UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark one)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended:
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to _____
Commission
file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A |
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. ☒
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☒ | Smaller reporting company | |||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
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The number of shares of the issuer’s common stock, $0.001 par value per share, outstanding at May 10, 2022 was .
MusclePharm Corporation
Form 10-Q
TABLE OF CONTENTS
| -2- |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan” and “would.” For example, statements concerning financial condition, possible or assumed future results of operations, growth opportunities, industry ranking, plans and objectives of management, markets for our common stock and future management and organizational structure are all forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement.
Any forward-looking statements are qualified in their entirety by reference to the risk factors discussed throughout this Quarterly Report on Form 10-Q. Some of the risks, uncertainties and assumptions that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, but are not limited to:
| ● | our business strategies; | |
| ● | the timing of regulatory submissions; | |
| ● | our ability to obtain and maintain regulatory approval of our existing product candidates and any other product candidates we may develop, and the labeling under any approval we may obtain; | |
| ● | risks relating to the timing and costs of clinical trials and the timing and costs of other expenses; | |
| ● | risks related to market acceptance of products; | |
| ● | intellectual property risks; | |
| ● | risks associated to our reliance on third party organizations; | |
| ● | our competitive position; | |
| ● | our industry environment; | |
| ● | our anticipated financial and operating results, including anticipated sources of revenues; | |
| ● | assumptions regarding the size of the available market, benefits of our products, product pricing and timing of product launches; | |
| ● | management’s expectation with respect to future acquisitions; | |
| ● | statements regarding our goals, intentions, plans and expectations, including the introduction of new products and markets; and | |
| ● | our cash needs and financing plans. |
All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q may include market data and certain industry data and forecasts, which we may obtain from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications, articles and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that such studies and publications are reliable, we have not independently verified market and industry data from third-party sources.
| -3- |
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MusclePharm Corporation
Consolidated Balance Sheets
(In thousands, except share and per share data)
| (Unaudited) | ||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowances of $ | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued and other liabilities | ||||||||
| Obligation under secured borrowing arrangement | ||||||||
| Operating lease liability | ||||||||
| Senior notes payable | ||||||||
| Convertible notes with a related party | ||||||||
| Revolving line of credit, related party | ||||||||
| Total Current Liabilities | ||||||||
| Other long term liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders’ deficit: | ||||||||
| Common stock, par value of $ per share; shares authorized, and shares issued as of March 31, 2022 and December 31, 2021, respectively; and and shares outstanding as of March 31, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Treasury Stock at Cost, shares | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
| -4- |
MusclePharm Corporation
Consolidated Statements of Operations
(In thousands, except share and per share data)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue, net | $ | $ | ||||||
| Cost of revenue | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Selling and promotion | ||||||||
| General and administrative | ||||||||
| Total operating expenses | ||||||||
| Income (loss) from operations | ( | ) | ||||||
| Other (expense) income: | ||||||||
| Gain on settlements | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other (expense) income, net | ( | ) | ||||||
| Income (loss) before provision for income taxes | ( | ) | ||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Net income (loss) per share, basic | $ | ( | ) | $ | ||||
| Net income (loss) per share, diluted | $ | ( | ) | $ | ||||
| Weighted average shares used to compute net income (loss) per share, basic | ||||||||
| Weighted average shares used to compute net income (loss) per share, diluted | ||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
| -5- |
MusclePharm Corporation
Consolidated Statements of Changes in Stockholders’ Deficit
(In thousands, except share and per share data)
| Common Stock | Treasury Stock | Additional Paid-In | Accumulated Other Comprehensive | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Loss | Total | ||||||||||||||||||||||
| Balance at December 31, 2020 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Stock-based compensation for issuance and amortization of restricted stock awards to employees, executives, and directors | - | |||||||||||||||||||||||||||
| Balance at March 31, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-In | Accumulated Other Comprehensive | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Loss | Total | ||||||||||||||||||||||
| Balance at December 31, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||
| Balance at March 31, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
| -6- |
MusclePharm Corporation
Consolidated Statements of Cash Flows
(In thousands)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income/(loss) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: | ||||||||
| Depreciation and amortization of property and equipment | ||||||||
| Amortization of intangible assets | ||||||||
| Bad debt expense | ( | ) | ( | ) | ||||
| Provision for inventory write down | ||||||||
| Stock-based compensation | ||||||||
| Amortization of debt issue cost | ||||||||
| OID Interest | ||||||||
| Amortization of debt discount | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Operating lease assets and liabilities | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Other long-term liabilities | ( | ) | ||||||
| Accrued and other liabilities | ||||||||
| Net cash provided by/(used in) operating activities | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| Net cash provided by/(used in) investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from line of credit | ||||||||
| Payments on lines of credit | ( | ) | ||||||
| Proceeds from secured borrowing arrangement, net of reserves | ||||||||
| Payments to secured borrowing arrangement, net of fees | ( | ) | ( | ) | ||||
| Proceeds from revolving line of credit, related party | ||||||||
| Payments on revolving line of credit, related party | ( | ) | ||||||
| Repayment of notes payable | ( | ) | ||||||
| Net cash provided by/(used in) financing activities | ( | ) | ||||||
| Net increase/(decrease) in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for interest | $ | $ | ||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
| -7- |
MusclePharm Corporation
Notes to the Consolidated Financial Statements
(dollars in thousands, unless otherwise indicated)
Note 1. Description of Business
Description of Business
MusclePharm Corporation, together with its subsidiaries (the “Company” or “MusclePharm”) is a scientifically-driven, performance lifestyle company that develops, markets and distributes branded sports nutrition products and nutritional supplements that are manufactured by the Company’s contract manufacturers. The Company’s portfolio of recognized brands, including MusclePharm, FitMiss and MP Combat Energy is marketed and sold globally. As of March 31, 2022, the Company had the following wholly-owned subsidiary which did not have any operations or assets as of and for the three months ended March 31, 2022: MusclePharm Canada Enterprises Corp.
In 2021, the Company announced its entrance into the functional energy space in collaboration with former Rockstar Energy executives. The Company launched three flavors of MP Combat Energy in September 2021 for domestic distribution and three additional flavors for international distribution. The Company believes the launch of its new energy products, reductions in operating costs and continued focus on gross profit and revenue growth will allow it to ultimately achieve sustained profitability. However, the Company can give no assurances that this will occur, especially with the cost to launch new energy products along with the recent increase in the cost of protein, which may have a material impact on the Company’s profitability. Additionally, the Company’s profitability may be materially impacted by the ability of the Company’s contract manufacturers to meet customers’ demands. Although, the Company believes entering the functional energy space will help to increase sales and gross margin, and reduce exposure to commodity prices, the Company can give no assurances that this will occur. To manage cash flow, the Company has entered into multiple financing arrangements. The entry into the Energy Drink business has created a second segment, which is presented in detail in Note 12.
Information About Our Segments
We are engaged in global sales of products that fall into two operating segments: Protein Products and Energy Drinks. Information regarding our operating segments and geographic and product information is contained in Note 12 to these consolidated financial statements.
Going Concern
The
Company has historically incurred significant losses and experienced negative cash flows since inception. As of March 31, 2022, the Company
had cash of $
The Company’s ability to continue as a going concern is dependent upon it generating profits in the future and/or obtaining the necessary financing to meet its obligations and repay liabilities arising from normal business operations when they come due. The Company is evaluating different strategies to obtain financing to fund its operations to cover expenses and focus on achieving a level of revenue adequate to support its current cost structure. Financing strategies may include, but are not limited to, issuances of capital stock, debt borrowings, partnerships and/or collaborations.
The Company has been focused on cost containment and improving gross margins by focusing on customers with higher margins, reducing product discounts and promotional activity, along with reducing the number of SKU’s and negotiating improved pricing for raw materials. In addition, the Company has worked to negotiate lower production costs with its contract manufacturers. Although these steps improved gross margins through the first quarter of 2022, with the recent further increases in commodity prices, primarily protein, the Company’s gross margins have been impacted and will continue to be impacted unless commodity prices return the same levels that were seen in 2021. The Company expects overall margins to improve as we ramp up energy sales with stronger gross margins in the energy drink segment.
| -8- |
COVID-19
The Company’s results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. There continues to be significant volatility and economic uncertainty in many markets and the ongoing COVID-19 pandemic contributes to that level of volatility and uncertainty and has created economic disruption. The Company is actively managing its business to respond to the impact. There were no adjustments recorded in the financial statements that might result from the outcome of these uncertainties.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may have a material impact on the Company’s business, financial condition and results of operations. Management continues to monitor the business environment for any significant changes that could impact the Company’s operations. The Company has taken proactive steps to manage costs and discretionary spending, such as remote working and reducing facility related expense.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all the information and notes required by U.S. GAAP for complete financial statements. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company’s management believes the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial position as of March 31, 2022, results of operations and cash flows for the three months ended March 31, 2022 and 2021. The results of operations for the three ended March 31, 2022 are not necessarily indicative of the results to be expected for the year ended December 31, 2022.
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K as amended for the year ended December 31, 2021, filed with the SEC on May 4, 2022.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Such estimates include, but are not limited to, allowance for doubtful accounts, revenue discounts and allowances, the valuation of inventory, the calculation of the Company’s effective tax rate and deferred tax assets, valuation of stock based compensation, warrants, likelihood and range of possible losses on contingencies and present value of lease liabilities. Actual results could differ from those estimates.
Disaggregation of Revenue
The following shows the disaggregation of revenue by distribution channel for the three months ended March 31, 2022 and 2021 (in thousands).
| For the Three Months Ended March 31, | ||||||||||||||||
| 2022 | % of Total | 2021 | % of Total | |||||||||||||
| Distribution Channel | ||||||||||||||||
| Specialty | $ | % | $ | % | ||||||||||||
| International | % | % | ||||||||||||||
| FDM | % | % | ||||||||||||||
| Total | $ | % | $ | % | ||||||||||||
| -9- |
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 and vendors are those that represent more than 10% of the Company’s net revenue or accounts receivable for each period presented.
During
the three months ended March 31, 2022, we had three customers who individually accounted for
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 products
due to defective manufacturing. During the three months ended March 31, 2022, the Company had four vendors who individually accounted
for
The
Company has a geographic concentration in the United States, with
Segments
Historically, the Company’s chief operating decision maker (“CODM”) reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. As such, the Company has had two reporting segments and operating unit structures. During the fourth quarter of 2021, the Company introduced a functional energy beverages line under the MusclePharm and FitMiss brands, so the CODM now reviews financial information and makes resource and opportunity decisions on a disaggregated basis with the functional energy drink business separate from protein products.
Litigation Estimates and Accruals
In the normal course of business or otherwise, the Company may become involved in legal proceedings. The Company will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred. The Company provides disclosures for material contingencies when there is a reasonable possibility that a loss or an additional loss may be incurred. In assessing whether a loss is a reasonable possibility, the Company may consider the following factors, among others: the nature of the litigation, claim or assessment, available information, opinions or views of legal counsel and other advisors, and the experience gained from similar cases.
Income Taxes
Income taxes are accounted for using the asset and liability method. Income tax expense includes the current tax liability from operations and the change in deferred income taxes during the year. Interest income, interest expense and penalties associated with income taxes are reflected in (Benefit) provision for income taxes on the consolidated statements of operations. 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 and 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 the Company will ultimately realize the tax benefit associated with a deferred tax asset. The Company recognizes 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.
| -10- |
Recent Accounting Pronouncements
In July 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement of all expected credit losses of financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for periods beginning after December 15, 2022, and interim periods within those fiscal years. The Company is currently evaluating the impact this ASU may have on its consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate that is expected to be discontinued because of reference rate reform. The amendments in this update provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in this ASU are effective for all entities as of March 12, 2020, through December 31, 2022. The Company has not modified any material contracts due to reference rate reform. The Company will continue to evaluate the impact this guidance will have on its consolidated financial statements for all future transactions affected by reference rate reform during the time permitted.
In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). The ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. This guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but not earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The FASB also specified that an entity should adopt the guidance as of the beginning of its annual fiscal year and is not permitted to adopt the guidance in an interim period. The Company is currently evaluating the impact this ASU may have on its consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The ASU addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is effective for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. There has not been a significant impact from the adoption of this ASU on the consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period financial statement presentation, including classification of certain operating expenses.
Note 3. Inventory
Inventory consists of finished goods and raw materials used to manufacture the Company’s products by one of our contract manufacturers for the three months ended March 31, 2022 and 2021. The Company records charges for obsolete and slow-moving inventory based on the age of the product as determined by the expiration date or otherwise determined to be obsolete. Products within one year of their expiration dates are considered for write-off purposes. Inventory write-downs, once established, are not reversed as they establish a new cost basis for the inventory. Historically, the Company has had minimal returns with established customers. The Company accounts for its inventory on a First-in First-out basis.
| -11- |
The components of inventory as of March 31, 2022 and December 31, 2021 were as follows (in thousands):
| March 31, 2022 | December 31, 2021 | |||||||
| Raw Materials | $ | $ | ||||||
| Finished Goods | ||||||||
| Inventory | ||||||||
| Less: inventory writedown | ( | ) | ||||||
| Inventory | $ | $ | ||||||
Note 4. Accrued and Other Liabilities
As of March 31, 2022 and December 31, 2021, the Company’s accrued and other liabilities consisted of the following (in thousands):
| March 31, 2022 | December 31, 2021 | |||||||
| Accrued professional fees | $ | $ | ||||||
| Accrued interest | ||||||||
| Accrued payroll and bonus | ||||||||
| Settlements — short term (Nutrablend and 4Excelsior) | ||||||||
| Accrued expenses — ThermoLife | ||||||||
| Accrued and other short-term liabilities | ||||||||
| Total accrued and other liabilities | $ | $ | ||||||
Note 5. Interest Expense
For the three months ended March 31, 2022 and March 31, 2021, interest expense consisted of the following:
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Interest expense, related party | $ | ( | ) | $ | ( | ) | ||
| Interest expense, other | ( | ) | ( | ) | ||||
| Interest expense, secured borrowing arrangement | ( | ) | ( | ) | ||||
| Amortization of debt issue cost associated with related warrants | ( | ) | - | |||||
| Amortization of debt issue cost - OID | ( | ) | - | |||||
| Total interest expense | $ | ( | ) | $ | ( | ) | ||
Note 6. Other Long -Term Liabilities
As of March 31, 2022 and December 31, 2021 the Company’s other long-term liabilities consisted of the following (in thousands):
| As of March 31, 2022 | As of December 31, 2021 | |||||||
| Settlements — long term (Nutrablend and 4Excelsior) | $ | $ | ||||||
| Total other long term liabilities | $ | $ | ||||||
| -12- |
Note 7. Debt
As of March 31, 2022 and December 31, 2021, the Company’s debt consisted of the following (in thousands):
| March 31, 2022 | December 31, 2021 | |||||||
| Senior notes payable | $ | $ | ||||||
Debt issue costs, net | ( | ) | ( | ) | ||||
| Refinanced convertible note, related party | ||||||||
| Revolving line of credit, related party | - | |||||||
| Obligations under secured borrowing arrangement | ||||||||
| Total current debt | $ | $ | ||||||
Senior Notes Payable
On
October 13, 2021, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain
institutional investors as purchasers (the “Investors”). Pursuant to the Securities Purchase Agreement, the Company sold,
and the Investors purchased, $
The
Senior Notes were issued with an original issue discount of
The
maturity date of the Senior Notes was extended to May 28, 2022, on April 12, 2022. The maturity date of the Senior Notes also may be
extended under other circumstances specified therein.
| -13- |
The
Warrants are exercisable for five () years to purchase
In conjunction with the private placement of Senior Notes and Warrants, each of the directors and officers of the Company entered into lock-up agreements, which prohibited sales of the Common Stock until after April 11, 2022, subject to certain exceptions.
The issuance of the Senior Notes and Warrants was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. In accordance with ASC 470-20-25-2, proceeds from the sale of a debt instrument with stock purchase warrants (detachable call options) are allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The portion of the proceeds so allocated to the warrants shall be accounted for as additional paid-in capital. The remainder of the proceeds shall be allocated to the debt instrument portion of the transaction.
November 2020 Convertible Note, Related Party
On
November 29, 2020, the Company entered into a refinancing agreement with Mr. Ryan Drexler, (the “November 2020 Refinancing”),
in which the Company issued to Mr. Drexler a convertible secured promissory note (the November 2020 “Convertible Note”) in
the original principal amount of $
Mr.
Drexler may, at any time, and from time to time, upon written notice to the Company, convert the outstanding principal and accrued interest
into shares of Common Stock, at a conversion price of $
The November 2020 Convertible Note contains customary restrictions on the ability of the Company to, among other things, grant liens or incur indebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain additional qualifications and carveouts, as set forth in the November 2020 Convertible Note. The November 2020 Convertible Note is subordinated to certain other indebtedness of the Company held by Prestige Capital Corporation (“Prestige”) and the Senior Notes.
| -14- |
For
the three months ended March 31, 2022 and 2021, interest expense related to the related party convertible secured promissory note was
$
August 2021 Convertible Note, Related Party
On
October 15, 2020, the Company entered into a secured revolving promissory note (the “Revolving Note”) with Mr. Ryan Drexler.
Under the terms of the Revolving Note, the Company can borrow up to $
On
August 13, 2021, the Company issued to Ryan Drexler (the “Holder”) a convertible secured promissory note (the “August
2021 Convertible Note”) in the original principal amount of $
The
August 2021 Convertible Note bears interest at the rate of
The
Holder may, at any time, and from time to time, upon written notice to the Company, convert the outstanding principal and accrued interest
into shares of Common Stock, at a conversion price equal to the closing price of the common stock on October 15, 2021. The Company may
prepay the August 2021 Convertible Note by giving the Holder between
The August 2021 Convertible Note contains customary events of default, including, among others, the failure by the Company to make a payment of principal or interest when due. Following an event of default, at the option of the Holder and upon written notice to the Company, or automatically under certain circumstances, all outstanding principal and accrued interest will become due and payable. The August 2021 Convertible Note also contains customary restrictions on the ability of the Company to, among other things, grant liens or incur indebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain additional qualifications and carveouts, as set forth in the August 2021 Convertible Note. The August 2021 Convertible Note is subordinated to certain other indebtedness of the Company held by Prestige Corporation (“Prestige”) and the Senior Notes.
| -15- |
For
the three months ended March 31, 2022, interest expense related to the related party convertible secured promissory note was $
Revolving Line of Credit, Related Party
On
March 8, 2022, the Company entered into an Unsecured Revolving Promissory Note (the “Note”) with the Mr. Ryan Drexler. Under
the terms of the Note, proceeds may be used solely to finance the production of orders from its largest customer or any of its affiliates
or subsidiaries. The Note does not contain a cap on borrowings thereunder. However, further advances under the Note are at the discretion
of the Lender. Outstanding balances under the Note accrue interest at the rate of
The
Note is subordinate to the
The
related party revolving line of credit balance as of March 31, 2022 was $
For
the three months ended March 31, 2022 and 2021 total related party debt was $
For
the three months ended March 31, 2022, interest expense related to the revolving line of credit, related party was $
Obligations Under Secured Borrowing Arrangement
In
January 2016, the Company entered into a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) with Prestige, pursuant
to which the Company agreed to sell and assign, and Prestige agreed to buy and accept, certain accounts receivable owed to the Company
(“Accounts”). Under the terms of the Purchase and Sale Agreement, upon the receipt and acceptance of each assignment of Accounts,
Prestige will pay the Company
On
June 14, 2021, Prestige advanced the Company $
On
July 26, 2021, Prestige advanced the Company $
For
the three months ended March 31, 2022 and 2021, the Company assigned Prestige accounts with an aggregate face amount of approximately
$
| -16- |
Paycheck Protection Program Loan
Due
to economic uncertainty as a result of the ongoing pandemic (“COVID-19”), on May 14, 2020, the Company received an aggregate
principal amount of $
On
October 25, 2021, the Company received a letter from HSBF indicating the Company’s SBA PPP loan has been forgiven in full by HSBF
and was recorded as a $
Note 8. Commitments and Contingencies
Contingencies
In the normal course of business or otherwise, the Company may become involved in legal proceedings. The Company will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred. The Company provides disclosures for material contingencies when there is a reasonable possibility that a loss or an additional loss may be incurred. In assessing whether a loss is a reasonable possibility, the Company may consider the following factors, among others: the nature of the litigation, claim or assessment, available information, opinions or views of legal counsel and other advisors, and the experience gained from similar cases. As of December 31, 2021, the Company was involved in the following material legal proceedings described below:
White Winston Select Asset Fund Series MP-18, LLC et al., v MusclePharm Corp., et al., (Nev. Dist. Ct.; Cal. Superior Court; Colorado Dist. Ct.; Mass. Super. Ct.)
On
August 21, 2018, White Winston Select Asset Fund Series MP-18, LLC and White Winston Select Asset Fund, LLC (together “White Winston”)
initiated a derivative action against the Company and its directors (the “director defendants”). White Winston alleges that
the director defendants breached their fiduciary duties by improperly approving the refinancing of three promissory notes issued by the
Company to Mr. Drexler (the “Amended Note”) in exchange for $
Along
with its complaint, White Winston also filed a motion for a temporary restraining order (“TRO”) and preliminary injunction
enjoining the exercise of Mr. Drexler’s conversion right under the Amended Note. On August 23, 2018, the Nevada district court
issued an ex parte TRO. On September 14, 2018, the court let the TRO expire and denied White Winston’s request for a preliminary
injunction, finding, among other things, that White Winston did not show a likelihood of success on the merits of the underlying action
and failed to establish irreparable harm. Following the court’s decision, the Company filed a motion seeking to recoup the legal
fees and costs it incurred in responding to the preliminary injunction motion. On October 31, 2019, the court awarded the Company $
Due to the uncertainty associated with determining our liability, if any, and due to our inability to ascertain with any reasonable degree of likelihood, as of the date of this report, the outcome of the trial, the Company has not recorded an estimate for its potential liability.
| -17- |
On
June 17, 2019, White Winston moved for the appointment of a temporary receiver over the Company, citing Plante Moran’s resignation.
The court granted White Winston’s request to hold an evidentiary hearing on the motion, but subsequently stayed the action pending
the parties’ attempts to resolve their dispute. Although the parties have been unable to reach a resolution, the litigation has
not yet resumed. On July 30, 2019, White Winston filed an action in the Superior Court of the State of California in and for the County
of Los Angeles, seeking access to the Company’s books and records and requesting the appointment of an independent auditor for
the Company. On February 25, 2021, the court ordered the Company to produce certain documents, denied White Winston’s request for
an auditor, and ordered the Company to pay a $
The Company and its Chief Executive Officer have been named as defendants in a new lawsuit filed on February 8, 2022 by White Winston Select Asset Funds, LLC and White Winston Select Asset Fund Series Fund MP-18, LLC (collectively, “White Winston”) in the Superior Court of Suffolk County Massachusetts. White Winston is bringing claims alleging unfair trade practices, abuse of process, malicious prosecution, breach of duty of loyalty and, in the alternative, for breach of the settlement agreement relating to the prior action filed by White Winston in Nevada. The Company has not yet responded to complaint and at this time cannot reasonably estimate any loss that may arise from this matter.
Bakery Barn, LLC v. MusclePharm Corporation
On
January 24, 2022, Bakery Barn (“Bakery Barn”) filed suit against Company in Allegheny County, Pennsylvania court. Company
received the Complaint on February 16, 2022. Bakery Barn alleges that the Company owes Bakery Barn over $
On February 24, 2022, Flaherty Fardo Rogel & Amick, LLC (“Company Counsel”) filed a Praecipe for Appearance on behalf of the Company. On February 28, 2022, Company Counsel filed Preliminary Objections to Complaint and Brief In Support Thereof. Bakery Barn filed an Amended Complaint in Civil Action on March 14, 2022. Company Counsel is in the process of filing Preliminary Objections to this Amended Complaint. The Company intends to continue to vigorously litigate the matter.
Bar Bakers, LLC v. CFC/Flavor Producers, LLC. Vs MusclePharm
On
March 18, 2022, the Company retained Barnes & Thornburg to represent it in connection with a Cross-Complaint filed in the
Superior Court of California, County of Orange, Case No. 30-2019-01073098-CU-BC-CJC in the matter Bar Bakers LLC v. Creative Flavor Concepts,
Inc. et al.. According to the pleadings, the matter arises from an agreement between the plaintiffs and defendants in which the plaintiff
agreed to manufacturer energy bars and sell them to the defendants. The defendants then sold the energy bars to various retailers, including
the Company. On May 29, 2019, the plaintiff sued the defendants alleging that the defendants were responsible for unpaid invoices –
nine for bars manufactured and delivered to the Company and one invoice for raw materials. According to the pleadings, the unpaid
invoices total $
ThermoLife International
In
January 2016, ThermoLife International LLC (“ThermoLife”), a supplier of nitrates to the Company, filed a complaint against
the Company in Arizona state court. ThermoLife alleged that the Company failed to meet minimum purchase requirements contained in the
parties’ supply agreement. The court held a bench trial on the issue of damages in October 2019, and on December 4, 2019, the court
entered judgment in favor of ThermoLife and against the Company in the amount of $
| -18- |
As
of March 31, 2022, the total amount accrued, including interest, was $
On May 4, 2022, the Arizona Supreme Court denied the Company’s petition for review of the decision of the appellate court and granted ThermoLife’s request for attorney’s fees.
Settlements
Manchester City Football Group
The
Company was engaged in a dispute with City Football Group Limited (“CFG”), the owner of Manchester City Football Group, concerning
amounts allegedly owed by the Company under a sponsorship agreement with CFG (the “Sponsorship Agreement”).
On
July 28, 2017, the Company approved a Settlement Agreement (the “CFG Settlement Agreement”) with CFG effective July 7, 2017.
The CFG Settlement Agreement represents a full and final settlement of all litigation between the parties. Under the terms of the agreement,
the Company agreed to pay CFG a sum of $
During the three months ended March 31, 2022 and 2021, the Company recorded a charge of $0.018 million and $0.018 million, respectively. This charge, representing imputed interest, is included in “Interest expense” in the Company’s consolidated statements of operations.
Nutrablend Matter
On
February 27, 2020, Nutrablend, a manufacturer of MusclePharm products, filed an action against the Company in the United States District
Court for the Eastern District of California, claiming approximately $
On
September 25, 2020, the parties successfully mediated the case to a settlement (the “Nutrablend Agreement”) and
The
Company agreed to issue Purchase Orders in a combined total amount of at least (i) $
On
July 7, 2021, the Company commenced an action against Nutrablend in the Central District of California, seeking (i) a declaration that
the Nutrablend Agreement purchase order provisions have been terminated due to Nutrablend’s failure to provide the Company with
reasonable assurances of its ability to fulfill its purchase orders; (ii) a declaration that approximately $
As
of March 31, 2022, the Company determined that approximately $
| -19- |
On
September 23, 2021, the Company entered into an Amendment to a Settlement Agreement that was originally entered into on September 25,
2020. Pursuant to the Amended Agreement, the Company is no longer obligated to issue Purchase Orders to Nutrablend as stated in the Settlement
Agreement, which, as stated in the Form 8-K dated September 25, 2020, consisted of at least (i) $
4Excelsior Matter
On
March 18, 2019, Excelsior Nutrition, Inc. (“4Excelsior”), a manufacturer of MusclePharm products, filed an action against
the Company in the Superior Court of the State of California for the County of Los Angeles, claiming approximately $
On
December 16, 2020, the Company and 4Excelsior entered into a Settlement Agreement and Mutual Release (“the Agreement”), pursuant
to which the parties resolved and settled the civil action pending in the Superior Court of the State of California for the County of
Los Angeles (the “Litigation”). The parties agreed to a mutual general release of claims and to jointly file within 10 business
days of the effective date of the Agreement a stipulation and proposed order of dismissal, dismissing with prejudice all claims and counterclaims
asserted in the Litigation. The Company agreed to pay $
The
Company determined that approximately $
The table below summarizes accrued expenses and interest expense incurred in for the three months ended March 31, 2022 and 2021 (in thousands):
| Cases | Accrued Amount as of March 31, 2022 | Accrued Amount as of December 31, 2021 | Interest Expense for Period Ending March 31, 2022 | Interest Expense for Period Ending March 31, 2021 | ||||||||||||
| Manchester City Football Group | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Nutrablend Matter | ( | ) | ( | ) | ||||||||||||
| 4Excelsior Matter | ( | ) | ( | ) | ||||||||||||
| ThermoLife International | ( | ) | ( | ) | ||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
The Company’s stock-based compensation for the three months ended March 31, 2022 and 2021 consisted primarily of stock option awards, and there was no activity other than vesting for the three months ended March 31, 2022.
For the three months ended March 31, 2022, the Company recorded approximately $ million of stock-based compensation expense related to stock options. The Company did not record stock-based compensation expense for the three months ended March 31, 2021.
| -20- |
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net Income (loss) | $ | ( | ) | $ | ||||
| Weighted average common shares used in computing net income (loss) per share, basic | ||||||||
| Potentially diluted securities | ||||||||
| Weighted average common shares used in computing net income (loss) per share, diluted | ||||||||
| Net income (loss) per share, basic | $ | ( | ) | $ | ||||
| Net income (loss) per share, diluted | $ | ( | ) | $ | ||||
Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock outstanding during each period.
Diluted net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. The Company uses the treasury stock method to determine whether there is a dilutive effect of outstanding potentially dilutive securities, and the if-converted method to assess the dilutive effect of the convertible notes.
As of March 31, 2022, there were fully
vested stock options of
| As of March 31, | ||||||||
| 2022 | 2021 | |||||||
| Stock options | ||||||||
| Warrants | - | |||||||
| Convertible notes | ||||||||
| Total common stock equivalents | ||||||||
The
average exercise price of the stock options and warrants as of March 31, 2022 is $
Note 11. Income Taxes
The Company’s tax expense for the three months ended March 31, 2022 and 2021 was zero.
Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due. Deferred taxes relate to differences between the basis of assets and liabilities for financial and income tax reporting which will be either taxable or deductible when the assets or liabilities are recovered or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of March 31, 2022.
| -21- |
Note 12. Segment Information and Geographic Data
Historically, 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 has had a single reporting segment and operating unit structure. During the third quarter of 2021, the Company introduced a functional energy beverages line under the MusclePharm and FitMiss brands, at which time, the CODM commenced reviewing financial information on a disaggregated basis with the functional energy drink business separate from base business of protein products. During 2021, revenues for the functional energy drink segment were not material, but it is anticipated to become a more significant segment of the Company’s business going forward. (All amounts below are in thousands):
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue, net | ||||||||
| Protein products | $ | $ | ||||||
| Energy drinks | ||||||||
| Total revenue, net | $ | $ | ||||||
| Three Months Ended March 31, 2022 | ||||||||||||
| Revenue | Cost of Revenue | Gross Profit | ||||||||||
| Protein products | $ | $ | $ | |||||||||
| Energy drinks | ||||||||||||
| Total | $ | $ | $ | |||||||||
As the Company’s products are made through contract manufacturers’, there were no capital expenditures related to either segment during the three months ended March 31, 2022 and 2021. Energy segment assets were not material as of March 31, 2022.
All of the Company’s assets are located in the United States.
Geographic Information:
Revenue, classified by the major geographic areas in which our customers are located is as follows:
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| United States | % | % | ||||||
| Other Countries | % | % | ||||||
| Total revenue | % | % | ||||||
No
other country accounted for more than
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue, net | ||||||||
| Protein products | ||||||||
| United States | $ | $ | ||||||
| International | ||||||||
| Total Protein Products | $ | $ | ||||||
| Energy drinks | ||||||||
| United States | - | |||||||
| International | - | |||||||
| Total energy drinks | $ | $ | ||||||
| Total revenue, net | $ | $ | ||||||
| -22- |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with and our financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our Annual Report on Form 10-K as amended for the fiscal year ended December 31, 2021 as may be amended, supplemented or superseded from time to time by other reports we file with the SEC. All amounts in this report are in U.S. dollars, unless otherwise noted.
Overview
MusclePharm is a scientifically-driven, performance lifestyle company that develops, manufactures, markets and distributes branded sports nutrition products and nutritional supplements. We offer a broad range of performance powders, capsules, tablets, gels and on-the-go ready to eat snacks that satisfy the needs of enthusiasts and professionals alike. Our portfolio of recognized brands, MusclePharm and FitMiss, is marketed and sold to over 100 countries globally.
Our offerings are clinically developed through a six-stage research process, and all of our manufactured products are rigorously vetted for banned substances by the leading quality assurance program, Informed-Choice. While we initially drove growth in the Specialty retail channel, in recent years we have expanded our focus to drive sales and retailer growth across leading e-commerce, Food Drug & Mass (“FDM”), Specialty and International channels.
| For the Months Ended March 31, | ||||||||||||||||
| 2022 | % of Total | 2021 | % of Total | |||||||||||||
| Distribution Channel | ||||||||||||||||
| Specialty | $ | 3,383 | 26 | % | $ | 6,795 | 52 | % | ||||||||
| International | $ | 733 | 6 | % | 3,847 | 29 | % | |||||||||
| FDM | $ | 8,985 | 68 | % | $ | 2,479 | 19 | % | ||||||||
| Total | $ | 13,101 | 100 | % | $ | 13,121 | 100 | % | ||||||||
Our consolidated financial statements are prepared using the accrual method of accounting in accordance with generally accepted accounting principles in the United States (“GAAP”) and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business.
Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. There continues to be significant volatility and economic uncertainty in many markets and the ongoing COVID-19 pandemic has increased that level of volatility and uncertainty and has created economic disruption. We are actively managing our business to respond to the impact. There were no adjustments recorded in the financial statements that might result from the outcome of these uncertainties.
COVID-19
The worldwide spread of COVID-19, including the emergence of variants, has resulted, and may continue to result in a global slowdown of economic activity, which may decrease demand for a broad variety of goods and services, while also disrupting supply channels, sales channels and advertising and marketing activities for an unknown period of time until the COVID-19 pandemic is contained, or economic activity normalizes. With the current uncertainty in economic activity, the impact on our revenue and results of operations is likely to continue and the size and duration of the impact we are currently unable to accurately predict. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on a variety of factors, including the duration and spread of COVID-19 and its variants, and its impact on our customers, contract manufacturers, vendors, industry and employees, all of which are uncertain at this time and cannot be accurately predicted. See “Item 1.A Risk Factors” for further discussion of the adverse impacts of the COVID-19 pandemic on our business.
| -23- |
Factors Affecting Our Performance
As we continue to execute our growth strategy and focus on our core products, we believe that we can, over time, continue to improve our operating margins and expense structure. In addition, we have implemented plans focused on cost containment, customer profitability, product and pricing controls that we believe will improve our gross margin and reduce our losses.
We expect that our advertising and promotion expense will continue to decrease as we focus on reducing our expenses and shifting our promotional costs, in part, from general branding and product awareness to acquiring customers and driving sales from existing customers. We expect that our discounts and allowances will continue to decrease, both overall and as a percentage of revenue, as we further reduce certain discretionary promotional activity that does not result in a commensurate increase in revenues.
Results of Operations
Comparison of the Three Months Ended March 31, 2022 to the Three Months Ended March 31, 2021:
The following table sets forth certain financial information from our consolidated statements of operations along with a percentage of net revenue and should be read in conjunction with the consolidated financial statements and related notes (in thousands).
| For the Months Ended March 31, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Amount | % of Revenue | Amount | % of Revenue | |||||||||||||
| Revenue, net | $ | 13,101 | 100 | % | $ | 13,121 | 100 | % | ||||||||
| Cost of revenue | 11,592 | 88 | % | 9,432 | 72 | % | ||||||||||
| Gross profit | 1,509 | 12 | % | 3,689 | 28 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Selling and promotion | 1,160 | 9 | % | 1,149 | 9 | % | ||||||||||
| General and administration | 2,829 | 22 | % | 2,268 | 17 | % | ||||||||||
| Total operating expenses | 3,989 | 30 | % | 3,417 | 26 | % | ||||||||||
| Income (loss) from operations | (2,480 | ) | -19 | % | 272 | 2 | % | |||||||||
| Other (expense) income: | ||||||||||||||||
| Gain on settlements | 12 | 0 | % | 200 | 2 | % | ||||||||||
| Interest expense | (3,821 | ) | -29 | % | (510 | ) | -4 | % | ||||||||
| Other (expense) income, net | (12 | ) | 0 | % | 132 | 1 | % | |||||||||
| Income (loss) before provision for income taxes | (6,301 | ) | -48 | % | 94 | 1 | % | |||||||||
| Net income (loss) | $ | (6,301 | ) | -48 | % | $ | 94 | 1 | % | |||||||
Revenue, net
We derive our revenue through the sales of our various branded sports nutrition products, nutritional supplements and energy drinks. Revenue is recognized when control of a promised good is transferred to a customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for the good. This usually occurs when finished goods are delivered to the Company’s customers or when finished goods are picked up by a customer’s carrier.
Net revenue reflects the transaction prices for contracts, which includes goods shipped at selling list prices reduced by discounts and sales allowances. We record discounts and sales allowances as a direct reduction of revenue for various discounts provided to our customers, consisting primarily of promotional related credits. 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.
| -24- |
For the three months ended March 31, 2022, our net revenues were approximately $13.1 million compared to $13.1 million for the three months ended March 31, 2021, a decline of approximately $20,000 or 0%. Net revenue for the energy segment was up $1 million, primarily driven by volume, while net revenue for the protein products segment was down $1 million. During the three months ended March 31, 2022, the Company had three customers who individually accounted for 59%, 13% and 12% of our net revenue. During the three months ended March 31, 2021, the Company had three customers who individually accounted for 28%, 17% and 14% of our net revenue. During the 1st Quarter of 2022 the Company instituted a price increase with select customers, contributing to 7.4 % of revenue for the three months ended March 31, 2022.
Discounts and sales allowances declined to approximately 11% of gross revenue, or $1.6 million, for the three months ended March 31, 2022, compared to approximately 15% of gross revenue, or $2.4 million, for the three months ended March 31, 2021. Discounts and sales allowances fluctuate based on customer mix and changes in discretionary promotional activity. We continue to monitor our discounts and allowances, reducing where practical to continue to meet our gross margin expectation.
Cost of Revenue and Gross Profit
Cost of revenue for our products is related to the production, manufacturing, and freight-in of the related products purchased from third-party manufacturers. We primarily use contract manufacturers to drop ship products directly to our customers.
We experienced cost increases for raw materials during the three months ended March 31, 2022 primarily due to industry shortages in supply and consistent with market demand. Compared to the prior year, commodity protein costs have increased 90% negatively affecting our gross margin. We are taking steps to manage the increase and shortages by entering into agreements with additional protein brokers to diversify our protein sources, along with working with new vendors to source other component such as tubs, trays and bags.
We have focused on cost containment and improving gross margins by concentrating on customers with higher margins, reducing product discounts and promotional activity, along with reducing the number of SKU’s and negotiating improved pricing for raw materials. With recent increases in commodity prices, our gross margins have eroded and will continue to be impacted.
We are focusing on growing the energy segment which contributed to two points of margin in the three months ended March 31, 2022.
Selling and promotion
Our selling and promotion expense consists primarily of expenses related to freight-out, print and online advertising, club demonstrations, and stock-based compensation. Historically, advertising and promotions were a large part of both our growth strategy and brand awareness, in particular strategic partnerships with sports athletes and fitness enthusiasts and endorsements, licensing, and co-branding agreements. Additionally, we co-developed products with sports athletes and teams. In connection with our restructuring plan, we terminated most of these contracts in a strategic shift away from such costly arrangements and moved toward digital advertising, ambassador programs and sampling promotional materials.
For the three months ended March 31, 2022, our selling and promotion expenses were approximately $1.2 million compared to $1.1 million for the three months ended March 31, 2021, an increase of $11,000 or 1%. The increase was primarily related to an increase in freight-out and stock-based compensation related to our Energy business and offset by decreases in Club Demonstrations. Freight out is up $77,000 or 11% and Stock based compensation is up $142,000 or 100%. Club demonstrations were down $222,000 or 75%. All other selling and promotion expenses represent an increase of $14,000.
| -25- |
General and Administrative
Our general and administrative expenses consist primarily of salaries and benefits, professional fees, depreciation and amortization, research and development, information technology equipment and network costs, facilities related expenses, directors’ fees, legal fees, accounting and audit fees, consulting fees, stock-based compensation, investor relations costs, insurance, bad debt and other corporate expenses.
For the three months ended March 31, 2022, our general and administrative expenses were approximately $2.8 million compared $2.3 million for the three months ended March 31, 2021, or an increase of approximately $561,000 or 25%. This was due to an increase in professional fees associated with accounting fees, an increase in salaries and benefits associated with stock-based compensation and an increase in bad debt expense, offset by a reduction in office and IT expenses. Professional fees are up $213,000 or 41%, salaries and benefits are up $176,000 or 17%, and bad debt expense is up $344,000 or 3100% and office/IT expenses are down $96,000 or 39%. All other general and administrative expenses represent a decrease of $76,000.
Gain on Settlements
For the three months ended March 31, 2022 and 2021, gain on settlements was $12,000 and $200,000 respectively.
Interest Expense
For the three months ended March 31, 2022, interest expense was approximately $3.8 million compared to $0.5 million for the three months ended March 31, 2021, or an increase of $3.3 million or 645%.
Interest expense increased primarily due to the $3.2 million amortization of stock warrants associated with the issuance of the Senior Secured debt offering during the year ended December 31, 2021.
Other (Expense) Income, Net
For the three months ended March 31, 2022 and 2021, other expense was $12,000, compared to other income of $132,000 respectively.
Provision for Income Taxes
For the three months ended March 31, 2022 and 2021, tax expense was zero. Our provision for income taxes consists primarily of federal and state income taxes in the U.S. and income taxes in foreign jurisdictions in which we conduct business. Due to uncertainty, as to the realization of benefits from our deferred tax assets, including net operating loss carryforwards, research and development and other tax credits, we have a full valuation allowance reserved against such assets. We expect to maintain this full valuation allowance at least in the near term.
Liquidity and Capital Resources
We have incurred significant losses and experienced negative cash flows since inception. As of March 31, 2022, we had cash of $0.5 million, a decline of $0.7 million from the December 31, 2021 balance of $1.2 million. As of March 31, 2022, we had a working capital deficit of $36.3 million, a stockholders’ deficit of $38.1 million and an accumulated deficit of $211.8 million resulting from recurring losses from operations. As a result of our history of losses and financial condition, there is substantial doubt about our ability to continue as a going concern.
Our ability to continue as a going concern is dependent upon us generating profitable operations in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. We are evaluating different strategies to obtain financing to fund our expenses and achieve a level of revenue adequate to support our current cost structure. Financing strategies may include, but are not limited to, issuances of capital stock, debt borrowings, partnerships and/or collaborations.
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We have funded our operations from proceeds from the sale of equity and debt securities. We will require significant additional capital to make the investments we need to execute our longer-term business plan. Our ability to successfully raise sufficient funds through the sale of debt or equity securities when needed is subject to many risks and uncertainties and, even if it were successful, future equity issuances would result in dilution to our existing shareholders and future debt securities may contain covenants that limit our operations or ability to enter into certain transactions.
We will need to raise additional funding through strategic relationships, public or private equity or debt financings, grants or other arrangements to develop and seek regulatory approvals for our existing and new product candidates. If such funding is not available, or not available on terms acceptable to us, our current development plan and plans for expansion of our general and administrative infrastructure may be curtailed.
Cash Flows
A summary of our cash flows is as follows (in thousands):
| For the Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Consolidated Statements of Cash Flows Data: | ||||||||
| Net cash (used in) provided by operating activities | $ | (3,582 | ) | $ | 98 | |||
| Net cash used in investing activities | - | (4 | ) | |||||
| Net cash provided by (used in) financing activities | 2,893 | (1,505 | ) | |||||
| Net change in cash | $ | (689 | ) | $ | (1,411 | ) | ||
Net Cash Operating Activities
Our net cash used in operating activities was $3.6 million for the three months ended March 31, 2022, compared to net cash provided by operating activities of $0.1 million for the three months ended March 31, 2021. The primary drivers include a $6.1 million net loss, and an increase in accounts receivable, net of $2.5 million.
Net Cash Investing Activities
Our net cash used in investing activities for the three months ended March 31, 2022, was zero compared to net cash used in investing activities of $0.004 million for the three months ended March 31, 2021.
Net Cash Financing Activities
Our net cash provided by financing activities for the three months ended March 31, 2022, was $2.9 million compared to net cash used by financing activities of $1.5 million for the three months ended March 31, 2021.
Non-GAAP Adjusted EBITDA
In addition to disclosing financial results calculated in accordance with GAAP, this Form 10-Q discloses Adjusted EBITDA, which is net loss adjusted for stock-based compensation, (gain) on settlement of accounts payable, interest expense, depreciation of property and equipment, amortization of intangible assets, and (gain) or loss on foreign currency.
Management uses Adjusted EBITDA as a supplement to GAAP measures to further evaluate period-to-period operating performance, as well as the Company’s ability to meet future working capital requirements. Management believes this non-GAAP measures will provide investors with important additional perspectives in evaluating the Company’s ongoing business performance.
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The GAAP measure most directly comparable to Adjusted EBITDA is net income (loss). The non-GAAP financial measure of Adjusted EBITDA should not be considered as an alternative to net income (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 income (loss) and is defined differently by different companies, our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
Set forth below are reconciliations of our reported GAAP net income (loss) to Adjusted EBITDA (in thousands):
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net income (loss) (GAAP) | $ | (6,301 | ) | $ | 94 | |||
| Non-GAAP adjustments: | ||||||||
| Gain on settlements | (12 | ) | (200 | ) | ||||
| Stock compensation expense | 437 | - | ||||||
| Interest expense and other income | 3,821 | 510 | ||||||
| Depreciation of Property and Equipment | 1 | 3 | ||||||
| Amortization of Intangible Assets | 35 | 80 | ||||||
| (Gain) loss from foreign currency | 12 | (11 | ) | |||||
| Adjusted EBITDA (non-GAAP) | $ | (2,007 | ) | $ | 476 | |||
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with GAAP and form the basis for the following discussion and analysis on critical accounting policies and estimates. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates and those differences could have a material effect on our business, financial condition and results of operations.
The preparation of our Financial Statements and the related disclosures in conformity with GAAP, requires our management to make judgments, assumptions, and estimates that affect the amounts of revenue, expenses, income, assets, and liabilities, reported in our Financial Statements and accompanying notes. Understanding our accounting policies and the extent to which our management uses judgment, assumptions, and estimates in applying these policies is integral to understanding our Financial Statements.
We describe our most significant accounting policies in “Note 2, Significant Accounting Policies” of our consolidated notes to our Financial Statements and found elsewhere in this Quarterly Report. These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates, and assumptions about highly complex and inherently uncertain matters. In addition, the use of different judgments, assumptions, or estimates could have a material impact on our financial condition or results of operations. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions.
Revenue Recognition
Our revenue represents sales of finished goods inventory and is recognized when control of the promised goods is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods. The reserves for trade promotions and product discounts, including sales incentives, are established based on our best estimate of the amounts necessary to settle existing credits for products sold as of the balance sheet date.
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All such costs are netted against sales. These costs include end-aisle or other in-store displays, contractual advertising fees and product discounts, and other customer specific promotional activity. We provide reimbursement to our customers for such amounts as credits against amounts owed. To determine the appropriate timing of recognition of consideration payable to a customer, all consideration that is payable to our customers is reflected in the transaction price at inception and reassessed routinely.
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. We assess 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 “General and administrative” expenses in the consolidated statements of operations. We reserve the receivable balance against the allowance when management determines a balance is uncollectible. We also review our customer discounts, and an accrual is made for discounts earned but not yet utilized at each period end.
Litigation Estimates and Accruals
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. We provide disclosures for material contingencies when there is a reasonable possibility that a loss or an additional loss may be incurred. In assessing whether a loss is a reasonable possibility, we may consider the following factors, among others: the nature of the litigation, claim or assessment, available information, opinions or views of legal counsel and other advisors, and the experience gained from similar cases.
Share-Based Payments and Stock-Based Compensation
Share-based compensation awards, including stock options and restricted stock awards, are recorded at estimated fair value on the applicable awards’ grant date, based on the estimated number of awards that are expected to vest. The grant date fair value is amortized on a straight-line basis over the time in which the awards are expected to vest, or immediately if no vesting is required. Share-based compensation awards issued to non-employees for services are also recorded at fair value on the grant date. The fair value of restricted stock awards is based on the fair value of the stock underlying the awards on the grant date as there is no exercise price.
The fair value of stock options is estimated using the Black-Scholes option-pricing model. The determination of the fair value of each stock award using this option-pricing model is affected by 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. Due to our limited experience with the expected term of options, the simplified method was utilized in determining the expected option term as prescribed in ASC 718 Compensation – Stock Compensation.
We recognize our 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.
There have been no material changes to our critical accounting policies during the period covered by this report.
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Warrants
In conjunction with the Securities Purchase Agreement (“SPA”), we issued 18,463,511 warrants to the senior note holders. The warrants entitle the holder to purchase one share of our common stock at an exercise price equal to $.7794 per share at any time on or after October 13, 2021 (the “Initial Exercise Date”) and on or prior to the close of business on October 13, 2026 the “Termination Date”). We determined that these warrants are free standing financial instruments that are legally detachable and separately exercisable from the debt instruments. Management also determined that the warrants are puttable for cash upon a fundamental transaction at the option of the holder and as such required classification as equity pursuant to ASC 470. In accordance with the accounting guidance, the outstanding warrants are recognized as equity on the balance sheet. The proceeds from the sale of a debt instrument with stock purchase warrants (detachable call options) shall be allocated to the two elements based on the relative fair values of the debt instrument without the warrants, and of the warrants themselves at time of issuance. The allocation of the portion of the value resulted in a discount of the debt instrument. The fair value of the warrants were measured using the Black Scholes option pricing model.
Recently Issued Accounting Pronouncements
See Note 2 to the accompanying consolidated financial statements for a discussion of recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance, to us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act.
ITEM 4. CONTROLS AND PROCEDURES
Background
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer have evaluated disclosure controls and procedures as of March 31, 2022. Based on this evaluation, they concluded that because of the material weaknesses in our internal control over financial reporting discussed below, our internal controls and procedures were not effective as required under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Disclosure controls and procedures are designed to ensure that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process affected by our management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with GAAP.
In designing and evaluating our internal controls and procedures, our management recognized that internal controls and procedures, no matter how well conceived and operated, can provide only a reasonable, not absolute, assurance that the objectives of the internal controls and procedures are met. In addition, any evaluation of the effectiveness of internal controls over financial reporting in future periods is subject to risk that those internal controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
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Our management assessed the effectiveness of its internal control over financial reporting as of March 31, 2022. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission’s 2013 Internal Control-Integrated Framework. Based on its assessment, as well as factors identified during the Audit Committee investigation and subsequent audit process, management has concluded that our internal control over financial reporting as of December 31, 2021 was not effective due to the existence of the material weaknesses in internal control over financial reporting described below.
Material Weaknesses
The Company has deficiencies in the design and operation of its internal controls in the financial processes related to the accounting for cash, accounts receivable, accounts payable, inventory, accrued liabilities, income taxes, debt, equity, revenue, costs of sales, stock-based compensation, and expenses classification. In addition, the Company has insufficient controls over the financial close and reporting process, including account reconciliations and preparation and review of financial statements and related disclosures. Significant employee turnover and lack of technical expertise in the accounting function, has led to a lack of documentation and inconsistent practices in the implementation and execution of internal controls, including those at the entity level, information technology general controls, segregation of duties controls, and business process controls.
Remediation
Our remedial actions to date and remediation plans to be undertaken in response to the material weaknesses on internal control over financial reporting and our conclusions reached in evaluating the effectiveness of our disclosure controls and procedures and internal controls over financial reporting as of March 31, 2022 and 2021, are described below.
| ● | We are in the process of designing and expect to implement, measures that we believe address or will address these control weaknesses, we continue to develop our internal controls, processes and reporting systems by, among other things, hiring qualified personnel with expertise to perform specific functions, and designing and implementing improved processes and internal controls, including ongoing senior management review and audit committee oversight. We plan to remediate the identified material weakness through the redistribution of job responsibilities, after hiring additional senior accounting staff, with additional technical accounting expertise and through the design and implementation of additional internal controls in order to promote adequate segregation of duties. Additionally, we intend to designate a member of management to review and improve our internal control processes. We expect to complete the remediation in 2022. We expect to incur additional costs to remediate the material weaknesses, primarily personnel costs for both internal and external resources. | |
| ● | We may not be successful in implementing these changes or in developing other internal controls, which may undermine our ability to provide accurate, timely and reliable reports on our financial and operating results. Further, we will not be able to fully assess whether the steps we are taking will remediate the material weakness in our internal control over financial reporting until we have completed our implementation efforts and sufficient time passes in order to evaluate their effectiveness. In addition, if we identify additional material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. Moreover, in the future we may engage in business transactions, such as acquisitions, reorganizations or implementation of new information systems that could negatively affect our internal control over financial reporting and result in material weaknesses. |
We expect to progress on our remediation efforts during the remainder of 2022.
Notwithstanding the material weaknesses described in this Item 4, Management has concluded that the consolidated financial statements and related financial information included in this Quarterly Report on Form 10-Q presents fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP. Management’s position is based on a number of factors, including, but not limited to:
| ● | With the substantial resources expended (including the use of external consultants); |
| ● | The reconsideration of significant accounting policies and accounting practices previously employed by the Company, resulting in other adjustments to previously issued consolidated financial statements; and |
| ● | Based on the actions described above, we have updated, and in some cases corrected, our accounting policies and have applied those to our consolidated financial statements for all periods presented. |
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be subject to litigation and claims arising in the ordinary course of business. For information regarding legal proceedings, see Note 8 to the Notes to Consolidated Financial Statements (unaudited) contained herein, which is incorporated by reference into this part II, Item 1.
ITEM 1A. RISK FACTORS
Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Annual Report on Form 10-K as amended for the year ended December 31, 2021(“Annual Report”). There have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibit No. |
Description | |
| 31.1* | Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1** | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 | |
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104* | Cover Page Interactive Data File - the cover page from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 is formatted in Inline XBRL |
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements 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 | ||
| Date: May 16, 2022 | By: | /s/ Ryan Drexler |
| Ryan Drexler | ||
Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) | ||
| Date: May 16, 2022 | By: | /s/ Sabina Rizvi |
| Sabina Rizvi | ||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||
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