Attached files
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the Fiscal Year ended December 31,
2017
Commission File Number –
000-53166
MusclePharm Corporation
(Exact name of registrant as specified in its
charter)
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Nevada
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77-0664193
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(State or other jurisdiction
of
incorporation or
organization)
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(I.R.S. Employer
Identification No.)
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4400 Vanowen St.
Burbank, CA
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91505
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(Address of principal executive
offices)
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(Zip code)
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(800) 292-3909
(Registrant’s telephone number, including
area code)
Securities registered pursuant to
Section 12(g) of the Act:
Title
of each class
Common Stock, Par Value $0.001 Per
Share
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. [ ] Yes [X]
No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. [ ] Yes [X] No
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate website, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to
submit and post such files) Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. (Check one):
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Large accelerated filer
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[ ]
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Accelerated filer
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[ ]
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Non-accelerated filer
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[ ]
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Smaller reporting company
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[X]
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X]
No
Aggregate market value of the voting common stock held by
non-affiliates of the registrant at June 30, 2017: $24.0
million.
Number of shares of the registrant’s common stock outstanding
at March 20, 2018: 14,650,554 (excludes 875,621 shares of common
stock held in treasury).
DOCUMENTS INCORPORATED BY REFERENCE:
None
MusclePharm Corporation
Form 10-K
For the Year Ended December 31, 2017
TABLE OF CONTENTS
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Page
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PART I
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Item 1.
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Business
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1
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Item 1A.
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Risk Factors
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8
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Item 1B.
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Unresolved Staff Comments
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16
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Item 2.
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Properties
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16
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Item 3.
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Legal Proceedings
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16
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Item 4.
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Mine Safety Disclosures
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17
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PART II
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Item 5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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18
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Item 6.
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Selected Financial Data
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19
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Item 7.
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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20
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Item 7A.
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Quantitative and Qualitative Disclosures about Market
Risk
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35
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Item 8.
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Financial Statements and Supplementary Data
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35
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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35
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Item 9A.
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Controls and Procedures
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35
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Item 9B.
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Other Information
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35
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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36
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Item 11.
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Executive Compensation
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39
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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47
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Item 13.
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Certain Relationships, Related Transactions and Director
Independence
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49
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Item 14.
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Principal Accountant Fees and Services
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51
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PART IV
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Item 15.
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Exhibits, Financial Statement Schedules
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52
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Item 16.
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Form 10-K Summary
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52
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Signatures
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53
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Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements contained in this Annual Report on Form
10-K other than statements of historical fact, including statements
regarding our future results of operations and financial position,
our business strategy and plans, and our objectives for future
operations, are forward-looking statements. The words
“believe,” “may,” “will,”
“estimate,” “continue,”
“anticipate,” “intend,”
“expect,” and similar expressions are intended to
identify forward-looking statements. We base these forward-looking
statements largely on our current expectations and projections
about future events and trends that we believe may affect our
financial condition, results of operations, business strategy,
short-term and long-term business operations and objectives, and
financial needs.
These forward-looking statements are subject to a number of risks,
uncertainties and assumptions, including those described in Part I,
Item 1A, “Risk Factors” in this Annual Report on
Form 10-K. Moreover, we operate in a very competitive and rapidly
changing environment. New risks may emerge from time to time. It is
not possible for our management to predict all risks, nor can we
assess the impact of all factors on our business or the extent to
which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any
forward-looking statements we may make. In light of these risks,
uncertainties and assumptions, the future events and trends
discussed in this Annual Report on Form 10-K may not occur and
actual results could differ materially and adversely from those
anticipated or implied in the forward-looking
statements.
We undertake no obligation to revise or publicly release the
results of any revision to these forward-looking statements, except
as required by law. Given these risks and uncertainties, readers
are cautioned not to place undue reliance on such forward-looking
statements.
PART I
Item 1. Business
MusclePharm Corporation, was incorporated in
Nevada in 2006. As used in this Annual Report on Form 10-K, the
terms “the Company,” “we,”
“our,” “MusclePharm” or “MP”
refer to MusclePharm Corporation and its predecessors and
subsidiaries, unless the context indicates otherwise. The Company
is headquartered in Burbank, California and, as of December 31,
2017, had the following wholly-owned operating subsidiaries:
MusclePharm Canada Enterprises Corp (“MusclePharm
Canada”), MusclePharm Ireland Limited (“MusclePharm
Ireland”) and MusclePharm Australia Pty Limited
(“MusclePharm Australia”). A former subsidiary of the
Company, BioZone Laboratories, Inc. (“BioZone”), was
sold on May 9, 2016.
MusclePharm
Corporation is a scientifically driven, performance lifestyle
company that develops, markets, and distributes branded nutritional
supplements. We offer a broad range of performance powders,
capsules, tablets and gels. Our portfolio of recognized brands,
including MusclePharm® and
FitMiss®, is marketed
and sold in more than 100 countries globally. These
clinically-developed, scientifically-driven nutritional supplements
are developed through a six-stage research process that utilizes
the expertise of leading nutritional scientists, doctors, and
universities.
On
August 24, 2015, the Company’s Board of Directors (the
“Board”) approved a restructuring plan for the
Company. The approved restructuring plan was designed to
reduce costs and to better align our resources for profitable
growth. Specifically, through December 31, 2017, the
restructuring plan resulted in: 1) reducing our workforce;
2) abandoning certain leased facilities; 3) renegotiating
or terminating a number of contracts with endorsers in a strategic
shift away from such arrangements and toward more cost-effective
marketing and advertising efforts; 4) discontinuing a number of
stock keeping units (“SKUs”) and writing down inventory
to net realizable value, or to zero in cases where the product was
discontinued; and 5) writing off certain assets. We have now
substantially completed the approved restructuring plan, and as
such, we do not anticipate any additional significant restructuring
related charges.
1
Management’s Plans with Respect to Liquidity and Capital
Resources
Management believes the restructuring plan, the continued reduction
in ongoing operating costs and expense controls, and the
aforementioned growth strategy, will enable us to ultimately
achieve profitability. We have reduced our operating expenses
sufficiently and believe that our ongoing sources of revenue will
be sufficient to cover these expenses for the foreseeable
future.
As of December 31, 2017, we had a stockholders’ deficit of
$12.5 million and recurring losses from operations. To manage cash
flow, we entered into a secured borrowing arrangement, pursuant to
which we have the ability to borrow up to $12.5 million subject to
sufficient amounts of accounts receivable to secure the loan. The
agreement’s term has been extended to July 31, 2018. In
October 2017, we also entered into a loan and security agreement to
borrow against our inventory up to a maximum of $3.0 million for an
initial six-month term which automatically extends for six
additional months. As of December 31, 2017, we owed $3.0 million on
this credit line, of which $1.0 million was repaid subsequent to
the end of the year. On November 3, 2017, we entered into a
refinancing transaction with Mr. Ryan Drexler, our Chairman of the
Board, Chief Executive Officer and President, to restructure all of
the $18.0 million in notes payable to him, which are now due on
December 31, 2019. Accordingly, such debt is classified as a
long-term liability at December 31, 2017. For additional
information on the refinancing with Mr. Drexler, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operation—Indebtedness
Agreements—Related-Party Notes Payable”
below.
As of December 31, 2017, we had approximately $6.2 million in cash
and $2.0 million in working capital.
The Company’s Consolidated Financial Statements as of and for
the year ended December 31, 2017 were prepared on the basis of a
going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the
ordinary course of business. Accordingly, they do not give effect
to adjustments that could be necessary should we be required to
liquidate our assets.
The Company’s ability to continue as a going concern and
raise capital for specific strategic initiatives could also depend
on obtaining adequate capital to fund operating losses until it
becomes profitable. The Company can give no assurances that any
additional capital that it is able to obtain, if any, will be
sufficient to meet its needs, or that any such financing will be
obtainable on acceptable terms or at all.
Mr. Drexler has verbally both stated his intent and ability to put
more capital into the business if necessary. However, Mr. Drexler
is under no obligation to the Company to do so, and we can give no
assurances that Mr. Drexler will be willing or able to do so at a
future date and/or that he will not demand payment of his
refinanced convertible note on its maturity date.
We believe that our capital resources as of December 31, 2017,
available borrowing capacity and current operating plans will be
sufficient to fund our planned operations for at least twelve
months from the date of filing this Annual Report on Form
10-K.
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,
from professional, 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.
2
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 Combat Crunch Protein Bars,
Bodybuilding.com’s Bar of the Year each of the last three
years.
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 every day. These products include daily
staples for a healthy body, such as a 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 complimentary 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.
Sales and Marketing
Historically, our advertising and promotion expenses have consisted
primarily of digital, print and media advertising, athletic
endorsements and sponsorships, promotional giveaways, trade show
event participation, and various partnering activities with our
trading partners. Prior to our restructuring that began in late
2015, advertising and promotions were a large part of both our
growth strategy and brand awareness. We built strategic
partnerships with sports athletes and fitness enthusiasts through
endorsements, licensing, and co-branding agreements. Additionally,
we co-developed products with sports athletes and pro teams. In
connection with our restructuring plan, we have terminated the
majority of these contracts in a strategic shift away from such
costly arrangements, and moved toward more cost-effective brand
partnerships, focusing on grass-roots marketing and advertising
efforts with athletes and retail outlets closer to our core
audience.
In 2017, we have reinvested a portion of those savings into: (1)
Building a new elite marketing organization; (2) Deep consumer
research to inform everything we do; and (3) A more comprehensive,
well-planned, integrated marketing strategy – an attack
rooted in a balanced portfolio of owned, earned and paid marketing
tactics.
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. During the third quarter of 2017, we
commissioned a 1000-athlete research study, which provided us
details about our consumers’ sports nutrition usage patterns,
fitness goals, information sources, media consumption habits, key
purchases influences, brand awareness and perception, and much
more. Since then, we have developed a team of experts –
consisting of both in-house employees and external partners –
to drive our message to the masses via a well-planned campaign
roadmap. Our marketing team members have expertise in areas
including content, design, strategy, innovation, social media,
search and public relations.
In focusing on our most prominent products, we plan to build
breakthrough campaigns that excite our consumer base through proven
tactics such as digital marketing, sampling, public relations,
athlete/influencer marketing, event marketing, trade activity, paid
media, advertising, SEO/SEM, and affiliate marketing. Our roster of
elite athletes, influencers and brand evangelists will continue to
play a meaningful role and are focused on combat sports (MMA,
jiu-jitsu), weight training, CrossFit, football and
more.
New product innovation, along with complementary marketing
campaigns, will be a key component of driving incremental
sales.
3
Distribution Channels
The
MusclePharm brands are marketed across major global retail
distribution channels – Specialty, International and Food,
Drug, and Mass (“FDM”). Our largest customers, Costco
Wholesale Corporation (“Costco”) and Amazon.com, Inc.
(“Amazon”) accounted for approximately 26% and 13% of
our 2017 net revenue, respectively. For further information
concerning our customer concentration, see Note 2 to the
accompanying Consolidated Financial Statements.
Specialty Market: 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 extensive and strategic marketing. We have seen
significant growth in our online sales in 2017 primarily through
our Amazon distribution channel.
International: We intend to
continue our focus on growing our international presence by
continuing to offer new products in key markets as well as opening
new distribution channels in select regions of the world. Our
international reach touches every relevant market in the world and
continues to expand. We 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
in specific circumstances. We feel our direct relationships with
these retail partners will provide us the best 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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2017
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% of Total
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2016
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% of Total
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Distribution Channel
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Specialty
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$39,056
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38%
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$56,979
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43%
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International
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40,499
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40%
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45,751
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35%
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FDM
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22,600
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22%
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27,774
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21%
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BioZone net revenue(1)
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—
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0%
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1,995
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1%
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Total
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$102,155
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100%
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$132,499
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100%
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(1) In
May 2016, we sold BioZone.
As noted above, we market our products globally. The following
table sets forth revenue, net by customer geographic area based off
shipping address (in thousands):
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For the Years Ended December 31,
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2017
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2016
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Revenue,
net
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United
States
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$61,656
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$86,748
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International
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40,499
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45,751
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Total
revenue, net
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$102,155
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$132,499
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Product Research, Development and Quality Control
Science, product research, and innovation are key factors to our
success. 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.
4
Our lines of supplements have been developed through a
six-stage research process that utilizes the expertise of
nutritional scientists, doctors, and universities and strives to
assure that all products promote quality and safety for our
customers.
We are committed to science and sport being equal in our product
development. We believe real-world applications are essential. We
are in the process of moving the MP Sports Science Institute from
Denver, Colorado to a new state-of-the-art, 20,000 square-foot
professional training and performance facility in Burbank,
California dedicated to optimizing the performance of our products
for all ranges of athletes. We plan to use a variety of measurement
devices, including ultrasound, DEXA scans and the Makoto Arena II,
all of which measure bone density, body fat, etc., to gather
cutting-edge feedback about our formulations. Our capabilities
allow us to determine body composition, cognitive function, and
multiple performance parameters such as strength, power, and
endurance. Collecting data helps our team strive to improve our
products and to continue to be innovative.
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 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 safe supplements 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 strategic working relationships with multiple third-party
manufacturers, including our former subsidiary, BioZone. 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 with distribution,
warehousing, and quality control, providing 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 the highest quality products, that meet the
consumer needs, are produced.
5
Our Competitors
The nutritional supplements market is very competitive and the
range of products is diverse. Competitors use price, shelf
space and store placement, brand and product recognition, new
product introductions, and raw materials to capture market
share.
Our range of competitors include numerous nutritional supplement
companies that are highly fragmented in terms of geographic market
coverage, distribution channels, and product categories. In
addition, large pharmaceutical companies and packaged food and
beverage companies compete with us in the nutritional supplement
market. Some of these companies 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: Cellucor,
Dymatize Enterprises LLC, Iovate Health Sciences International
Inc., and Optimum Nutrition, 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. 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.
Government Regulation
The formulation, manufacturing, packaging, labeling, advertising,
distribution, 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 conditions that, unless complied with, may constitute
adulteration or misbranding of such products. The FDCA has been
adjusted 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.
6
We have over 70 trademark applications in the United States, 51 of
which are currently registered with the United States Patent and
Trademark Office. Our registered trademarks include registrations
of our house marks, as well as marks associated with our core
product lines.
We also have filed for protection of various marks throughout the
world and are committed to a significant long-term strategy to
build and protect the MusclePharm brand globally. We have applied
for the “MusclePharm” mark effective in 37 countries,
including the United States. The mark has been granted final
trademark registration effective in all 37 of those
countries.
Seasonality
Our business does not typically experience seasonal variations but
revenue may fluctuate based upon promotions. During 2017, our
revenue fluctuated mainly due to the discontinuation of various
products and product lines as well as certain issues related to our
supply chain, which limited availability of certain inventory, and
have been resolved on a go-forward basis.
Employees
As of December 31, 2017, we had 56 total
employees, all of whom were full time. None of the employees are
represented by a union. Management considers its relations with our
employees to be good and to have been maintained in a normal and
customary manner.
Corporate Information
Our principal executive offices are located at 4400 Vanowen St.,
Burbank, CA 91505 and our telephone number is (800) 292-3909.
We were incorporated in the State of Nevada in 2006. Our Internet
addresses are www.musclepharm.com
and www.musclepharmcorp.com.
The information contained on our
websites is not incorporated herein.
Available Information
Our corporate website is www.musclepharmcorp.com. We post the following filings as soon as
reasonably practicable after they are electronically filed with or
furnished to the Securities and Exchange Commission (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.
Copies of any of these documents will be provided in print to any
shareholder who submits a request in writing to MusclePharm
Investor Relations, 4400 Vanowen St., Burbank, CA 91505.
Additionally, our filings with the SEC may be read and copied at
the SEC Public Reference Room at 100 F Street, NE, Washington, DC
20549. Information on the operation of the Public Reference Room
may be obtained by calling 800-SEC-0330.
7
Item 1A. Risk Factors
Certain factors may have a material adverse effect on our business,
financial condition and results of operations. You should consider
carefully the risks and uncertainties described below, in addition
to other information contained in this Annual Report on Form 10-K,
including our consolidated financial statements and related notes.
The risks and uncertainties described below are not the only ones
we face. Additional risks and uncertainties that we are unaware of,
or that we currently believe are not material, may also become
important factors that adversely affect our business. If any of the
following risks actually occurs, our business, financial condition,
results of operations and future prospects could be materially and
adversely affected. In that event, the trading price of our common
stock could decline, and you could lose part or all of your
investment.
Risks Related to Our Business and Industry
Our indebtedness may limit our operating flexibility.
We have a convertible secured promissory note with our Chairman of
the Board, Chief Executive Officer and President, Mr. Ryan Drexler,
with an aggregate principal amount of $18.0 million. Our
indebtedness could have important consequences to us. For example,
it could:
●
make
us more vulnerable to general adverse economic and industry
conditions;
●
limit
our ability to obtain additional financing for working capital,
capital expenditures, acquisitions and other general corporate
requirements; and
●
limit
our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate
In addition, our ability to pay or refinance our debt depends on
our successful financial and operating performance, cash flows and
capital resources, which in turn depend upon prevailing economic
conditions and certain financial, business and other factors, many
of which are beyond our control. These factors include, among
others:
●
economic
and demand factors affecting our industry;
●
pricing
pressures;
●
increased
operating costs; competitive conditions; and
●
other
operating difficulties.
If our cash flows and capital resources are insufficient to fund
our debt service obligations, we may be forced to reduce or delay
operating or capital expenditures, sell material assets or
operations, seek to obtain additional capital, or restructure our
debt.
We may incur additional indebtedness in the future. Our incurrence
of additional indebtedness would intensify the risks described
above.
For a description of our indebtedness see “Item 7.
Management’s Discussion and Analysis of Financial Conditions
and Results of Operations–Liquidity and Capital
Resources.”
Our operating results may fluctuate, which makes them difficult to
predict and they may fall short of expectations.
Our operating results may fluctuate as a result of a number of
factors, many of which may be outside of our control. As a result,
comparing our operating results on a period-to-period basis may not
be meaningful, and you should not rely on our past results as an
indication of our future performance. Our quarterly, year-to-date,
and annual expenses as a percentage of our revenues may differ
significantly from our historical or projected rates. Our operating
results in future quarters may not meet expectations.
Each of the following factors, as well as others, may affect our
operating results:
●
our
loss of one or more significant customers;
●
the
introduction of successful new products by our competitors;
and
●
adverse
media reports on the use or efficacy of nutritional
supplements.
8
Because our business is changing and evolving, our historical
operating results may not be useful to you in predicting our future
operating results.
We may be required to raise additional financing to fund our
operations.
As business always holds some uncertainty, we may 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.
The concentration of stock ownership with Mr. Drexler may influence
the outcome of certain matters requiring stockholder
approval.
As of December 31, 2017, Mr. Ryan Drexler, our Chairman of the
Board, Chief Executive Officer and President, beneficially owns
approximately 59% of our outstanding shares of common stock,
including debt representing 52% of our common stock on an
as-converted basis, which is convertible into common stock at Mr.
Drexler’s election. As a result, Mr. Drexler may be able to
substantially influence the strategic direction of the Company and
the outcome of matters requiring approval by our stockholders. Mr.
Drexler’s interests, including his interests as a holder of a
convertible secured promissory note for $18.0 million, 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.
Our failure to respond appropriately to competitive challenges,
changing consumer preferences and demand for new products could
significantly harm our customer relationships and product
sales.
The nutritional sports supplement industry is characterized by
intense competition for product offerings and rapid and frequent
changes in consumer demand. Our failure to accurately predict
product trends could negatively impact our results and cause our
revenues to decline.
Our success with any particular product offering (whether new or
existing) depends upon a number of factors, including our ability
to:
●
deliver
quality products in a timely manner in sufficient
volumes;
●
accurately
anticipate customer needs and forecast accurately to our
manufacturers;
●
differentiate
our product offerings from those of our competitors;
●
competitively
price our products; and
●
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.
Our industry is highly competitive, and our failure to compete
effectively could adversely affect our market share, financial
condition, and future growth.
The nutritional supplement industry is highly competitive with
respect to:
●
price;
●
shelf
space and store placement;
●
brand
and product recognition;
●
new
product introductions; and
●
raw
materials.
9
Some 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, labeling and advertising for our products are
regulated by various federal, state, and local agencies as well as
those of each foreign country to which we distribute. 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, 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 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 2017, our largest customers, Costco and Amazon, individually
accounted for approximately 26% and 13%, respectively, of our net
revenue. During 2016, our largest customer, Costco, individually
accounted for approximately 20% 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, or any
serious financial difficulty of a major customer may have a
material adverse effect on our sales and operating
results.
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.
10
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 and operating results 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 and operating results.
Our insurance coverage or third-party indemnification rights may
not be sufficient to cover our legal claims or other losses that we
may incur in the future.
We maintain insurance at what we believe are adequate levels for
property, general product liability, product recall, directors 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.
Our current management team has a limited history of working together and may
not be able to execute our business plan.
Certain members of our senior
management team, including our Interim Chief Financial Officer,
have only recently joined our management team or assumed their
roles. As a result, our current management team has worked together
for only a limited period of time and has a limited
track record
of executing our business plan as a team. Accordingly, it is
difficult to predict whether our management team, individually and
collectively, will be effective in operating our
business.
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.
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
is intense. The loss or limitation of the services of any of our
key management employees or our inability to hire qualified
employees could have a material adverse effect on our business and
results of operations.
Changes in the economies of the markets in which we do business may
affect consumer demand for our products.
Consumer spending habits, including spending for our products, are
affected by, among other things, prevailing economic conditions,
levels of employment, fuel prices, changes in exchange rates,
salaries and wages, the availability of consumer credit, consumer
confidence and consumer perception of economic conditions. Economic
slowdowns in the markets in which we do business and an uncertain
economic outlook may adversely affect consumer spending habits,
which may result in lower sales of our products in future periods.
A prolonged global or regional economic downturn could have a
material negative impact on our financial position, results of
operation or cash flows.
If we fail to effectively manage our growth, our business and
operating results could be harmed.
The growth in our business will continue to place significant
demands on our management, and our operational and financial
infrastructure. To effectively manage this 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 significant capital expenditures, and utilize management
resources. Failure to implement these proposed growth objectives
could have a material adverse effect on our business and operating
results.
11
We are exposed to fluctuations in currency exchange rates, which
could negatively affect our results of operations.
Our consolidated results of operations and cash flows are subject
to fluctuations due to changes in foreign currency exchange rates.
For the year ended December 31, 2017, approximately
40% of our revenue was from
international sales. The majority of our revenue is denominated in
United States Dollars, with the exception of Canada and Ireland,
where we invoice primarily in local currencies. Our expenses are
generally denominated in the currencies in which our operations are
located, which is primarily in North America and Europe. Revenue
resulting from selling in local currencies and costs incurred in
local currencies are exposed to foreign currency exchange rate
fluctuations that can affect our operating income. As exchange
rates vary, our operating income may differ from expectations. To
date, we have not entered into any hedging arrangements with
respect to foreign currency risk or other derivative
instruments.
Taxation and transfer pricing affect our operations.
As a United States (“U.S.”) company doing business in
international markets, we are subject to foreign tax and
intercompany pricing laws, including those relating to the flow of
funds between us and our subsidiaries. These pricing laws are
designed to ensure that appropriate levels of income and expense
are reported by our U.S. and foreign entities, and that they are
taxed appropriately. If regulators challenge our corporate
structures, transfer pricing methodologies or intercompany
transfers, our operations may be harmed, and our effective tax rate
may increase. We are eligible to receive foreign tax credits in the
U.S. for certain foreign taxes actually paid abroad. In the event
any audits or assessments are concluded adversely to us, we may not
be able to offset the consolidated effect of foreign income tax
assessments through the use of U.S. foreign tax credits. Because
the laws and regulations governing U.S. foreign tax credits are
complex and subject to periodic legislative amendment, we cannot be
sure that we would in fact be able to take advantage of any foreign
tax credits in the future. The various customs, exchange control
and transfer pricing laws are continually changing, and are subject
to the interpretation of governmental agencies.
Despite our efforts to be aware of and to comply with such laws and
changes to the interpretations thereof, there is a risk that we may
not continue to operate in compliance with such laws. We may need
to adjust our operating procedures in response to these
interpretational changes, and such changes could have a material
negative impact on our financial position, results of operation or
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.
As our business expands, the number of products and competitors in
our markets are expected to increase and product overlaps may occur
and infringement claims may increase in number and significance.
Intellectual property lawsuits are subject to inherent
uncertainties due to the complexity of the technical issues
involved, and we cannot be certain that we would be successful in
defending ourselves against intellectual property claims. Further,
many potential litigants have the capability to dedicate
substantially greater resources than we can to enforce their
intellectual property rights and to defend claims that may be
brought against them. Furthermore, a successful claimant could
secure a judgment that requires us to pay substantial damages or
prevents us from distributing products or performing certain
services.
12
An increase in product returns could negatively impact our
operating results and profitability.
We permit the return of damaged or defective products and accept
limited amounts of product returns in certain instances. While such
returns 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 outsource our manufacturing and anticipate continued reliance 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. We plan to continue to rely
upon contract manufacturers to produce our products.
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.
A shortage in the supply of key raw materials or a price increase
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 any shortages or delays
in obtaining raw materials. If circumstances changed, shortages
could result in materially higher raw material prices or adversely
affect our ability to have a product manufactured. 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.
System and technology failures and obsolescence could harm our
business.
Our business is highly dependent upon our information technology
infrastructure (websites, supply chain, and enterprise resource
planning applications) to manage effectively and efficiently our
operations, including order entry, customer billing, accurately
tracking purchases and managing accounting, finance and inventory.
The occurrences of natural disasters, security breaches or other
unanticipated problems could result in interruptions in our
day-to-day business that could adversely affect us.
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.
13
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, 2017, 14,650,554 shares of
our common stock were outstanding and we did not have any
outstanding shares of preferred stock. The future issuance of
common stock and preferred stock may result in substantial dilution
in the percentage of our common stock held by our then existing
stockholders. 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 convertible promissory note agreement contains 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 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
convertible promissory note agreement, a default may allow Mr.
Drexler to accelerate the related debt and to exercise his remedies
under the agreement, which includes the right to declare the
principal amount of that debt, together with accrued and unpaid
interest and other related amounts, immediately due and payable,
and to exercise any remedies he may have to foreclose on assets
that are subject to liens securing that debt.
For additional details regarding our indebtedness, see Note 8 to
the accompanying Consolidated Financial Statements.
Our common stock is quoted on the OTCQB, which may have an
unfavorable impact on our stock price and liquidity.
Our common stock is quoted on the OTCQB Marketplace
(“OTCQB”). The OTCQB is an automated quotation service
operated by OTC Markets, LLC. The quotation of our shares on the
OTCQB may result in a less liquid market available for existing and
potential stockholders to trade shares of our common stock, in part
because of the inability or unwillingness of certain investors to
acquire shares of common stock not traded on a national securities
exchange, and could depress the trading price of our common stock
and have a long-term adverse impact on our ability to raise capital
in the future.
Nevada corporation laws limit the personal liability of corporate
directors and officers and require indemnification under certain
circumstances.
Section 78.138(7) of the Nevada Revised Statutes provides that,
subject to certain very limited statutory exceptions or unless the
articles of incorporation provide for greater individual liability,
a director or officer of a Nevada corporation is not individually
liable to the corporation or its stockholders for any damages as a
result of any act or failure to act in his or her capacity as a
director or officer, unless it is proven that the act or failure to
act constituted a breach of his or her fiduciary duties as a
director or officer and such breach involved intentional
misconduct, fraud or a knowing violation of law. We have not
included in our articles of incorporation any provision intended to
provide for greater liability as contemplated by this statutory
provision.
14
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.
Our articles of incorporation, our amended and restated by-laws,
and Nevada law could deter a change of our management, which could
discourage or delay offers to acquire us.
Certain provisions of Nevada law and of our articles of
incorporation, and by-laws, as amended, could discourage or make it
more difficult to accomplish a proxy contest or other change in our
management or the acquisition of control by a holder of a
substantial amount of our voting stock. It is possible that these
provisions could make it more difficult to accomplish, or could
deter transactions that stockholders may otherwise consider to be
in their best interests or in our best interests. These provisions
include:
●
requiring
stockholders who wish to request a special meeting of the
stockholders to disclose certain specified information in such
request and to deliver such request in a specific way within a
certain timeframe, which may inhibit or deter stockholders from
requesting special meetings of the stockholders;
●
requiring
that stockholders who wish to act by written consent request a
record date from us for such action and such request must include
disclosure of certain specified information, which may inhibit or
deter stockholders from acting by written consent;
●
establishing
the Board as the sole entity to fill vacancies of the Board, which
lengthens the time needed to elect a new majority of the
Board;
●
establishing
a two-thirds majority vote of the stockholders to remove a director
from the Board, as opposed to a simple majority, which lengthens
the time needed to elect a new majority of the Board;
and
●
establishing
that any person who acquires equity in us shall be deemed to have
notice and consented to the forum selection provision of our Bylaws
requiring actions to be brought only in New York, which may inhibit
or deter stockholders actions (i) on behalf of us;
(ii) asserting claims of breach of fiduciary duty by officers
or directors of us; or (iii) arising out of the Nevada Revised
Statutes, and establishing more detailed disclosure in any
stockholder’s advance notice to nominate a new member of the
Board, including specified information regarding such nominee,
which may inhibit or deter such nomination and lengthen the time
needed to elect a new majority of the Board.
In addition, the “business combination” provisions of
the Nevada Revised Statutes prohibit certain business combinations
between Nevada corporations and “interested
stockholders” for three years after the “interested
stockholder” first becomes an “interested
stockholder,” unless the corporation’s board of
directors approves the combination in advance. For purposes of
Nevada law, an “interested stockholder” is any person
who is (i) the beneficial owner, directly or indirectly, of ten
percent or more of the voting power of the outstanding voting
shares of the corporation, or (ii) an affiliate or associate of the
corporation and at any time within the three previous years was the
beneficial owner, directly or indirectly, of ten percent or more of
the voting power of the then outstanding shares of the corporation.
The definition of the term “business combination” is
sufficiently broad to cover virtually any kind of transaction that
would allow a potential acquirer to use the corporation’s
assets to finance the acquisition or otherwise to benefit its own
interests rather than the interests of the corporation and its
other stockholders. This business combination law may potentially
discourage parties from, or make it more difficult for parties to,
take control of the Company.
Further, the Nevada Revised Statutes contain a provision governing
“acquisition of controlling interest”. This law
provides generally that any person or entity that acquires 20% or
more of the outstanding voting shares of a publicly-held Nevada
corporation in the secondary public or private market may be denied
voting rights with respect to the acquired shares, unless a
majority of the disinterested shareholders of the corporation
elects to restore such voting rights in whole or in part. The
control share acquisition act provides that a person or entity
acquires “control shares” whenever it acquires shares
that, but for the operation of the control share acquisition act,
would bring its voting power within any of the following three
ranges: 20 to 331/3%, 331/3 to 50%; or more than 50%.
15
A “control share acquisition” is generally defined as
the direct or indirect acquisition of either ownership or voting
power associated with issued and outstanding control shares. The
shareholders or board of directors of a corporation may elect to
exempt the stock of the corporation from the provisions of the
control share acquisition act through adoption of a provision to
that effect in the articles of incorporation or bylaws of the
corporation. Our articles of incorporation and bylaws do not exempt
our common stock from the control share acquisition
act.
The control share acquisition act is applicable only to shares of
“Issuing Corporations” as defined by the Nevada law. An
Issuing Corporation is a Nevada corporation, which (i) has 200 or
more shareholders, with at least 100 of such shareholders being
both shareholders of record and residents of Nevada; and (ii) does
business in Nevada directly or through an affiliated
corporation.
At this time, we do not have 100 shareholder-of-record residents of
Nevada. Therefore, the provisions of the control share acquisition
act do not apply to acquisitions of our shares and will not until
such time as these requirements have been met. At such time as they
may apply, the provisions of the control share acquisition act may
discourage companies or persons interested in acquiring a
significant interest in or control of us, regardless of whether
such acquisition may be in the interest of our
shareholders.
Item 1B. Unresolved Staff comments
None.
Item 2. Properties
As of December 31, 2017, we operated in leased office and
warehouse facilities across the U.S. and Canada totaling
approximately 116,000 square feet, including approximately
27,000 square feet for our corporate headquarters and MP
Sports Science Center in Burbank, California. We do not own any
real property. Our office space and locations as of
December 31, 2017 can be seen in the below table.
|
Location
|
|
Function
|
Approximate
Square Feet
|
Expiration
Date of Lease
|
Monthly
Rent
|
|
Burbank,
CA
|
|
Company
Headquarters, MP Sports Science Center
|
27,226
|
September
30, 2022
|
$36,400
|
|
Denver,
CO
|
|
Company
Headquarters prior to November 2017
|
30,302
|
December 31, 2020
|
$10,500
|
|
Burlington, Ontario,
Canada
|
|
MP
Canada subsidiary
|
2,390
|
December
31, 2018 CAD
|
3,286
|
|
Spring
Hill, TN
|
|
Warehouse
and distribution
|
52,740
|
June
30, 2020
|
$21,450
|
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. As of December 31, 2017, 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.
Supplier Complaint
In
January 2016, ThermoLife International LLC
(“ThermoLife”), a supplier of nitrates to MusclePharm,
filed a complaint against us in Arizona state court. In its
complaint, ThermoLife alleges that we failed to meet minimum
purchase requirements contained in the parties’ supply
agreement. In March 2016, we filed an answer to
ThermoLife’s complaint, denying the allegations contained in
the complaint, and filed a counterclaim alleging that ThermoLife
breached its express warranty to MusclePharm because
ThermoLife’s products were defective and could not be
incorporated into our products. Therefore, we believe that
ThermoLife’s complaint is without merit. The lawsuit is
currently in the discovery phase.
16
Former Executive Lawsuit
In December 2015 we accepted notice by Mr. Richard Estalella
(“Estalella”) to terminate his employment as our
President. Although Estalella sought to terminate his
employment with us for “Good Reason,” as defined in
Estalella’s employment agreement with us, we advised
Estalella that we deemed his resignation to be without Good
Reason.
In February 2016, Estalella filed a complaint in Colorado state
court against us and Ryan Drexler, Chairman of the Board, Chief
Executive Officer and President, alleging, among other things, that
we breached his employment agreement, and seeking certain equitable
relief and unspecified damages. We believe Estalella’s claims
are without merit. As of the date of this report, we have evaluated
the potential outcome of this lawsuit and recorded the liability
consistent with our policy for accruing for contingencies. We have
concluded the discovery phase of the lawsuit and are preparing for
trial, with a revised trial date expected to commence in May
2018.
Insurance Carrier Lawsuit
We are engaged in litigation with an insurance carrier, Liberty
Insurance Underwriters, Inc. (“Liberty”), arising out
of Liberty’s denial of coverage. In 2014, we sought coverage
under an insurance policy with Liberty for claims against our
directors and officers arising out of an investigation by the
Securities and Exchange Commission. Liberty denied coverage, and,
on February 12, 2015, we filed a complaint in the District Court,
City and County of Denver, Colorado against Liberty claiming
wrongful and unreasonable denial of coverage for the cost and
expenses incurred in connection with the SEC investigation and
related matters. Liberty removed the complaint to the United States
District Court for the District of Colorado, which in August 2016
granted Liberty’s motion for summary judgment, denying
coverage and dismissing our claims with prejudice, and denied our
motion for summary judgment. We filed an appeal in November 2016.
We filed our opening brief on February 1, 2017 and Liberty filed
its response brief on April 7, 2017. We filed our reply brief on
May 5, 2017. The case moved to the 10th
Circuit Court of Appeals (the
“10th
Circuit”). In October 2017 the
10th
Circuit affirmed the lower
court’s grant of summary judgment in favor of Liberty. We are
currently working with Liberty to determine what amounts are
recoverable under the policy that fall outside of the
litigation.
Manchester City Football Group
We were engaged in a dispute with City Football Group Limited
(“CFG”), the owner of Manchester City Football Group,
concerning amounts allegedly owed by us under a Sponsorship
Agreement with CFG(the “Sponsorship Agreement”). In
August 2016, CFG commenced arbitration in the United Kingdom
against us, seeking approximately $8.3 million for the
Company’s purported breach of the Sponsorship
Agreement.
On July 28, 2017, we 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, we agreed to pay CFG a sum of $3 million,
consisting of a $1 million payment that was advanced by a related
party on July 7, 2017, and subsequent $1 million installments to be
paid by July 7, 2018 and July 7, 2019, respectively.
Item 4. Mine Safety Disclosures
None.
17
PART II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
The following table shows the reported high and low bid quotations
per share for our common stock based upon the closing price. Our
common stock is quoted on the OTCQB, which is operated by the OTC
Markets Group, under the symbol “MSLP.”
|
|
High
|
Low
|
|
2017
|
|
|
|
Fourth
Quarter
|
$1.50
|
$0.42
|
|
Third
Quarter
|
$1.94
|
$1.20
|
|
Second
Quarter
|
$2.25
|
$1.90
|
|
First
Quarter
|
$2.19
|
$1.72
|
|
|
||
|
2016
|
|
|
|
Fourth
Quarter
|
$2.40
|
$1.54
|
|
Third
Quarter
|
$3.10
|
$2.00
|
|
Second
Quarter
|
$3.25
|
$2.65
|
|
First
Quarter
|
$3.55
|
$1.71
|
Quotations on the OTCQB reflect bid and ask quotations, may reflect
inter-dealer prices, without retail markup, markdown or commission,
and may not represent actual transactions. Our transfer agent is
Corporate Stock Transfer, Inc., which is located at 3200 Cherry
Creek Drive South, Suite 430, Denver, Colorado
80209.
Holders of Record
As of March 20, 2018, the closing price of our common stock
was $0.75, as provided by the OTCQB, and we had 14,650,554 shares
of common stock outstanding, held by approximately 310 holders
of record of our common stock. The number of holders does not
include individuals or entities who beneficially own shares but
whose shares are held of record by a broker or clearing agency, but
does include each such broker or clearing agency as one record
holder.
Unregistered Sale of Securities
None.
The Securities Enforcement and Penny Stock Reform Act of
1990
The
Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure and documentation related to the market for
penny stock and for trades in any stock defined as a penny stock.
Unless we can trade at over $5.00 per share on the bid, it is more
likely than not that our securities, for some period of time, would
be defined under that Act as a “penny stock.” As a
result, those who trade in our securities may be required to
provide additional information related to their eligibility to
trade our shares. These requirements present a substantial burden
on any person or brokerage firm that plans to trade our securities
and could thereby make it unlikely that any liquid trading market
would ever result in our securities so long as the provisions of
this Act are applicable to our securities.
Any
broker-dealer engaged by the purchaser for the purpose of selling
his or her shares in us will be subject to Rules 15g-1 through
15g-10 of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. Rather than creating a need to comply with those
rules, some broker-dealers will refuse to attempt to sell penny
stock.
18
The
penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from those rules, to deliver
a standardized risk disclosure document prepared by the SEC,
which:
●
contains
a description of the nature and level of risk in the market for
penny stocks in both public offerings and secondary trading;
contains a description of the broker’s or dealer’s
duties to the customer and of the rights and remedies available to
the customer with respect to a violation to such duties or other
requirements of the Exchange Act;
●
contains
a brief, clear, narrative description of a dealer market, including
“bid” and “ask” prices for penny stocks and
the significance of the spread between the bid and ask
price;
●
contains
a toll-free telephone number for inquiries on disciplinary
actions;
●
defines
significant terms in the disclosure document or in the conduct of
trading penny stocks; and
●
contains
such other information and is in such form (including language,
type, size and format) as the SEC shall require by rule or
regulation.
The
broker-dealer also must provide, prior to effecting any transaction
in a penny stock, to the customer:
●
the
bid and offer quotations for the penny stock;
●
the
compensation of the broker-dealer and its salesperson in the
transaction;
●
the
number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the
market for such stock; and
●
monthly
account statements showing the market value of each penny stock
held in the customer’s account.
In
addition, the penny stock rules require that prior to a transaction
in a penny stock not otherwise exempt from those rules; the
broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive
the purchaser’s written acknowledgment of the receipt of a
risk disclosure statement, a written agreement to transactions
involving penny stocks, and a signed and dated copy of a written
suitability statement. These disclosure requirements will have the
effect of reducing the trading activity in the secondary market for
our stock because it will be subject to these penny stock rules.
Therefore, stockholders may have difficulty selling their
securities.
Dividend Policy
We have never declared dividends on our common stock, and currently
do not plan to declare dividends on shares of our common stock in
the foreseeable future. We expect to retain our future earnings, if
any, for use in the operation and expansion of our business.
Subject to the foregoing, the payment of cash dividends in the
future, if any, will be at the discretion of our Board and will
depend upon such factors as restrictions in debt agreements,
earnings levels, capital requirements, our overall financial
condition and any other factors deemed relevant by our
Board.
ITEM 6. SELECTED FINANCIAL DATA
The
Company qualifies as a smaller reporting company as defined in Item
10(f)(1) of SEC Regulation S-K, and is not required to provide the
information required by this Item.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with our
consolidated financial statements and related notes included
elsewhere in this Annual Report on Form 10-K. This discussion
contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from
those discussed below. See “Forward Looking Statements”
and “Item 1A. Risk Factors.”
Overview
We are a scientifically-driven performance lifestyle company that
develops, manufactures, markets and distributes branded sports
nutrition products and nutritional supplements. We offer a broad
range of performance powders, bars and capsules, which seek to help
athletes of all types achieve a heightened level of performance and
satisfaction. Our portfolio consists of sports nutrition staples,
such as protein powders and bars, and preworkout powders, as well
as well-known supplements like creatine, BCAA, fish oil, a
multi-vitamin and more. These products fall under
globally-recognized brands, MusclePharm® and FitMiss®,
which are marketed and sold in more than 100 countries globally. In
late 2017, we relocated our corporate headquarters from Denver, CO
to Burbank, CA.
Our offerings are clinically-developed through a six-stage research
process, and all of our manufactured products are rigorously vetted
for banned substances by the leading quality assurance program,
Informed-Choice. While we initially drove growth in the Specialty
retail channel, in recent years we have expanded our focus to drive
sales and retailer growth across leading e-commerce, Food Drug
& Mass, and Club retail channels, including Amazon, Costco,
Kroger, Walgreens, 7-Eleven, and many others. Our sales in the
e-commerce space grew approximately 250% in the year ended December
31, 2017 compared to the year ended December 31, 2016.
Additionally, BodyBuilding.com named our Combat Crunch Bar as
Protein Bar of the Year in each of 2015, 2016 and
2017.
Outlook and Summary of Significant Transactions and Activities
During 2017
During 2017, we made significant progress stabilizing our Company,
strengthening the brand and continuing to build out our status as a
leading nutritional supplement innovator, focused on the needs of
athletes. Following is a brief discussion of our significant
accomplishments.
Introduction of our Organic Line, the MP Natural
Series
During the second quarter of 2017, we introduced a new organic
product line, the MP Natural Series (the “Natural
Series”). The Natural Series accounted for approximately $1.5
million of revenues in the year ended December 31, 2017. The
Natural Series continues to receive the attention of athletes and
gain expansion in both the natural retailer channel and FDM channel
via acceptance at retailers such as Sprouts, Fresh Thyme and
various Kroger banners. Utilizing current consumer insights, we
believe that the Natural Series will take advantage of the current
trend of organic and non-GMO performance supplements, introducing
us to potential new consumers and broadening our base of existing
consumers.
Relocation of our Corporate Headquarters
In fourth quarter of 2017, we relocated our corporate headquarters
from Denver, CO to Burbank, CA. The move had three primary
intentions: (i) enable us to be closer to our largest consumer base
and influencers; (ii) find new talent to help shepherd the brand
forward in a differential way; and (iii) allow for year-round
training and content capture at our Sports Science
Institute.
Since moving, we have built out an entirely revamped Sports Science
Institute in a 20,000 square-foot space, consisting of training
equipment for cross training, weight training, combat sport
training, and more, as well as an area dedicated specifically to
athlete recovery. MusclePharm athletes, as well as professional
trainers, dieticians and influencers, use the facility on a regular
basis. Moreover, we have hosted events including the Eddie Bravo
Invitational, a jiu-jitsu exhibition, which was broadcast live on
UFC Fight Pass, as well as Pay Per View.
20
We believe the move positions our Company in an influential light
within a competitive industry, and has afforded MusclePharm the
opportunity to source new leaders from complementary
industries.
Settlement of the Manchester City Football Group
Litigation
During July 2017, we settled our dispute with Manchester City
Football Group, arising out of a dispute between the parties. We
recorded a loss on the settlement of $1.5 million for the year
ended December 31, 2017. See additional information in Note 9 to
the accompanying Consolidated Financial Statements.
Marketing Team Overhaul
In August 2017, we hired a Chief Marketing Officer, Matthew Kerbel,
whose prior experience spans includes organizations including Lyft,
General Mills and Activision. Mr. Kerbel is charged with tasks
including energizing sales via the integration of
research-informed, 360° marketing programs, evolving our
digital ecosystem, driving earned media in partnership with key
influencers and public relations firms; shepherding, the
MusclePharm brand to be more community-oriented. Since the hiring,
we have overhauled the marketing organization, which now consists
of an internal creative capability (including a new Creative
Director), agency partners, and freelance expert
consultants.
Outlook
As we continue to execute our growth strategy and focus on our core
operations, we anticipate both continued improvement in our
operating margins and expense structure, as well as topline sales
advancement. The termination of the Arnold Schwarzenegger
product-line licensing agreement, discontinuance of unprofitable
SKUs and product families, as well as the migration to new product
suppliers have impacted revenue growth for the short-term. However,
we anticipate revenues and growth margin to strengthen as we
increase focus on our core MusclePharm products. In addition, the
sale of our wholly-owned subsidiary, BioZone, in May 2016, enables
us to further narrow our focus on core products, and further
innovate and develop new products. We also anticipate continued
savings in advertising and promotions expenses as we focus on
effective marketing and advertising strategies, and move away from
celebrity endorsements.
Management’s Plans with Respect to Liquidity and Capital
Resources
Management believes the substantially completed restructuring plan,
the continued reduction in ongoing operating costs and expense
controls, and the aforementioned growth strategy, will enable us to
ultimately achieve profitability. We have reduced our operating
expenses sufficiently and believe that our ongoing sources of
revenue will be sufficient to cover these expenses for the
foreseeable future.
As of December 31, 2017, we had a stockholders’ deficit of
$12.5 million and recurring losses from operations. To manage cash
flow, we entered into a secured borrowing arrangement, pursuant to
which we have the ability to borrow up to $12.5 million subject to
sufficient amounts of accounts receivable to secure the loan. The
Agreement’s term has been extended to July 31, 2018. In
October 2017, we also entered into a loan and security agreement to
borrow against our inventory up to a maximum of $3.0 million for an
initial six-month term which automatically extends for six
additional months. As of December 31, 2017, we owed $3.0 million on
this credit line, of which $1.0 million was repaid subsequent to
the end of the year. On November 3, 2017, we entered into a
refinancing transaction with Mr. Ryan Drexler, our Chairman of the
Board, Chief Executive Officer and President, to restructure all of
the $18.0 million in notes payable to him, which are now due on
December 31, 2019. Accordingly, such debt is classified as a
long-term liability at December 31, 2017.
As of December 31, 2017, we had approximately $6.2 million in cash
and $2.0 million in working capital.
21
The Company’s Consolidated Financial Statements as of and for
the year ended December 31, 2017 were prepared on the basis of a
going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the
ordinary course of business. Accordingly, they do not give effect
to adjustments that could be necessary should we be required to
liquidate our assets.
The Company’s ability to continue as a going concern and
raise capital for specific strategic initiatives could also depend
on obtaining adequate capital to fund operating losses until it
becomes profitable. The Company can give no assurances that any
additional capital that it is able to obtain, if any, will be
sufficient to meet its needs, or that any such financing will be
obtainable on acceptable terms.
Mr. Drexler has verbally both stated his intent and ability to put
more capital into the business if necessary. However, Mr. Drexler
is under no obligation to the Company to do so, and we can give no
assurances that Mr. Drexler will be willing or able to do so at a
future date and/or that he will not demand payment of his
refinanced convertible note on December 31, 2019.
We believe that our capital resources as of December 31, 2017,
available borrowing capacity and current operating plans will be
sufficient to fund the planned operations for at least twelve
months from the date of filing this report.
Results of Operations
Comparison of the Year Ended December 31, 2017 to the Year
Ended December 31, 2016
|
|
For the Years Ended
December 31,
|
|
|
|
|
|
2017
|
2016
|
$ Change
|
% Change
|
|
|
($ in
thousands)
|
|
|
|
|
Revenue,
net
|
$102,155
|
$132,499
|
$(30,344)
|
(22.9)%
|
|
Cost of revenue (1)
|
71,710
|
88,026
|
(16,316)
|
(18.5)
|
|
Gross
profit
|
30,445
|
44,473
|
(14,028)
|
(31.5)
|
|
Operating
expenses:
|
|
|
|
|
|
Advertising
and promotion
|
9,352
|
10,652
|
(1,300)
|
(12.2)
|
|
Salaries
and benefits
|
10,134
|
18,033
|
(7,899)
|
(43.8)
|
|
Selling,
general and administrative
|
12,071
|
15,941
|
(3,870)
|
(24.3)
|
|
Research
and development
|
642
|
1,869
|
(1,227)
|
(65.7)
|
|
Professional
fees
|
3,378
|
5,735
|
(2,357)
|
(41.1)
|
|
Restructuring
and other charges
|
—
|
(3,477)
|
3,477
|
(100.0)
|
|
Settlement
of obligations
|
1,877
|
—
|
1,877
|
100.0
|
|
Impairment
of assets
|
180
|
4,378
|
(4,198)
|
(95.9)
|
|
Total
operating expenses
|
37,634
|
53,131
|
(15,497)
|
(29.2)
|
|
Loss
from operations
|
(7,189)
|
(8,658)
|
1,469
|
(17.0)
|
|
Gain
on settlement of accounts payable
|
430
|
9,927
|
(9,497)
|
(95.7)
|
|
Loss
on sale of subisdiary
|
—
|
(2,115)
|
2,115
|
(100.0)
|
|
Other
expense, net
|
(4,072)
|
(2,313)
|
(1,759)
|
76.0
|
|
Loss
before provision for income taxes
|
(10,831)
|
(3,159)
|
(7,672)
|
(242.9)
|
|
Provision
for income taxes
|
142
|
318
|
(176)
|
(55.3)
|
|
Net
loss
|
$(10,973)
|
$(3,477)
|
$7,496
|
(215.6)%
|
(1)
Cost
of revenue for the year ended December 31, 2016 includes
restructuring charges of $2.3 million, related to write-down of
inventory for discontinued products.
22
The following table presents our operating results as a percentage
of revenue, net for the periods presented:
|
|
For the Years Ended
December 31,
|
|
|
|
2017
|
2016
|
|
Revenue,
net
|
100%
|
100%
|
|
Cost
of revenue
|
70
|
66
|
|
Gross
profit
|
30
|
34
|
|
Operating
expenses:
|
|
|
|
Advertising
and promotion
|
9
|
8
|
|
Salaries
and benefits
|
10
|
14
|
|
Selling,
general and administrative
|
12
|
12
|
|
Research
and development
|
1
|
2
|
|
Professional
fees
|
3
|
4
|
|
Restructuring
and other charges
|
—
|
(3)
|
|
Settlement
obligations
|
2
|
—
|
|
Impairment
of assets
|
—
|
3
|
|
Total
operating expenses
|
37
|
40
|
|
Loss
from operations
|
(7)
|
(6)
|
|
Gain
on settlement of accounts payable
|
—
|
7
|
|
Loss
on sale of subisdiary
|
—
|
(2)
|
|
Other
expense, net
|
(4)
|
(2)
|
|
Loss
before provision for income taxes
|
(11)
|
(3)
|
|
Provision
for income taxes
|
—
|
—
|
|
Net
loss
|
(11)%
|
(3)%
|
Revenue, net
We derive our revenue through the sales of our various branded
nutritional supplements. Revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the price
is fixed or determinable, and collection is reasonably assured
which generally occurs upon shipment or delivery of the
products. We record sales incentives as a direct reduction of
revenue for various discounts provided to our customers consisting
primarily of volume incentive rebates and advertising related
credits. We accrue for sales discounts over the period they are
earned. Sales discounts are a significant part of our
marketing plan to our customers as they help drive increased sales
and brand awareness with end users through promotions that we
support through our distributors and re-sellers.
Net revenue decreased $30.3 million, or 22.9%, to $102.2 million
for the year ended December 31, 2017, compared to $132.5 million
for the year ended December 31, 2016. Net revenue for the year
ended December 31, 2017 decreased $2.0 million due to the sale of
BioZone. Net revenue from our international customers decreased by
$5.2 million or 11.5%, net revenue from FDM decreased $5.2 million
or 18.6%, and net revenue from specialty lines decreased $17.9
million or 31.5%. These decreases were related primarily to a
general shift in business strategy to streamline our distribution
channels and increased efforts to online marketing. Discounts and
sales allowances decreased to 15% of gross revenue, or $18.0
million, for the year ended December 31, 2017 from 21% of gross
revenue, or $34.6 million for the same period in 2016. The decrease
in discounts and allowances is primarily related to a reduction of
promotions related to new product introductions and a reduction of
discounts and allowances on existing products with key
customers.
During the year ended December 31, 2017, our largest customers,
Costco and Amazon, accounted for approximately 26% and 13%,
respectively, of our net revenue. During the year ended December
31, 2016, our largest customer, Costco, accounted for approximately
20% of our net revenue.
23
Cost of Revenue and Gross Margin
Cost of revenue for MusclePharm products is directly related to the
production, manufacturing, and freight-in of the related products
purchased from third party contract manufacturers. We mainly ship
customer orders from our distribution center in Spring Hill,
Tennessee. The facilities are operated with our equipment and
employees, and we own the related inventory. We also use contract
manufacturers to drop ship products directly to our
customers.
In addition, BioZone manufactured products and, therefore, derived
costs of revenue through the costs of raw materials, direct labor,
freight-in and other supply and equipment expenses. We mainly
shipped BioZone customer orders from our distribution center in
Pittsburg, California. We completed the sale of BioZone during the
second quarter of 2016, and closed the distribution center during
the third quarter of 2016.
Our historical experience has been that, over the life cycle of a
particular product, the cost of revenue as a percentage of total
revenue has typically declined as a result of efficiencies and
resulting decreases in our product costs. The decrease in cost
generally results from an increase in the volume purchased from
manufacturing suppliers, as well as yield improvements and test
enhancements.
Our gross profit fluctuates due to several factors, including sales
incentives, new product introductions and upgrades to existing
product lines, changes in customer and product mixes, the mix of
product demand, shipment volumes, our product costs, pricing, and
inventory write-downs. Cost of revenue is expected to decrease over
time as a percentage of revenue due primarily to our focus on
supply chain efficiency and negotiating better pricing with our
manufacturers.
Costs of revenue decreased 18.5% to $72.0 million for the year
ended December 31, 2017, compared to $88.0 million for the same
period in 2016. Accordingly, gross profit for the year ended
December 31, 2017 decreased $14.0 million to $30.4 million compared
to $44.5 million for the same period 2016. Gross profit margin was
30% and 34% for the years ended December 31, 2017 and 2016,
respectively.
Operating Expenses
Operating expenses for the year ended December 31, 2017 were
$37.6 million, compared to $53.1 million for the same period
in 2016. During the third quarter of 2015, we commenced our
restructuring plan, which resulted in a credit of $3.5 million
during the year ended December 31, 2016. Changes to operating
expenses are as follows:
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.
Advertising and promotion expenses decreased 12.2% to $9.4 million
for the year ended December 31, 2017, or 9% of revenue, compared to
$10.7 million, or 8% of revenue, for the same period in 2016. We
have implemented new strategies to our advertising and promotion
expenditures to maximize our gross profit and have focused our
efforts from athletic endorsements to strategic partnerships within
the industry in order to maximize our sales and profits. We plan to
monitor these efforts during 2018 for effectiveness and have plans
for continued promotions.
Salaries and Benefits
Salaries and benefits consist primarily of salaries, bonuses,
benefits and stock-based compensation paid or provided to our
employees. These costs are a significant component of our operating
expenses. During the third quarter of 2015, we executed a
restructuring plan, resulting in a reduction in our workforce that
concluded during the third quarter of 2016. Salaries and benefits
continued to decrease due to potential additional headcount
reductions, limited headcount additions, as well as a reduction of
future restricted stock awards, and a reduction in amortization of
existing stock-based grants through the end of 2017. We relocated
our headquarters in the fourth quarter of 2017 and are in the
process of phasing out our international offices. We anticipate
that during 2018, our salaries and benefits will stabilize and
align with our future growth.
24
Salaries and benefits decreased 43.8% to $10.1 million, or 10% of
revenue, for the year ended December 31, 2017 compared to $18.0
million, or 14% of revenue, for the same period in 2016.
Stock-based compensation expense decreased $3.1 million and other
compensation expense decreased by $4.8 million related to the
reductions of our headcount.
Selling, General and Administrative
Our selling, general and administrative expenses consist primarily
of depreciation and amortization, information technology equipment
and network costs, facilities related expenses, director’s
fees, which include both cash and stock-based compensation,
insurance, rental expenses related to equipment leases, supplies,
legal settlement costs, and other corporate expenses.
Selling, general and administrative expenses decreased by 24.3% to
$12.1 million, or 12% of revenue, for the year ended December 31,
2017 compared to $15.9 million, or 12% of revenue, for the same
period in 2016. The decrease was primarily due to lower office
expenses and other cost savings of $1.6 million, lower freight
expense of $1.2 million, a decrease in rent expense of $0.4
million, lower depreciation and amortization of $0.7 million, lower
insurance costs of $0.4 million and lower IT costs of $0.7 million.
These expenses were partially offset by increases
of $1.1 million related to an increase in provisions
for doubtful accounts.
Research and Development
Research and development expenses consist primarily of R&D
personnel salaries, bonuses, benefits, and stock-based
compensation, product quality control, which includes third-party
testing, and research fees related to the development of new
products. We expense research and development costs as
incurred.
Research and development expenses decreased 65.7% to $0.6 million,
or 1% of revenue, for the year ended December 31, 2017 compared to
$1.9 million, also 1% of revenue, for the same period in 2016. The
decrease was primarily due to a reduction in salaries and benefits
and research fees.
Professional Fees
Professional fees consist primarily of legal fees, accounting and
audit fees, consulting fees, which includes both cash and
stock-based compensation, and investor relations costs. We expect
our professional fees to decrease as we rationalize our
professional service providers and focus on key initiatives. Also,
as our ongoing legal matters are reduced, we expect to see a
further decline in legal costs for specific settlement activities.
We intend to continue to invest in strengthening our governance,
internal controls, and process improvements which may require some
support from third-party service providers.
Professional fees decreased 41.1% to $3.4 million, or 3% of
revenue, for the year ended December 31, 2017, compared to $5.7
million, or also 4% of revenue, for the same period in
2016. The decrease was primarily due to a decrease in legal
fees of $1.3 million related primarily to a reduction in
litigation, accounting fees of $0.6 million, fees related to the
SEC matters of $0.2 million, and lower consulting fees of $0.2
million.
Restructuring and Other Charges
For the year ended December 31, 2016, we recorded a credit in
“Restructuring and other charges” of $3.5 million which
primarily included: (i) an expense credit of $4.8 million
related to the release of the restructuring accrual of $7.0 million
which was expensed during the year ended December 31, 2015, offset
by the cash payment of $2.2 million related to the settlement
agreement which terminated all future commitments between ETW
Corporation (“ETW”) and the Company (see Note 14 to the
accompanying Consolidated Financial Statements); (ii) $1.4 million
related to write-off of long-lived assets related to the
abandonment of certain lease facilities; and (iii) $0.9 million
related to severance and other employee compensation costs. The
restructuring plan was substantially complete as of December 31,
2016.
25
Settlement of obligations
For the year ended December 31, 2017, we recorded settlement of
obligation charges of $1.9 million, which included: (i)
a settlement of $1.5 million with the Manchester City Football
Group, (ii) a settlement of $0.2 million with Sherman and Howard
and (iii) the settlement of two additional lawsuits totaling $0.2
million.
Impairment of assets
During the year ended December 31, 2017, we determined that certain
portions of our former headquarters in Denver, CO, which totaled
$0.2 million, were impaired due to the closure of our gym and the
discontinued use of certain portions of our facility.
During the year ended December 31, 2016, we determined that
certain prepaid manufacturing costs and our investment in a warrant
to purchase Capstone’s parent company, which totaled $2.4
million, were impaired due to Capstone’s sale of their
primary powder manufacturing facility in June 2016 and the
termination of our manufacturing relationship with them. See
additional information in Note 6 to the accompanying Consolidated
Financial Statements. Additionally, during the year ended December
31, 2016, $2.0 million of intangible assets, prepaid assets and
inventory related to the Arnold Schwarzenegger product line was
written off. Per the agreement to terminate the product line, no
further use of his likeness or sales of the inventory were allowed
and therefore, we disposed of all the remaining product in
inventory.
Gain on settlement of accounts payable
During 2017, we negotiated the reduction in various accounts,
resulting in a total gain of $0.4 million.
During November 2016, we settled our dispute with Capstone arising
out of a manufacturing agreement between the parties. We recorded a
gain on settlement of $9.1 million for the year ended December 31,
2016. See additional information in Note 9 of the accompanying
Consolidated Financial Statements. In addition, we negotiated the
reduction of various accounts, resulting in a total gain of $9.9
million.
Loss on sale of subsidiary
During the year ended December 31, 2016, we sold our wholly-owned
subsidiary, BioZone, for a loss of $2.1 million. See additional
information in Note 4 to the accompanying Consolidated Financial
Statements. The loss on the sale of BioZone primarily related to
the subsidiary’s pre-tax losses for 2016. Pre-tax loss for
BioZone for the year ended December 31, 2016 was $1.5 million,
which represented the operations through the disposition date in
May 2016.
Other expense, net
For the years ended December 31, 2017 and 2016, “Other
expense, net” consisted of the following (in
thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
Other
expense, net:
|
|
|
|
Interest
expense, related party
|
$(2,423)
|
$(682)
|
|
Interest
expense, other
|
(46)
|
(258)
|
|
Interest
expense, secured borrowing arrangement
|
(792)
|
(702)
|
|
Foreign
currency transaction gain
|
26
|
23
|
|
Other
|
(837)
|
(694)
|
|
Total
other expense, net
|
$(4,072)
|
$(2,313)
|
26
Net other expense for the year ended December 31, 2017 increased
76%, or $1.8 million, compared to the same period in 2016. The
increase in net other expense was primarily related to financing
fees and other miscellaneous expenses.
Provision for income taxes
Provision for income taxes consists primarily of federal and state
income taxes in the U.S. and income taxes in foreign jurisdictions
in which we conduct business. Due to uncertainty, as to the
realization of benefits from our deferred tax assets, including net
operating loss carry-forwards, research and development and other
tax credits, we have a full valuation allowance reserved against
such assets. We expect to maintain this full valuation allowance at
least in the near term.
Liquidity and Capital Resources
Management believes the substantially completed restructuring plan,
the continued reduction in ongoing operating costs and expense
controls, and the aforementioned growth strategy, will enable us to
ultimately achieve profitability. We have reduced our operating
expenses sufficiently and believe that our ongoing sources of
revenue will be sufficient to cover these expenses for the
foreseeable future.
As of December 31, 2017, we had a stockholders’ deficit of
$12.5 million and recurring losses from operations. To manage cash
flow, we entered into a secured borrowing arrangement, pursuant to
which we have the ability to borrow up to $12.5 million subject to
sufficient amounts of accounts receivable to secure the loan. The
Agreement’s term has been extended to July 31, 2018. In
October 2017, we also entered into a loan and security agreement to
borrow against our inventory up to a maximum of $3.0 million for an
initial six-month term which automatically extends for six
additional months. As of December 31, 2017, we owed $3.0 million on
this credit line, of which $1.0 million was repaid subsequent to
the end of the year. On November 3, 2017, we entered into a
refinancing transaction with Mr. Ryan Drexler, our Chairman of the
Board, Chief Executive Officer and President, to restructure all of
the $18.0 million in notes payable to him, which are now due on
December 31, 2019. Accordingly, such debt is classified as a
long-term liability at December 31, 2017.
As of December 31, 2017, we had approximately $6.2 million in cash
and $2.0 million in working capital.
The Company’s Consolidated Financial Statements as of and for
the year ended December 31, 2017 were prepared on the basis of a
going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the
ordinary course of business. Accordingly, they do not give effect
to adjustments that could be necessary should we be required to
liquidate assets.
The Company’s ability to continue as a going concern and
raise capital for specific strategic initiatives could also depend
on obtaining adequate capital to fund operating losses until it
becomes profitable. The Company can give no assurances that any
additional capital that it is able to obtain, if any, will be
sufficient to meet its needs, or that any such financing will be
obtainable on acceptable terms.
Mr. Drexler has verbally both stated his intent and ability to put
more capital into the business if necessary. However, Mr. Drexler
is under no obligation to the Company to do so, and we can give no
assurances that Mr. Drexler will be willing or able to do so at a
future date and/or that he will not demand payment of his
refinanced convertible note on December 31, 2019.
We expect our capital resources as of December 31, 2017, available
borrowing capacity and current operating plans will be sufficient
to fund the planned operations for at least twelve months from the
date of filing this report.
27
Our net consolidated cash flows are as follows (in
thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
Consolidated Statements of Cash Flows Data:
|
|
|
|
Net
cash used in operating activities
|
$(5,131)
|
$(15,068)
|
|
Net
cash (used in) provided by investing activities
|
(37)
|
5,395
|
|
Net
cash provided by financing activities
|
6,436
|
7,522
|
|
Effect
of exchange rate changes on cash
|
17
|
13
|
|
Net
change in cash
|
$1,285
|
$(2,138)
|
Operating Activities
Our cash (used in) provided by operating activities is driven
primarily by sales of our products and vendor provided credit. Our
primary uses of cash from operating activities have been for
inventory purchases, advertising and promotion expenses,
personnel-related expenditures, manufacturing costs, professional
fees, costs related to our facilities, and legal fees. Our cash
flows from operating activities will continue to be affected
principally by the results of operations and the extent to which we
increase spending on personnel expenditures, sales and marketing
activities, and our working capital requirements.
Our operating cash flows were $9.9 million higher for the year
ended December 31, 2017 compared to the same period in 2016. The
change primarily relates to the net change in net operating assets
and liabilities, which resulted in a use of cash of $5.1 million
and $15.1 million for the years ended December 31, 2017 and 2016,
respectively. During the year ended December 31, 2017, the increase
in our accounts receivable resulted in a decrease of our working
capital of $4.6 million. The decreases were partially offset by
increases of our working capital through an increase in our
liabilities related to accounts payable and accrued liabilities of
$2 million and a decrease in our inventory and prepaid items of $3
million. During the year ended December 31, 2016, the
decrease in liabilities related to accounts payable and accrued
liabilities resulted in a $20.8 million decrease in working
capital. These decreases were offset by a reduction in our accounts
receivable balance, which provided a source of working capital of
$7.3 million. These changes in working
capital were offset by a net loss adjusted for non-cash charges,
which resulted in a use of cash of $5.1 million for the year ended
December 31, 2017, compared to a use of cash of $15.1 million for
the same period in 2016.
Investing Activities
Cash used by investing activities was $37,000 for the year ended
December 31, 2017 for the purchases of property and
equipment.
Cash provided by investing activities was $5.4 million for the year
ended December 31, 2016, primarily due to the cash proceeds from
sale of BioZone totaling $5.9 million, offset by purchases of
property and equipment of $0.5 million.
Financing Activities
Cash provided by
financing activities was
$6.4 million for the year ended December 31, 2017, primarily
due to borrowings of $3.0 million from a line of credit, $2.7
million in net borrowings from our secured line of credit, and $0.9
million in net proceeds from secured promissory notes with Mr.
Drexler, our Chairman of the Board, Chief Executive Officer and
President.
Cash provided by
financing activities was
$7.5 million for the year ended December 31, 2016, primarily
due to the proceeds from the second convertible secured promissory
note with Mr. Drexler, of $11.0 million and proceeds from our
secured borrowing arrangement, offset by repayment on our line of
credit of $3.0 million and repayment of a term loan of
$2.9 million.
28
Indebtedness Agreements
Related-Party Notes Payable
On
November 3, 2017, we entered into a refinancing transaction (the
“Refinancing”) with Mr. Ryan Drexler, the
Company’s Chairman of the Board of Directors, Chief Executive
Officer and President. As part of the Refinancing, we issued to Mr.
Drexler an amended and restated convertible secured promissory note
(the “Refinanced Convertible Note”) in the original
principal amount of $18,000,000, which amends and restates (i) a
convertible secured promissory note dated as of December 7, 2015,
and amended as of January 14, 2017, in the original principal
amount of $6,000,000 with an interest rate of 8% prior to the
amendment and 10% following the amendment (the “2015
Convertible Note”), (ii) a convertible secured promissory
note dated as of November 8, 2016, in the original principal amount
of $11,000,000 with an interest rate of 10% (the “2016
Convertible Note”) , and (iii) a secured demand promissory
note dated as of July 27, 2017, in the original principal amount of
$1,000,000 with an interest rate of 15% (the “2017
Note”, and together with the 2015 Convertible Note and the
2016 Convertible Note, collectively, the “Prior
Notes”). The due date of the 2015 Convertible Note and the
2016 Convertible Note was November 8, 2017. The 2017 Note was due
on demand.
2017 Refinanced Convertible Note
The $18
million Refinanced Convertible Note bears interest at the rate of
12% per annum. Interest payments are due on the last day of each
quarter. At our option (as determined by its independent
directors), we may repay up to one sixth of any interest payment by
either adding such amount to the principal amount of the note or by
converting such interest amount into an equivalent amount our
common stock. Any interest not paid when due shall be capitalized
and added to the principal amount of the Refinanced Convertible
Note and bear interest on the applicable interest payment date
along with all other unpaid principal, capitalized interest, and
other capitalized obligations.
Both
the principal and the interest under the Refinanced Convertible
Note are due on December 31, 2019, unless converted
earlier.
Mr.
Drexler may convert the outstanding principal and accrued interest
into shares of our common stock at a conversion price of $1.11 per
share at any time. We may prepay the Refinanced Convertible Note by
giving Mr. Drexler between 15 and 60 days’ notice depending
upon the specific circumstances, subject to Mr. Drexler’s
conversion right.
The
Refinanced Convertible Note contains customary events of default,
including, among others, the failure by us to make a payment of
principal or interest when due. Following an event of default,
interest will accrue at the rate of 14% per annum. In addition,
following an event of default, any conversion, redemption, payment
or prepayment of the Refinanced Convertible Note will be at a
premium of 105%. The Refinanced Convertible Note also contains
customary restrictions on the ability of us to, among other things,
grant liens or incur indebtedness other than certain obligations
incurred in the ordinary course of business. The restrictions are
also subject to certain additional qualifications and carveouts, as
set forth in the Refinanced Convertible Note. The Refinanced
Convertible Note is subordinated to certain other indebtedness of
us, as described below.
As part
of the Refinancing, we and Mr. Drexler entered into a restructuring
agreement (the “Restructuring Agreement”) pursuant to
which the parties agreed to enter into the Refinanced Convertible
Note and to amend and restate the security agreement pursuant to
which the Prior Notes were secured by all of the assets and
properties of us and our subsidiaries whether tangible or
intangible, by entering into the Third Amended and Restated
Security Agreement (the “Amended Security Agreement”).
Pursuant to the Restructuring Agreement, we 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.
In
connection with the refinancing, the Company recorded a debt
discount of $1.2 million. The debt discount is equal to the change
in the fair value of the conversion option between the Refinanced
Convertible Note and the Prior Notes. The fair value of the
conversion option was determined using a Monte Carlo simulation and
the model of stock price behavior known as GBM which simulates a
future period as a random step from a previous
period.
29
In
addition, the Refinanced Convertible Note contains two embedded
derivatives for default interest and an event of default put. Due
to the unlikely event of default, the embedded derivatives have a
de minimis value as of December 31, 2017.
For the years ended December 31, 2017 and 2016, interest expense
related to the related party notes was $2.4 million and $0.7
million, respectively. During the years ended December 31, 2017 and
2016, $2.2 million and $0.5 million, respectively, in interest was
paid to Mr. Drexler. For the year ended December 31, 2016, in
connection with issuing the Prior Notes, the Company recorded a
beneficial conversion feature of $601,000 as a debt discount which
was amortized over the original term of the debt using the
effective interest method.
Inventory Financing
On
October 6, 2017, we and our affiliate (together with us,
“Borrower”) entered into a Loan and Security Agreement
(“Security Agreement”) with Crossroads Financial Group,
LLC (“Crossroads”). Pursuant to the Security Agreement,
Borrower may borrow up to 70% of its Inventory Cost or up to 75% of Net Orderly
Liquidation Value (each as defined in the Security Agreement), up
to a maximum amount of $3.0 million at an interest rate of 1.5% per
month, subject to a minimum monthly fee of $22,500. The initial
term of the Security Agreement is six months from the date of
execution, and such initial term is extended automatically in
six-month 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
Borrower to, among other things, grant liens, incur debt and
transfer assets. Under the Security Agreement, Borrower has agreed
to grant Crossroads a security interest in all our present and
future accounts, chattel paper, goods (including inventory and
equipment), instruments, investment property, documents, general
intangibles, intangibles, letter of credit rights, commercial tort
claims, deposit accounts, supporting obligations, documents,
records and the proceeds thereof. As of December 31, 2017, we had
borrowed $3 million from Crossroads, of which $1.0 million was
repaid subsequent to the end of the year.
Secured Borrowing Arrangement
In January 2016, we entered into a Purchase and Sale Agreement (the
“Purchase and Sale Agreement”) with Prestige Capital
Corporation (“Prestige”) pursuant to which we agreed to
sell and assign and Prestige agreed to buy and accept, certain
accounts receivable owed to 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 us 80% of the net face amount of the assigned
Accounts, up to a maximum total borrowings of $12.5 million subject
to sufficient amounts of accounts receivable to secure the loan.
The remaining 20% will be paid to us upon collection of the
assigned Accounts, less any chargeback, disputes, or other amounts
due to Prestige. Prestige’s purchase of the assigned Accounts
from us will be at a discount fee which varies based on the number
of days outstanding from the assignment of Accounts to collection
of the assigned Accounts. In addition, we granted Prestige a
continuing security interest in and lien upon all accounts
receivable, inventory, fixed assets, general intangibles and other
assets. The Purchase and Sale
Agreement’s term has been extended to July 31, 2018. At
December 31, 2017, we had approximately $5.4 million of outstanding
borrowings.
For the year ended December 31, 2017, we sold to Prestige accounts
with an aggregate face amount of approximately $42.1 million, for
which Prestige paid to us approximately $33.7 million in cash.
During the year ended December 31, 2017, $31.6 million was
subsequently repaid to Prestige, including fees and
interest.
During
the year ended December 31, 2016, we sold to Prestige accounts with
an aggregate face amount of approximately $54.6 million, for which
Prestige paid to us approximately $43.7 million in cash. During the
year ended December 31, 2016, $41.9 million was subsequently
repaid to Prestige, including fees and interest.
30
Contractual Obligations
Our principal commitments consist of obligations under operating
leases for office and warehouse facilities, capital leases for
manufacturing and warehouse equipment, debt, restructuring
liability and non-cancelable endorsement and sponsorship
agreements. The following table summarizes our commitments to
settle contractual obligations in cash as of December 31,
2017:
|
|
Payments Due by Period
|
||||
|
|
1 Year
|
2 to 3 Years
|
4 to 5 Years
|
Thereafter
|
Total
|
|
|
(in
thousands)
|
||||
|
Operating lease obligations(1)
|
$860
|
$1,581
|
$850
|
$—
|
$3,291
|
|
Capital
lease obligations
|
136
|
151
|
—
|
—
|
287
|
|
Secured
borrowing arrangement
|
8,385
|
—
|
—
|
—
|
8,385
|
|
Convertible notes with a related
party(2)
|
1,800
|
19,800
|
—
|
—
|
21,600
|
|
Restructuring
liability
|
599
|
126
|
—
|
—
|
725
|
|
Settlement
agreement
|
1,000
|
1,000
|
—
|
—
|
2,000
|
|
Other contractual obligations(3)
|
1,034
|
424
|
—
|
—
|
1,458
|
|
Total
|
$13,814
|
$23,082
|
$850
|
$—
|
$37,746
|
|
(1)
|
The amounts in the table above excluded operating lease expenses
which were abandoned in conjunction with our restructuring plans
and is included within the caption Restructuring
liability.
|
|
(2)
|
See
“Indebtedness Agreement” above. Amount includes
interest.
|
|
(3)
|
Other
contractual obligations consist of non-cancelable endorsement and
sponsorship agreements and the minimum purchase requirement with
BioZone. See Note 4 to the accompanying Consolidated Financial
Statements for further information.
|
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
December 31, 2017.
Non-GAAP Adjusted EBITDA
In addition to disclosing financial results calculated in
accordance with U.S. Generally Accepted Accounting Principles
(GAAP), this Form 10-K discloses Adjusted EBITDA, which is net loss
adjusted for stock-based compensation, restructuring and asset
impairment charges, gain/(loss) on settlement of accounts payable,
loss on sale of subsidiary, amortization of prepaid sponsorship
fees, other expense, net, amortization of prepaid stock
compensation, depreciation and amortization of property and
equipment, amortization of intangible assets, (recovery)/provision
for doubtful accounts, , issuance of common stock warrants,
settlement related, including legal and income taxes. In addition,
the Company provides an Adjusted EBITDA, excluding one-time events
which excludes charges related to executive severance, discontinued
business/product lines, unusual credits against revenue and unusual
spikes in whey protein costs. Management believes that these
non-GAAP measures provide investors with important additional
perspectives into our ongoing business performance.
The GAAP measure most directly comparable to Adjusted EBITDA is net
loss. The non-GAAP financial measure of Adjusted EBITDA should not
be considered as an alternative to net loss. Adjusted EBITDA is not
a presentation made in accordance with GAAP and has important
limitations as an analytical tool and should not be considered in
isolation or as a substitute for analysis of our results as
reported under GAAP. Because Adjusted EBITDA excludes some, but not
all, items that affect net loss and is defined differently by
different companies, our definition of Adjusted EBITDA may not be
comparable to similarly titled measures of other
companies.
31
Set forth below are reconciliations of our reported GAAP net loss
to Adjusted EBITDA and Adjusted EBITDA excluding one-time events
(in thousands):
|
|
|
Three
Months Ended
|
|
Three Months Ended
|
||||||
|
|
Year
Ended
Dec. 31,
2017
|
Dec. 31,
2017
|
Sept. 30,
2017
|
June 30,
2017
|
Mar. 31,
2017
|
Year Ended
Dec. 31,
2016
|
Dec. 31,
2016
|
Sept. 30,
2016
|
June 30,
2016
|
Mar. 31,
2016
|
|
Net income
(loss)
|
$(10,973)
|
$(2,547)
|
$(2,128)
|
$(3,149)
|
$(3,149)
|
$(3,477)
|
$8,771
|
$(1,447)
|
$(4,196)
|
$(6,605)
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
2,096
|
408
|
540
|
541
|
607
|
5,304
|
323
|
(116)
|
427
|
4,670
|
|
Restructuring and asset impairment charges
|
180
|
180
|
—
|
—
|
—
|
3,186
|
(970)
|
1,920
|
—
|
2,236
|
|
Gain on settlement of accounts payable
|
(430)
|
41
|
—
|
(22)
|
(449)
|
(9,927)
|
(9,927)
|
—
|
—
|
—
|
|
Loss on sale of subsidiary
|
—
|
—
|
—
|
—
|
—
|
2,115
|
—
|
—
|
2,115
|
—
|
|
Amortization of prepaid sponsorship fees
|
461
|
86
|
120
|
110
|
145
|
1,235
|
180
|
211
|
146
|
698
|
|
Other expense, net
|
4,072
|
1,546
|
858
|
690
|
978
|
2,313
|
1,009
|
117
|
516
|
671
|
|
Amortization of prepaid stock compensation
|
—
|
—
|
—
|
—
|
—
|
938
|
—
|
—
|
235
|
703
|
|
Depreciation and amortization of property and
equipment
|
1,139
|
230
|
279
|
290
|
340
|
1,551
|
389
|
346
|
389
|
427
|
|
Amortization of intangible assets
|
320
|
80
|
80
|
80
|
80
|
576
|
80
|
80
|
196
|
220
|
|
(Recovery) provision for doubtful accounts
|
1,524
|
310
|
990
|
144
|
80
|
386
|
152
|
225
|
43
|
(34)
|
|
Issuance of common stock warrants to third parties for
services
|
—
|
—
|
—
|
—
|
—
|
6
|
—
|
—
|
3
|
3
|
|
Settlements, including legal
|
3,633
|
866
|
532
|
1,942
|
303
|
3,533
|
1,248
|
723
|
816
|
746
|
|
Provision for income taxes
|
142
|
24
|
14
|
76
|
28
|
318
|
180
|
—
|
7
|
131
|
|
Adjusted EBITDA
|
2,174
|
$1,224
|
$1,285
|
$702
|
$(1,037)
|
$8,057
|
$1,435
|
$2,059
|
$697
|
$3,866
|
|
One-time events:
|
|
|
|
|
|
|
|
|
|
|
|
Executive
severance
|
831
|
109
|
66
|
134
|
522
|
1,062
|
—
|
—
|
—
|
1,062
|
|
Discontinued
business/product lines
|
272
|
—
|
—
|
132
|
140
|
2,102
|
(121)
|
—
|
771
|
1,452
|
|
Unusual
credits against revenue
|
1,141
|
—
|
—
|
—
|
1,141
|
—
|
—
|
—
|
—
|
—
|
|
Whey
protein costs
|
1,322
|
—
|
—
|
296
|
1,026
|
—
|
—
|
—
|
—
|
—
|
|
Total
one-time adjustments
|
3,566
|
109
|
66
|
562
|
2,829
|
3,164
|
(121)
|
—
|
771
|
2,514
|
|
Adjusted
EBITDA excluding one-time events
|
$5,740
|
$1,333
|
$1,351
|
$1,264
|
$1,792
|
$11,221
|
$1,314
|
$2,059
|
$1,468
|
$6,380
|
32
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in
accordance with U.S. Generally Accepted Accounting Principles and
form the basis for the following discussion and analysis on
critical accounting policies and estimates. The preparation of the
consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We evaluate our estimates and
assumptions on a regular basis. We base our estimates on historical
experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results could differ from these estimates and those
differences could have a material effect on our financial position
and results of operations.
Inventory
MusclePharm products are produced through third party
manufacturers, and the cost of product inventory is recorded using
standard cost methodology. This standard cost methodology closely
approximates actual cost. Prior to the sale of the BioZone
subsidiary, its products were manufactured in production facilities
in Pittsburg, CA, and the cost of inventory was recorded using a
weighted average cost basis. BioZone was sold in May 2016.
Inventory is valued at the lower of cost or net realizable value.
Adjustments to reduce the cost of inventory to its net realizable
value are made, if required, and estimates are made for
obsolescence, excess or slow-moving inventories, non-conforming
inventories and expired inventory. These estimates are based on
management’s assessment of current future product demand,
production plan, and market conditions.
Revenue Recognition
Revenue is recognized when all of the following criteria are
met:
●
Persuasive evidence of an
arrangement exists. Evidence of an arrangement consists of an order
from our distributors, resellers or customers.
●
Delivery has
occurred. Delivery is
deemed to have occurred when title and risk of loss has
transferred, typically upon shipment of products to customers or
upon delivery.
●
The fee is fixed or
determinable. We assess
whether the fee is fixed or determinable based on the terms
associated with the transaction.
●
Collection is reasonably
assured. We assess
collectability based on credit analysis and payment
history.
Our standard terms and conditions of sale allow for product returns
or replacements in certain cases. Estimates of expected future
product returns are recognized at the time of sale based on
analyses of historical return trends by customer type. Upon
recognition, we reduce revenue and cost of revenue for the
estimated return. Return rates can fluctuate over time, but are
sufficiently predictable with established customers to allow us to
estimate expected future product returns, and an accrual is
recorded for future expected returns when the related revenue is
recognized. Product returns incurred from established customers
were insignificant for the years ended December 31, 2017 and 2016,
respectively.
We offer sales incentives through various programs, consisting
primarily of advertising related credits, volume incentive rebates
and sales incentive reserves. We record advertising related credits
with customers as a reduction to revenue as no identifiable benefit
is received in exchange for credits claimed by the customer. Volume
incentive rebates are provided to certain customers based on
contractually agreed upon percentages once certain thresholds have
been met. Sales incentive reserves are computed based on historical
trending and budgeted discount percentages, which are typically
based on historical discount rates with adjustments for any known
changes, such as future promotions or one-time historical
promotions that will not repeat for each customer. We record sales
incentive reserves and volume rebate reserves as a reduction to
revenue.
33
During the years ended December 31, 2017 and 2016, we recorded
discounts, and to a lesser degree, sales returns, totaling $18.0
million and $34.6 million, respectively, which accounted for 15%
and 21% of gross revenue in each period, respectively.
Share-Based Payments and Stock-Based Compensation
Share-based compensation awards, including stock options and
restricted stock awards, are recorded at estimated fair value on
the awards’ grant date, based on estimated number of shares
that are expected to vest. The grant date fair value is amortized
on a straight-line basis over the time in which the awards are
expected to vest, or immediately if no vesting is required.
Share-based compensation awards issued to non-employees for
services are recorded at either the fair value of the services
rendered or the fair value of the share-based payments whichever is
more readily determinable. The fair value of restricted stock
awards is based on the fair value of the stock underlying the
awards on the grant date as there is no exercise
price.
The fair value of stock options is estimated using the
Black-Scholes option-pricing model. The determination of the fair
value of each stock award using this option-pricing model is
affected by our assumptions regarding a number of complex and
subjective variables. These variables include, but are not limited
to, the expected stock price volatility over the term of the awards
and the expected term of the awards based on an analysis of the
actual and projected employee stock option exercise behaviors and
the contractual term of the awards. We recognize stock-based
compensation expense over the requisite service period, which is
generally consistent with the vesting of the awards, based on the
estimated fair value of all stock-based payments issued to
employees and directors that are expected to vest.
Intangible Assets
Acquired intangible assets are recorded at estimated fair value,
net of accumulated amortization, and costs incurred in obtaining
certain trademarks are capitalized, and are amortized over their
related useful lives, using a straight-line basis consistent with
the underlying expected future cash flows related to the specific
intangible asset. 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.
Advertising and Promotion
Our advertising and promotion expenses consist primarily of
digital, print and media advertising, athletic endorsements and
sponsorships, promotional giveaways, trade show events and various
partnering activities with our trading partners, and are expensed
as incurred. For major trade shows, the expenses are recognized
within a calendar year over the period in which we recognize
revenue associated with sales generated at the trade show. Some of
the contracts provide for contingent payments to endorsers or
athletes based upon specific achievement in their sports, such as
winning a championship. We record expense for these payments if and
when the endorser achieves the specific achievement.
34
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
Company qualifies as a smaller reporting company as defined in Item
10(f)(1) of SEC Regulation S-K, and is not required to provide the
information required by this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See
the Consolidated Financial Statements set forth on the “Index
to Financial Statements” on Page 54 of this Form 10-K, which
Consolidated Financial Statements are incorporated by reference
into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Conclusion Regarding the
Effectiveness of Disclosure Controls and
Procedures
Under
the supervision and with the participation of our principal
executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Accordingly, our principal executive officer and
principal financial officer concluded that our disclosure controls
and procedures as defined in Rule 13a-15(e) under the Exchange
Act were effective as of December 31, 2017 to ensure that
information required to be disclosed in reports we file or submit
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files
or submits under the Exchange Act is accumulated and communicated
to the issuer’s management, including its principal executive
and principal financial officers, or persons performing similar
functions as appropriate to allow timely decisions regarding
required disclosure.
(b) Management’s Annual
Report on Internal Control Over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our
internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements
for external purposes in accordance with U. S. generally accepted
accounting principles.
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of December 31,
2017. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control-Integrated Framework.
Based
on its assessment, management has concluded that our internal
control over financial reporting was effective as of
December 31, 2017.
Inherent Limitations Over Internal Controls
Internal
control over financial reporting cannot provide absolute assurance
of achieving financial reporting objectives because of its inherent
limitations, including the possibility of human error and
circumvention by collusion or overriding of controls. Accordingly,
even an effective internal control system may not prevent or detect
material misstatements on a timely basis. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions or that the degree of compliance with the policies or
procedures may deteriorate.
(c) Changes in Internal Control
Over Financial Reporting
There
has been no change in our internal control over financial reporting
identified in connection with the evaluation that occurred during
our last fiscal quarter that has materially affected, or that is
reasonably likely to materially affect, our internal control over
financial reporting.
This
Annual Report on Form 10-K does not include an attestation report
of our registered independent public accounting firm regarding
internal control over financial reporting. Management’s
report was not subject to attestation by our registered independent
public accounting firm pursuant to rules of the SEC that permit us
to provide only management’s report in this Annual
Report.
ITEM 9B. OTHER INFORMATION
None.
35
PART III
Item 10. Directors, Executive Officers and Corporate
Governance
EXECUTIVE OFFICERS AND DIRECTORS
The names of our directors and executive officers, their ages as of
March 20, 2018 and certain other information about them are set
forth below. There are no family relationships among any of our
directors or executive officers.
|
Name
|
|
Age
|
|
Position
|
|
|
Ryan Drexler
|
|
|
47
|
|
Chief Executive Officer, President and Chairman of the Board of
Directors
|
|
Brian
Casutto
|
|
|
47
|
|
Executive Vice President of Sales and Operations and
Director
|
|
William
Bush
|
|
|
53
|
|
Director
|
|
John
J. Desmond
|
|
|
67
|
|
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 was
appointed to serve as our Interim Chief Executive Officer,
President and Chairman of the Board of Directors on March 15,
2016 and was designated as our Interim Principal Executive Officer.
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.
BRIAN CASUTTO – EXECUTIVE VICE PRESIDENT OF SALES AND
OPERATIONS AND DIRECTOR
Brian
Casutto was appointed to the Board of Directors as a director
during July 2017. Mr. Casutto was appointed to the role of
Executive Vice President of Sales and Operations in July of 2015.
Mr. Casutto joined MusclePharm in June of 2014 to lead product
development and brand positioning of the recently announced Natural
Series. From 1997 to 2014, Mr. Casutto served as Executive Vice
President, Sales for Country Life Vitamins. Because of his
experience in running and developing nutritional supplement
companies, we believe that Mr. Casutto is well qualified to serve
on our Board of Directors.
36
WILLIAM BUSH – DIRECTOR
William
Bush joined our Board of Directors as an independent director in
May 2015 and serves as lead director, chair of the Compensation
Committee and as a member of the Audit Committee and as Chair of
the Nominating & Corporate Governance Committee. Since November
2016, Mr. Bush serves as chief financial officer of Stem, Inc., a
leading software-driven energy storage provider. From January 2010
to November 2016, Mr. Bush served as the chief financial
officer of Borrego Solar Systems, Inc., which is one of the
nation’s leading financiers, designers and installers of
commercial and industrial grid-connected solar systems. From
October 2008 to December 2009, Mr. Bush served as the chief
financial officer of Solar Semiconductor, Ltd., a private
vertically integrated manufacturer and distributor of photovoltaic
modules and systems targeted for use in industrial, commercial and
residential applications, with operations in India, helping it
reach $100 million in sales in its first 15 months of operation.
Prior to that, Mr. Bush served as chief financial officer and
corporate controller for a number of high growth software and
online media companies as well as being one of the founding members
of Buzzsaw.com, Inc., a spinoff of Autodesk, Inc. Prior to his work
at Buzzsaw.com, Mr. Bush served as corporate controller for
Autodesk, Inc. (NasdaqGM: ADSK), the fourth largest software
applications company in the world. Because of his significant
experience in finance, we believe that Mr. Bush is well qualified
to serve on our Board of Directors.
JOHN J. DESMOND –DIRECTOR
John J.
Desmond joined our Board of Directors as an independent director in
July 2017 and serves as chair of the Audit Committee, a member of
the Nominating & Corporate Governance Committee, and a member
of the Compensation Committee. Previously, Mr. Desmond was
Partner-in-Charge of the Long Island (New York) office of Grant
Thornton LLP from 1988 through his retirement from the firm in
2015, having served over 40 years in the public accounting
profession. At Grant Thornton LLP, Mr. Desmond's experience
included among other things, serving as lead audit partner for many
public and privately-held global companies. Mr. Desmond was elected
by the U.S. Partners of Grant Thornton LLP to their Partnership
Board from 2001 through 2013. The Partnership Board was responsible
for oversight of many of the firm's activities including strategic
planning, the performance of the senior leadership team and
financial performance. Mr. Desmond currently serves on the Board of
Directors of The First of Long Island (NASDAQ: FLIC) and its wholly
owned bank subsidiary, The First National Bank of Long Island,
and has been a director since October 2016. Mr. Desmond also
serves or has served as a Board member of a number of
not-for-profit entities. Mr. Desmond holds a B.S. degree in
Accounting from St. John's University and is a Certified Public
Accountant. Because of his significant experience in corporate
governance, banking, strategic planning, business leadership,
organizational management and business operations, accounting and
financial reporting, finance, mergers and acquisitions, legal
and regulatory, we believe that Mr. Desmond is well qualified to
serve on our Board of Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE
Section 16(a) of the Exchange Act, requires our directors and
named executive officers, and persons who beneficially own more
than 10% of our common stock, to file initial reports of ownership
and reports of changes in ownership of our common stock and our
other equity securities with the SEC. As a practical matter, we
assist our directors and officers by monitoring transactions and
completing and filing Section 16 reports on their behalf.
Based solely on a review of the copies of such forms in our
possession and on written representations from reporting persons,
we believe that during 2017, all of our named executive officers
and directors filed the required reports on a timely basis under
Section 16(a) of the Exchange Act, except for as
follows:
|
Name
|
Date of Award
|
Date
Filed
|
Stock Awards
|
|
Ryan
Drexler
|
1/1/2017
|
2/7/2017
|
350,000
|
|
Michael
Doron
|
4/21/2017
|
—
|
10,081
|
|
William
J. Bush
|
4/21/2017
|
9/22/2017
|
10,081
|
|
William
J. Bush
|
7/24/2017
|
9/22/2017
|
53,476
|
|
Michael
Doron
|
7/24/2017
|
—
|
35,093
|
|
John
J. Desmond
|
7/24/2017
|
3/28/2018
|
80,214
|
37
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.
In addition to its management oversight function, our Board of
Directors remains committed to strong and effective corporate
governance, and, as a result, it regularly monitors our corporate
governance policies and practices to ensure we meet or exceed the
requirements of applicable laws, regulations and rules, the Nasdaq
listing standards (even though we are not subject to them), as well
as the best practices of other public companies.
Our corporate governance program features the
following:
●
a
Board of Directors that is nominated for election
annually;
●
we
have no stockholder rights plan in place;
●
periodically
updated 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
clear Code of Conduct that is reviewed regularly for best
practices;
●
a
clear Insider Trading Policy that is reviewed
regularly;
●
a
Corporate Communications Policy that is reviewed with employees and
the Board periodically;
●
a
clear set of Corporate Governance Guidelines that is reviewed
regularly for best practices;
●
no
board member is serving on an excessive number of public company
boards; and
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, financial risks, among others. The Board of Directors
also delegates oversight to Board committees to oversee selected
elements of risk.
38
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.
AUDIT COMMITTEE
The Audit Committee reviews the work of our internal accounting and
audit processes and the Independent Registered Public Accounting
Firm. The Audit Committee has sole authority for the appointment,
and oversight of our Independent Registered Public Accounting Firm
and to approve any significant non-audit relationship with the
Independent Registered Public Accounting Firm. The Audit Committee
is also responsible for preparing the report required by the rules
of the SEC to be included in our annual proxy statement. The Audit
Committee is currently comprised of Mr. Desmond and
Mr. Bush. The Company’s Board of Directors has
determined that Mr. Desmond is an “Audit Committee financial
expert” within the meaning of Item 407 of Regulation S-K.
Additionally, Mr. Desmond serves as chair of the Audit Committee.
Each of Messrs. Desmond and Bush are independent for Audit
Committee purposes, as determined under Exchange Act rules.
Mr. Bush joined the Audit Committee in May 2015, Mr. Desmond
joined the Audit Committee in July 2017. During 2017, the Audit
Committee held 4 meetings.
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, 2017. As a
“smaller reporting company” we are permitted, and have
opted, to comply with the scaled back executive compensation
disclosure rules applicable to a “smaller reporting
company” under the Exchange Act. Only two individuals served
as executive officers, as defined in Rule 3b-7 under the Exchange
Act, as of the end of the fiscal year ended December 31, 2017 and
only one additional individual served as an executive officer at
any time during such fiscal year. The following discussion relates
to the compensation of those executive officers, who we refer to as
our “named executive officers” or “NEOs” in
this Annual Report on Form 10-K. For the fiscal year ended December
31, 2017, our NEOs were:
●
Ryan
Drexler—Chief Executive Officer, President and Chairman of
the Board of Directors;
●
Brian
Casutto – Executive Vice President of Sales and Operations;
and
●
Brent
Baker – Former Executive Vice President of International
Business*
*Mr. Baker’s employment with the Company terminated on March
23, 2017.
39
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 determined 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 2017, Messrs. Drexler’s and Casutto’s base salaries
were not increased from 2016 levels and Mr. Baker’s annual
base salary was increased by $50,000. For 2017, our named executive
officers’ base salaries were as follows:
|
Name
|
2017
Base Salary
|
|
Ryan
Drexler
|
$550,000
|
|
Brian
Casutto
|
$400,000
|
|
Brent
Baker
|
$350,000
|
Cash Bonuses
Pursuant to their employment agreements, each of our named
executive officers is eligible to earn a cash bonus, with a target
amount established by the Compensation Committee, based on the
achievement of specified performance goals. For 2017, the target
bonus amount was $300,000 for Mr. Casutto and $400,000 for Mr.
Baker. Mr. Drexler was eligible to receive cash bonuses of up to
$350,000 based on the achievement of specified performance goals.
For 2017, Messrs. Drexler and Casutto earned cash bonuses in the
amounts set forth in the “Summary Compensation Table”
below. In connection with his termination of employment in March
2017, Mr. Baker received a bonus of $80,311 for the first quarter
of 2018.
Incentive Equity Awards
Incentive equity awards granted by the Company have historically
been in the form of restricted stock awards. The Company also
grants stock options from time to time. The Compensation Committee
believes that equity-based awards are an effective retention tool
that also align our executives’ interests with those of our
stockholders. In 2017, we granted Mr. Drexler 350,000 shares of
restricted stock, which vested in full on the first anniversary of
the grant date. Mr. Drexler’s equity awards also vest in full
upon a termination of his employment or upon change in control.
None of our other named executive officers were granted
equity-based awards in 2017. In connection with his termination of
employment in March 2017, 10,000 shares of restricted stock held by
Mr. Baker that were granted in 2016 vested in full in accordance
with the original terms of the grant.
Employment Agreements
We have entered into employment agreements with each of Mr. Drexler
and Mr. Casutto that include certain severance and change in
control payments. These
agreements are described in detail under “Narrative
Disclosure to Summary Compensation Table”
below.
40
Employee Benefit Plans and Perquisites
We maintain a Section 401(k) Savings/Retirement Plan (the
401(k) 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 $10,600 and limits
imposed by applicable law.
We do not maintain any other defined benefit, defined contribution
or deferred compensation plans for our employees.
Our current named executive officers are eligible to participate in
all of our employee benefit plans, such as medical, dental, vision,
group life and disability insurance, in each case on the same basis
as other employees, subject to applicable law. We also provide
vacation and other paid holidays to all employees, including our
current executive officers. In addition, we provide certain
highly-compensated employees, including our current named executive
officers, with life insurance and supplemental long-term disability
coverage. We also provide certain perquisites, as described and
quantified in the Summary Compensation Table below under “All
Other Compensation.”
Summary Compensation Table
The following summary compensation tables sets forth all
compensation awarded to, earned by, or paid to our named executive
officers for 2017 and 2016, in respect of their employment with the
Company.
|
Name and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock Awards
($)
|
Option Awards
($)
|
Non-Equity Incentive Plan Compensation
($)
|
All
Other Comp-ensation
($)
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
Ryan Drexler (1)
|
|
|
|
|
|
|
|
|
|
Chairman
of the Board,
|
2017
|
550,000
|
426,226
|
686,000(2)
|
—
|
—
|
31,841(7)
|
1,694,067
|
|
Chief Executive Officer and President
|
2016
|
466,667(1)
|
750,000
|
454,000(3)
|
236,263(4)
|
—
|
76,155(7)
|
1,983,085
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Brian
Casutto
|
2017
|
400,000
|
178,670
|
—
|
—
|
—
|
93,641(7)
|
672,311
|
|
Executive
Vice President of Sales and Operations
|
2016
|
395,833
|
233,750
|
94,500(5)
|
—
|
—
|
28,176
|
752,259
|
|
|
|
|
|
|
|
|
|
|
|
Brent Baker (6)
|
2017
|
136,123
|
80,311
|
—
|
—
|
—
|
361,178(7)
|
577,612
|
|
Former
Executive Vice President of International Business
|
2016
|
300,000
|
210,000
|
—
|
—
|
—
|
30,179
|
540,179
|
(1)
Mr. Drexler
is the Chairman of the Board of Directors. On November 18, 2016,
Mr. Drexler agreed to continue to serve as the Chairman of the
Board of Directors and as our Chief Executive Officer and
President. For information regarding certain transactions between
Mr. Drexler and the Company, see Note 8 to the Consolidated
Financial Statements below.
(2)
Reflects
the grant date fair value of restricted stock award granted to Mr.
Drexler in 2017 calculated in accordance with FASB ASC Topic 718,
disregarding the effects of estimated forfeitures, based on the
closing price of our common stock of $1.96 on the date of the grant
multiplied by the number of shares of restricted stock
granted.
41
(3)
Reflects
the grant date fair value of restricted stock award granted to Mr.
Drexler in 2016, calculated in accordance with FASB ASC Topic 718,
disregarding the effects of estimated forfeitures, based on the
closing price of our common stock of $2.27 on the date of the grant
multiplied by the number of shares of restricted stock
granted.
(4)
Reflects
the grant date fair value of the option awards granted to Mr.
Drexler in 2016, calculated in accordance with FASB ASC Topic 718,
disregarding the effects of estimated forfeitures. The grant date
fair value of $1.72 per share was determined using the Black-Sholes
option-pricing model, with the following assumptions:
|
|
For the Year Ended
December 31, 2016
|
|
Expected
term of options
|
6.5
years
|
|
Expected
stock price volatility
|
131.0%
|
|
Expected
dividend yield
|
0%
|
|
Risk-free
interest rate
|
1.71%
|
(5)
Reflects
the grant date fair value of the restricted stock granted to Mr.
Casutto in 2016, calculated in accordance with FASB ASC Topic 718,
disregarding the effects of estimated forfeitures, based on the
closing price of our common stock of $1.89 on the date of the grant
multiplied by the number of shares of restricted stock
granted.
(6)
Mr.
Baker’s employment with the Company was terminated on March
23, 2017.
(7)
Amounts
under All Other Compensation for 2017 include Company 401(k)
matching contributions, insurance premiums paid by the Company on
behalf of our named executive officers, perquisites and severance
payments, as follows:
|
|
Drexler
|
Casutto
|
Baker
|
|
Company
401(k) Matching Contributions
|
$—
|
$—
|
$5,575
|
|
Severance (a)
|
—
|
—
|
350,000
|
|
Miscellaneous (b)
|
16,204
|
19,292
|
900
|
|
Automobile Expenses (c)
|
—
|
20,967
|
3,250
|
|
Housing Costs(d)
|
15,637
|
46,215
|
—
|
|
Insurance
Premiums
|
—
|
7,167
|
1,453
|
|
TOTAL
|
$31,841
|
$93,641
|
$361,178
|
|
|
(a)
|
Represents the amount of severance paid or accrued in 2017 relating
to Mr. Baker’s termination of employment. For details
relating to these payments, see “Narrative Disclosure to
Summary Compensation Table” below.
|
|
|
(b)
|
These amounts include amounts paid by the Company for miscellaneous
expenses, including Company-provided matching contributions to
health savings accounts for our named executive officer and amounts
paid for expenses incurred by our named executive officers that
were not adequately substantiated or did not qualify as a
reimbursable business expense under our expense reimbursement
policy.
|
|
|
(c)
|
We provided an automobile allowance for Mr. Casutto, and the use of
a Company car by Mr. Drexler and Mr. Casutto while they are in
Colorado. For the Company car
provided to Mr. Drexler and 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 each of Mr. Drexler and Mr.
Cassuto represents one-half of the total annual cost to the Company
for the Company car.
|
|
|
(d)
|
We paid for temporary housing for Mr. Casutto and Mr. Drexler for
periods when they lived in Colorado while they maintained residency
outside of the State. Additionally, we are providing for housing
for Mr. Casutto for his apartment in California as his residency
remains out of the State. The amounts disclosed in the table above
represents rent and utility costs billed by the landlord for this
temporary housing.
|
42
Narrative Disclosure to Summary Compensation Table
We have entered into employment agreements with each of Mr. Drexler
and Mr. Casutto that include certain severance and change in
control payments and entered into a separation agreement with Mr.
Baker that provides for severance benefits, in each case, as
described below. As used below, the terms “without
cause,” “good reason,” “qualifying
sale,” “aggregate purchase price,”
“performance bonus,” “cash-based
incentives,” and “change in control” are defined
in the applicable agreements.
Mr. Drexler. Mr. Drexler is
party to an employment agreement with the Company, which was
entered into as of February 11, 2016 and has subsequently been
amended and restated, most recently effective as of February 1,
2018. Subject to earlier termination as provided therein, the term
of his agreement runs through February 1, 2021 and automatically
renews for successive one-year terms thereafter, unless either
party provides at least three months’ written notice of its
or his intention not to review. Under his employment agreement,
Mr. Drexler was entitled to a base salary of $550,00 per year
for 2017 and is entitled to a base salary of $700,000 per year for
2018, which will be increased to $750,000 per year effective
January 1, 2020, in each case, subject to increase by the board.
For 2017, Mr. Drexler was eligible to receive cash-based incentives
of up to $350,000 based on the achievement of specified performance
goals and, under his amended and restated agreement, is eligible to
receive a 2018 performance bonus equal to 75% of his annual base
salary, subject to the Company’s achievement of specified
performance conditions unless otherwise determined by the Board.
Under his amended and restated employment agreement, Mr. Drexler is
also eligible to receive additional cash-based incentives of up to
$350,000 based on the achievement of specified performance
goals.
Concurrently with entering into the amended and restated employment
agreement in February 2018, Mr. Drexler and the Company entered
into a transaction bonus agreement, which provides that, upon the
occurrence of a qualifying sale, and provided that at the time of
the qualifying sale Mr. Drexler is an owner of at least 20% of the
shares of the Company, Mr. Drexler will be entitled to a
transaction bonus equal to 10% of the aggregate purchase price, if
such price is in excess of $50 million. Mr. Drexler is entitled to
this transaction bonus regardless of whether the qualifying
transaction occurs during his employment or at any time
thereafter.
If Mr. Drexler’s employment is terminated for any reason,
each equity award granted to him will fully vest and he will be
entitled to any unpaid performance bonus or cash-based incentives
(as described above), to the extent earned as of the date of such
termination, in addition to any amounts required by law or Company
policy. In addition, if Mr. Drexler’s employment is
terminated by the Company without cause or by Mr. Drexler for good
reason prior to (but not in connection with) a qualifying sale, Mr.
Drexler will be entitled to receive (i) 12 months’ of base
salary continuation, (ii) up to 12 months’ of
Company-subsidized COBRA premiums, and (iii) a lump sum payment of
the performance bonus for the year his employment terminates. If
Mr. Drexler’s employment is terminated by the Company without
cause or by Mr. Drexler for good reason within 12 months
following (or prior to, but in connection with or anticipation of)
a qualifying sale, Mr. Drexler
will be entitled to receive, in lieu of the amounts described in
the preceding sentence, (i) a lump sum payment
equal to 200% of his annual base salary, (ii) up to 18
months’ of Company-subsidized COBRA, and (iii) a lump sum
payment equal to 200% of the performance bonus for the year his
employment terminates. The
severance payable to Mr. Drexler on a termination of his employment
by the Company without cause or by Mr. Drexler for good reason is
subject to his execution (and non-revocation) of a release of
claims in favor of the Company.
Under the employment agreement, Mr. Drexler has 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.
43
Mr. Casutto. Mr. Casutto is
party to an employment agreement with the Company, which was
entered into as of July 15, 2015 and was amended and restated as of
January 1, 1018. The original term of the employment agreement
ended on December 31, 2017 and has been extended to December 31,
2018. Under his employment agreement, Mr. Casutto is entitled
to a base salary of $400,000 per year, which may be increased at
the discretion of the Compensation Committee. In addition, Mr.
Casutto is 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, which may be
adjusted at the discretion of the Compensation Committee. Under his
employment agreement he is 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 will 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 will vest in full. If Mr.
Casutto’s employment is terminated without cause or he
resigns for good reason within six months prior to (under certain
circumstances) or two years following a change in control (or the
end of the term of the employment agreement, if earlier), then Mr.
Casutto will be entitled to receive, in lieu of the amounts
described above, (i) base salary continuation for 12 months,(ii) a
bonus equal to the greater of 100% of his target bonus and the
bonus for the year of termination of employment as determined by
the Compensation Committee, (iii) a lump sum cash payment of
$500,000, (iv) reimbursement of COBRA premiums for up to 12 months
and (v) all equity and other incentive awards held by Mr. Casutto
will fully vest. If Mr. Casutto’s employment is terminated
due to his death or disability, he will be entitled to receive (i)
the greater of 100% of his target bonus for the year of termination
or the bonus for such year as determined by the Compensation
Committee, (ii) reimbursement of COBRA premiums for up to 12 months
and (iii) if such termination is due to his disability, base salary
continuation for 6 months. 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 has agreed to certain
restrictions on competition and solicitation, which continue for 12
months following the termination of his employment. The employment
agreement also contains restrictions with respect to disclosure of
the Company’s confidential information.
Mr. Baker. Mr. Baker was party
to an employment agreement with the Company, which was entered into
as of January 1, 2016. Under his employment agreement,
Mr. Baker was entitled to a base salary of $350,000 for 2017,
subject to increase at the discretion of the Compensation
Committee. In addition, Mr. Baker 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
$400,000 per year, payable quarterly.
Under the employment agreement, Mr. Baker 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.
Mr. Baker’s employment terminated on March 23, 2017. In
connection with his termination of employment, subject to his
execution (and non-revocation) of a release of claims in favor of
the Company, Mr. Baker became entitled to receive (i) severance in
the amount of $350,000, payable over a 12-month period, a lump sum
payment of $39,378, representing Mr. Baker’s accrued and
unused vacation time, and a first quarter bonus of $80,311, and
10,000 shares of unvested restricted stock held by Mr. Baker became
fully vested. In addition, the restrictions on competition
contained in his employment agreement were reduced to 6 months
following his termination of employment.
44
Outstanding Equity Awards at Year End
The following table provides information concerning restricted
stock and options to purchase shares of our common stock held by
our named executive officers as of December 31,
2017.
|
Outstanding Equity Awards at Year End
|
||||||||
|
|
|
|
Option Awards
|
Stock Awards
|
||||
|
Name
|
|
Grant Date
|
Number of Securities Underlying Unexercised Options (#)
Exercisable
|
Number of Securities Underlying Unexercised Options (#)
Unexercisable
|
Option Exercise Price($)
|
Option Expiration Date
|
Number of Shares of Stock that
Have NotVested (1)
(#)
|
Market Value of Shares or Units of
Stock that Have Not Vested (2)
|
|
Ryan Drexler(3)
|
|
1/1/2017
|
|
|
|
|
350,000
|
$227,500
|
|
|
2/22/2016
|
120,191
|
17,171
|
$1.89
|
2/22/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
Casutto
|
|
10/1/2014
|
—
|
—
|
—
|
—
|
30,000
|
19,500
|
|
|
2/23/2016
|
—
|
—
|
—
|
—
|
20,000
|
13,000
|
|
|
(1)
|
The table below shows the vesting dates for the unvested shares of
restricted stock listed in the above Outstanding Equity Awards at
Year-End for 2017 Table, generally subject to the named executive
officer’s continued employment through such date. The
restricted stock granted to Mr. Drexler would vest in full upon a
termination of his employment or a change in control. The
restricted stock granted to Mr. Casutto would vest in connection
with a termination of Mr. Casutto’s employment under certain
circumstances, as described under “Narrative Disclosure to
Summary Compensation Table” above.
|
|
Vesting
Date
|
Drexler
|
Casutto
|
|
1/1/2018
|
350,000
|
—
|
|
5/23/2018
|
—
|
10,000
|
|
12/31/2018
|
—
|
30,000
|
|
5/23/2019
|
—
|
10,000
|
The market value of the restricted stock represents the product of
the closing price of a share of our common stock as of
December 29, 2017 (the last trading day of the year), which
was $0.65, and the number of shares of restricted stock held by the
named executive officer on December 31, 2017.
The stock options granted to Mr. Drexler vest in equal quarterly
installments over the two-year period commencing on the date of
grant, subject to Mr. Drexler’s continued employment. The
stock options granted to Mr. Drexler vested in full on February 22,
2018.
DIRECTOR COMPENSATION
Non-Employee Director Compensation Arrangements
The
Board of Directors had adopted a non-employee director compensation
policy that provides annual retainer fees to each of our
non-employee directors. The annual retainer fee was at a rate of
$55,000 for the first and second quarter of 2017. The Lead Director
receives an additional $25,000 annual retainer. Additionally,
Committee members receive annual retainers as follows:
|
|
Q1 &
Q2
|
|
|
Committee
|
Chairman
|
Member
|
|
Audit
Committee
|
$20,000
|
$8,500
|
|
Compensation
Committee
|
15,000
|
6,500
|
|
Nominating &
Corporate Governance Committee
|
7,500
|
5,000
|
|
Strategic
Initiative Committee
|
7,500
|
5,000
|
45
In July 2017, the Board approved a new compensation program for
independent directors. As of July 1, 2017, Mr. Bush and Mr. Desmond
will earn cash compensation of $140,000 and $100,000, annually,
respectively, and be granted an annual grant of restricted shares
having a grant date fair value of $100,000 and $150,000,
respectively.
All cash retainers are prorated for partial years of service. We
pay annual cash retainer fees to the Board of 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
2017, each of our non-employee directors received awards of
restricted common stock having an annual grant date value as
described above, which are granted in quarterly installments. The
number of shares for each quarterly award is determined by dividing
the dollar value above by the average closing price of
MusclePharm’s common stock for the first fifteen business
days of the first month of each quarter.
2017 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, 2017. Messrs. Drexler and
Casutto receive no additional compensation for their service as a
director, and, consequently, are not included in this table. The
compensation received by Messrs. Drexler and Casutto in respect of
their employment is set forth in the “Summary Compensation
Table” above.
|
Name
|
Total
Fees Earned or Paid in Cash
|
Stock
Awards(1)
|
Total
|
|
John J.
Desmond
|
$50,000
|
$150,000
|
$200,000
|
|
William J.
Bush
|
159,000
|
121,900
|
280,900
|
|
Michael
Doran
|
133,625
|
87,500
|
221,125
|
|
|
(1)
|
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. As of December 31, 2017, the aggregate
number of shares of restricted stock held by our non-employee
directors was as follows:
|
|
Name
|
Number of
Stock Awards Outstanding as of December 31, 2017
|
|
John J.
Desmond
|
80,214
|
|
William J.
Bush
|
154,086
|
|
Michael
Doron
|
126,231
|
46
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, (ii) each named executive officer, and
(iii) each person who we know beneficially owns more than 5%
of our common stock as of March 20, 2018.
We have determined beneficial ownership in accordance with the
rules of the SEC. Except as indicated by the footnotes below, we
believe, based on the information furnished to us, that the persons
and entities named in the table below have sole voting and
investment power with respect to all shares of common stock that
they beneficially own, subject to applicable community property
laws.
|
|
Shares Beneficially Owned
|
|
|
|
Common Stock (1)
|
|
|
Name of
Beneficial Owner
|
Shares
|
% (2)
|
|
Named
Executive Officers:
|
|
|
|
Ryan
Drexler (3)
|
18,434,910
|
58.9%
|
|
Brian
Casutto
|
125,000
|
*
|
|
Non-Employee
Directors:
|
|
|
|
William
Bush
|
154,086
|
1.0%
|
|
John J.
Desmond
|
80,214
|
*
|
|
Officers and
Directors as a Group (four persons):
|
18,794,210
|
60.0%
|
*
Represents
less than one percent.
(1)
This
column lists beneficial ownership of voting securities as
calculated under SEC rules. Otherwise, except to the extent noted
below, each director, named executive officer or entity has sole
voting and investment power over the shares reported. Standard
brokerage accounts may include nonnegotiable provisions regarding
set-offs or similar rights.
(2)
Percent of total voting power represents voting power with respect
to 14,650,554 shares of common stock outstanding as of March 20,
2018, plus 16,216,216 shares of common stock as if the conversion
option of the outstanding convertible debt was exercised and
options to purchase common shares 137,262 shares (31,302,621 common
shares) were also exercised.
(3)
Ryan
Drexler, the Company’s Chief Executive Officer, President and
Chairman of the Board of Directors is the sole member of Consac,
LLC, and as such has voting and investment power over the
securities owned by the stockholder. These shares are also included
in the beneficial owners of more than five percent table
below.
Beneficial Owners of More than Five Percent
The
following table shows the number of shares of our common stock, as
of March 20, 2018, held by persons known to us to beneficially own
more than five percent of our outstanding common
stock.
|
|
Shares Beneficially Owned
|
|
|
|
Common Stock
(1)
|
|
|
Name of
Beneficial Owner
|
Shares
|
%
(2)
|
|
Wynnefield Capital
(3)
|
1,336,305
|
9.1%
|
|
Consac, LLC
(4)
|
18,434,910
|
58.9%
|
|
Amerop Holdings,
Inc. (5)
|
2,211,781
|
15.3%
|
47
(1)
This column
lists beneficial ownership of voting securities as calculated under
SEC rules. Otherwise, except to the extent noted below, each
director, named executive officer or entity has sole voting and
investment power over the shares reported. Standard brokerage
accounts may include nonnegotiable provisions regarding set-offs or
similar rights.
(2)
Percent of total
voting power represents voting power with respect to 14,650,554
shares of common stock outstanding as of March 20, 2018.
To
compute the percentage of outstanding shares of common stock held
by each person and unless otherwise noted, any share of common
stock which such person has the right to acquire pursuant to the
exercise of stock options exercisable within 60 days of March 31,
2018 or upon conversion of convertible debt is deemed to be
outstanding, but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other
person.
(3)
Joshua Landes and Nelson Obus may be deemed to hold an indirect
beneficial interest in these shares, which are directly
beneficially owned by Wynnefield Partners Small Cap Value, L.P.,
Wynnefield Partners Small Cap Value, L.P. I, Wynnefield Small Cap
Value Offshore Fund and Wynnefield Capital, Inc. Profit Sharing
Plan because they are co-managing members of Wynnefield Capital
Management, LLC and principal executive officers of Wynnefield
Capital, Inc. The principal place of business for Wynnefield
Capital is 450 Seventh Avenue, Suite 509, New York, New York 10123.
This information is based on a Schedule 13D/A filed on January 3,
2018 with the SEC.
(4)
Ryan Drexler,
the Company’s Chief Executive Officer, President and Chairman
of the Board of Directors is the sole member of Consac, LLC, and as
such has voting and investment power over the securities owned by
the stockholder. These shares are also included in the Named
Executive Officers portion of the Management Beneficial Ownership
table above. Mr. Drexler disclaims such beneficial ownership except
to the extent of his pecuniary interests therein.
(5)
Amerop
Holdings, Inc. reported sole voting power with respect to 2,211,781
shares. The address of Amerop Holdings, Inc. is 1800 Broadway,
Suite 100, Boulder, CO 80302. This information is based on a Schedule 13D
filed on October 17, 2017 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 and replaced our 2010 Equity Incentive
Plan. 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,
2017:
|
PLAN
CATEGORY
|
Number of securities
to be issued upon exercise of outstanding options,
warrants and rights (a)
|
Weighted average
exercise price of outstanding options, warrants and rights
(b)
|
Number of securities
remaining
available for future issuance under equity compensation plans
(excluding securities reflected in column (a) (c)
|
|
Equity
compensation plans approved by security holders:
|
|
|
|
|
2015 Incentive
Compensation Plan
|
331,584
|
$2.10
|
1,374,519
|
|
|
|
|
|
|
Total
|
331,584
|
$2.10
|
1,374,519
|
48
Item 13. Certain Relationships and Related Transactions, and
Director Independence
RELATED PARTY TRANSACTIONS
Related-Party Notes Payable
On
November 3, 2017, we entered into a refinancing transaction (the
“Refinancing”) with Mr. Ryan Drexler, the
Company’s Chairman of the Board of Directors, Chief Executive
Officer and President. The refinancing was overseen and approved by
a Special Committee of the Board of Directors, comprised of John J.
Desmond and William Bush, each of whom is an independent member of
our Board of Directors. As part of the Refinancing, we issued to
Mr. Drexler an amended and restated convertible secured promissory
note (the “Refinanced Convertible Note”) in the
original principal amount of $18,000,000, which amends and restates
(i) a convertible secured promissory note dated as of December 7,
2015, and amended as of January 14, 2017, in the original principal
amount of $6,000,000 with an interest rate of 8% prior to the
amendment and 10% following the amendment (the “2015
Convertible Note”), (ii) a convertible secured promissory
note dated as of November 8, 2016, in the original principal amount
of $11,000,000 with an interest rate of 10% (the “2016
Convertible Note”) , and (iii) a secured demand promissory
note dated as of July 27, 2017, in the original principal amount of
$1,000,000 with an interest rate of 15% (the “2017
Note”, and together with the 2015 Convertible Note and the
2016 Convertible Note, collectively, the “Prior
Notes”). The due date of the 2015 Convertible Note and the
2016 Convertible Note was November 8, 2017. The 2017 Note was due
on demand.
2017 Refinanced Convertible Note
The $18
million Refinanced Convertible Note bears interest at the rate of
12% per annum. Interest payments are due on the last day of each
quarter. At our option (as determined by its independent
directors), we may repay up to one sixth of any interest payment by
either adding such amount to the principal amount of the note or by
converting such interest amount into an equivalent amount our
common stock. Any interest not paid when due shall be capitalized
and added to the principal amount of the Refinanced Convertible
Note and bear interest on the applicable interest payment date
along with all other unpaid principal, capitalized interest, and
other capitalized obligations.
Both
the principal and the interest under the Refinanced Convertible
Note are due on December 31, 2019, unless converted
earlier.
Mr.
Drexler may convert the outstanding principal and accrued interest
into shares of our common stock at a conversion price of $1.11 per
share at any time. We may prepay the Refinanced Convertible Note by
giving Mr. Drexler between 15 and 60 days’ notice depending
upon the specific circumstances, subject to Mr. Drexler’s
conversion right.
The
Refinanced Convertible Note contains customary events of default,
including, among others, the failure by us to make a payment of
principal or interest when due. Following an event of default,
interest will accrue at the rate of 14% per annum. In addition,
following an event of default, any conversion, redemption, payment
or prepayment of the Refinanced Convertible Note will be at a
premium of 105%. The Refinanced Convertible Note also contains
customary restrictions on the ability of us to, among other things,
grant liens or incur indebtedness other than certain obligations
incurred in the ordinary course of business. The restrictions are
also subject to certain additional qualifications and carveouts, as
set forth in the Refinanced Convertible Note. The Refinanced
Convertible Note is subordinated to certain other indebtedness of
us, as described below.
As part
of the Refinancing, we and Mr. Drexler entered into a restructuring
agreement (the “Restructuring Agreement”) pursuant to
which the parties agreed to enter into the Refinanced Convertible
Note and to amend and restate the security agreement pursuant to
which the Prior Notes were secured by all of the assets and
properties of us and our subsidiaries whether tangible or
intangible, by entering into the Third Amended and Restated
Security Agreement (the “Amended Security Agreement”).
Pursuant to the Restructuring Agreement, we 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.
In
connection with the refinancing, the Company recorded a debt
discount of $1.2 million. The debt discount is equal to the change
in the fair value of the conversion option between the Refinanced
Convertible Note and the Prior Notes. The fair value of the
conversion option was determined a Monte Carlo simulation and the
model of stock price behavior known as GBM which simulates a future
period as a random step from a previous period. The Company engaged
a third-party valuation firm to perform this complex
valuation.
In addition, the
Refinanced Convertible Note contains two embedded derivatives for
default interest and an event of default put. Due to the unlikely
event of default, the embedded derivatives have a de minimis value
as of December 31, 2017.
For the years ended December 31, 2017 and 2016, interest expense
related to the related party notes was $2.4 million and $0.7
million, respectively. During the years ended December 31, 2017 and
2016, $2.2 million and $0.5 million, respectively, in interest was
paid to Mr. Drexler. For the year ended December 31, 2016, in
connection with issuing the Prior Notes, the Company recorded a
beneficial conversion feature of $601,000 as a debt discount which
was amortized over the original term of the debt using the
effective interest method.
49
Review, Approval or Ratification of Transactions with Related
Parties
We
adopted 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.
Although
we have not always had a written policy for the review and approval
of transactions with related persons, our Board of Directors has
historically reviewed and approved any transaction where a director
or officer had a financial interest, including all of the
transactions described above. Prior to approving such a
transaction, the material facts as to a director’s or
officer’s relationship or interest as to the agreement or
transaction were disclosed to our Board of Directors. Our Board of
Directors would take this information into account when evaluating
the transaction and in determining whether such transaction was
fair to us and in the best interest of all of our
stockholders.
BOARD COMMITTEES
Our Board of Directors has established an Audit Committee, a
Compensation Committee, Nominating & Corporate Governance
Committee and, each of which have the composition and
responsibilities described below. Members serve on these committees
until their resignations or until otherwise determined by our Board
of Directors. The Board of Directors has further determined that
Messrs. Desmond and Bush, chair and member, respectively, of
the Audit Committee of the Board of Directors, are each an
“Audit Committee Financial Expert,” as such term is
defined in Item 407(d)(5) of Regulation S-K promulgated by the
SEC, by virtue of their relevant experience listed in their
respective biographical summaries provided above in the section
entitled “Executive Officers and Directors.” Each of
our committees have a written charter. Current copies of the
charters of the Audit Committee, Compensation Committee, and
Nominating & Corporate Governance Committee are available
on our website at ir.musclepharmcorp.com/governance-documents. As
necessary, the Board of Directors may establish special committees
to address issues not directly under the governance of the
established committees.
Audit Committee. The Audit Committee reviews the work of our
internal accounting and audit processes and the Independent
Registered Public Accounting Firm. The Audit Committee has sole
authority for the appointment, compensation 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, as chair, and Mr. Bush, as
a member. Mr. Desmond assumed the role of chair of the Audit
Committee in July 2017 from Mr. Bush who served as chair since May
2015. During 2017, 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, with the assistance of Longnecker, also
produces an annual report on executive compensation for inclusion
in our proxy statement. The Compensation Committee is currently
comprised of Mr. Bush, as chair, and Mr. Desmond, as a member.
Mr. Desmond joined the Compensation Committee in July 2017 and
Mr. Bush joined as a member in May 2015. During 2017, the
Compensation Committee held four meetings.
50
Nominating & Corporate Governance Committee. The
Nominating & Corporate Governance Committee is responsible
for recommending to our Board of Directors individuals to be
nominated as directors and committee members. This includes
evaluation of new candidates as well as evaluation of current
directors. In evaluating the current directors, the
Nominating & Corporate Governance Committee conducted a
thorough self-evaluation process, which included the use of
questionnaires and a third-party expert that interviewed each of
the directors and provided an analysis of the results of the
interviews to the committee. This committee is also responsible for
developing and recommending to the Board of Directors our corporate
governance guidelines, as well as reviewing and recommending
revisions to the guidelines on a regular basis. The
Nominating & Corporate Governance Committee is currently
comprised of Mr. Bush, as chair, and Mr. Desmond, as a member.
During 2016, the Nominating & Corporate Governance
Committee held no meetings. A meeting was held in June 2017 for
Messrs. Casutto and Desmond’s nominations to our Board of
Directors.
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
and Mr. Casutto, are each independent directors as such term is
defined in NASDAQ Marketplace Rule 5605(a)(2). Additionally, we
have Compensation, Nominating and Corporate Governance, and Audit
committees comprised solely of independent directors.
Audit
Committee members must also satisfy the independence criteria set
forth in Rule 10A-3 under the Exchange Act. In order to be
considered independent for purposes of Rule 10A-3, a member of an
audit committee of a listed company may not, other than in his or
her capacity as a member of the audit committee, the Board of
Directors, or any other board committee: accept, directly or
indirectly, any consulting, advisory, or other compensatory fee
from the listed company or any of its subsidiaries; or be an
affiliated person of the listed company or any of its
subsidiaries.
Our
Board of Directors has determined that none of our non-employee
directors has a relationship that would interfere with the exercise
of independent judgment in carrying out the responsibilities of a
director and that each of these directors is independent as that
term is defined under the rules of NASDAQ. Our Board of Directors
has also determined that past and present directors, who comprise
our Audit Committee, Compensation Committee, and our Nominating and
Corporate Governance Committee, satisfied and 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 EKS&H LLLP for the years
ended December 31, 2017 and 2016:
|
|
2017
|
2016
|
|
Audit fees
(1)
|
$245,000
|
$239,000
|
|
Audit-related fees
(2)
|
62,000
|
60,000
|
|
All other fees
(3)
|
17,000
|
25,000
|
|
Total
|
$324,000
|
$324,000
|
51
(1)
Represents the
aggregate fees billed for the audit of the Company’s
financial statements.
(2)
Represents the
aggregate fees billed for assurance and related services, including
the fees for the Quarterly reviews, that are reasonably related to
the audit or review of the Company’s financial statements and
are not reported under audit fees.
(3)
Represents the
aggregate fees billed for all products and services provided that
are not included under audit fees, audit-related fees or tax fees.
These services included a review of a Registration Statement on
Form S-8 and related consent procedures, review of the agreement to
sell our wholly-owned subsidiary, BioZone Laboratories, Inc. and
various Current Reports on Form 8-K.
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 EKS&H LLLP during fiscal years 2017 and 2016 were
pre-approved by the Audit Committee in accordance with the
pre-approval policy described above.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A.
Financial Statements and Financial Statement
Schedules.
1.
Financial Statements.
The
list of the Consolidated Financial Statements and report of the
independent registered public accounting firm set forth on the
Index to Financial Statements on Page 54 of this Form 10-K and are
required by this Item are included in Part II, Item 8.
2.
Financial Statement Schedules.
No
financial statement schedules are applicable to this
filing.
B.
Exhibits.
The
list of Exhibits required by Item 601 of Regulation S-K is provided
in the Exhibit Index on pages 55 to 57 of this Form 10-K, which is
incorporated herein by reference.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
52
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
MUSCLEPHARM CORPORATION (the “Registrant”)
|
||
|
|
|
|
|
|||
|
Dated: April 2, 2018
|
|
|
|
By:
|
|
/s/ Ryan Drexler
|
|
|
|
|
|
|
|
Chief Executive Officer and President
|
|
|
|
|
|
|
|
(Principal Executive Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
/s/
Ryan Drexler
|
|
Chief
Executive Officer, President and Chairman of the Board of
Directors
|
|
April 2,
2018
|
|
Ryan
Drexler
|
|
(Principal Executive Officer,
Principal Financial Officer and Principal Accounting
Officer)
|
|
|
|
|
|
|
||
|
/s/
Brian Casutto
|
|
Executive
Vice President of Sales and Operations
|
|
April
2, 2018
|
|
Brian
Casutto
|
|
Director
|
|
|
|
|
|
|
||
|
/s/
John J. Desmond
|
|
Director
|
|
April
2, 2018
|
|
John
J. Desmond
|
|
|
|
|
|
|
|
|
||
|
/s/
William Bush
|
|
Director
|
|
April
2, 2018
|
|
William
Bush
|
|
|
|
|
53
INDEX TO FINANCIAL STATEMENTS
|
Financial Statements:
|
|
||
|
|
Report of Independent Registered Public Accounting
Firm
|
F-1
|
|
|
|
Consolidated Balance Sheets as of December 31, 2017 and
2016
|
F-2
|
|
|
|
Consolidated Statements of Operations for the Years Ended December
31, 2017 and 2016
|
F-3
|
|
|
|
Consolidated Statements of Comprehensive Loss for the Years Ended
December 31, 2017 and 2016
|
F-4
|
|
|
|
Consolidated Statement of Stockholders’ Deficit for the Years
Ended December 31, 2017 and 2016
|
F-5
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended December
31, 2017 and 2016
|
F-7
|
|
|
|
Notes to Consolidated Financial Statements
|
F-9
|
|
|
|
|
|
|
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders
MusclePharm
Corporation
Burbank,
California
OPINION ON THE CONSOLIDATED FINANCIAL STATEMENTS
We have
audited the accompanying consolidated balance sheets of MusclePharm
Corporation and subsidiaries (the "Company") as of December 31,
2017 and 2016, and the related consolidated statements of
operations, comprehensive loss, stockholders' deficit, and cash
flows, for each year in the two-year period ended December 31,
2017, and the related notes (collectively referred to as the
"financial statements"). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2017 and 2016, and the results of
its operations and its cash flows for each year in the two-year
period ended December 31, 2017, in conformity with accounting
principles generally accepted in the United States of
America.
BASIS FOR OPINION
These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express
no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
EKS&H
LLLP
April
2, 2018
Denver,
Colorado
We have
served as the Company's auditor since 2012.
F-1
MusclePharm Corporation
Consolidated Balance Sheets
(In thousands, except share and per share data)
|
|
As of December 31,
|
|
|
|
2017
|
2016
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash
|
$6,228
|
$4,943
|
|
Accounts
receivable, net of allowance for doubtful accounts of $1,363 and
$462, respectively
|
16,668
|
13,353
|
|
Inventory
|
6,484
|
8,568
|
|
Prepaid
giveaways
|
89
|
205
|
|
Prepaid
expenses and other current assets
|
993
|
1,725
|
|
Total
current assets
|
30,462
|
28,794
|
|
Property
and equipment, net
|
1,822
|
3,243
|
|
Intangible
assets, net
|
1,317
|
1,638
|
|
Other
assets
|
225
|
421
|
|
TOTAL
ASSETS
|
$33,826
|
$34,096
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$11,742
|
$9,625
|
|
Accrued
liabilities
|
7,761
|
9,051
|
|
Accrued
restructuring charges, current
|
595
|
614
|
|
Obligation
under secured borrowing arrangement
|
5,385
|
2,681
|
|
Convertible
notes with a related party, net of discount
|
—
|
16,465
|
|
Line
of credit
|
3,000
|
—
|
|
Total
current liabilities
|
28,483
|
38,436
|
|
Convertible
note with a related party, net of discount
|
16,669
|
—
|
|
Accrued
restructuring charges, long-term
|
120
|
208
|
|
Other
long-term liabilities
|
1,088
|
332
|
|
TOTAL
LIABILITIES
|
46,360
|
38,976
|
|
Commitments
and contingencies (Note 9)
|
|
|
|
Stockholders'
deficit:
|
|
|
|
Common
stock, par value of $0.001 per share; 100,000,000 shares
authorized; 15,526,175 and 14,987,230 shares issued as of December
31, 2017 and 2016, respectively; 14,650,554 and 14,111,609 shares
outstanding as of December 31, 2017 and 2016,
respectively
|
14
|
14
|
|
Additional
paid-in capital
|
159,608
|
156,301
|
|
Treasury
stock, at cost; 875,621 shares
|
(10,039)
|
(10,039)
|
|
Accumulated
other comprehensive loss
|
(150)
|
(162)
|
|
Accumulated
deficit
|
(161,967)
|
(150,994)
|
|
TOTAL
STOCKHOLDERS’ DEFICIT
|
(12,534)
|
(4,880)
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
$33,826
|
$34,096
|
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-2
MusclePharm Corporation
Consolidated Statements of Operations
(In thousands, except share and per share data)
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
Revenue,
net
|
$102,155
|
$132,499
|
|
Cost of revenue (1)
|
71,710
|
88,026
|
|
Gross
profit
|
30,445
|
44,473
|
|
Operating
expenses:
|
|
|
|
Advertising
and promotion
|
9,352
|
10,652
|
|
Salaries
and benefits
|
10,134
|
18,033
|
|
Selling,
general and administrative
|
12,071
|
15,941
|
|
Research
and development
|
642
|
1,869
|
|
Professional
fees
|
3,378
|
5,735
|
|
Restructuring
and other charges (reversals)
|
—
|
(3,477)
|
|
Settlement
of obligations
|
1,877
|
—
|
|
Impairment
of assets
|
180
|
4,378
|
|
Total
operating expenses
|
37,634
|
53,131
|
|
Loss
from operations
|
(7,189)
|
(8,658)
|
|
Gain
on settlement of accounts payable
|
430
|
9,927
|
|
Loss
on sale of subsidiary
|
—
|
(2,115)
|
|
Other
expense, net
|
(4,072)
|
(2,313)
|
|
Loss
before provision for income taxes
|
(10,831)
|
(3,159)
|
|
Provision
for income taxes
|
142
|
318
|
|
Net
loss
|
$(10,973)
|
$(3,477)
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
$(0.79)
|
$(0.26)
|
|
|
|
|
|
Weighted
average shares used to compute net loss per share, basic and
diluted
|
13,877,686
|
13,438,248
|
(1)
Cost
of revenue for the year ended December 31, 2016 includes
restructuring charges of $2.3 million, related to write-down of
inventory for discontinued products.
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-3
MusclePharm Corporation
Consolidated Statements of Comprehensive Loss
(In thousands)
|
|
For the Years Ended
December 31,
|
|
|
|
2017
|
2016
|
|
Net
loss
|
$(10,973)
|
$(3,477)
|
|
Other
comprehensive loss:
|
|
|
|
Change
in foreign currency translation adjustment
|
12
|
10
|
|
Comprehensive
loss
|
$(10,961)
|
$(3,467)
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-4
MusclePharm Corporation
Consolidated Statement of Stockholders’ Deficit
(In thousands, except share data)
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Additional
|
|
Other
|
|
Total
|
|
|
Common Stock
|
Paid-in
|
Treasury
|
Comprehensive
|
Accumulated
|
Stockholders’
|
|
|
|
Shares
|
Amount
|
Capital
|
Stock
|
Loss
|
Deficit
|
Deficit
|
|
Balance—December
31, 2015
|
13,788,540
|
$14
|
$147,646
|
$(10,039)
|
$(172)
|
$(147,517)
|
$(10,068)
|
|
Stock-based
compensation for issuance of common stock warrants for third-party
services
|
—
|
—
|
6
|
—
|
—
|
—
|
6
|
|
Stock-based
compensation for issuance and amortization of restricted stock
awards to employees, executives and directors
|
572,154
|
—
|
1,708
|
—
|
—
|
—
|
1,708
|
|
Stock-based
compensation for accelerated vesting of restricted stock awards to
a terminated executive
|
—
|
—
|
3,900
|
—
|
—
|
—
|
3,900
|
|
Stock-based
compensation for accelerated vesting of restricted stock awards to
terminated employees as part of restructuring
|
—
|
—
|
288
|
—
|
—
|
—
|
288
|
|
Stock-based
compensation for issuance of stock options to an executive and a
director
|
—
|
—
|
153
|
—
|
—
|
—
|
153
|
|
Issuance
of shares of common stock related to sale of
subsidiary
|
200,000
|
—
|
640
|
—
|
—
|
—
|
640
|
|
Cancellation
of executive restricted stock
|
(449,085)
|
—
|
(456)
|
—
|
—
|
—
|
(456)
|
|
Issuance
of warrants for legal settlement
|
—
|
—
|
1,815
|
—
|
—
|
—
|
1,815
|
|
Beneficial
conversion feature related to convertible note
|
—
|
—
|
601
|
—
|
—
|
—
|
601
|
|
Change
in foreign currency translation adjustment
|
—
|
—
|
—
|
—
|
10
|
—
|
10
|
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(3,477)
|
(3,477)
|
|
Balance—December
31, 2016
|
14,111,609
|
$14
|
$156,301
|
$(10,039)
|
$(162)
|
$(150,994)
|
$(4,880)
|
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-5
MusclePharm Corporation
Consolidated Statement of Stockholders’ Deficit
(Continued)
(In thousands, except share data)
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Additional
|
|
Other
|
|
Total
|
|
|
Common Stock
|
Paid-in
|
Treasury
|
Comprehensive
|
Accumulated
|
Stockholders’
|
|
|
|
Shares
|
Amount
|
Capital
|
Stock
|
Loss
|
Deficit
|
Deficit
|
|
Balance—December
31, 2016
|
14,111,609
|
$14
|
$156,301
|
$(10,039)
|
$(162)
|
$(150,994)
|
$(4,880)
|
|
Stock-based
compensation for issuance and amortization of restricted stock
awards to employees, executives and directors
|
538,945
|
—
|
1,954
|
—
|
—
|
—
|
1,954
|
|
Stock-based
compensation for issuance of stock options to an executive and a
director
|
—
|
—
|
141
|
—
|
—
|
—
|
141
|
|
Beneficial
conversion feature related to convertible note
|
—
|
—
|
1,212
|
—
|
—
|
—
|
1,212
|
|
Change
in foreign currency translation adjustment
|
—
|
—
|
—
|
—
|
12
|
—
|
12
|
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(10,973)
|
(10,973)
|
|
Balance—December
31, 2017
|
14,650,554
|
$14
|
$159,608
|
$(10,039)
|
$(150)
|
$(161,967)
|
$(12,534)
|
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-6
MusclePharm Corporation
Consolidated Statements of Cash Flows
(In thousands)
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
Net
loss
|
$(10,973)
|
$(3,477)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
Depreciation
of property and equipment
|
1,139
|
1,551
|
|
Amortization
of intangible assets
|
321
|
576
|
|
Bad
debt expense
|
1,524
|
386
|
|
Gain
on settlement of accounts payable
|
(430)
|
(9,927)
|
|
Loss
on disposal of property and equipment
|
31
|
163
|
|
Loss
on sale of subsidiary
|
—
|
2,115
|
|
Non-cash
impairment of assets
|
180
|
4,381
|
|
Non-cash
restructuring and other charges (reversals)
|
—
|
(4,132)
|
|
Inventory
write down related to restructuring
|
—
|
2,285
|
|
Amortization
of prepaid stock compensation
|
—
|
938
|
|
Amortization
of debt discount and issuance costs
|
545
|
113
|
|
Stock-based
compensation
|
2,096
|
5,304
|
|
Issuance
of common stock warrants to third parties for services
|
—
|
6
|
|
Write off of prepaid financing costs
|
275
|
—
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(4,619)
|
7,338
|
|
Inventory
|
2,124
|
(480)
|
|
Prepaid
giveaways
|
117
|
103
|
|
Prepaid
expenses and other current assets
|
732
|
2,482
|
|
Other
assets
|
(77)
|
(322)
|
|
Accounts
payable and accrued liabilities
|
1,991
|
(20,802)
|
|
Accrued
restructuring charges
|
(107)
|
(3,669)
|
|
Net
cash used in operating activities
|
(5,131)
|
(15,068)
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Purchase
of property and equipment
|
(37)
|
(508)
|
|
Proceeds
from disposal of property and equipment
|
—
|
115
|
|
Proceeds
from sale of subsidiary
|
—
|
5,942
|
|
Trademark
registrations
|
—
|
(154)
|
|
Net
cash (used in) provided by investing activities
|
$(37)
|
$5,395
|
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-7
MusclePharm Corporation
Consolidated Statements of Cash Flows (Continued)
(In thousands)
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
Proceeds
from line of credit
|
$3,000
|
$—
|
|
Payments
on line of credit
|
—
|
(3,000)
|
|
Repayments
of term loan
|
—
|
(2,949)
|
|
Net
proceeds from convertible notes with a related party
|
871
|
11,000
|
|
Proceeds
from secured borrowing arrangement, net of reserves
|
33,692
|
43,925
|
|
Payments
on secured borrowing arrangement, net of fees
|
(30,988)
|
(41,245)
|
|
Repayments
of other debt obligations
|
—
|
(20)
|
|
Repayment
of capital lease obligations
|
(139)
|
(189)
|
|
Net
cash provided by financing activities
|
6,436
|
7,522
|
|
Effect
of exchange rate changes on cash
|
17
|
13
|
|
NET
CHANGE IN CASH
|
1,285
|
(2,138)
|
|
CASH
— BEGINNING OF PERIOD
|
4,943
|
7,081
|
|
CASH
— END OF PERIOD
|
$6,228
|
$4,943
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
Cash
paid for interest
|
$2,445
|
$1,557
|
|
Cash
paid for taxes
|
$106
|
$218
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
|
Warrants
issued for legal settlement
|
$—
|
$1,815
|
|
Shares
of common stock issued in conjunction with BioZone
disposition
|
$—
|
$640
|
|
Property
and equipment acquired in conjunction with capital
leases
|
$—
|
$460
|
|
Conversion
feature related to refinanced convertible note
|
$1,212
|
—
|
|
Beneficial
conversion feature related to convertible note
|
$—
|
$601
|
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-8
MusclePharm Corporation
Notes to Consolidated Financial Statements
Note 1. Description of Business
Description of Business
MusclePharm Corporation, or the Company, was incorporated in Nevada
in 2006. Except as otherwise indicated herein, the terms
“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 nutritional supplements. The Company is
headquartered in Burbank, California and as of December 31, 2017
had the following wholly-owned operating subsidiaries: MusclePharm
Canada Enterprises Corp. (“MusclePharm Canada”),
MusclePharm Ireland Limited (“MusclePharm Ireland”) and
MusclePharm Australia Pty Limited (“MusclePharm
Australia”). A former subsidiary of the Company, BioZone
Laboratories, Inc. (“BioZone”), was sold on May 9,
2016.
Management’s Plans with Respect to Liquidity and Capital
Resources
Management believes the restructuring plan, the continued reduction
in ongoing operating costs and expense controls, and the
aforementioned growth strategy, will enable us to ultimately
achieve profitability. We have reduced our operating expenses
sufficiently and believe that our ongoing sources of revenue will
be sufficient to cover these expenses for the foreseeable
future.
As of December 31, 2017, we had a stockholders’ deficit of
$12.5 million and recurring losses from operations. To manage cash
flow, we entered into a secured borrowing arrangement, pursuant to
which we have the ability to borrow up to $12.5 million subject to
sufficient amounts of accounts receivable to secure the loan. The
Agreement’s term has been extended to July 31, 2018. In
October 2017, we also entered into a loan and security agreement to
borrow against our inventory up to a maximum of $3.0 million for an
initial six-month term which automatically extends for six
additional months. As of December 31, 2017, we owed $3.0 million on
this credit line, of which $1.0 million was repaid subsequent to
the end of the year. On November 3, 2017, we entered into a
refinancing transaction with Mr. Ryan Drexler, our Chairman of the
Board, Chief Executive Officer and President, to restructure all of
the $18.0 million in notes payable to him, which are now due on
December 31, 2019. Accordingly, such debt is classified as a
long-term liability at December 31, 2017.
As of December 31, 2017, the Company had approximately $6.2 million
in cash and $2.0 million in working capital.
The Company’s Consolidated Financial Statements as of and for
the year ended December 31, 2017 were prepared on the basis of a
going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the
ordinary course of business. Accordingly, they do not give effect
to adjustments that could be necessary should we be required to
liquidate assets.
The Company’s ability to continue as a going concern and
raise capital for specific strategic initiatives could also depend
on obtaining adequate capital to fund operating losses until it
becomes profitable. The Company can give no assurances that any
additional capital that it is able to obtain, if any, will be
sufficient to meet its needs, or that any such financing will be
obtainable on acceptable terms.
Mr. Drexler has verbally both stated his intent and ability to put
more capital into the business if necessary. However, Mr. Drexler
is under no obligation to the Company to do so, and we can give no
assurances that Mr. Drexler will be willing or able to do so at a
future date and/or that he will not demand payment of his
refinanced convertible note on December 31, 2019.
Our capital resources as of December 31, 2017, available borrowing
capacity and current operating plans are expected to be sufficient
to fund the planned operations for at least twelve months from the
date of filing this report.
F-9
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting
principles in the United States (“GAAP”). 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.
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 future cash flows and operating
plans, 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, 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, 2017 and 2016, 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,
2017 and 2016 (in thousands):
|
|
As of December 31,
|
|
|
|
2017
|
2016
|
|
Accounts
receivable
|
$18,973
|
$15,574
|
|
Less:
allowance for discounts
|
(942)
|
(1,759)
|
|
Less:
allowance for doubtful accounts
|
(1,363)
|
(462)
|
|
Accounts
receivable, net
|
$16,668
|
$13,353
|
F-10
The allowance for discounts consisted of the following activity for
the years ended December 31, 2017 and 2016 (in
thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
Allowance
for discounts, beginning balance
|
$1,759
|
$3,707
|
|
Charges
against revenues
|
18,016
|
34,627
|
|
Utilization
of reserve
|
(18,833)
|
(36,575)
|
|
Allowance
for discounts, ending balance
|
$942
|
$1,759
|
Revenue Recognition
Revenue is recognized when all of the following criteria are
met:
●
Persuasive evidence of an
arrangement exists. Evidence of an arrangement consists of an order
from the Company’s distributors, resellers or
customers.
●
Delivery has
occurred. Delivery is
deemed to have occurred when title and risk of loss has
transferred, typically upon shipment of products to
customers.
●
The fee is fixed or
determinable. The Company
assesses whether the fee is fixed or determinable based on the
terms associated with the transaction.
●
Collection is reasonably
assured. The Company
assesses collectability based on credit analysis and payment
history.
The Company’s standard terms and conditions of sale allow for
product returns or replacements in certain cases. Estimates of
expected future product returns are recognized at the time of sale
based on analyses of historical return trends by customer type.
Upon recognition, the Company reduces revenue and cost of revenue
for the estimated return. Return rates can fluctuate over time, but
are sufficiently predictable with established customers to allow
the Company to estimate expected future product returns, and an
accrual is recorded for future expected returns when the related
revenue is recognized. Product returns incurred from established
customers were insignificant for the years ended December 31, 2017
and 2016, respectively.
The Company offers sales incentives through various programs,
consisting primarily of advertising related credits, volume
incentive rebates, and sales incentive reserves. The Company
records advertising related credits with customers as a reduction
to revenue as no identifiable benefit is received in exchange for
credits claimed by the customer. Volume incentive rebates are
provided to certain customers based on contractually agreed upon
percentages once certain thresholds have been met. Sales incentive
reserves are computed based on historical trending and budgeted
discount percentages, which are typically based on historical
discount rates with adjustments for any known changes, such as
future promotions or one-time historical promotions that will not
repeat for each customer. The Company records sales incentive
reserves and volume rebate reserves as a reduction to
revenue.
During the years ended December 31, 2017 and 2016, the Company
recorded discounts, and to a lesser degree, sales returns, totaling
$18.0 million and $34.6 million, respectively, which accounted for
15% and 21% 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 which represent more than 10% of
the Company’s net revenue for each period presented, or the
Company’s net accounts receivable balance as of each
respective balance sheet date. For each significant customer,
revenue as a percentage of total revenue and accounts receivable as
a percentage of total net accounts receivable are as
follows:
F-11
|
|
Percentage of Net
Revenue for the
Years Ended
December 31,
|
Percentage of Net
Accounts Receivable
as of December 31,
|
||
|
|
2017
|
2016
|
2017
|
2016
|
|
Customers
|
|
|
|
|
|
Costco
|
26%
|
20%
|
21%
|
17%
|
|
Amazon
|
13%
|
*
|
14%
|
*
|
|
Vitamin
Shoppe, Inc.
|
*
|
*
|
*
|
10%
|
|
Sport
One Trading LLC
|
*
|
*
|
*
|
10%
|
*
Represents less than 10% of net revenue or net accounts
receivable.
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, 2017 and
2016:
|
|
For the Years
Ended December 31,
|
|
|
Vendor
|
2017
|
2016
|
|
Nutra
Blend
|
53%
|
52%
|
|
S.K.Laboratories
|
16%
|
*
|
|
Prinova
|
15%
|
*
|
|
Bakery
Barn
|
*
|
25%
|
*
Represents less than 10% of purchases.
Inventory
MusclePharm products are produced through third party
manufacturers, and the cost of product inventory is recorded using
standard cost methodology. This standard cost methodology closely
approximates actual cost. Prior to the sale of the BioZone
subsidiary, its products were manufactured in production facilities
in Pittsburg, CA, and the cost of inventory was recorded using a
weighted average cost basis. BioZone was sold in May 2016.
Inventory is valued at the lower of cost or net realizable value.
Adjustments to reduce the cost of inventory to its net realizable
value are made, if required, and estimates are made for
obsolescence, excess or slow-moving inventories, non-conforming
inventories and expired inventory. These estimates are based on
management’s assessment of current future product demand,
production plan and market conditions.
Prepaid Giveaways
Prepaid giveaways represent non-inventory sample items which are
given away to aid in promotion of the brand. Costs related to
promotional giveaways are expensed as a component of
“Advertising and promotion” expenses in the
Consolidated Statements of Operations when the product is either
given away at a promotional event or shipped to the
customer.
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, print advertising, insurance and service contracts
requiring up-front payments. During the year ended December 31,
2016, the Company wrote down $1.4 million related to an impaired
manufacturing agreement. See additional information in Note 6.
During the year ended December 31, 2017, the Company did not have
any similar write-offs.
F-12
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
|
|
Leasehold
improvements
|
|
Lesser of estimated useful life or remaining lease
term
|
|
Manufacturing
and lab equipment
|
|
3 - 5 years
|
|
Vehicles
|
|
3 - 5 years
|
|
Displays
|
|
5 years
|
|
Website
|
|
3 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. Based upon
management’s analysis, the Company recognized $0.2 million of
impairments of long-lived assets related to leasehold improvements
for the discontinued use of certain portions of the Denver office
during the year ended December 31, 2017. Based upon
management’s analysis, the Company recognized $1.7 million of
impairments of long-lived assets related to the termination of
certain manufacturing agreements and product lines during the year
ended December 31, 2016. See additional information in Note 6 and
Note 9.
Beneficial Conversion Feature
The issuance of the Company's convertible notes to a related party
in 2016 generated a beneficial conversion feature, which arises
when a debt or equity security is issued with an embedded
conversion option that is beneficial to the investor or in the
money at inception because the conversion option has an effective
strike price that is less than the market price of the underlying
stock at the commitment date. The Company recognized the beneficial
conversion features by allocating the intrinsic value of the
conversion option, which is the number of shares of common stock
available upon conversion multiplied by the difference between the
effective conversion price per share and the fair value of common
stock per share on the commitment date, to additional paid-in
capital, resulting in a discount on the convertible notes. The
discounts are accreting from the date of issuance through the
redemption dates. Accretion expense is recognized over the period
utilizing the effective interest method. See additional information
in Note 8.
F-13
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 the
use of 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.
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. The Company ships customer orders
from a warehouse which is operated with the Company’s
equipment and employees, with inventory that is owned by the
Company. The Company also utilizes contract manufacturers to drop
ship product directly to customers.
Cost of revenue for products produced by BioZone consisted of raw
materials, direct labor, freight-in, supplies and equipment rental
expenses. The Company sold BioZone in May 2016.
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. For major trade shows, the expenses are recognized within
a calendar year over the period in which the Company recognizes
revenue associated with sales generated at the trade show. Some of
the contracts provide for contingent payments to endorsers or
athletes based upon specific achievement in their sports, such as
winning a championship. 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 awards’ grant date, based on 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 recorded at either the fair value of the services
rendered or the fair value of the share-based payments whichever is
more readily determinable. 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.
F-14
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. 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 loss” in the Consolidated Balance
Sheets.
Foreign currency gains and losses resulting from transactions
denominated in a currency other than the functional currency are
included in “Other expense, net” in the Consolidated
Statements of Operations.
Comprehensive Loss
Comprehensive loss is composed of two components: net loss and
other comprehensive loss. Other comprehensive loss refers to
revenue, expenses, gains and losses that under GAAP are recorded as
an element of stockholders’ deficit, but are excluded from
the Company’s net loss. The Company’s other
comprehensive loss is made up of foreign currency translation
adjustments for both periods presented.
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. 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.
F-15
Recent Accounting Pronouncements
During August 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2016-15, Statement of Cash Flows -
Classification of Certain Cash Receipts and Cash
Payments, which addresses eight
specific cash flow issues with the objective of reducing the
existing diversity in practice in how certain cash receipts and
cash payments are presented and classified in the statement of cash
flows. The standard is effective for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal
years. Early adoption is permitted, including adoption in an
interim period. The Company evaluated the impact of this new
pronouncement on the Company’s Consolidated Statements of
Cash Flows and it did not have a significant
impact.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with
Customers (“ASU
2014-09”), which provides guidance for revenue recognition.
ASU 2014-09 affects any entity that either enters into contracts
with customers to transfer goods or services or enters into
contracts for the transfer of nonfinancial assets and supersedes
the revenue recognition requirements in Topic 605,
Revenue
Recognition, and most
industry-specific guidance. This ASU also supersedes some cost
guidance included in Subtopic 605-35, Revenue Recognition-
Construction-Type and Production-Type Contracts. ASU 2014-09’s core principle is that a
company will recognize revenue when it transfers promised goods or
services to customers in an amount that reflects the consideration
to which a company expects to be entitled in exchange for those
goods or services. In doing so, companies will need to use more
judgment and make more estimates than under today’s guidance,
including identifying performance obligations in the contract,
estimating the amount of variable consideration to include in the
transaction price and allocating the transaction price to each
separate performance obligation. In August 2015, the FASB issued
ASU No. 2015-14, Revenue from Contracts with
Customers (Topic 606): Deferral of the Effective
Date (“ASU
2015-14”), which delays the effective date of ASU 2014-09 by
one year. The FASB also agreed to allow entities to choose to adopt
the standard as of the original effective date. As such, the
updated standard will be effective for the Company in the first
quarter of 2018. The Company may adopt the new standard under the
full retrospective approach or the modified retrospective approach.
The Company intends to apply the modified retrospective
approach upon adoption in the
first quarter of 2018. The new standard will not impact the
Company’s revenue. The new standard will not have a material
impact on the timing or classification of the Company’s cash
flows as reported in the Consolidated Statement of Cash Flows and
is not expected to have a significant impact on the Company’s
Consolidated Statement of Operations. The Company does not
anticipate any adjustments as a result of implementing the new
standard.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic
842), which supersedes Topic
840, Leases (“ASU 2016-02”). The guidance in this
new standard requires lessees to put most leases on their balance
sheets but recognize expenses on their income statements in a
manner similar to the current accounting and eliminates the current
real estate-specific provisions for all entities. The guidance also
modifies the classification criteria and the accounting for
sales-type and direct financing leases for lessors. ASU 2016-02 is
effective for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years, with early adoption
permitted. The Company is currently evaluating the impact of the
adoption of ASU 2016-02.
In 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, 2019,
and interim periods within those fiscal years. The Company is in
the process of evaluating the impact of the
pronouncement.
Note 3. Fair Value of Financial Instruments
Management believes the fair values of the obligations under the
secured borrowing arrangement approximate carrying value because
the debt carries market rates of interest available to the Company
and are short-term in nature. The Company’s remaining
financial instruments consisted primarily of cash, prepaids,
accounts receivable, accounts payable, accrued liabilities and
accrued restructuring charges, warrants and conversion option all
of which are short-term in nature with fair values approximating
carrying value. As of December 31, 2017 and 2016, the Company held
no assets or liabilities that required re-measurement at fair value
on a recurring basis.
During the year ended December 31, 2017, management concluded that
$0.2 million of long-lived assets were impaired, based on level 3
valuations regarding the partial closure of the Denver
headquarters. Based on the partial closure of the office,
management determined that the leasehold improvements had no future
value. During the year ended December 31, 2016, management
concluded that $1.8 million of long-lived assets were impaired,
based on level 3 valuations regarding the termination of certain
manufacturing agreements with Capstone and the termination of the
Endorsement Licensing and Co-Branding Agreement related to our
Arnold Schwarzenegger product line. Based on the termination of
these agreements, management determined the assets related to these
agreements had no future value. See additional information in Note
6 and Note 9.
During 2017, in connection with the related party note
restructuring, the Company engaged a third party valuation firm to
determine the fair value of the conversion option. The third party
valuation firm utilized a Monte Carlo simulation. See further
discussion in Note 8. The fair value of the new conversion option
is a level 3 valuation.
F-16
Note 4. Sale of BioZone
In May 2016, the Company completed the sale of its wholly-owned
subsidiary, BioZone, for gross proceeds of $9.8 million, including
cash of $5.9 million, a $2.0 million credit for future inventory
deliveries reflected as a prepaid asset in the Consolidated Balance
Sheets and $1.5 million which is subject to an earn-out based on
the financial performance of BioZone for the twelve months
following the closing of the transaction. In addition, the Company
agreed to pay down $350,000 of BioZone’s accounts payables,
which was deducted from the purchase price. As part of the
transaction, the Company also agreed to transfer to the buyer
200,000 shares of its common stock with a market value on the date
of issuance of $640,000, for consideration of $50,000. The Company
recorded a loss of $2.1 million related to the sale of BioZone for
the nine months ended September 30, 2016. The potential earn-out
was not achieved in May 2017, at which time the earnout
expired.
Purchase Commitment
Upon the completion of the sale of BioZone, the Company entered
into a manufacturing and supply agreement whereby the Company is
required to purchase a minimum of approximately $2.5 million of
products per year from BioZone annually for an initial term of
three years. If the minimum order quantities of specific products
are not met, a $3.0 million minimum purchase of other products must
be met in order to waive the shortfall, which is at 25% of the
realized shortfall. Due to the timing of achieving the minimum
purchase quantities, we are below these targets. As a result, we
have reserved an amount to cover the estimated purchase commitment
shortfall during the year ended December 31, 2017.
The following table summarizes the components of the loss from the
sale of BioZone (in thousands):
|
Cash
proceeds from sale
|
$5,942
|
|
Consideration
for common stock transferred
|
50
|
|
Prepaid
inventory
|
2,000
|
|
Fair
market value of the common stock transferred
|
(640)
|
|
Assets
sold:
|
|
|
Accounts
receivable, net
|
(923)
|
|
Inventory,
net
|
(1,761)
|
|
Fixed
assets, net
|
(2,003)
|
|
Intangible
assets, net
|
(5,657)
|
|
All
other assets
|
(41)
|
|
Liabilities
transferred
|
1,197
|
|
Transaction
and other costs
|
(279)
|
|
Loss
on sale of subsidiary
|
$(2,115)
|
Note 5. Restructuring
As part of an effort to better focus and align the Company’s
resources toward profitable growth, on August 24, 2015, the
Board authorized the Company to undertake steps to commence a
restructuring of the business and operations, which was
substantially concluded as of December 31, 2016. The Company closed
certain facilities, reduced headcount, discontinued products and
renegotiated certain contracts resulting in restructuring and other
charges of $18.3 million for the year ended December 31, 2015
and recoveries of such charges of $3.5 million for the year ended
December 31, 2016.
Included in these charges, for the years ended December 31, 2016,
the Company recorded restructuring charges in “Cost of
revenue” of $2.3 million, related to the write-down of
inventory identified to be discontinued in the restructuring
plan.
F-17
For the year ended December 31, 2016, the Company recorded a credit
in “Restructuring and other charges” of $3.5 million
which primarily included: (i) an expense credit of $4.8
million related to the release of the restructuring accrual of $7.0
million which was expensed during the year ended December 31, 2015,
offset by the cash payment of $2.2 million related to the
settlement agreement which terminated all future commitments
between ETW Corporation (“ETW”) and the Company (see
Note 14); (ii) $1.4 million related to write-off of long-lived
assets related to the abandonment of certain lease facilities; and
(iii) $0.9 million related to severance and other employee
compensation costs. The restructuring plan was substantially
complete as of December 31, 2016.
The following table illustrates the provision of the restructuring
charges and the accrued restructuring charges balance as of
December 31, 2017 and 2016 (in thousands):
|
|
Employee Severance Costs
|
Contract Termination Costs
|
Purchase Commitment of Discontinued Inventories Not Yet
Received
|
Abandoned Lease Facilities
|
Total
|
|
Balance
as of December 31, 2015
|
$508
|
$8,150
|
$350
|
$411
|
$9,419
|
|
Expensed
|
601
|
(288)
|
—
|
1,399
|
1,712
|
|
Benefit
from settlement of
|
|
|
|
|
|
|
Endorsement Agreement with
|
|
|
|
|
|
|
ETW
|
—
|
(4,750)
|
—
|
—
|
(4,750)
|
|
Cash
payments
|
(1,109)
|
(2,804)
|
(175)
|
(1,506)
|
(5,594)
|
|
Reclassification
from accounts payable to restructuring charges
|
—
|
—
|
—
|
35
|
35
|
|
Balance
as of December 31, 2016
|
—
|
308
|
175
|
339
|
822
|
|
Expensed
|
—
|
—
|
—
|
816
|
816
|
|
Cash
payments
|
—
|
—
|
—
|
(923)
|
(923)
|
|
Balance
as of December 31, 2017
|
$—
|
$308
|
$175
|
$232
|
$715
|
The total future payments under the restructuring plan as of
December 31, 2017 are as follows (in thousands):
|
|
For the Years Ending December 31,
|
|||
|
Outstanding Payments
|
2018
|
2019
|
2020
|
Total
|
|
Contract
termination costs
|
$308
|
$—
|
$—
|
$308
|
|
Purchase
commitment of discontinued inventories not yet
received
|
175
|
—
|
—
|
175
|
|
Abandoned
leased facilities
|
112
|
91
|
29
|
232
|
|
Total
future payments
|
$595
|
$91
|
$29
|
$715
|
Note 6. Balance Sheet Components
Inventory
Inventory consisted solely of finished goods as of December 31,
2017 and 2016.
The Company records charges for obsolete and slow-moving inventory
based on the age of the product as determined by the expiration
date. Products within one year of their expiration dates are
considered for write-off purposes. Historically, the Company has
had minimal returns with established customers. Other than
write-off of inventory during restructuring activities, the Company
incurred insignificant inventory write-offs during the years ended
December 31, 2017 and 2016. Inventory write-downs, once
established, are not reversed as they establish a new cost basis
for the inventory.
F-18
As disclosed further in Note 5, the Company executed a
restructuring plan in August 2015 and wrote off inventory
related to discontinued products. For the years ended December 31,
2017 and 2016, discontinued inventory of $1.7 million and $2.3
million, respectively, was written off and included as a component
of “Cost of revenue” in the accompanying Consolidated
Statements of Operations.
In May 2016, the Company completed the sale of BioZone, which
resulted in a reduction of inventory of $1.8 million. See
additional information in Note 4. Additionally, $0.4 million of
inventory related to the Arnold Schwarzenegger product line was
considered impaired as the inventory had no future value as a
result of the contract termination, and included as a component of
the “Impairment of assets” in the accompanying
Consolidated Statements of Operations for the year ended December
31, 2016. See additional information in Note 9.
Property and Equipment
Property and equipment consisted of the following as of December
31, 2017 and 2016 (in thousands):
|
|
As of December 31,
|
|
|
|
2017
|
2016
|
|
Furniture,
fixtures and equipment
|
$3,597
|
$3,521
|
|
Leasehold
improvements
|
2,044
|
2,504
|
|
Manufacturing
and lab equipment
|
3
|
3
|
|
Vehicles
|
86
|
334
|
|
Displays
|
485
|
483
|
|
Website
|
462
|
462
|
|
Construction
in process
|
—
|
55
|
|
Property
and equipment, gross
|
6,677
|
7,362
|
|
Less:
accumulated depreciation and amortization
|
(4,855)
|
(4,119)
|
|
Property
and equipment, net
|
$1,822
|
$3,243
|
Depreciation and amortization expense related to property and
equipment was $1.1 million and $1.5 million for the years ended
December 31, 2017 and 2016, respectively, which is included in
“Selling, general, and administrative” expense in the
accompanying Consolidated Statements of Operations.
In May 2016, the Company completed the sale of BioZone, which
resulted in a reduction of various components of property and
equipment of $2.0 million. See additional information in Note 4. As
disclosed further in Note 5, the Company executed a restructuring
plan in August 2015 and wrote off certain long-lived assets,
primarily leasehold improvements, related to the abandonment of
certain leased facilities. The write-off of long-lived assets was
$0.3 million for the year ended December 31, 2016, and was included
as a component of “Restructuring and other charges” in
the accompanying Consolidated Statements of
Operations.
Intangible Assets
Intangible assets included the assets acquired pursuant to the
BioZone asset acquisition and MusclePharm’s apparel rights
reacquired from Worldwide Apparel as of December 31, 2015. BioZone
was sold during the year ended December 31, 2016. Intangible assets
consisted of the following (in thousands):
F-19
|
|
As of December 31, 2017
|
|||
|
|
Gross Value
|
Accumulated Amortization
|
Net Carrying Value
|
Remaining Weighted-Average Useful Lives (years)
|
|
Amortized Intangible Assets
|
|
|
|
|
|
Brand
(apparel rights)
|
$2,244
|
$(927)
|
$1,317
|
4.1
|
|
Total
intangible assets
|
$2,244
|
$(927)
|
$1,317
|
|
|
|
As of December 31, 2016
|
|||
|
|
Gross Value
|
Accumulated Amortization
|
Net Carrying Value
|
Remaining Weighted-Average Useful Lives (years)
|
|
Amortized Intangible Assets
|
|
|
|
|
|
Brand
(apparel rights)
|
$2,244
|
$(606)
|
$1,638
|
5.1
|
|
Total
intangible assets
|
$2,244
|
$(606)
|
$1,638
|
|
Intangible assets amortization expense was $0.3 million and $0.6
million for the years ended December 31, 2017 and 2016,
respectively, which is included in the “Selling, general, and
administrative” expense in the accompanying Consolidated
Statements of Operations. Additionally, $1.2 million of capitalized
brand and trademark expenses with a net carrying value of $0.8
million related to the Arnold Schwarzenegger product line were
considered impaired, and included as a component of the
“Impairment of assets” in the accompanying Consolidated
Statements of Operations for the year ended December 31, 2016. See
additional information in Note 9.
As of December 31, 2017, the estimated future amortization expense
of intangible assets is as follows (in thousands):
|
For the Year Ending December 31,
|
|
|
2018
|
$321
|
|
2019
|
321
|
|
2020
|
321
|
|
2021
|
321
|
|
2022
|
33
|
|
Total
amortization expense
|
$1,317
|
Note 7. Other Expense, net
For the years ended December 31, 2017 and 2016, “Other
expense, net” consisted of the following (in
thousands):
|
|
For the Year Ended December 31,
|
|
|
|
2017
|
2016
|
|
Other
expense, net:
|
|
|
|
Interest
expense, related party
|
$(2,423)
|
$(682)
|
|
Interest
expense, other
|
(46)
|
(258)
|
|
Interest
expense, secured borrowing arrangement
|
(792)
|
(702)
|
|
Foreign
currency transaction gain
|
26
|
23
|
|
Other
|
(837)
|
(694)
|
|
Total
other expense, net
|
$(4,072)
|
$(2,313)
|
F-20
Note 8. Debt
As of December 31, 2017 and 2016, the Company’s debt
consisted of the following (in thousands):
|
|
As of December 31,
|
|
|
|
2017
|
2016
|
|
2017
Refinanced Convertible Note due December 31, 2019 with a related
party
|
$18,000
|
$—
|
|
2016
Convertible Note due November 8, 2017 with a related party, net of
discount
|
—
|
10,465
|
|
2015
Convertible Note due November 8, 2017 with a related
party
|
—
|
6,000
|
|
Obligations
under secured borrowing arrangement
|
5,385
|
2,681
|
|
Secured
line of credit
|
3,000
|
—
|
|
Unamortized
loan costs
|
(1,331)
|
|
|
Total
debt
|
25,054
|
19,146
|
|
Less:
current portion
|
(8,385)
|
(19,146)
|
|
Long
term debt
|
$16,669
|
$—
|
Related-Party Notes Payable
On
November 3, 2017, MusclePharm Corporation (the
“Company”) entered into a refinancing transaction (the
“Refinancing”) with Mr. Ryan Drexler, the
Company’s Chairman of the Board of Directors, Chief Executive
Officer and President. As part of the Refinancing, the Company
issued to Mr. Drexler an amended and restated convertible secured
promissory note (the “Refinanced Convertible Note”) in
the original principal amount of $18,000,000, which amends and
restates (i) a convertible secured promissory note dated as of
December 7, 2015, and amended as of January 14, 2017, in the
original principal amount of $6,000,000 with an interest rate of 8%
prior to the amendment and 10% following an amendment (the
“2015 Convertible Note”), (ii) a convertible secured
promissory note dated as of November 8, 2016, in the original
principal amount of $11,000,000 with an interest rate of 10% (the
“2016 Convertible Note”) , and (iii) a secured demand
promissory note dated as of July 27, 2017, in the original
principal amount of $1,000,000 with an interest rate of 15% (the
“2017 Note”, and together with the 2015 Convertible
Note and the 2016 Convertible Note, collectively, the “Prior
Notes”). The due date of the 2015 Convertible Note and the
2016 Convertible Note was November 8, 2017. The 2017 Note was due
on demand.
2017 Refinanced Convertible Note
The
$18.0 million Refinanced Convertible Note bears interest at the
rate of 12% per annum. Interest payments are due on the last day of
each quarter. At the Company’s option (as determined by its
independent directors), the Company may repay up to one sixth of
any interest payment by either adding such amount to the principal
amount of the note or by converting such interest amount into an
equivalent amount of the Company’s common stock. Any interest
not paid when due shall be capitalized and added to the principal
amount of the Refinanced Convertible Note and bear interest on the
applicable interest payment date along with all other unpaid
principal, capitalized interest, and other capitalized
obligations.
Both
the principal and the interest under the Refinanced Convertible
Note are due on December 31, 2019, unless converted
earlier.
Mr.
Drexler may convert the outstanding principal and accrued interest
into shares of the Company’s common stock at a conversion
price of $1.11 per share at any time. The Company may prepay the
Refinanced Convertible Note by giving Mr. Drexler between 15 and 60
days’ notice depending upon the specific circumstances,
subject to Mr. Drexler’s conversion right.
F-21
The
Refinanced Convertible Note contains customary events of default,
including, among others, the failure by the Company to make a
payment of principal or interest when due. Following an event of
default, interest will accrue at the rate of 14% per annum. In
addition, following an event of default, any conversion,
redemption, payment or prepayment of the Refinanced Convertible
Note will be at a premium of 105%. The Refinanced Convertible Note
also contains customary restrictions on the ability of the Company
to, among other things, grant liens or incur indebtedness other
than certain obligations incurred in the ordinary course of
business. The restrictions are also subject to certain additional
qualifications and carveouts, as set forth in the Refinanced
Convertible Note. The Refinanced Convertible Note is subordinated
to certain other indebtedness of the Company, as described under
Item 8.01 below.
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 enter into the Refinanced
Convertible Note and to amend and restate the security agreement
pursuant to which the Prior Notes were secured by all of the assets
and properties of the Company and its subsidiaries whether tangible
or intangible, by entering into the Third Amended and Restated
Security Agreement (the “Amended Security Agreement”).
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.
In
connection with the refinancing, the Company recorded a debt
discount of $1.2 million. The debt discount is equal to the change
in the fair value of the conversion option between the Refinanced
Convertible Note and the Prior Notes. The fair value of the
conversion option was determined a Monte Carlo simulation and the
model of stock price behavior known as GBM which simulates a future
period as a random step from a previous period. Significant
assumptions were: expected stock price premium of 40%, expected
trading days of 252 days, and volatility of 60%.
In
addition, the Refinanced Convertible Note contains two embedded
derivatives for default interest and an event of default put. Due
to the unlikely event of default, the embedded derivatives have a
de minimis value as of December 31, 2017.
2017 Note
On July
24, 2017, the Company entered into a secured demand promissory
note, pursuant to which Mr. Drexler loaned the Company $1.0
million, which was payable upon demand. Proceeds from the 2017 Note
were used to partially fund a settlement agreement. The 2017 Note
carried interest at a rate of 15% per annum. Any interest not paid
when due would be capitalized and added to the principal amount of
the 2017 Note and bears interest on the applicable interest payment
date along with all other unpaid principal, capitalized interest,
and other capitalized obligations. The Company could prepay the
2017 Note without penalty any time prior to a demand request from
Mr. Drexler. This Note was refinanced as part of the 2017
Refinanced Convertible Note.
2016 Convertible Note
In
November 2016, the Company entered into a convertible secured
promissory note agreement with Mr. Drexler pursuant to which Mr.
Drexler loaned the Company $11.0 million. Proceeds from the 2016
Convertible Note were used to fund the settlement of litigation.
The 2016 Convertible Note was secured by all assets and properties
of the Company and its subsidiaries, whether tangible or
intangible. The 2016 Convertible Note carried interest at a rate of
10% per annum, or 12% if there is an event of default. Both the
principal and the interest under the 2016 Convertible Note were due
on November 8, 2017, unless converted earlier. Mr. Drexler could
convert the outstanding principal and accrued interest into
6,010,929 shares of the Company's common stock for $1.83 per share
at any time. The Company could prepay the 2016 Convertible Note at
the aggregate principal amount therein, plus accrued interest, by
giving Mr. Drexler between 15 and 60 day-notice depending upon the
specific circumstances, provided that Mr. Drexler could convert the
2016 Convertible Note during the applicable notice period. The
Company recorded the 2016 Convertible Note as a liability in the
balance sheet and also recorded a beneficial conversion feature of
$601,000 as a debt discount upon issuance of the convertible note,
which was amortized over the term of the debt using the effective
interest method. The beneficial conversion feature was calculated
based on the difference between the fair value of common stock on
the transaction date and the effective conversion price of the
convertible note. As of December 31, 2017 and 2016, the 2016
Convertible Note had an outstanding principal balance of $0.0
million and $11.0 million, respectively, and a carrying value of
$0.0 million and $10.5 million, respectively. This Note was
refinanced as part of the 2017 Refinanced Convertible
Note.
F-22
2015 Convertible Note
In
December 2015, the Company entered into a convertible secured
promissory note agreement with Mr. Drexler, pursuant to which he
loaned the Company $6.0 million. Proceeds from the 2015 Convertible
Note were used to fund working capital requirements. The 2015
Convertible Note was secured by all assets and properties of the
Company and its subsidiaries, whether tangible or intangible. The
2015 Convertible Note originally carried an interest at a rate of
8% per annum, or 10% in the event of default. Both the principal
and the interest under the 2015 Convertible Note were originally
due in January 2017, unless converted earlier. The due date of the
2015 Convertible Note was extended to November 8, 2017 and the
interest rate raised to 10%per annum, or 12% in the event of
default. Mr. Drexler could convert the outstanding principal and
accrued interest into 2,608,695 shares of common stock for $2.30
per share at any time. The Company could prepay the convertible
note at the aggregate principal amount therein plus accrued
interest by giving the holder between 15 and 60 day-notice,
depending upon the specific circumstances, provided that Mr.
Drexler could convert the 2015 Convertible Note during the
applicable notice period. The Company recorded the 2015 Convertible
Note as a liability in the balance sheet and also recorded a
beneficial conversion feature of $52,000 as a debt discount upon
issuance of the 2015 Convertible Note, which was amortized over the
original term of the debt using the effective interest method. The
beneficial conversion feature was calculated based on the
difference between the fair value of common stock on the
transaction date and the effective conversion price of the
convertible note. As of December 31, 2017 and 2016, the convertible
note had an outstanding principal balance and carrying value of
$0.0 and $6.0 million, respectively. In connection with the Company
entering into the 2015 Convertible Note with Mr. Drexler, the
Company granted Mr. Drexler the right to designate two directors to
the Board. This Note was refinanced as part of the 2017 Refinanced
Convertible Note.
For the years ended December 31, 2017 and 2016, interest expense
related to the related party convertible secured promissory notes
was $2.4 million and $0.7 million, respectively. During the years
ended December 31, 2017 and 2016, $2.2 million and $0.5 million,
respectively, in interest was paid in cash to Mr.
Drexler.
Inventory Financing
On
October 6, 2017, the Company and its affiliate (together with the
Company, “Borrower”) entered into a Loan and Security
Agreement (“Security Agreement”) with Crossroads
Financial Group, LLC (“Crossroads”). Pursuant to the
Security Agreement, Borrower may borrow up to 70% of its Inventory
Cost or up to 75% of Net
Orderly Liquidation Value (each as defined in the Security
Agreement), up to a maximum amount of $3.0 million at an interest
rate of 1.5% per month, subject to a minimum monthly fee of
$22,500. The initial term of the Security Agreement is six months
from the date of execution, and such initial term is extended
automatically in six-month 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 Borrower to, among other things,
grant liens, incur debt and transfer assets. Under the Security
Agreement, Borrower has agreed to grant Crossroads a security
interest in all Borrower’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. As of December 31, 2017, the Company borrowed
$3 million from Crossroads, of which $1 million was repaid
subsequent to year end.
Secured Borrowing Arrangement
In January 2016, the Company entered into a Purchase and Sale
Agreement (the “Purchase and Sale Agreement”) with
Prestige Capital Corporation (“Prestige”) pursuant to
which the Company agreed to sell and assign and Prestige agreed to
buy and accept, certain accounts receivable owed to the Company
(“Accounts”). Under the terms of the 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 borrowings
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
chargeback, 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 based on the number of days
outstanding from the assignment of Accounts to collection of the
assigned Accounts. In addition, the Company granted Prestige a
continuing security interest in and lien upon all accounts
receivable, inventory, fixed assets, general intangibles and other
assets. The Purchase and Sale Agreement’s term has been
extended to July 31, 2018. At December 31, 2017, we had
approximately $5.4 million of outstanding borrowings.
F-23
For the year ended December 31, 2017, the Company sold to Prestige
accounts with an aggregate face amount of approximately $42.1
million, for which Prestige paid to the Company approximately $33.7
million in cash. During year ended December 31, 2017,
$31.6 million was subsequently repaid to Prestige, including
fees and interest.
During
the year ended December 31, 2016, the Company sold to Prestige
accounts with an aggregate face amount of approximately $54.6
million, for which Prestige paid to the Company approximately $43.7
million in cash. During the year ended December 31, 2016,
$41.9 million was subsequently repaid to Prestige, including
fees and interest. The proceeds from the initial assignment to
Prestige under this secured borrowing arrangement were primarily
utilized to pay off the balance of the existing line of credit and
term loan with ANB Bank.
Note 9. Commitments and Contingencies
Operating Leases
The Company leases office and warehouse facilities under operating
leases, which expire at various dates through 2022. The amounts
reflected in the table below are for the aggregate future minimum
lease payments under non-cancelable facility operating leases for
properties that have not been abandoned as part of the
restructuring plan. See Note 5 for additional details regarding the
restructured leases. Under lease agreements that contain escalating
rent provisions, lease expense is recorded on a straight-line basis
over the lease term. Rent expense was $0.6 million and $0.9 million
for years ended December 31, 2017 and 2016,
respectively.
As of December 31, 2017, future minimum lease payments are as
follows (in thousands):
|
For the Year Ending December 31,
|
|
|
2018
|
860
|
|
2019
|
846
|
|
2020
|
735
|
|
2021
|
481
|
|
2022
|
369
|
|
Total
minimum lease payments
|
$3,291
|
Capital Leases
In December 2014, the Company entered into a capital lease
agreement providing for approximately $1.8 million in credit to
lease up to 50 vehicles as part of a fleet lease program. As of
December 31, 2017, the Company was leasing two vehicles under the
capital lease which were included in “Property and equipment,
net” in the Consolidated Balance Sheets. The original cost of
leased assets was $86,000 and the associated accumulated
depreciation was $54,000. The Company also leases manufacturing and
warehouse equipment under capital leases, which expire at various
dates through February 2020. Several of such leases were
reclassified to the restructuring liability during 2016, and
related assets were written off to restructuring expense for the
year ended December 31, 2016.
As of December 31, 2017 and December 31, 2016, short-term
capital lease liabilities of $126,000 and $173,000, respectively,
are included as a component of current accrued liabilities, and the
long-term capital lease liabilities of $146,000 and $332,000,
respectively, are included as a component of long-term liabilities
in the Consolidated Balance Sheets.
As December 31, 2017, the Company’s future minimum lease
payments under capital lease agreements, are as follows (in
thousands):
F-24
|
For the Year Ending December 31,
|
|
|
2018
|
$136
|
|
2019
|
101
|
|
2020
|
50
|
|
Total
minimum lease payments
|
287
|
|
Less
amounts representing interest
|
(19)
|
|
Present
value of minimum lease payments
|
$268
|
Purchase Commitment
As described in Note 4, upon closing of the sale of BioZone, the
Company entered into a manufacturing and supply agreement whereby
the Company is required to purchase a minimum of approximately $2.5
million of products per year from BioZone annually for an initial
term of three years. If the minimum order quantities of specific
products are not met, a $3.0 million minimum purchase of other
products must be met in order to waive the shortfall, which is at
25% of the realized shortfall. Due to the timing of achieving the
minimum purchase quantities, we are below these targets. As a
result, we have reserved an amount to cover the estimated purchase
commitment shortfall during the year ended December 31,
2017.
Sponsorship and Endorsement Contract Liabilities
The Company has various non-cancelable endorsement and sponsorship
agreements with terms expiring through 2019. The total value of
future contractual payments as of December 31, 2017 are as follows
(in thousands):
|
|
For the Years Ending December 31,
|
||
|
|
2018
|
2019
|
Total
|
|
Outstanding Payments
|
|
|
|
|
Endorsement
|
$276
|
$62
|
$338
|
|
Sponsorship
|
144
|
55
|
199
|
|
Total
future payments
|
$420
|
$117
|
$537
|
Settlements
Bakery Barn
In May 2017, Bakery Barn, a supplier of our protein bars, filed a
lawsuit in the Western District of Pennsylvania alleging that the
Company had failed to pay $1,406,079 owing for finished product
manufactured by Bakery Barn, as well as packaging materials
purchased by Bakery Barn to manufacture the Company’s protein
bars. The Company filed an answer and counterclaims against Bakery
Barn, alleging that Bakery Barn had breached the Manufacturing
Agreement and the Quality Agreement by supplying the Company with
stale, hardened, moldy or otherwise unsaleable protein bars, and
that Bakery Barn’s breaches have caused the Company, at a
minimum, several hundred thousand dollars in damages. On October
27, 2017, the parties settled their dispute and entered into a
settlement agreement, pursuant to which the Company agreed to pay
Bakery Barn $350,000 on October 28, 2017, and an additional
$352,416 by November 26, 2017, both of which have been paid. The
parties also agreed that Bakery Barn would resume producing
products for the Company under substantially the same terms
embodied in the oral Manufacturing Agreement, until such time that
the Manufacturing Agreement can be reduced to writing.
The Company settled and recorded a gain on the settlement of
accounts payable in its Statement of Operations for year ended
December 31, 2017 for approximately $391,000.
F-25
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. 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 has agreed to pay CFG a sum of $3
million, consisting of a $1 million payment that was advanced by a
related party on July 7, 2017, and subsequent $1 million
installments to be paid by July 7, 2018 and July 7, 2019,
respectively. The 2018 payment is accrued in current liabilities
and the 2019 payment is accrued in long-term
liabilities.
The Company recorded a charge in its Statement of Operations for
the year ended December 31, 2017 for approximately $1.5 million,
representing the discounted value of the unrecorded settlement
amount and an additional $0.2 million, representing imputed
interest. The Company has now concluded the finalization of all its
major legacy endorsement deals.
Arnold Schwarzenegger
The Company was engaged in a dispute with Marine MP, LLC
(“Marine MP”), Arnold Schwarzenegger
(“Schwarzenegger”), and Fitness Publications, Inc.
(“Fitness,” and together with Marine MP and
Schwarzenegger, the “AS Parties”) concerning amounts
allegedly owed under the parties’ Endorsement Licensing and
Co-Branding Agreement (the “Endorsement Agreement”). In
May 2016, the Company received written notice that the AS Parties
were terminating the Endorsement Licensing and Co-Branding
Agreement by and among the Company and the AS Parties, then the
Company provided written notice to the AS Parties that it was
terminating the Endorsement Agreement, and the AS Parties then
commenced arbitration, which alleged that the Company breached the
parties’ agreement and misappropriated Schwarzenegger’s
likeness. The Company filed its response and counterclaimed for
breach of contract and breach of the implied covenant of good faith
and fair dealing.
On December 17, 2016, the Company entered into a Settlement
Agreement (the “AS Parties Settlement Agreement”) with
the AS Parties, effective January 4, 2017. Pursuant to the AS
Parties Settlement Agreement, and to resolve and settle all
disputes between the parties and release all claims between them,
the Company agreed to pay the AS Parties (a) $1.0 million, which
payment was released to the AS Parties on January 5, 2017, and (b)
$2.0 million within six months of the effective date of the AS
Parties Settlement Agreement. The Company paid the settlement in
full as of September 30, 2017. The Company also has agreed that it
will not sell any products from its Arnold Schwarzenegger product
line, will donate to a charity chosen by Arnold Schwarzenegger any
remaining usable product, and otherwise destroy any products
currently in inventory. This inventory was written off to
“Impairment of assets” in the Consolidated Statement of
Operations during the year ended December 31, 2016. In addition, in
connection with the transaction, the 780,000 shares of Company
common stock held by Marine MP were sold to a third party on
January 4, 2017 in exchange for an aggregate payment by such third
party of $1,677,000 to the AS Parties.
Capstone Nutrition Agreements
The Company entered into a series of agreements with Capstone
Nutrition (“Capstone”) effective March 2, 2015,
including an amendment (the “Amendment”) to a
Manufacturing Agreement dated November 27, 2013 (as amended,
the “Manufacturing Agreement”). Pursuant to the
Amendment, Capstone was the Company’s nonexclusive
manufacturer of dietary supplements and food products sold or
intended to be sold by the Company. The Amendment included various
agreements including amended pricing terms. The initial term per
this Amendment was to end on January 1, 2022, and could have
been extended for three successive 24-month terms, and included
renewal options.
F-26
The Company and Capstone entered into a Class B Common Stock
Warrant Purchase Agreement (“Warrant Agreement”)
whereby the Company could purchase approximately 19.9% of
Capstone’s parent company, INI Parent, Inc.
(“INI”), on a fully-diluted basis as of March 2,
2015. Pursuant to the Warrant Agreement, INI issued to the Company
a warrant (the “Warrant”) to purchase shares of
INI’s Class B common stock, par value $0.001 per share, at an
exercise price of $0.01 per share (the “Warrant
Shares”). The Warrant could have been exercised if the
Company was in compliance with the terms and conditions of the
Amendment.
The Company utilized the Black-Scholes valuation model to determine
the value of the Warrant and recorded an asset of $977,000, which
was accounted for under the cost method and assessed for
impairment. The Warrant was included in “Investments,
long-term” in the Consolidated Balance Sheet as of December
31, 2015. However, during the second quarter of 2016, the Company
reassessed the value of the Warrant and considered it to be fully
impaired as the Company no longer believed there was any remaining
value to the Warrant. The Company also had recorded
$1.5 million of prepaid expenses and other assets in the
Consolidated Balance Sheet as of December 31, 2015, which were
being amortized over the remaining life of the Manufacturing
Agreement of 6.5 years. However, during the second quarter of
2016, the Company reassessed the Manufacturing Agreement, which was
the basis of the prepaid asset, and considered the entire remaining
balance of $1.4 million impaired as the Company no longer believed
there was any remaining value to the Manufacturing Agreement. These
conclusions were based in large part on the fact that Capstone sold
its primary powder manufacturing facility during the second quarter
of 2016, which significantly reduced its manufacturing capacity,
and the dispute which is discussed below.
In total, the Company recognized $2.4 million of impairment expense
during year ended December 31, 2016 related to previously recorded
Capstone-related assets.
The Company and INI also entered into an option agreement (the
“Option Agreement”). Subject to additional provisions
and conditions set forth in the Option Agreement, at any time on or
prior to June 30, 2016, the Company had the right to purchase
for cash all of the remaining outstanding shares of INI’s
common stock not already owned by the Company after giving effect
to the exercise of the Warrant, based on an aggregate enterprise
value, equal to $200.0 million. The fair value of the option
was deemed de minimis as of the transaction date. The Company did
not exercise the option to purchase the remaining outstanding
shares of INI’s common stock and such option expired on June
30, 2016.
The Company was engaged in a dispute with Capstone arising out of a
Manufacturing Agreement between the parties. On November 7, 2016,
the parties executed a settlement agreement (the “Capstone
Settlement Agreement”), which terminated the Manufacturing
Agreement. Under the Capstone Settlement Agreement, the Company
paid cash to Capstone in the amount of $11.0 million. All pending
litigation was dismissed with prejudice. The Capstone Settlement
Agreement released all parties from any and all claims, actions,
causes of action, suits, controversies or counterclaims that the
parties have had, now have or thereafter can, shall or may have.
The Company also issued a warrant to purchase 1,289,378 shares of
the Company’s common stock to INI (the “Settlement
Warrant”). The exercise price of the Settlement Warrant was
$1.83 per share, with a term of four years. The Company valued the
Settlement Warrant by utilizing the Black Scholes model at
approximately $1.8 million.
As of the settlement date, the Company had approximately $21.9
million in accounts payable and accrued liabilities associated with
the Capstone liability. Based upon the amounts included herein, the
Company recorded a gain of approximately $9.1 million based on the
Capstone settlement.
Contingencies
In the normal course of business or otherwise, the Company may
become involved in legal proceedings. The Company will accrue a
liability for such matters when it is probable that a liability has
been incurred and the amount can be reasonably estimated. When only
a range of possible loss can be established, the most probable
amount in the range is accrued. If no amount within this range is a
better estimate than any other amount within the range, the minimum
amount in the range is accrued. The accrual for a litigation loss
contingency might include, for example, estimates of potential
damages, outside legal fees and other directly related costs
expected to be incurred. As of December 31, 2017, the Company was
involved in the following material legal proceedings described
below.
F-27
ThermoLife
In January 2016, ThermoLife International LLC
(“ThermoLife”), a supplier of nitrates to MusclePharm,
filed a complaint against the Company in Arizona state court. In
its complaint, ThermoLife alleges that the Company failed to meet
minimum purchase requirements contained in the parties’
supply agreement and seeks monetary damages for the deficiency in
purchase amounts. In March 2016, the Company filed an answer
to ThermoLife’s complaint, denying the allegations contained
in the complaint, and filed a counterclaim alleging that ThermoLife
breached its express warranty to MusclePharm because
ThermoLife’s products were defective and could not be
incorporated into the Company’s products. Therefore, the
Company believes that ThermoLife’s complaint is without
merit. The lawsuit continues to be in the discovery
phase.
Former Executive Lawsuit
In December 2015, the Company accepted notice by Mr. Richard
Estalella (“Estalella”) to terminate his employment as
the Company’s President. Although Estalella sought to
terminate his employment with the Company for “Good
Reason,” as defined in Estalella’s employment agreement
with the Company (the “Employment Agreement”), the
Company advised Estalella that it deemed his resignation to be
without Good Reason.
In February 2016, Estalella filed a complaint in Colorado state
court against the Company and Ryan Drexler, Chairman of the Board,
Chief Executive Officer and President, alleging, among other
things, that the Company breached the Employment Agreement, and
seeking certain equitable relief and unspecified damages. The
Company believes Estalella’s claims are without merit. As of
the date of this report, the Company has evaluated the potential
outcome of this lawsuit and recorded the liability consistent with
its policy for accruing for contingencies. The discovery phase of
the lawsuit has concluded and the Company is preparing for a
revised trial date expected to commence in May 2018.
Insurance Carrier Lawsuit
The Company is engaged in litigation with an insurance carrier,
Liberty Insurance Underwriters, Inc. (“Liberty”),
arising out of Liberty’s denial of coverage. In 2014, the
Company sought coverage under an insurance policy with Liberty
for claims against directors and officers of the Company arising
out of an investigation by the Securities and Exchange Commission
(“SEC”). Liberty denied coverage, and, on February 12,
2015, the Company filed a complaint in the District Court, City and
County of Denver, Colorado against Liberty claiming wrongful and
unreasonable denial of coverage for the cost and expenses incurred
in connection with the SEC investigation and related matters.
Liberty removed the complaint to the United States District Court
for the District of Colorado, which in August 2016 granted
Liberty’s motion for summary judgment, denying coverage and
dismissing the Company’s claims with prejudice, and denied
the Company’s motion for summary judgment. The Company filed
an appeal in November 2016. The Company filed its opening brief on
February 1, 2017 and Liberty filed its response brief on April 7,
2017. The Company filed its reply brief on May 5, 2017. The case
moved to the 10th
Circuit Court of Appeals. In October
2017 the 10th
Circuit affirmed the lower
court’s grant of summary judgment in favor of Liberty. We are
currently working with Liberty to determine what amounts are
recoverable under the policy that fall outside of the
litigation.
IRS Audit
On April 6, 2016, the Internal Revenue Service (“IRS”)
selected the Company’s 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 the
Company’s 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
its Federal income tax. On October 5, 2016, the IRS commenced an
audit of the Company’s employment and withholding tax
liability for 2014. The IRS is contending 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 $0.4 million related to employment taxes and
$4.9 million related to federal tax withholding and penalties.
Additionally, the IRS is asserting that the Company owes
information reporting penalties of approximately $2.0 million. The
Company’s counsel has submitted a formal protest to the IRS
disputing on several grounds all of the proposed adjustments and
penalties on the Company’s behalf, and the Company intends to
pursue this matter vigorously through the IRS appeal process. Due
to the uncertainty associated with determining the Company’s
liability for the asserted taxes and penalties, if any, and to the
Company’s inability to ascertain with any reasonable degree
of likelihood, as of the date of this report, the outcome of the
IRS appeals process, the Company has recorded an estimate for its
potential liability, if any, associated with these
taxes.
F-28
Note 10. Stockholders’ Deficit
Common Stock
For the year ended December 31, 2017, the Company had the following
transactions related to its common stock including restricted stock
awards (in thousands, except share and per share
data):
|
Transaction Type
|
Quantity (Shares)
|
Valuation
($)
|
Range of
Value per Share
|
|
Shares issued to employees, executives and directors
|
538,945
|
$1,045
|
$1.87-2.17
|
|
Total
|
538,945
|
$1,045
|
$1.87-2.17
|
For the year ended December 31, 2016, the Company had the following
transactions related to its common stock including restricted stock
awards (in thousands, except share and per share
data):
|
Transaction Type
|
Quantity (Shares)
|
Valuation
($)
|
Range of
Value per Share
|
|
Shares issued to employees, executives and directors
|
572,154
|
$1,367
|
$1.89-2.95
|
|
Shares issued related to sale of subsidiary
|
200,000
|
640
|
$3.20
|
|
Cancellation and forfeiture of restricted stock
|
(449,085)
|
(456)
|
$2.72-13.00
|
|
Total
|
323,069
|
$1,551
|
$1.89-13.00
|
The fair value of all stock issuances above is based upon the
quoted closing trading price on the date of issuance.
Common stock outstanding as of December 31, 2017 and 2016 includes
shares legally outstanding even if subject to future
vesting.
Warrants
In November 2016, the Company issued a warrant to purchase
1,289,378 shares of its common stock to the parent company of
Capstone related to the dispute settlement. See Note 9 for
additional information. The exercise price of this warrant was
$1.83 per share, with a contractual term of four years. The Company
has valued this warrant by utilizing the Black-Scholes model at
approximately $1.8 million with the following
assumptions: contractual life of four years, risk free
interest rate of 1.27%, dividend yield of 0%, and expected
volatility of 118.4%.
In July 2014, the Company issued a warrant to purchase 100,000
shares of its common stock related to an endorsement agreement. See
Note 14 for additional information. The exercise price of this
warrant was $11.90 per share, with a contractual term of five
years. This warrant was fully vested as of December 31,
2016.
Treasury Stock
During
the years ended December 31, 2017 and 2016, the Company did not
repurchase any shares of its common stock and held 875,621 shares
in treasury as of December 31, 2017 and 2016. As of December 31,
2015, 860,900 of the Company’s shares held in treasury were
subject to a pledge with a lender in connection with a term loan
which was cancelled when the term loan was paid off in January
2016.
F-29
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, 2017,
833,574 shares were 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, 2017 and 2016 consisted primarily of restricted stock
awards. The restricted stock awards that were granted to employees,
executives and Board members were as follows:
|
|
Unvested Restricted Stock Awards
|
|
|
|
Number of
Shares
|
Weighted Average
Grant Date
Fair
Value
|
|
Unvested
balance – December 31, 2015
|
1,025,999
|
$12.34
|
|
Granted
|
572,154
|
2.39
|
|
Vested
|
(843,643)
|
9.94
|
|
Cancelled
|
(260,000)
|
13.00
|
|
Forfeited
|
(116,085)
|
8.65
|
|
Unvested
balance – December 31, 2016
|
378,425
|
3.45
|
|
Granted
|
538,945
|
1.94
|
|
Vested
|
(430,103)
|
2.83
|
|
Unvested
balance – December 31, 2017
|
487,267
|
2.32
|
The total fair value of restricted stock awards granted to
employees, executives and Board members was $1.0 million and $1.4
million for the years ended December 31, 2017 and 2016,
respectively. As of December 31, 2017, the total unrecognized
expense for unvested restricted stock awards, net of expected
forfeitures, was $1.1 million, which is expected to be amortized
over a weighted average period of 10 months.
F-30
Restricted Stock Awards Issued to Ryan Drexler, Chairman of the
Board, Chief Executive Officer and President
The Company issued Mr. Drexler (i) 200,000 shares of restricted
stock, with a grant date value of $0.5 million, in December 2016
and (ii) 350,000 shares of restricted stock, with a grant date
value of $0.7 million, in January 2017, in each case, calculated
based upon the closing price of the Company’s common stock on
the date of issuance. These shares of restricted stock vested in
full upon the first anniversary of the grant date.
In October 2015, the Company entered into loan modification
agreements with the banking institution under its line of credit
and term loan to: (i) change the maturity date of the loans to
January 15, 2016, (ii) prohibit the loans to be declared in
default prior to December 10, 2015, except for defaults
resulting from failure to make timely payments, and (iii) delete
certain financial covenants from the line of credit. In
consideration for these modifications, Ryan Drexler, and a family
member, provided their individual guaranty for the remaining
balance of the loans of $6.2 million. In consideration for
executing his guaranty, the Company issued to Mr. Drexler
28,571 shares of common stock with a grant date fair value of
$80,000, based upon the closing price of the Company’s common
stock on the date of issuance.
Accelerated Vesting of Restricted Stock Awards Related to
Terminations of Employment
In March 2016, Brad Pyatt, the Company’s former Chief
Executive Officer, terminated employment with the Company. In
connection with the termination of his employment, 500,000 shares
of restricted stock held by Mr. Pyatt vested in full upon his
termination of employment in accordance with the original grant
terms. In connection with the accelerated vesting of these
restricted stock awards, the Company recognized stock compensation
expense of $3.9 million, which is included in “Salaries and
Benefits” in the accompanying Consolidated Statements of
Operations for the year ended December 31, 2016.
In March 2017, Brent Baker, the Company’s former Executive
Vice President of International Business, terminated employment
with the Company. In connection with his termination of employment
in March 2017, 10,000 shares of restricted stock held by Mr. Baker
vested in full upon his termination of employment in accordance
with the original grant terms. In connection with the accelerated
vesting of these restricted stock awards, the Company recognized
stock compensation expense of $42,902, which is included in
“Salaries and Benefits” in the accompanying
Consolidated Statements of Operations for the year ended December
31, 2017.
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, the Company’s
Chairman of the Board, Chief Executive Officer, and President, and
options to purchase 54,945 shares of its common stock to Michael
Doron, the former Lead Director of the Board. Upon resignation from
the Board of Directors in June 2017, Mr. Doron forfeited 20,604 of
the options issued. 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 is 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. The table below
sets forth the assumptions used in valuing such
options.
|
|
For the Year Ended
December
31,
2016
|
|
Expected
term of options
|
6.5
years
|
|
Expected
volatility-range used
|
118.4%-131.0%
|
|
Expected
volatility-weighted average
|
125.7%
|
|
Risk-free
interest rate-range used
|
1.27%-1.71%
|
F-31
For the years ended December 31, 2017 and 2016, the Company
recorded stock compensation expense related to options of $0.2
million for both years.
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, 2017 and 2016, as well as the total
options exercisable as of December 31, 2017. 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 Granted During the
Year
|
Weighted Average Remaining Contractual Life (Years)
|
Aggregate Intrinsic Value
|
|
Issued
and outstanding as of December 31, 2015
|
—
|
—
|
—
|
—
|
—
|
|
Granted
|
331,584
|
$2.10
|
$1.88
|
—
|
$—
|
|
Exercised
|
—
|
—
|
—
|
—
|
—
|
|
Forfeited
|
—
|
—
|
—
|
—
|
—
|
|
Issued
and outstanding as of December 31, 2016
|
331,584
|
2.10
|
1.88
|
—
|
—
|
|
Granted
|
—
|
—
|
—
|
|
|
|
Exercised
|
—
|
—
|
—
|
|
|
|
Forfeited
|
(159,881)
|
2.33
|
2.09
|
|
|
|
Issued
and outstanding as of December 31, 2017
|
171,703
|
1.89
|
1.72
|
8.15
|
—
|
|
Exercisable
as of December 31, 2017
|
72,114
|
$1.89
|
1.72
|
8.15
|
—
|
As of December 31, 2017, the total unrecognized expense for
unvested stock options was approximately $20,000, which is expected
to be amortized over a weighted average period of two
months.
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 the years ended December
31, 2017 and 2016, the Company’s matching contribution were
$0.1 million and $0.2 million, respectively.
Note 13. Net Loss per Share
Basic net loss per share is computed by dividing net loss for the
period by the weighted average number of shares of common stock
outstanding during each period. There was no dilutive effect for
the outstanding potentially dilutive securities for the years ended
December 31, 2017 and 2016, respectively, as the Company reported a
net loss for all periods.
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):
F-32
|
|
For the Years Ended
December 31,
|
|
|
|
2017
|
2016
|
|
Net
loss
|
$(10,973)
|
$(3,477)
|
|
Weighted
average common shares used in computing net loss per share, basic
and diluted
|
13,877,686
|
13,438,248
|
|
Net
loss per share, basic and diluted
|
$(0.79)
|
$(0.26)
|
Diluted net loss per share is computed by dividing net loss for the
period by the weighted average number of shares of common stock,
common stock equivalents and potentially dilutive securities
outstanding during each period. The Company uses the treasury stock
method to determine whether there is a dilutive effect of
outstanding potentially dilutive securities, and the if-converted
method to assess the dilutive effect of the convertible
notes.
There was no dilutive effect for the outstanding awards for the
years ended December 31, 2017 and 2016, respectively, as the
Company reported a net loss for both periods. However, if
the Company had net income for the
year ended December 31, 2017, the potentially dilutive securities
included in the earnings per share computation would have been
18,264,564. If the Company had net income for the year ended
December 31, 2016, the potentially dilutive securities included in
the earnings per share computation would have been
10,719,011.
Total outstanding potentially dilutive securities were comprised of
the following:
|
|
As of December 31,
|
|
|
|
2017
|
2016
|
|
Stock
options
|
171,703
|
331,584
|
|
Warrants
|
1,389,378
|
1,389,378
|
|
Unvested
restricted stock
|
487,267
|
378,425
|
|
Convertible
notes
|
16,216,216
|
8,619,624
|
|
Total
common stock equivalents
|
18,264,564
|
10,719,011
|
Note 14. Endorsement Agreements
Arnold Schwarzenegger
In July 2013, the Company entered into an Endorsement
Licensing and Co-Branding Agreement by and among the Company and AS
Parties. Under the terms of the agreement, Mr. Schwarzenegger was
co-developing a special Arnold Schwarzenegger product line being
co-marketed under Mr. Schwarzenegger’s name and likeness. In
connection with this agreement, the Company also issued to Marine
MP, LLC fully vested restricted shares of common stock with an
aggregate market value of $8.5 million. The issuance was being
amortized over the original three-year term of the agreement to
“Advertising and promotion” expense.
In May 2016, the Company received written notice to terminate the
Endorsement Licensing and Co-Branding Agreement effective
immediately. As a result, $2.0 million of intangible assets,
prepaid assets and inventory related to the Arnold Schwarzenegger
product line was written off as an impairment expense.
On December 17, 2016, the Company entered into the AS Parties
Settlement Agreement, effective January 4, 2017. Pursuant to the AS
Parties Settlement Agreement, and to resolve and settle all
disputes between the parties and release all claims between them,
the Endorsement Licensing and Co-Branding Agreement was terminated
and the Company agreed to pay the AS Parties (a) $1 million, which
payment was released to the AS Parties on January 5, 2017, and (b)
$2.0 million within six months of the effective date of the AS
Parties Settlement Agreement. The Company also has agreed that it
will not sell any products from its Arnold Schwarzenegger product
line, will donate to a charity chosen by Arnold Schwarzenegger any
remaining usable product, and otherwise destroy any products
currently in inventory. See Note 9 for further
details.
F-33
ETW
In July 2014, the Company entered into an Endorsement Agreement
with ETW. Under the terms of the agreement, Tiger Woods agreed to
endorse certain of the Company’s products and use a golf bag
during all professional golf play that prominently displayed the
MusclePharm name and logo.
In conjunction with this agreement, the Company issued 446,853
shares of the Company’s restricted common stock to ETW, with
an aggregate market value of $5.0 million. The shares were
amortized over the original four-year term of the agreement. The
current and non-current portions of the unamortized stock
compensation were initially included as a component of
“Prepaid stock compensation” in the Consolidated
Balance Sheets. The amount of unamortized stock compensation
expense of $3.5 million related to this agreement was written off
in connection with the restructuring plan disclosed further in Note
5.
In May 2016, the Company entered into a settlement agreement with
ETW, which eliminates all costs and terminates all future
commitments under the Endorsement Agreement. Pursuant to the
settlement agreement, the Company paid ETW $2.2 million to
terminate the parties’ obligations under Endorsement
Agreement and to resolve all disputes between the parties. As a
result, the Company adjusted its restructuring accrual balance from
$7.0 million to $2.2 million according to the settlement agreement
and recorded an expense credit of $4.8 million during the year
ended December 31, 2016.
Johnny Manziel
In July 2014, the Company entered into an Endorsement Agreement for
the services of Johnny Manziel. As part of this agreement, the
Company issued a warrant to purchase 100,000 shares of its common
stock at an exercise price of $11.90 per share. The warrants vest
monthly over a period of 24 months beginning August 15, 2014,
and have a five-year contractual term. The Company recognized
stock-based compensation expense of $6,000 for the year ended
December 31, 2016, related to these warrants, which is included as
a component of “Advertising and promotion” expense in
the accompanying Consolidated Statements of Operations. In
connection with the restructuring disclosed in Note 5, the Company
notified Johnny Manziel of its intention to terminate the
endorsement agreement due to breach; however, Johnny Manziel has
disputed the termination notice. As of December 31, 2016, all
shares were vested under the warrant.
Note 15. Income Taxes
The components of loss before provision for income taxes for the
years ended December 31, 2017 and 2016 are as follows (in
thousands):
|
|
For the Years Ended
December 31,
|
|
|
|
2017
|
2016
|
|
Domestic
|
$(11,123)
|
$(3,857)
|
|
Foreign
|
293
|
698
|
|
Loss
before provision for income taxes
|
$(10,830)
|
$(3,159)
|
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently
due. Deferred taxes relate to differences between the basis of
assets and liabilities for financial and income tax reporting which
will be either taxable or deductible when the assets or liabilities
are recovered or settled.
As of December 31, 2017, the Company has a Federal net
operating loss carry-forward of $89.2 million available to offset
future taxable income. The Company has estimated state loss
carry-forwards of $54.6 million. The Company also has federal
research and development credit carryforwards of $0.2 million as of
December 31, 2017. Utilization of net operating losses and
R&D credits may be limited due to potential ownership changes
under Section 382 of the IRS Code. These net operating loss
carry-forwards and federal R&D credits have expiration dates
starting in 2030 through 2037.
F-34
The valuation allowance as of December 31, 2017 was $24.0
million. The net change in valuation allowance for the year ended
December 31, 2017 was a decrease of $7.6 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, 2017.
The effects of temporary differences that gave rise to significant
portions of deferred tax assets as of December 31, 2017 and 2016,
are as follows (in thousands):
|
|
As of December 31,
|
|
|
|
2017
|
2016
|
|
Deferred
tax assets:
|
|
|
|
Net
operating loss carryforwards
|
$21,661
|
$29,359
|
|
Other
|
1,936
|
1,794
|
|
Gross
deferred tax assets
|
23,597
|
31,153
|
|
Valuation
allowance
|
(23,597)
|
(31,153)
|
|
Net
deferred tax assets
|
—
|
—
|
|
Deferred
tax liability
|
|
|
|
Stock-based
compensation
|
—
|
—
|
|
Intangibles
|
—
|
—
|
|
Gross
deferred tax liabilities
|
—
|
—
|
|
Net
deferred tax assets
|
$—
|
$—
|
The Company incurred income tax expense of $108,000 and $318,000
for the years ended December 31, 2017 and 2016, respectively. Of
the total tax provision for the years ended December 31, 2017 and
2016, $50,000 and $134,000 was attributed to taxes for foreign
operations, respectively.
The income tax provision for the years ended December 31, 2017 and
2016 included the following (in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
Current
income tax expense:
|
|
|
|
Federal
|
$—
|
$145
|
|
State
|
58
|
39
|
|
Foreign
|
50
|
134
|
|
|
108
|
318
|
|
Deferred
income tax provision:
|
|
|
|
Federal
|
—
|
—
|
|
State
|
—
|
—
|
|
Foreign
|
—
|
—
|
|
|
—
|
—
|
|
Provision
for income taxes, net
|
$108
|
$318
|
The income tax provision differs from those computed using the
statutory federal tax rate of 34% due to the following (in
thousands):
F-35
|
|
For
the Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
Expected
provision at statutory federal rate
|
$(3,682)
|
$(1,074)
|
|
State
tax — net of federal benefit
|
19
|
23
|
|
Foreign
income/losses taxed at different rates
|
(31)
|
(38)
|
|
Sale
of BioZone
|
—
|
949
|
|
Stock-based
compensation
|
289
|
—
|
|
Rate
change
|
11,989
|
—
|
|
Other
|
156
|
217
|
|
Change
in valuation allowance
|
(8,632)
|
241
|
|
Income
tax expense
|
$108
|
$318
|
A reconciliation of the beginning and ending amount of unrecognized
tax benefits (“UTB’s”) is as follows (in
thousands):
|
Gross
UTB’s as of December 31, 2016
|
$245
|
|
Deductions
for tax positions taken in a prior year
|
(206)
|
|
Additions
for tax positions taken in the current year
|
—
|
|
Gross
UTB’s as of December 31, 2017
|
$39
|
If recognized, none of the Company’s unrecognized tax
benefits as of December 31, 2017 would reduce its annual
effective tax rate but would result in a corresponding adjustment
to its deferred tax valuation allowance. As of December 31,
2017, 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. By statute, all tax years are open to examination
by the major taxing jurisdictions to which the Company is
subject.
The Tax
Cuts and Jobs Act of 2017 (Tax Act), as signed by the President of
the United States on December 22, 2017, significantly revises U.S.
tax law. The tax reform legislation reduces the corporate tax rate,
limits or eliminates certain tax deductions and changes the
taxation of foreign earnings of U.S. multinational companies. The
Deemed Repatriation Transition Tax (Transition Tax) is a tax on
previously untaxed accumulated and current earnings and profits
(E&P) of our foreign subsidiary at reduced tax rates. To
determine the amount of the Transition Tax, we must determine, in
addition to other factors, the amount of post-1986 E&P of the
relevant subsidiaries, as well as the amount of non-U.S. income
taxes paid on such earnings.
The Tax
Act reduces the corporate tax rate to 21 percent, effective January
1, 2018. Consequently, we recorded a provisional decrease to
deferred tax assets of approximately $12.0 million. This reduction
was fully offset by a corresponding change in the valuation
allowance recorded against our deferred tax assets.
The SEC
staff issued SAB 118, which provides guidance on accounting for the
tax effects of the Tax Act. SAB 118 provides a measurement period
that should not extend beyond one year from the Tax Act enactment
date for companies to complete the accounting under ASC 740. In
accordance with SAB 118, a company must reflect the income tax
effects of those aspects of the Act for which the accounting under
ASC 740 is complete. To the extent that a company’s
accounting for certain income tax effects of the Tax Act is
incomplete but it is able to determine a reasonable estimate, it
must record a provisional estimate in the financial statements. If
a company cannot determine a provisional estimate to be included in
the financial statements, it should continue to apply ASC 740 on
the basis of the provisions of the tax laws that were in effect
immediately before the enactment of the Tax Act. We are able to
make a reasonable estimate of the Transition Tax and expect to
utilize U.S. net operating losses to reduce the tax. We will
continue to gather additional information to more precisely compute
the amount of the Transition Tax within the measurement period.
Although the tax rate reduction is known, we have not collected all
of the necessary data to complete our analysis of the effect of the
Tax Act on the underlying deferred taxes and as such, the amounts
recorded as of December 31, 2017 are provisional.
F-36
Note 16. 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,
|
|
|
|
2017
|
2016
|
|
Revenue,
net:
|
|
|
|
United
States
|
$61,656
|
$86,748
|
|
International
|
40,499
|
45,751
|
|
Total
revenue, net
|
$102,155
|
$132,499
|
Note 17. Other Related Party Transactions
Key Executive Life Insurance
The Company had purchased split dollar life insurance policies on
certain key executives. These policies provide a split of 50% of
the death benefit proceeds to the Company and 50% to the
officer’s designated beneficiaries. All policies were
terminated or transferred to the former employees as of December
31, 2016.
Note 18. 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
Effective
February 1, 2018, we entered into an Amended and Restated Executive
Employment Agreement with Ryan Drexler, pursuant to which, among
other things, Mr. Drexler agreed to continue to serve as the
Company’s Chairman of the Board of Directors, Chief Executive
Officer and President through January 31, 2021.
F-37
Exhibit Index
|
|
|
|
|
Incorporated by Reference
|
||||||
|
Exhibit
No.
|
|
Description
|
|
Form
|
|
SEC File
Number
|
|
Exhibit
|
|
Filing Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Articles
of Incorporation of MusclePharm Corporation (successor to Tone in
Twenty).
|
|
SB-2
|
|
333-147111
|
|
3.1
|
|
November 2, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amendment to the Articles of Incorporation.
|
|
SB-2
|
|
333-147111
|
|
3.3
|
|
November 2, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amendment to the Articles of Incorporation.
|
|
8-K
|
|
000-53166
|
|
3.3
|
|
February 24, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amendment to the Articles of Incorporation.
|
|
10-Q
|
|
000-53166
|
|
3.1
|
|
May 23, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amendment to the Articles of Incorporation.
|
|
8-K
|
|
000-53166
|
|
3.1
|
|
November 23, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amendment to the Articles of Incorporation.
|
|
8-K
|
|
000-53166
|
|
3.1
|
|
January 27, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amendment to the Articles of Incorporation.
|
|
8-K
|
|
000-53166
|
|
3.1
|
|
March 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of Change.
|
|
8-K
|
|
000-53166
|
|
3.1
|
|
November 28, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate
of Amendment to Articles of Incorporation.
|
|
8-K
|
|
000-53166
|
|
3.2
|
|
November 28, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of Correction.
|
|
S-1/A
|
|
333-184625
|
|
3.15
|
|
December 26, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Amended and Restated Bylaws.
|
|
8-K
|
|
000-53166
|
|
3.1
|
|
September 27, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specimen
of certificate for MusclePharm Corporation Common
Stock.
|
|
S-1/A
|
|
333-184625
|
|
4.4
|
|
December 28, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant,
dated November 7, 2016 by and between MusclePharm Corporation and
INI Buyer, Inc.
|
|
10-Q
|
|
000-53166
|
|
4.1
|
|
November 9, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Incentive Compensation Plan.
|
|
S-8
|
|
333-212576
|
|
4.14
|
|
July 18, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchasing
Agreement with General Nutrition Corporation dated
December 16, 2009.
|
|
8-K
|
|
000-53166
|
|
10.2
|
|
February 24, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Form
of Registration Rights Agreement, dated July 13, 2012, between
MusclePharm Corporation and TCA Global Credit Master Fund
LP.
|
|
8-K
|
|
000-53166
|
|
10.1
|
|
July 20, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Form of Indemnification Agreement.
|
|
8-K
|
|
000-53166
|
|
10.1
|
|
August 27, 2012
|
|
55
Exhibit Index (continued)
|
|
|
|
|
Incorporated by Reference
|
||||||
|
Exhibit
No.
|
|
Description
|
|
Form
|
|
SEC File
Number
|
|
Exhibit
|
|
Filing Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.4*
|
|
MusclePharm
Corporation 2015 Incentive Compensation Plan.
|
|
S-8
|
|
000-53166
|
|
4.14
|
|
July 18, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Confidentiality
and Non-Disclosure Agreement, dated June 23, 2015, between
MusclePharm Corporation and Consac, LLC, an affiliate of
Ryan Drexler.
|
|
10-Q
|
|
000-53166
|
|
10.6
|
|
August 10, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.6*
|
|
Executive
Employment Agreement, dated February 11, 2016, between
MusclePharm Corporation and Ryan Drexler.
|
|
8-K
|
|
000-53166
|
|
10.1
|
|
February 16, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agreement
for Purchase and Sale of Stock dated April 21, 2016, between
MusclePharm Corporation and BioZone Laboratories, Inc., BioZone
Holdings, Inc. and Flavor Producers, Inc.
|
|
8-K
|
|
000-53166
|
|
10.1
|
|
April 27, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Secured Promissory Note, dated November 8, 2016, by and between
MusclePharm Corporation and Ryan Drexler.
|
|
10-Q
|
|
000-53166
|
|
10.1
|
|
November 9, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amended
and Restated Security Agreement, dated November 8, 2016, by and
between MusclePharm Corporation and Ryan Drexler.
|
|
10-Q
|
|
000-53166
|
|
10.2
|
|
November 9, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement
Agreement, dated November 7, by and among MusclePharm Corporation
and F.H.G. Corporation d/b/a Capstone Nutrition, INI Parent, Inc.,
INI Buyer, Inc. and Medley Capital Corporation.
|
|
10-Q
|
|
000-53166
|
|
10.3
|
|
November 9, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amended
and Restated Executive Employment Agreement, between MusclePharm
Corporation and Ryan Drexler.
|
|
8-K
|
|
000-53166
|
|
10.1
|
|
March 1, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment
Agreement, between MusclePharm Corporation and Peter
Lynch.
|
|
8-K
|
|
000-53166
|
|
10.1
|
|
December 2, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Secured Promissory Note, dated December 7, 2015, by and between
MusclePharm Corporation and Ryan Drexler.
|
|
10-K
|
|
000-53166
|
|
10.14
|
|
March 15, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
Exhibit Index (continued)
|
|
|
|
|
Incorporated by Reference
|
||||||
|
ExhibitNo.
|
|
Description
|
|
Form
|
|
SEC File
Number
|
|
Exhibit
|
|
Filing Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Amendment to Convertible Secured Promissory Note, dated December 7,
2015, by and between MusclePharm Corporation and Ryan
Drexler.
|
|
10-K
|
|
000-53166
|
|
10.15
|
|
March 15, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amended
and Restated Executive Employment Agreement, between MusclePharm
Corporation and Ryan Drexler
|
|
8-K
|
|
000-53166
|
|
10.1
|
|
March 1, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.16**
|
|
Lease
Agreement for the Corporate Headquarters located in Burbank, CA
effective October 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.17**
|
|
Executive
Employment Agreement, between MusclePharm Corporation and Brian
Casutto
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Code
of Ethics.
|
|
8-K
|
|
000-53166
|
|
14
|
|
April 23, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
Governance Guidelines, adopted March 8, 2015.
|
|
10-Q
|
|
000-53166
|
|
99.1
|
|
May 11, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.1**
|
|
Subsidiaries
of the Registrant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.1**
|
|
Consent
of Independent Public Accounting Firm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1**
|
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2**
|
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1***
|
|
Certification
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.2***
|
|
Certification
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101**
|
|
The following materials from MusclePharm Corporation’s annual
report on Form 10-K for the year ended December 31, 2017 formatted
in XBRL (eXtensible Business Reporting Language): (i) the
Consolidated Balance Sheets; (ii) the Consolidated Statements of
Operations; (iii) the Consolidated Statements of Comprehensive
Income; (iv) the Consolidated Statement of Changes in
Stockholders’ Deficit; (v) the Consolidated Statements of
Cash Flows; and (vi) related notes to these financial
statements.
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*
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Indicates management contract or compensatory plan or
arrangement.
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**
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Filed herewith
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***
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Furnished herewith
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