no record of any consents being signed
by the Company and the IRS extending the statutes of limitations beyond December 15, 2020. Based on these facts, the Company believes
that the statutes of limitations for assessment of additional employment tax and corporation income tax against the Corporation for 2014
expired on December 15, 2020. The Company does not know whether the IRS agrees with the Corporation’s statements regarding the
current status of the statutes of limitations described herein.
On
August 22, 2018, Richard Estalella filed an action against us and two other defendants in the Colorado District Court for the County
of Denver, seeking damages arising out of the IRS’s assertion of tax liability and penalties relating to the 2014 restricted stock
grants. We have answered Estalella’s complaint, asserted counterclaims against Estalella for his failure to ensure that all withholding
taxes were paid in connection with the 2014 restricted stock grants, and filed cross-claims against two valuation firms named in the
action (as well as their principals) for failing to properly value the 2014 restricted stock grants for tax purposes. Trial in the matter
has been scheduled for February 7, 2022. There are no amounts accrued related to this matter.
The
Company will continue to vigorously litigate the matter.
Note
10. Stockholders’ Deficit
Common
Stock
The
fair value of all stock issuances is based upon the quoted closing trading price on the date of issuance. Common stock outstanding as
of December 31, 2020 and 2019 includes shares legally outstanding even if subject to future vesting. For the year ended December 31,
2020, the Company had the following transactions related to its common stock including restricted stock awards (in thousands, except
share and per share data):
|
Transaction Type
|
|
Quantity (Shares)
|
|
|
Valuation
|
|
|
Range of Value per Share
|
|
|
Stock issued for advertising services
|
|
|
226,722
|
|
|
$
|
204
|
|
|
$
|
0.90
|
|
|
Restricted stock forfeited by directors
|
|
|
(121,850
|
)
|
|
|
(51
|
)
|
|
|
0.42
|
|
|
Total
|
|
|
104,872
|
|
|
$
|
153
|
|
|
$
|
0.42 to 0.90
|
|
For
the year ended December 31, 2019, the Company had the following transactions related to its common stock including restricted stock awards
(in thousands, except share and per share data):
|
Transaction Type
|
|
Quantity (Shares)
|
|
|
Valuation
|
|
|
Range of Value per Share
|
|
|
Stock issued for note conversion
|
|
|
16,216,216
|
|
|
$
|
18,000
|
|
|
$
|
1.11
|
|
|
Stock issued for consulting services
|
|
|
22,222
|
|
|
|
10
|
|
|
|
0.45
|
|
|
Stock issued in relation to Biozone settlement
|
|
|
150,000
|
|
|
|
60
|
|
|
|
0.40
|
|
|
Restricted stock issued to directors
|
|
|
595,238
|
|
|
|
250
|
|
|
|
0.42
|
|
|
Stock issued for advertising services
|
|
|
702,069
|
|
|
|
632
|
|
|
|
0.90
|
|
|
Total
|
|
|
17,685,745
|
|
|
$
|
18,952
|
|
|
$
|
0.40
to 1.11
|
|
Warrants
For
the years ended December 31, 2020 and 2019, the Company did not issue any warrants. Outstanding warrants of 1,289,378 shares that were
issued in 2016 with a four-year term, expired in November 2020.
Treasury
Stock
During
the years ended December 31, 2020 and 2019, the Company did not repurchase any shares of its common stock and held 875,621 shares in
treasury as of December 31, 2020 and 2019.
Note
11. Stock-Based Compensation
Stock
Incentive Plans
In
2015, the Board adopted the MusclePharm Corporation 2015 Incentive Compensation Plan (the “2015 Plan”). The 2015 Plan provides
for the issuance of incentive stock options, non-qualified stock options, restricted stock, stock appreciation rights, restricted stock
units, dividend equivalent rights, and other cash- and stock-based awards to employees, consultants and directors of the Company or its
subsidiaries.
The
2015 Plan is administered by the Board, unless the Board elects to delegate administration responsibilities to a committee (either of
the foregoing, or their authorized delegates, the “plan administrator”), and will continue in effect until terminated. The
2015 Plan may be amended, modified or terminated, subject to stockholder approval to the extent necessary to comply with applicable law
or to the extent an amendment increases the number of shares available under the 2015 Plan or permits the extension of the exercise period
for an stock option or stock appreciation right beyond ten years from the date of grant, and, with respect to outstanding awards, subject
to the consent of the holder thereof if the amendment, modification or termination materially and adversely affects such holder. The
total number of shares that may be issued under the 2015 Plan cannot exceed 2,000,000, subject to adjustment in the event of certain
changes in the capital structure of the Company. As of December 31, 2020, there were 576,494 remaining shares available for issuance
under the 2015 Plan.
The
plan administrator determines the individuals who are issued awards and the terms and conditions of the awards, including vesting terms
and conditions. The plan administrator also determines the methods by which the exercise price of stock options may be paid, which may
include a combination of cash or check, shares, a promissory note or other property, and the methods by which shares are delivered.
Under
the 2015 Plan, in any calendar year, the maximum number of shares with respect to which awards may be granted to any one participant
during the year is 350,000 shares, subject to adjustment in the event of specified changes in the capital structure of the Company, and
the maximum amount that may be paid in cash during any calendar year with respect to any award is $1.5 million.
Restricted
Stock
The
Company’s stock-based compensation for the years ended December 31, 2020 and 2019 consisted primarily of restricted stock awards.
The restricted stock awards granted to employees, executives and Board members during the years ended December 31, 2020 and 2019 were
as follows:
|
|
|
Unvested Restricted Stock Awards
|
|
|
|
|
Number of Shares
|
|
|
Weighted Average Grant Date Fair
Value
|
|
|
Unvested balance – December 31, 2018
|
|
|
197,500
|
|
|
$
|
1.05
|
|
|
Granted
|
|
|
838,942
|
|
|
|
0.42
|
|
|
Vested
|
|
|
(346,310
|
)
|
|
|
0.78
|
|
|
Unvested balance – December 31, 2019
|
|
|
690,132
|
|
|
|
0.42
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Vested
|
|
|
(568,280
|
)
|
|
|
0.42
|
|
|
Forfeited
|
|
|
(121,852
|
)
|
|
|
0.42
|
|
|
Unvested balance – December 31, 2020
|
|
|
—
|
|
|
|
—
|
|
There
were no restricted stock awards granted for the year ended December 31, 2020. The total fair value of restricted stock awards granted
to employees, executives and Board members was $0.4 million for the year ended December 31, 2019, respectively.
As
of December 31, 2020, there was no unrecognized expense for unvested restricted stock awards.
Stock
Options
The
Company may grant options to purchase shares of the Company’s common stock to certain employees and directors pursuant to the 2015
Plan. Under the 2015 Plan, all stock options are granted with an exercise price equal to or greater than the fair market value of a share
of the Company’s common stock on the date of grant. Vesting is generally determined by the plan administrator under the 2015 Plan.
No stock option may be exercisable more than ten years after the date it is granted.
In
February 2016, the Company issued options to purchase 137,362 shares of its common stock to Mr. Drexler. These stock options were granted
with an exercise price of $1.89 per share, a contractual term of 10 years and a grant date fair value of $1.72 per share, or $0.3 million
in the aggregate, which was amortized on a straight-line basis over the vesting period of two years. The Company determined the fair
value of the stock options using the Black-Scholes model.
For
the year ended December 31, 2020 and 2019, the Company recorded no stock compensation expense related to stock options.
Stock
Options Summary Table
The
following table describes the total options outstanding, granted, exercised, expired and forfeited as of and during the years ended December
31, 2020 and 2019, as well as the total options exercisable as of December 31, 2020. Shares obtained from the exercise of our options
are subject to various trading restrictions.
|
|
|
Options Pursuant to the 2015 Plan
|
|
|
Weighted Average Exercise Price Per Share
|
|
|
Weighted Average Fair Value of Options
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Aggregate Intrinsic Value
|
|
|
Issued and outstanding as of December 31, 2018
|
|
|
171,703
|
|
|
$
|
1.89
|
|
|
$
|
1.72
|
|
|
|
7.17
|
|
|
$
|
—
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Issued and outstanding as of December 31, 2019
|
|
|
171,703
|
|
|
$
|
1.89
|
|
|
$
|
1.72
|
|
|
|
6.17
|
|
|
$
|
—
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Issued and outstanding as of December 31, 2020
|
|
|
171,703
|
|
|
$
|
1.89
|
|
|
$
|
1.72
|
|
|
|
5.13
|
|
|
$
|
—
|
|
|
Exercisable as of December 31, 2020
|
|
|
171,703
|
|
|
$
|
1.89
|
|
|
$
|
1.72
|
|
|
|
5.13
|
|
|
$
|
—
|
|
Note
12. Defined Contribution Plan
The
Company established a 401(k) Plan (the “401(k) Plan”) for eligible employees of the Company. Generally, all employees of
the Company who are at least twenty-one years of age and who have completed six months of service are eligible to participate in the
401(k) Plan. The 401(k) Plan is a defined contribution plan that provides that participants may make voluntary salary deferral contributions,
on a pretax basis, in the form of voluntary payroll deductions. The Company may make discretionary matching contributions. For each of
the years ended December 31, 2020 and 2019, the Company’s matching contribution were $87,000 and $80,000, respectively.
Note
13. Net Income (Loss) per Share
Basic
net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common
stock outstanding during each period. The following table sets forth the computation of the Company’s basic and diluted net loss
per share for the years presented (in thousands, except share and per share data):
|
|
|
For the Years Ended
December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Net income (loss)
|
|
$
|
3,185
|
|
|
$
|
(18,927
|
)
|
|
Weighted average common shares used in computing net income (loss) per share, basic
|
|
|
32,812,462
|
|
|
|
20,475,313
|
|
|
Potentially diluted securities
|
|
|
8,359,999
|
|
|
|
—
|
|
|
Weighted average common shares used in computing net income (loss) per share, diluted
|
|
|
41,172,461
|
|
|
|
20,475,313
|
|
|
Net income (loss) per share, basic
|
|
$
|
0.10
|
|
|
$
|
(0.92
|
)
|
|
Net income (loss) per share, diluted
|
|
$
|
0.08
|
|
|
$
|
(0.92
|
)
|
Diluted
net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common
stock, common stock equivalents and potentially dilutive securities outstanding during each period. The Company uses the treasury stock
method to determine whether there is a dilutive effect of outstanding potentially dilutive securities, and the if-converted method to
assess the dilutive effect of the convertible notes.
The Company reported a net income for the
year ended December 31, 2020. The weighted average shares of 8,359,999, which represented potentially dilutive securities
related to Mr. Drexler’s convertible notes outstanding in 2020, were included in the computations for the diluted
net income per share for the year ended December 31, 2020.
The
following securities were excluded from the computations of the diluted net income (loss) per share, as the effect of the securities
would be anti-dilutive:
|
|
|
As of December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Stock options
|
|
|
171,703
|
|
|
|
171,703
|
|
|
Warrants
|
|
|
—
|
|
|
|
1,289,378
|
|
|
Unvested restricted stock
|
|
|
—
|
|
|
|
690,132
|
|
|
Convertible notes
|
|
|
—
|
|
|
|
931,974
|
|
|
Total common stock equivalents
|
|
|
171,703
|
|
|
|
3,083,187
|
|
Note
14. Income Taxes
The
components of income (loss) before provision for income taxes for the years ended December 31, 2020 and 2019 are as follows
(in thousands):
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Domestic
|
|
$
|
3,160
|
|
|
$
|
(18,831
|
)
|
|
Foreign
|
|
|
6
|
|
|
|
(10
|
)
|
|
Income (loss) before provision for income taxes
|
|
$
|
3,166
|
|
|
$
|
(18,841
|
)
|
Income
taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently
due. Deferred taxes relate to differences between the basis of assets and liabilities for financial and income tax reporting which will
be either taxable or deductible when the assets or liabilities are recovered or settled.
The
Company has federal net operating loss carryforwards of $42 million and $114.2 million as of December 31, 2020 and 2019, respectively,
of which $19 million will expire between 2031 and 2038 and $23 million can be carried forward indefinitely. The Company has estimated
state net operating loss carryforwards of $32 million and $83.1 million as of December 31, 2020 and 2019, respectively, most of which
will expire between 2026 and 2040. Utilization of the Company’s federal and certain state net operating losses is subject to limitation
due to the ownership change limitations provided by the Internal Revenue Code Sec. 382 and similar state provisions. Such an annual limitation
results in the expiration of the net operating loss carryforwards before utilization. The Company believes that utilization of its federal
and certain state net operating losses is substantially limited as a result of the conversion of Mr. Drexler’s convertible note
in September 2019. Accordingly, for financial reporting purposes, the Company has recorded a significant decrease in the federal and
net operating loss carryforwards for the year ended December 31, 2020.
The
valuation allowance as of December 31, 2020 was $13.6 million. The net change in valuation allowance for the year ended December 31,
2020 was a decrease of $18.7 million. In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred
income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible.
Management
considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative to the
realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of December 31, 2020
and 2019.
The
effects of temporary differences that gave rise to significant portions of deferred tax assets as of December 31, 2020 and 2019, are
as follows (in thousands):
|
|
|
As of December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
10,656
|
|
|
$
|
28,505
|
|
|
Stock compensation
|
|
|
290
|
|
|
|
—
|
|
|
Other
|
|
|
2,606
|
|
|
|
3,784
|
|
|
Gross deferred tax assets
|
|
|
13,552
|
|
|
|
32,289
|
|
|
Valuation allowance
|
|
|
(13,552
|
)
|
|
|
(32,289
|
)
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The
income tax (benefit) provision for the years ended December 31, 2020 and 2019 included the following (in thousands):
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
State
|
|
|
(19
|
)
|
|
|
54
|
|
|
Foreign
|
|
|
10
|
|
|
|
32
|
|
|
|
|
|
(9
|
)
|
|
|
86
|
|
|
Deferred income tax provision:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
(Benefit) provision for income taxes, net
|
|
$
|
(9
|
)
|
|
$
|
86
|
|
The
income tax (benefit) provision differs from those computed using the statutory federal tax rate of 21% due to the following
(in thousands):
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Expected provision at statutory federal rate
|
|
$
|
665
|
|
|
$
|
(3,957
|
)
|
|
State tax — net of federal benefit
|
|
|
18
|
|
|
|
48
|
|
|
Foreign income/losses taxed at different rates
|
|
|
9
|
|
|
|
34
|
|
|
Other
|
|
|
(38
|
)
|
|
|
11
|
|
|
Change in valuation allowance
|
|
|
(663
|
)
|
|
|
3,950
|
|
|
Income tax (benefit) expense
|
|
$
|
(9
|
)
|
|
$
|
86
|
|
A
reconciliation of the beginning and ending amount of unrecognized tax benefits (“UTB’s”) is as follows (in thousands):
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Gross UTB’s, beginning balance
|
|
$
|
128
|
|
|
$
|
39
|
|
|
Reductions for tax positions taken in a prior year
|
|
|
(128
|
)
|
|
|
89
|
|
|
Gross UTB’s, ending balance
|
|
$
|
—
|
|
|
$
|
128
|
|
The
Company’s policy is to recognize interest and penalties related to uncertain tax benefits in its provision for income taxes. As
of December 31, 2020 and 2019, the Company has not recorded a liability for potential interest or penalties. The Company also does not
expect its unrecognized tax benefits to change significantly over the next 12 months.
The
Company is subject to taxation in the U.S., as well as various state and foreign jurisdictions. As of December 31, 2020, the Company’s
statute is open from 2017, 2016 and 2016 forward for federal, state and foreign tax purposes, respectively. However, years prior to 2016
could still be considered open for adjustments to net operating loss carryforwards.
On
March 27, 2020, President Trump signed into law the CARES Act. Among the changes to the U.S. federal income tax, the CARES Act restored
net operating loss carryback rules that were eliminated by 2017 Tax Cuts and Jobs Act, modified the limit on the deduction for net interest
expense and accelerated the timeframe for refunds of AMT credits. Based on an analysis of the impact of the CARES Act, the Company has
not identified any overall material effect on the 2019 and 2020 tax liabilities.
Note
15. Segments, Geographical Information
The
Company’s chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating
resources and evaluating financial performance. As such, the Company currently has a single reporting segment and operating unit structure.
In addition, substantially all long-lived assets are attributable to operations in the U.S. for both periods presented.
Revenue,
net by geography is based on the company addresses of the customers. The following table sets forth revenue, net by geographic area (in
thousands):
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Revenue, net:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
46,578
|
|
|
$
|
56,976
|
|
|
International
|
|
|
17,862
|
|
|
|
22,691
|
|
|
Total revenue, net
|
|
$
|
64,440
|
|
|
$
|
79,667
|
|
Note
16. Subsequent Events
GAAP
requires an entity to disclose events that occur after the balance sheet date but before financial statements are issued or are available
to be issued (“subsequent events”) as well as the date through which an entity has evaluated subsequent events. There are
two types of subsequent events.
The
first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance
sheet, including the estimates inherent in the process of preparing financial statements, (“recognized subsequent events”).
The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose
subsequent to that date (“non-recognized subsequent events”).
Recognized
Subsequent Events
None
Unrecognized
Subsequent Events