MusclePharm Corp - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

For the quarterly period ended: September 30, 2021 or

For the transition period from ______ to _____

Commission file number: 000-53166

MusclePharm Corporation

(Exact name of registrant as specified in its charter)

(800) 292-3909

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☐ Yes ☒ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☐ Yes ☒ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

Number of shares of the registrant’s common stock outstanding at November 15, 2021: 33,386,200 (excludes 875,621 shares of common stock held in treasury).

MusclePharm Corporation

Form 10-Q

TABLE OF CONTENTS

Forward-Looking Statements

Except as otherwise indicated herein, the terms “MusclePharm,” “Company,” “we,” “our” and “us” refer to MusclePharm Corporation and its subsidiaries. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (“the Exchange Act”), and Section 27A of the Securities Act of 1933, as amended. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, including our future profits, financing sources and our ability to satisfy our liabilities, our business strategy and plans, and our objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “intends,” “predicts,” “potential,” or “continue” or other comparable terminology. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs.

These forward-looking statements are not guarantees of future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict and are subject to a number of risks, uncertainties and assumptions, including those described in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 29, 2021. Moreover, we operate in a very competitive and rapidly changing environment. In particular, we have experienced a slowdown in sales from our retail customers due to the ongoing COVID-19 pandemic, and we cannot predict the ultimate impact of the COVID-19 pandemic on our business. New risks may emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Note Regarding Trademarks

We have proprietary rights to a number of registered and unregistered trademarks worldwide that we believe are important to our business, including, but not limited to: “MusclePharm” and “FitMiss”. We have, in certain cases, omitted the ®, © and ™ designations for these and other trademarks used in this Form 10-Q. Nevertheless, all rights to such trademarks are reserved. These and other trademarks referenced in this Form 10-Q are the property of their respective owners and they will assert, to the fullest extent under applicable law, their rights thereto.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements  

MusclePharm Corporation

Consolidated Balance Sheets

(In thousands, except share and per share data)

The accompanying notes are an integral part of these Consolidated Financial Statements.

MusclePharm Corporation

Consolidated Statements of Operations

(In thousands, except share and per share data)

The accompanying notes are an integral part of these Consolidated  Financial Statements.

MusclePharm Corporation

Consolidated Statements of Changes in Stockholders’ Deficit

(In thousands, except share data)

(Unaudited)

The accompanying notes are an integral part of these Consolidated Financial Statements.

MusclePharm Corporation

Consolidated Statements of Changes in Stockholders’ Deficit

(In thousands, except share data)

(Unaudited)

The accompanying notes are an integral part of these Consolidated Financial Statements.

MusclePharm Corporation

Consolidated Statements of Cash Flows

(In thousands, except share and per share data)

The accompanying notes are an integral part of these Consolidated Financial Statements.

MusclePharm Corporation

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Description of Business

Description of Business

MusclePharm Corporation, together with its subsidiaries (the “Company” or “MusclePharm”) is a scientifically-driven, performance lifestyle company that develops, markets and distributes branded sports nutrition products and nutritional supplements that are manufactured by the Company’s co-manufacturers. Our portfolio of recognized brands, including MusclePharm and FitMiss, is marketed and sold globally.

The Company has historically incurred significant losses and experienced negative cash flows since inception. As of September 30, 2021, the Company had cash of $0.4 million, a decline of $1.6 million from the December 31, 2020 balance of $2.0 million. As of September 30, 2021, the Company had a working capital deficit of $26.7 million, a stockholders’ deficit of $29.8 million and an accumulated deficit of $199 million resulting from recurring losses from operations. As a result of our history of losses and financial condition, there is substantial doubt about our ability to continue as a going concern.

The Company’s ability to continue as a going concern is dependent upon it generating profits in the future and/or obtaining the necessary financing to meet its obligations and repay liabilities arising from normal business operations when they come due. The Company is evaluating different strategies to obtain financing to fund its operations to cover expenses and focus on achieving a level of revenue adequate to support its current cost structure. Financing strategies may include, but are not limited to, private placements of capital stock, debt borrowings, partnerships and/or collaborations.

The Company has been focused on cost containment and improving gross margins by focusing on customers with higher margins, reducing product discounts and promotional activity, along with reducing the number of SKU’s and negotiate pricing for raw materials. In addition, the Company has worked to negotiate lower production costs with its co-manufacturers. Although these steps improved gross margins through the first quarter of 2021, with the recent increases in commodity prices, primarily protein, the Company’s gross margins have been impacted and will continue to be impacted unless commodity prices return the same levels that were seen in 2020.

In 2021, the Company announced its entrance into the functional energy space with its partnership with a former Rockstar Energy executive. The Company launched three flavors of MP Combat Energy in September for domestic distribution and three additional flavors for international distribution. The Company believes with the launch of its new energy products, reductions in operating costs and continued focus on gross profit and top line sales growth will allow it to ultimately achieve sustained profitability. However, the Company can give no assurances that this will occur, especially with the cost to launch new energy products along with the recent increase in the cost of protein, which may have a material impact on the Company’s profitability. Additionally, the Company’s profitability may be materially impacted by the ability of our third-party manufacturers to meet our customers’ demands. Although, the Company believes entering the functional energy space will help to increase sales and gross margin, and reduce exposure to commodity prices, the Company can give no assurances that this will occur. To manage cash flow, the Company has entered into multiple financing arrangements.

The Company’s results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. There continues to be significant volatility and economic uncertainty in many markets and the ongoing COVID-19 pandemic contributes to that level of volatility and uncertainty and has created economic disruption. The Company is actively managing its business to respond to the impact. There were no adjustments recorded in the financial statements that might result from the outcome of these uncertainties.

The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may have a material impact on our business, financial condition and results of operations. Management continues to monitor the business environment for any significant changes that could impact the Company’s operations. The Company has taken proactive steps to manage costs and discretionary spending, such as remote working and reducing facility related expense.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all the information and notes required by U.S. GAAP for complete financial statements. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company’s management believes the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial position as of September 30, 2021, results of operations for the three and nine months ended September 30, 2021 and 2020, and cash flows for the nine months ended September 30, 2021 and 2020. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the year ended December 31, 2021.

These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 29, 2021.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Such estimates include, but are not limited to, allowance for doubtful accounts, revenue discounts and allowances, the valuation of inventory and deferred tax assets, the assessment of useful lives, recoverability and valuation of long-lived assets, likelihood and range of possible losses on contingencies, present value of lease liabilities, among others. Actual results could differ from those estimates.

Shipping and Handling

The Company accounts for shipping and handling costs as fulfillment activities, which are therefore recognized upon shipment of the goods.

For the three and nine months ended September 30, 2021, the Company incurred $0.4 million and $1.4 million, respectively, of inbound shipping and handling costs. For the three and nine months ended September 30, 2020, the Company incurred $0.2 million and $0.9 million, respectively, of inbound shipping and handling costs. Shipping and handling costs related to inbound purchases of raw material and finished goods are included in cost of revenue in our consolidated statements of operations.

For the three and nine months ended September 30, 2021, the Company incurred $0.7 million and $2.3 million, respectively, of shipping and handling costs related to shipments to our customers. For the three and nine months ended September 30, 2020, the Company incurred $0.6 million and $1.7 million, respectively, of shipping and handling costs related to shipments to our customers. Shipping and handling costs related to shipments to our customers is included in “Selling, general and administrative” expense in our consolidated statements of operations.

Sales Discounts and Returns

The Company excludes from its revenue any amounts collected from customers for sales (and similar) taxes. During the three months ended September 30, 2021 and 2020, the Company recorded discounts, and to a lesser degree, sales returns, totaling $1.9 million and $4.1 million, respectively, which accounted for 13.9% and 20.4% of gross revenue in each period, respectively.

During the nine months ended September 30, 2021, and 2020, the Company recorded discounts, and to a lesser degree, sales returns, totaling $6.3 million and $11.7 million, respectively, which accounted for 13.5% and 19.1% of gross revenue in each period, respectively.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The Company maintains its cash balance at credit-worthy financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. There was an aggregate uninsured cash balance of $0.1 million as of September 30, 2021. Management believes the financial risk associated with these balances is minimal and has not experienced any losses to date.

Significant customers are those that represent more than 10% of the Company’s revenue, net or accounts receivable for each period presented.

For the three months ended September 30, 2021, the Company had one customer who individually accounted for 50% of net revenue. For the nine months ended September 30, 2021, the Company had three customers who individually accounted for 44%, 12%, and 11% of net revenue. Two customers accounted for 51%, 10% of accounts receivable, net as of September 30, 2021.

For the three months ended September 30, 2020, the Company had two customers who individually accounted for 46% and 10% of net revenue. For the nine months ended September 30, 2020, the Company had three customers who individually accounted for 37%, 19% and 13% of net revenue. Three customers accounted for 37%, 20% and 11% of accounts receivable, net as of September 30, 2020.

The Company uses a limited number of non-affiliated suppliers for contract manufacturing of its products. For the three months ended September 30, 2021, the Company had three suppliers who individually accounted for approximately 19%, 16% and 12% of its purchases with contract manufacturers and raw material providers. For the nine months ended September 30, 2021, the Company had three suppliers who individually accounted for approximately 22%, 17% and 15% of its purchases with contract manufacturers and raw material providers. Three vendors accounted for 26%, 19%, 10% of accounts payable as of September 30, 2021.

For the three months ended September 30, 2020, the Company had two suppliers who individually accounted for approximately 37% and 10% of its purchases with contract manufacturers and raw material providers. For the nine months ended September 30, 2020, the Company had three suppliers who individually accounted for approximately 26%, 23% and 22% of its purchases with contract manufacturers and raw material providers.

Recent Accounting Pronouncements

In July 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement of all expected credit losses of financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for periods beginning after December 15, 2022, and interim periods within those fiscal years. The Company is currently evaluating the impact this ASU may have on its consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). The ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. This guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but not earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The FASB also specified that an entity should adopt the guidance as of the beginning of its annual fiscal year and is not permitted to adopt the guidance in an interim period. The Company is currently evaluating the impact this ASU may have on its consolidated financial statements.

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The ASU addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is effective for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this ASU may have on its consolidated financial statements.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which was expected to reduce cost and complexity related to the accounting for income taxes. The ASU removes specific exceptions to the general principles in Topic 740 in U.S. GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intra-period tax allocation; exceptions to accounting for basis differences when there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also simplifies U.S. GAAP for: franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods. The Company adopted this ASU effective January 1, 2021, with certain provisions applied retrospectively and other provisions applied prospectively. Adoption of this ASU did not have a material impact to the Company’s condensed consolidated balance sheet, statements of operations, or cash flows.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period financial statement presentations, including classification of certain labilities and operating expenses. These changes in presentation did not have a material impact on the Company’s financial condition or results of operations. The Company has updated its Consolidated Statements of Operations to be presented by function, which did not change total operating expenses or gross margins.

Note 3. Inventory

Inventory consisted solely of finished goods and raw materials used to manufacture our products by one of our co-manufacturers (in thousands):

 Schedule of Inventory

Note 4. Accrued and Other Liabilities

As of September 30, 2021 and December 31, 2020, the Company’s accrued and other liabilities consisted of the following (in thousands):

 Schedule of Accrued and Other Liabilities

Note 5. Interest and other income (expense), net

For the three and nine months ended September 30, 2021 and 2020, “Interest and other income (expense), net” consisted of the following (in thousands):

 Schedule of Interest and Other Expense, Net

Note 6. Leases

A summary of the Company’s lease portfolio as of September 30, 2021 and December 31, 2020 is presented in the table below (in thousands):

 Schedule of Supplemental Balance Sheet Information

Supplemental cash flow information related to leases was as follows:

 Schedule of Supplemental Cash Flow Information

Note 7. Other Long-Term Liabilities

As of September 30, 2021, and December 31, 2020, the Company’s other long-term liabilities consisted of the following (in thousands):

 Schedule of Other Long-Term Liabilities

Note 8. Debt

Related-Party Refinanced Convertible Note

On November 29, 2020, the Company entered into a refinancing agreement with Mr. Ryan Drexler, the Company’s Chairman of the Board of Directors and Chief Executive Officer (the “November 2020 Refinancing”), in which the Company issued to Mr. Drexler a convertible secured promissory note (the “November 2020 Convertible Note”) in the original principal amount of $2,871,967  , which amended and restated a convertible secured promissory note dated as of August 21, 2020. The $2,871,967 million November 2020 Convertible Note bears interest at the rate of 12% per annum. Unless earlier converted or repaid, all outstanding principal and any accrued but unpaid interest under the November 2020 Convertible Note was due and payable on July 1, 2021; however, the Company and Mr. Drexler agreed to an extension until July 14, 2022. Any interest not paid when due shall be capitalized and added to the principal amount of the November 2020 Convertible Note and bear interest on the applicable interest payment date along with all other unpaid principal, capitalized interest, and other capitalized obligations.

Mr. Drexler may, at any time, and from time to time, upon written notice to the Company, convert the outstanding principal and accrued interest into shares of Common Stock, at a conversion price of $0.23 per share. At the election of the Company, one-sixth of the interest may be paid in kind (“PIK Interest”) by adding such amount to the principal amount of the note, or through the issuance of shares of the Company’s common stock to Mr. Drexler. The PIK Interest is convertible to common stock at the closing price per share on the last business day of each calendar quarter. In no event will the conversion price of such PIK Interest be less than $0.10. The Company may prepay the Note by giving Mr. Drexler between 15- and 60-days’ notice depending upon the specific circumstances, subject to Mr. Drexler’s conversion right. The Company intends to pay all interest due on the Convertible Note to Mr. Drexler at the end of each calendar quarter.

The November 2020 Convertible Note contains customary restrictions on the ability of the Company to, among other things, grant liens or incur indebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain additional qualifications and carveouts, as set forth in the November 2020 Convertible Note. The November 2020 Convertible Note is subordinated to the secured borrowing arrangement the Company entered into with Prestige Capital Corporation (“Prestige”).

The convertible note balance as of September 30, 2021 and December 31, 2020 was $2,871,967.

Related-Party Secured Revolving Promissory Note/Related-Party Convertible Note

On October 15, 2020, the Company entered into a secured revolving promissory note (the “Revolving Note”) with Ryan Drexler. Under the terms of the Revolving Note, the Company can borrow up to $3.0 million. The Revolving Note bears interest at the rate of 12% per annum. The funds were used for the purchase of whey protein and other general corporate purposes. Both the outstanding principal, if any, and all accrued interest under the Revolving Note were due on March 31, 2021;

On August 13, 2021, the Company issued to Ryan Drexler (the “Holder”) a convertible secured promissory note (the “August 2021 Convertible Note”) in the original principal amount of $2,457,549 and cancelled the Revolving Note.

The August 2021 Convertible Note bears interest at the rate of 12% per annum. Interest payments are due on the last day of each calendar quarter. At the Company’s option (as determined by its independent directors), the Company may repay up to one sixth of any interest payment by either adding such amount to the principal amount of the August 2021 Convertible Note or by converting such interest amount into an equivalent amount of the Company’s common stock, $0.001 par value per share (the “Common Stock”). Any interest not paid when due shall be capitalized and added to the principal amount of the August 2021 Convertible Note and bear interest on the applicable interest payment date along with all other unpaid principal, capitalized interest, and other capitalized obligations. Both the principal and any accrued but unpaid interest under the August 2021 Convertible Note will be due on July 14, 2022, unless converted or repaid earlier.

The Holder may, at any time, and from time to time, upon written notice to the Company, convert the outstanding principal and accrued interest into shares of Common Stock, at a conversion price equal to the closing price of the common stock on October 15, 2021. The Company may prepay the August 2021 Convertible Note by giving the Holder between 15 and 60 days’ notice depending upon the specific circumstances, subject to the Holder’s conversion right.

The August 2021 Convertible Note contains customary events of default, including, among others, the failure by the Company to make a payment of principal or interest when due. Following an event of default, at the option of the Holder and upon written notice to the Company, or automatically under certain circumstances, all outstanding principal and accrued interest will become due and payable. The August 2021 Convertible Note also contains customary restrictions on the ability of the Company to, among other things, grant liens or incur indebtedness other than certain obligations incurred in the ordinary course of business. The restrictions are also subject to certain additional qualifications and carveouts, as set forth in the August 2021 Convertible Note. The August 2021 Convertible Note is subordinated to certain other indebtedness of the Company.

The convertible note balance as of September 30, 2021 was $2,457,549 and December 31, 2020 was zero.

The revolver balance of September 30, 2021 was zero and December 31,2020 was $0.7 million

For the three months ended September 30, 2021 and 2020, interest expense related to the total related party debt was $0.2 million and $0.1 million respectively.

For the nine months ended September 30, 2021 and 2020, interest expense related to the total related party debt was $0.4 million and $0.2 million, respectively.

Secured Borrowing Arrangement

In January 2016, the Company entered into a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) with Prestige, pursuant to which the Company agreed to sell and assign and Prestige agreed to buy and accept, certain accounts receivable owed to the Company (“Accounts”). Under the terms of the Purchase and Sale Agreement, upon the receipt and acceptance of each assignment of Accounts, Prestige will pay the Company 80% of the net face amount of the assigned Accounts, up to a maximum total borrowing of $12.5 million subject to sufficient amounts of accounts receivable to secure the loan. The remaining 20% will be paid to the Company upon collection of the assigned Accounts, less any chargebacks (including chargebacks for any customer amounts that remain outstanding for over 90 days), disputes, or other amounts due to Prestige. Prestige’s purchase of the assigned Accounts from the Company will be at a discount fee which varies from 0.7% to 4%, based on the number of days outstanding from the assignment of Accounts to collection of the assigned Accounts. In addition, the Company granted Prestige a continuing security interest in and first priority lien upon all accounts receivable, inventory, fixed assets, general intangibles, and other assets. Prestige will have no recourse against the Company if payments are not made due to the insolvency of an account debtor within 90 days of invoice date, with the exception of international and certain domestic customers. On April 10, 2019, the Company and Prestige amended the terms of the agreement. The agreement was extended until April 1, 2020 and automatically renews for one (1) year periods unless either party receives written notice of cancellation from the other, at minimum, thirty (30) days prior to the expiration date thereafter.

On June 14, 2021  , Prestige advanced the Company $1 million with a six-month term, 15% interest rate and 2% accommodation fee.

On July 26, 2021, Prestige advanced the Company $1 million with a six month term and a 15% interest rate. In addition, there was an accommodation fee equal to 1% of the amount advanced plus 18,750 stock options.

As of September 30, 2021, and December 31, 2020, the Company had outstanding borrowings under the secured borrowing arrangement (including the 2 advances) of approximately $6.1 million and $7.1 million, respectively.

On Oct 12th, the June 14th and July 26th Prestige $2 million advance was extended to the date of the termination of the $7.0 million senior secured note offering.

During the three months ended September 30, 2021 and 2020, the Company assigned to Prestige, accounts with an aggregate face amount of approximately $15 million and $14.6 million, respectively, for which Prestige paid to the Company approximately $12 million and $11.6 million, respectively, in cash. During the three months ended September 30, 2021 and 2020, $11.2 million and $11.6 million, respectively, was repaid to Prestige, including fees and interest.

During the nine months ended September 30, 2021 and 2020, the Company assigned to Prestige, accounts with an aggregate face amount of approximately $47.8 million and $41 million, respectively, for which Prestige paid to the Company approximately $38.2 million and $32.8 million, respectively, in cash. During the nine months ended September 30, 2021 and 2020, $39.3 million and $34.3 million, respectively, was repaid to Prestige, including fees and interest.

Paycheck Protection Program Loan

Due to economic uncertainty as a result of the ongoing pandemic (COVID-19), on May 14, 2020, the Company received an aggregate principal amount of $964,910 pursuant to the borrowing arrangement (“Note”) with Harvest Small Business Finance, LLC (“HSBF”) and agreed to pay the principal amount plus interest at a 1% fixed interest rate per year, on the unpaid principal balance. The Note includes forgiveness provisions in accordance with the requirements of the Paycheck Protection Program, Section 1106 of the CARES Act.

The Note is expected to mature on May 16, 2025. Payments were due by November 16, 2020 (the “Deferment Period”) and interest was accrued during the Deferment Period. However, the Flexibility Act, which was signed into law on June 5, 2020, extended the Deferment Period to the date that the forgiven amount is remitted by the United States Small Business Administration (“SBA”) to HSBF. The Company is in the process of filling out the forgiveness application form. As of September 30, 2021, the Company owed approximately $1.0 million (principal plus accrued interest), which $0.1 million is classified as “short-term” and the remaining amount is recorded within “Other long-term liabilities.”

On October 25^th, 2021, the Company received a letter from HSBF notifying the Company that its SBA PPP loan has been forgiven in full by HSBF. The Company has $965K loan liability and $13K in accrued interest that will be eliminated from the general ledger in October.

Change Capital Holdings I, LLC Merchant and Purchase Agreement

On August 31, 2021 the company entered into a merchant receivables and purchase securities agreement with Change Capital Holdings I, LLC (“Change Capital”). The company received funding of $1 million for purchase of protein and other components. The agreement term is 1 year but can be paid back at any time.

On October 12^th, 2021 the company repaid the outstanding balance to Change Capital Holdings I, LLC.

Note 9. Commitments and Contingencies

Settlements

Manchester City Football Group

The Company was engaged in a dispute with City Football Group Limited (“CFG”), the owner of Manchester City Football Group, concerning amounts allegedly owed by the Company under a sponsorship agreement with CFG (the “Sponsorship Agreement”). In August 2016, CFG commenced arbitration in the United Kingdom against the Company, seeking approximately $8.3 million for the Company’s purported breach of the Sponsorship Agreement.

On July 28, 2017, the Company approved a Settlement Agreement (the “CFG Settlement Agreement”) with CFG effective July 7, 2017. The CFG Settlement Agreement represents a full and final settlement of all litigation between the parties. Under the terms of the agreement, the Company agreed to pay CFG a sum of $3 million, which was recorded as accrued expenses in 2017. The settlement consists of a $1 million payment that was advanced by a related party on July 7, 2017, a $1 million installment paid on July 7, 2018 and a subsequent $1 million installment payment to be paid by July 7, 2019. Of this amount, the Company has remitted $0.3 million.

During the three months ended September 30, 2021 and 2020, the Company recorded a charge of $19,000 and $19,000, respectively and during the nine months ended September 30, 2021 and 2020, the Company recorded a charge of $57,000 and $57,000, respectively. This charge, representing imputed interest, is included in “Interest and other expense, net” in the Company’s consolidated statements of operations.

Nutrablend Matter

On February 27, 2020, Nutrablend, a manufacturer of MusclePharm products, filed an action against the Company in the United States District Court for the Eastern District of California, claiming approximately $3.1 million in allegedly unpaid invoices. These invoices relate to the third and fourth quarter of 2019, and a liability has been recorded in the books for the related periods.

On September 25, 2020, the parties successfully mediated the case to a settlement (the “Nutrablend Agreement”) and the Company agreed to (i) pay approximately $3.1 million (“Owed Amount”) in monthly payments (“Monthly Payments”) from September 1, 2020 through June 30, 2023 and (ii) issue monthly purchase orders (“Purchase Orders”) at minimum amounts accepted by Nutrablend.

The Company agreed to issue Purchase Orders in a combined total amount of at least (i) $1,500,000 from September 1, 2020 through November 30, 2020; (ii) $1,800,000 from December 1, 2020 through February 28, 2021; (iii) $2,100,000 from March 31, 2021 through May 31, 2021; (iv) $2,100,000 from June 1, 2021 through August 31, 2021; and (v) $1,400,000 from September 1, 2021 through October 30, 2021. Beginning on November 1, 2021, the Company will be required to issue monthly Purchase Orders to Nutrablend in a minimum amount of $700,000 until the Owed Amount is paid in full to Nutrablend. In the event that the Company pays the Owed Amount in full before September 1, 2021, it’s entitled to a rebate on all completed Purchase Orders. Further, once the monthly payments, and any additional payments that the Company has made on the Owed Amount, reduce the outstanding balance of the Owed Amount to below $2.0 million, the Company is eligible for an extension of a line of credit from Nutrablend in an amount of up to $3.0 million.

On July 7, 2021, the Company commenced an action against Nutrablend in the Central District of California, seeking (i) a declaration that the Nutrablend Agreement purchase order provisions have been terminated due to Nutrablend’s failure to provide the Company with reasonable assurances of its ability to fulfill its purchase orders; (ii) a declaration that approximately $2.0 million in purchase orders that the Company placed in July and August 2020 were intended to and do count towards the minimums set forth in the Nutrablend Agreement; and (iii) damages based on Nutrablend’s failure to fulfill purchase orders. The case is ongoing.

As of September 30, 2021, the Company determined that approximately $1.1 million dollars of the Owed Amount was due within a year, and this amount was recorded in “Accrued and other liabilities” in the consolidated balance sheets. The present value of the remaining Owed Amount that was due after a year was $0.7 million, and the amount was recorded in “Other long-term liabilities” in the consolidated balance sheets. The Company made payments of $1.0 million as of September 30, 2021.

During the three and nine months ended September 30, 2021, the Company recorded interest of $0.1 million and $0.2 million, respectively. This charge, representing imputed interest, is included in “Interest and other expense, net” in the Company’s consolidated statements of operations.

On September 23, 2021, the Company entered into an Amendment to a Settlement Agreement that was originally entered into on September 25, 2020. Pursuant to the Amended Agreement, the Company is no longer obligated to issue Purchase Orders to Nutrablend as stated in the Settlement Agreement, which, as stated in the Form 8-K dated September 25, 2020, consisted of at least (i) $1,500,000 from September 1, 2020 through November 30, 2020; (ii) $1,800,000 from December 1, 2020 through February 28, 2021; (iii) $2,100,000 from March 1, 2021 through May 31, 2021; (iv) $2,100,000 from June 1, 2021 through August 31, 2021; and (v) $1,400,000 from September 1, 2021 through October 30, 2021. The Monthly Payments provision of the Settlement Agreement remains unchanged.

4Excelsior Matter

On March 18, 2019, Excelsior Nutrition, Inc. (“4Excelsior”), a manufacturer of MusclePharm products, filed an action against the Company in the Superior Court of the State of California for the County of Los Angeles, claiming approximately $6.2 million in damages relating to allegedly unpaid invoices, as well as approximately $7.8 million in consequential damages.

On December 16, 2020, the Company and 4Excelsior entered into a Settlement Agreement and Mutual Release (“the Agreement”), pursuant to which the parties resolved and settled the civil action pending in the Superior Court of the State of California for the County of Los Angeles (the “Litigation”). The parties agreed to a mutual general release of claims and to jointly file within 10 business days of the effective date of the Agreement a stipulation and proposed order of dismissal, dismissing with prejudice all claims and counterclaims asserted in the Litigation. The Company agreed to pay $4.75 million (the “Settlement Amount”) in four monthly payments of $70,000, beginning January 5, 2021, and thereafter in monthly payments of $0.1 million until the Settlement Amount is fully paid. The Company may prepay all or any portion of the Settlement Amount at any time without penalty or premium. The Agreement provides that, in the event of a Default (as defined in the Agreement) by the Company, the entire outstanding balance of the Settlement Amount will become immediately due and payable, plus accrued interest at a rate of 18% per annum, commencing from the date of default.

The Company determined that approximately $1.1 million dollars of the Settlement Amount was due within a year, and this amount was recorded in “Accrued and other liabilities” in the consolidated balance sheets. The present value of the remaining Settlement Amount that was due after a year was $2.0 million, and the amount was recorded in “Other long-term liabilities” in the consolidated balance sheets. The Company made payments of $0.8 million as of September 30, 2021.

During the three and nine months ended September 30, 2021, the Company recorded interest expense of $0.1 million and $0.3 million, respectively, in the consolidated statements of operations.

Contingencies

In the normal course of business or otherwise, the Company may become involved in legal proceedings. The Company will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred. The Company provides disclosures for material contingencies when there is a reasonable possibility that a loss or an additional loss may be incurred. In assessing whether a loss is a reasonable possibility, the Company may consider the following factors, among others: the nature of the litigation, claim or assessment, available information, opinions or views of legal counsel and other advisors, and the experience gained from similar cases. As of September 30, 2021, the Company was involved in the following material legal proceedings described below.

ThermoLife International

In January 2016, ThermoLife International LLC (“ThermoLife”), a supplier of nitrates to the Company, filed a complaint against the Company in Arizona state court. ThermoLife alleged that the Company failed to meet minimum purchase requirements contained in the parties’ supply agreement. The court held a bench trial on the issue of damages in October 2019, and on December 4, 2019, the court entered judgment in favor of ThermoLife and against the Company in the amount of $1.6 million, comprised of $0.9 million in damages, interest in the amount of $0.3 million and attorneys’ fees and costs in the amount of $0.4 million. The Company recorded $1.6 million in accrued expenses in 2018. As of September 30, 2021, the total amount accrued, including interest, was $1.9 million. The Company has filed an appeal and posted bonds in the total amount of $0.6 million in order to stay execution on the judgment pending appeal. Of the $0.6 million, $0.25 million (including fees) was paid by Mr. Drexler on behalf of the Company. See “Note 8. Debt” for additional information. The balance of $0.35 million was secured by a personal guaranty from Mr. Drexler, while the associated annual fee of $12,500 has been paid by the Company. On April 27, 2021, the appellate court issued a decision largely affirming the trial court judgement, except vacating the judgement’s $0.3 million prejudgment interest award and remanding for a recalculation of prejudgment interest. On May 18, 2021, ThermoLife filed a motion asking the trial court to increase the Company’s appeal bond to the full amount of the judgment, or $1.9 million, which the Court denied on June 2, 2021.

For both the three months ended September 30, 2021 and 2020, interest expense recognized by the Company on the awarded damages was $67,025 and for both the nine months ended September 30, 2021 and 2020, interest expense recognized by the Company on the awarded damages was $66,000.

The Company intends to vigorously continue pursuing its defenses. On June 25, 2021, the Company filed a petition for review in the Arizona Supreme Court requesting that the Court accept review of the appeal affirming the judgment against the Company. ThermoLife opposed the petition for review on July 26, 2021. The Arizona Supreme Court has not yet ruled on the Company’s petition for review.

White Winston Select Asset Fund Series MP-18, LLC et al., v. MusclePharm Corp., et al., (Nev. Dist. Ct.; Cal. Superior Court; Colorado Dist. Ct.; Mass. Super. Ct.)

On August 21, 2018, White Winston Select Asset Fund Series MP-18, LLC and White Winston Select Asset Fund, LLC (together “White Winston”) initiated a derivative action against the Company and its directors (the “director defendants”). White Winston alleges that the director defendants breached their fiduciary duties by improperly approving the refinancing of three promissory notes issued by the Company to Mr. Drexler (the “Amended Note”) in exchange for $18.0 million in loans. White Winston alleges that this refinancing improperly diluted their economic and voting power and constituted an improper distribution in violation of Nevada law. In its complaint, White Winston sought the appointment of a receiver over the Company, a permanent injunction against the exercise of Mr. Drexler’s conversion right under the Amended Note, and other unspecified monetary damages. On September 13, 2018, White Winston filed an amended complaint, which added a former executive of the Company, as a plaintiff (together with White Winston, the “White Winston Plaintiffs”). On December 9, 2019, the White Winston Plaintiffs filed a Second Amended Complaint, in which they added allegations relating to the resignation of the Company’s auditor, Plante & Moran PLLC (“Plante Moran”). the Company has moved to dismiss the Second Amended Complaint. That motion has not yet been fully briefed.

Along with its complaint, White Winston also filed a motion for a temporary restraining order (“TRO”) and preliminary injunction enjoining the exercise of Mr. Drexler’s conversion right under the Amended Note. On August 23, 2018, the Nevada district court issued an ex parte TRO. On September 14, 2018, the court let the TRO expire and denied White Winston’s request for a preliminary injunction, finding, among other things, that White Winston did not show a likelihood of success on the merits of the underlying action and failed to establish irreparable harm. Following the court’s decision, the Company filed a motion seeking to recoup the legal fees and costs it incurred in responding to the preliminary injunction motion. On October 31, 2019, the court awarded the Company $56,000 in fees and costs.

Due to the uncertainty associated with determining our liability, if any, and due to our inability to ascertain with any reasonable degree of likelihood, as of the date of this report, the outcome of the trial, the Company has not recorded an estimate for its potential liability.

On June 17, 2019, White Winston moved for the appointment of a temporary receiver over the Company, citing Plante Moran’s resignation. The court granted White Winston’s request to hold an evidentiary hearing on the motion, but subsequently stayed the action pending the parties’ attempts to resolve their dispute. Although the parties have been unable to reach a resolution, the litigation has not yet resumed. On July 30, 2019, White Winston filed an action in the Superior Court of the State of California in and for the County of Los Angeles, seeking access to the Company’s books and records and requesting the appointment of an independent auditor for the company. On February 25, 2021, the court ordered the Company to produce certain documents, denied White Winston’s request for an auditor, and ordered the Company to pay a $1,500 penalty. On July 20, 2021 the California court awarded White Winston $92,942 in attorneys’ fees and cost relating to the books-and-records action. The Company paid the amounts due on July 30, 2021, and on August 4, 2021 White Winston submitted a filing acknowledging that the California court’s judgment has been fully satisfied.

IRS Audit

On April 6, 2016, the Internal Revenue Service (“IRS”) selected our 2014 Federal Income Tax Return for audit. As a result of the audit, the IRS proposed certain adjustments with respect to the tax reporting of our former executives’ 2014 restricted stock grants. Due to the Company’s current and historical loss position, the proposed adjustments would have no material impact on the Company’s Federal income tax. On October 5, 2016, the IRS commenced an audit of our employment and withholding tax liability for 2014. The IRS contended that the Company inaccurately reported the value of the restricted stock grants and improperly failed to provide for employment taxes and Federal tax withholding on these grants. In addition, the IRS proposed certain penalties associated with the Company’s filings. On April 4, 2017, the Company received a “30-day letter” from the IRS asserting back taxes and penalties of approximately $5.3 million, of which $4.4 million related to withholding taxes, specifically, income withholding and Social Security taxes, and $0.9 million related to penalties. Additionally, the IRS asserted that the Company owes information reporting penalties of approximately $2.0 million.

The Company’s counsel submitted a formal protest to the IRS disputing on several grounds all of the proposed adjustments and penalties on the Company’s behalf, and the Company pursued this matter vigorously through the IRS appeal process. An Appeals Conference was held with the IRS in Denver, Colorado on July 31, 2019. At the conference, the Company made substantial arguments challenging the IRS’s claims for employment taxes and penalties. On December 16, 2019, a further Appeals Conference was held with the IRS by telephone. At the telephone conference, the Appeals Officer confirmed that he agreed with the Company’s argument that the failure to deposit penalties should be conceded by the IRS. The failure to deposit penalties total about $2 million. Thus, with this concession, the IRS’s claims have been reduced from approximately $7.3 million to about $5.3 million.

The remaining issue involved the fair market value of restricted stock units the Company granted to certain former officers (the “Former Officers”) of the Company under Internal Revenue Code § 83. The Company and the IRS disagreed as to the value of the restricted stock on the date of the grants, i.e., October 1, 2014. The Company and the IRS exchanged expert valuation reports on the fair market value of the stock and had extensive negotiations on this issue. The IRS also made parallel claims regarding the restricted stock units against the Former Officers of the Company. The IRS asserted that the Former Officers received ordinary income from the stock grants, and that they owe additional personal income taxes based on the fair market value of the stock. The Former Officers’ cases, unlike the Company’s case, are pending before the United States Tax Court. In the Tax Court litigation, the Former Officers are challenging the IRS’s determinations regarding the fair market value of the restricted stock grants on October 1, 2014. The Former Officers have separate counsel from the Company. The same IRS Appeals Officer and Revenue Agents assigned to the Company’s case are also involved in the cases for the Former Officers. Throughout the proceedings, the Company has argued to the IRS that it is the Former Officers who are directly and principally liable for the amount of any tax due, and not the Company.

The Former Officers cases were scheduled for trial in Tax Court on March 9, 2020. The trial of the cases was continued by the Court on February 4, 2020. The basis for the continuance was that the IRS and the Former Officers had made progress toward a settlement of the valuation issue involving the grants of the restricted stock. The Tax Court ordered the Former Officers to file status reports regarding progress of their settlement negotiations with the IRS on or before February 28, 2021. The IRS and the Former Officers filed status reports with the Tax Court on February 26, 2021. After receiving the status reports, the Tax Court issued an order directing the parties to file further status reports on or before July 9, 2021. The Tax Court has not set a trial dates in the cases of the Former Officers.

On June 29, 2021, an IRS Appeals Officer confirmed that the tax matter had exceeded the applicable statute of limitations and was deemed closed from any further assessment by the IRS.

On August 22, 2018, Richard Estalella filed an action against us and two other defendants in the Colorado District Court for the County of Denver, seeking damages arising out of the IRS’s assertion of tax liability and penalties relating to the 2014 restricted stock grants. We have answered Estalella’s complaint, asserted counterclaims against Estalella for his failure to ensure that all withholding taxes were paid in connection with the 2014 restricted stock grants, and filed cross-claims against two valuation firms named in the action (as well as their principals) for failing to properly value the 2014 restricted stock grants for tax purposes. Trial in the matter has been scheduled for February 7, 2022. There are no amounts accrued related to this matter.

The Company engaged in mediation with all parties to Estalella’s lawsuit on November 2, 2021. Following mediation, on November 3, 2021, the Company approved a global settlement with the parties to Mr. Estalella’s lawsuit. The parties are currently in the process of negotiating, finalizing, and executing the settlement agreement. This settlement agreement, upon finalization by the parties and dismissal of the litigation by the Court, will constitute a full and final settlement of Mr. Estalella’s claims against all parties to the litigation, including the Company, as well as of the Company’s claims against the two valuation firms.

Note 10. Stock-Based Compensation

Restricted Stock

For the three and nine months ended September 30, 2021, the Company recorded $0.0 million of stock-based compensation expense related to restricted stock.

For the three and nine months ended September 30, 2020, the Company recorded $0.0 and $0.2 million, respectively, of stock-based compensation expense related to restricted stock.

Transaction Equity Bonus

On April 5, 2021, with the appointment of the Company’s President and Chief Financial Officer, the Company granted an award where upon the occurrence of a sale of the Company, the President and Chief Financial Officer will receive 2% of the fully diluted equity of the Company. The grant will vest upon the one-year anniversary and if a sale transaction has not occurred by the two-year anniversary, then the President and Chief Financial Officer shall have the option to convert the transaction equity bonus into common shares. The fair value of this grant is approximately $1.0 million, which is being expensed on a straight-line basis over one-year.

For the three and nine months ended September 30, 2021, the Company recorded $0.2 and $0.5 million of stock-based compensation expense related to transaction awards.

For the three and nine months ended September 30, 2020, the Company recorded no expense  related to transaction awards.

Stock Options

On May 12, 2021, the Company entered into an Agreement (the “Agreement”) with Joseph Cannata   (“Cannata”), pursuant to which the Company has engaged Cannata on a non-exclusive basis to assist with the growth of the Company’s energy beverage product line.

In connection with entry into the Agreement, the Company issued to Cannata an option to purchase 1,673,994 shares of the Company’s common stock at a price per share of $1.12. The option has an exercise term of 10 years (subject to potential acceleration upon a sale of the Company) and will vest in two equal tranches upon the achievement of certain net revenue milestones related to the Company’s energy beverage products with the determination in the second quarter of 2021 that it is probable the performance criteria related to the grants will be achieved. The estimated fair value of this grant is $1.9 million and was determined by using the Black-Scholes valuation model with a term of 7.5 years; annual volatility rate of 205%; discount rate of 1.34%; and 0% for dividend rate. The fair value of performance-based restricted stock awards is recognized over the derived requisite vesting period beginning in the period in which they are deemed probable to vest.

On July 26, 2021, the Company entered into a Modification Agreement (the “Modification”) with Prestige Capital Finance, LLC (“Prestige”), providing a second over-advance from the purchase and sale agreement dated January 2016. The over-advance provided $1 million of funding to the Company, to be repaid within the earlier of six months from the date of the agreement, or when the Company arranges additional funding. In connection with the Modification, the Company will grant options to Prestige to purchase 18,750 shares of the Company’s common stock.

On August 12, 2021, the Company entered into an Agreement (the “Agreement”) with T.J. Dillashaw (“Dillashaw”), pursuant to which the Company has engaged Dillashaw on a non-exclusive basis to promote the Company’s energy beverage product line. In connection with entry into the Agreement, the Company will issue to Dillashaw an option to purchase 50,000 shares of the Company’s common stock.

On September 1, 2021, the Company will provide a stock option grant to an employee to be vested after two years of continuous employment. In connection with option grant, the Company will issue to the employee an option to purchase 25,000 shares of the Company’s common stock.

For the three and nine months ended September 30, 2021, the Company recorded approximately $0.2 million and $0.2 of stock-based compensation expense related to stock options.

For the three and nine months ended September 30, 2020, the Company recorded no expense related to stock options.

Note 11. Net Loss per Share

Basic net loss per share is computed by dividing net loss for the period by the weighted average number of shares of common stock outstanding during each period.

The following table sets forth the computation of the Company’s basic and diluted net loss per share for the periods presented (in thousands, except share and per share data):

 Schedule of Basic and Diluted Net Income (loss) Per Share

Diluted net loss per share is computed by dividing net loss for the period by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. The Company uses the treasury stock method to determine whether there is a dilutive effect of outstanding potentially dilutive securities, and the if-converted method to assess the dilutive effect of the convertible notes.

There was no dilutive effect for the outstanding awards for the three and nine months ended September 30, 2021 the Company reported net loss for three and nine periods presented. However, if the Company had net income for the nine months ended September 30, 2021, the potentially dilutive securities included in earnings per share computation would have been 17,922,541.

The following securities were excluded from the computations of diluted Net Income (loss) per share, as the effect of the securities would be anti-dilutive:

 Schedule of Outstanding Potentially Dilutive Securities

Note 12. Income Taxes

The Company recorded a tax provision of $32,000 and $20,000 for the three months ended September 30, 2021, and 2020, respectively, and $40,000 and $64,000 for the nine months ended September 30, 2021 and 2020, respectively.

Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due. Deferred taxes relate to differences between the basis of assets and liabilities for financial and income tax reporting which will be either taxable or deductible when the assets or liabilities are recovered or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of September 30, 2021.

Note 13. Segments, Geographical Information

The Company’s chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. As such, the Company currently has a single reporting segment and operating unit structure. In addition, substantially all long-lived assets are attributable to operations in the U.S. for both periods presented.

Revenue, net by geography is based on the company addresses of the customers. The following table sets forth revenue, net by geographic area (in thousands):

 Schedule of Revenue, Net by Geographic Area

The MusclePharm brands are marketed across major global retail distribution channels. Below is a table of revenue, net by our major distribution channel (in thousands):

 Schedule of Revenue, Net by Major Distribution Channel

Note 14. Subsequent Events

On October 13, 2021, the Company entered into a Securities Purchase Agreement with certain institutional investors as purchasers. Pursuant to the Securities Purchase Agreement, the Company sold, and the Investors purchased, $7,050,000 million in principal amount of senior notes and warrants. The Company received net proceeds of $6,202,763.

The Senior Notes were issued with an original issue discount of 14%, bear no interest and mature after 6 months, on April 13, 2022. To secure its obligations thereunder and under the Securities Purchase Agreement, the Company has granted a security interest over substantially all of its assets to the collateral agent for the benefit of the Investors, pursuant to a pledge and security agreement.

The maturity date of the Senior Notes may be extended to May 28, 2022 if no event of default has occurred and is continuing and cash flows from operating and investing activities (but not cash flows from financing activities) of the Company and its subsidiaries was positive for March 2022 and no event of default is reasonably expected to occur on or before April 30, 2022 and the sum of cash flows from operating and investing activities (but not from financing activities) of the Company and its subsidiaries will be positive for April 2022. The maturity date of the Senior Notes also may be extended under other circumstances specified therein. If the maturity date is extended, interest will accrue on and from April 13, 2022 at 18% per annum until the Senior Notes are paid in full.

The Warrants are exercisable for five (5) years to purchase 17,355,700 shares of the Company’s common stock, par value $0.001 per share, at an exercise price of $0.78, subject to adjustment under certain circumstances described in the Warrants.

In addition, each of the directors and officers of the Company entered into lock-up agreements, which prohibit sales of the Common Stock until after April 11, 2022, subject to certain exceptions.

On October 28, 2021, the Company entered into an Agreement with Jason May, pursuant to which the Company has engaged May on a non-exclusive basis to assist with the growth of the Company’s energy beverage product line.

In connection with entry into the Agreement, the Company issued to May an option to purchase 1,673,994 shares of the Company’s common stock at a price per share of $0.70. The option has an exercise term of 10 years (subject to potential acceleration upon a sale of the Company) and will vest in two equal tranches upon the achievement of certain net revenue milestones related to the Company’s energy beverage products.

In addition, the Company agreed to make quarterly payments to May during the term of the Agreement in amounts equal to 17.5% of the gross profit attributable to the applicable products, excluding products sold through certain excluded sales channels.

The Agreement continues in effect unless terminated by the mutual agreement of the parties, upon the sale of the Company and upon other specified termination events.

On October 25^th, 2021, the Company received a letter from HSBF notifying the Company that its SBA PPP loan has been forgiven in full by HSBF. The Company has $965K loan liability and $13K in accrued interest that will be eliminated from the general ledger in October.

On October 12^th, 2021 the company repaid the outstanding balance for Change Capital I, LLC.

On October 12^th, 2021 the June 14^th and July 26^th Prestige $2 million advance was extended to the maturity date of the $7.0 million senior secured note offering.

On November 3, 2021, the Company approved a global settlement agreement with the parties to Mr. Estalella’s lawsuit. This settlement agreement, upon finalization by the parties and dismissal of the litigation by the Court, will constitute a full and final settlement of Mr. Estalella’s claims against all parties to the litigation, including the Company, as well as of the Company’s claims against the two valuation firms.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (the “Form 10-Q”), and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”), as filed with the Securities and Exchange Commission on March 29, 2021. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could 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 entitled “Risk Factors” included elsewhere in this Form 10-Q. Except as otherwise indicated herein, the terms “MusclePharm,” “Company,” “we,” “our” and “us” refer to MusclePharm Corporation and its subsidiaries.

Overview

MusclePharm is a scientifically-driven, performance lifestyle company that develops, manufactures, markets and distributes branded sports nutrition products and nutritional supplements. We offer a broad range of performance powders, capsules, tablets, gels and on-the-go ready to eat snacks that satisfy the needs of enthusiasts and professionals alike. Our portfolio of recognized brands, MusclePharm and FitMiss, is marketed and sold in more than 100 countries globally.

Our offerings are clinically developed through a six-stage research process, and all of our manufactured products are rigorously vetted for banned substances by the leading quality assurance program, Informed-Choice. While we initially drove growth in the Specialty retail channel, in recent years we have expanded our focus to drive sales and retailer growth across leading e-commerce, Food Drug & Mass (“FDM”), and Club retail channels. Our primary distribution channels are Specialty, International and FDM.

COVID-19

Our results of operations have been affected by economic conditions, including macroeconomic conditions and levels of business confidence. There continues to be significant volatility and economic uncertainty in many markets and the ongoing COVID-19 pandemic has increased that level of volatility and uncertainty and has created economic disruption. As COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of the infection. Additionally, more restrictive proclamations and/or directives may be issued in the future.

The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may have a material impact on our business, financial condition and results of operations. 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.

Results of Operations

Comparison of the Three Months Ended September 30, 2021 to the Three Months Ended September 30, 2020 ($ in thousands):

Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020 ($ in thousands):

The following table presents our operating results as a percentage of revenue, net for the periods presented:

Revenue, net

We derive our revenue through the sales of our various branded nutritional supplements. Revenue is recognized when control of a promised good is transferred to a customer in an amount that reflects the consideration that the Company expects to be entitled to in exchange for that good. This usually occurs when finished goods are delivered to the Company’s customers or when finished goods are picked up by a customer or a customer’s carrier.

The MusclePharm brands are marketed across major global retail distribution channels. Below is a table of revenue, net by distribution channel (in thousands):

Revenue, net reflects the transaction prices for contracts, which includes products shipped at selling list prices reduced by variable consideration. We record sales incentives as a direct reduction of revenue for various discounts provided to our customers consisting primarily of volume incentive rebates and promotional related credits. We accrue for sales discounts over the period they are earned. Sales discounts are a significant part of our marketing plan to our customers as they help drive increased sales and brand awareness with end users through promotions that we support through our distributors and re-sellers.

Revenue, net decreased $4.1 million, or 26%, to $11.9 million for the three months ended September 30, 2021, compared to $16.1 million for the three months ended September 30, 2020. Revenue, net for the three months ended September 30, 2021 decreased primarily due to industry wide supply shortages on components and protein, which delayed production of our products. The company did not take any material price increase in the three months ended September 30^th, 2021 which would impact revenue.

Discounts  and sales allowances decreased to 13.9% of gross revenue, or $1.9 million, for the three months ended September 30, 2021, from 20% of gross revenue, or $4.1 million for the same period in 2020. The reduction in discounts as a percent of gross revenue was due to changes in customer mix and discretionary promotional activity.

During the three months ended September 30, 2021 and 2020, our largest customer accounted for approximately 50% and 46% of our revenue, net, respectively.

Revenue, net decreased $9.3 million, or 19%, to $40.0 million for the nine months ended September 30, 2021, compared to $49.3 million for the nine months ended September 30, 2020. Revenue, net for the nine months ended September 30, 2021 decreased primarily due to industry wide supply shortages on components and protein, which delayed production of our products. The company did not take any material price increase in the nine months ended September 30th, 2021, which would impact revenue

Discounts and sales allowances decreased to 14% of gross revenue, or $6.3 million, for the nine months ended September 30, 2021, from 19% of gross revenue, or $11.7 million for the same period in 2020. The reduction in discounts as a percent of gross revenue was due to changes in customer mix and discretionary promotional activity.

During the nine months ended September 30, 2021 and 2020, our largest customer accounted for approximately 44% and 37% of our revenue, net, respectively.

Cost of Revenue and Gross Profit

Cost of revenue for MusclePharm products is directly related to the production, manufacturing, and freight-in of the related products purchased from third party contract manufacturers. We primarily use contract manufacturers to drop ship products directly to our customers.

Our gross profit fluctuates primarily due to several factors, including sales incentives, new product introductions and upgrades to existing product lines, changes in customer and product mixes, the mix of product demand, shipment volumes, our product costs, and pricing.

The Company experienced cost increases for its raw materials for the nine months ended September 30, 2021, primarily due to industry shortages in supply and consistent market demand. Compared to quarter three of 2020, commodity protein costs have increased 145% in quarter three of 2021, negatively affecting Company gross margin. The Company is taking steps to manage the increase and shortages by entering into agreements with additional protein brokers to diversify its protein sources, along with working with new vendors to source other components such as scoops and bags. In addition, the Company is increasing prices to customers on select products in the fourth quarter.

For the remainder of 2021, given the current market, the Company expects continued pressure on protein prices but is unable to forecast future protein prices. Any additional increases in protein prices, to the extent not offset by the steps described above, will negatively impact the Company’s gross margins, liquidity and ability to use capital resources for other business purposes.

Costs of revenue increased 8%, despite the decrease in sales volume of $4.1 million for the three months ended September 30, 2021, compared to the same period in 2020. This increase was due to increased commodity costs, specifically protein, the prices of which have risen 145% year over year, along with increased freight costs. Gross profit for the three months ended September 30, 2021 decreased 99% to $.03 million, compared to $5.0 million for the same period in 2020. Gross profit was 0.2% of revenue, net for the three months ended September 30, 2021 compared to 31% of revenue, net for the same period in 2020. Negatively impacting the gross profit percentage were higher commodity prices, specifically for protein and   freight costs.

Costs of revenue decreased 1% to $34.1 million for the nine months ended September 30, 2021, compared to $34.5 million for the same period in 2020. This decrease was due to lower sales volume along with increased commodity costs, specifically protein, prices of which have 140% year over year, along with increased freight costs. Gross profit for the nine months ended September 30, 2021 decreased 60% to $5.9 million, compared to $14.8 million for the same period in 2020. Gross profit was 15% of revenue, net for the nine months ended September 30, 2021 compared to 30% of revenue, net for the same period in 2020. Negatively impacting the gross profit percentage were higher commodity prices, specifically for protein and freight costs. During the second quarter of 2021, the Company met with one of its largest customers to review and finalize their discretionary promotional activity, generating significant reductions to estimates for the remainder of 2021. These reductions will decrease the annual spend on discretionary promotional activity for this customer by 41% compared to 2020 spend, which so far has improved the gross profit by 2% by September 30, 2021. 

Operating Expenses

Selling and Promotion

Our selling and promotion expense consists primarily of expenses related to freight-out, club demonstrations, print and online advertising, trade shows and strategic partnerships with athletes and sports teams. Historically, advertising and promotions were a large part of both our growth strategy and brand awareness, in particular strategic partnerships with sports athletes and fitness enthusiasts through endorsements, licensing, and co-branding agreements. Additionally, we co-developed products with sports athletes and teams. In connection with our restructuring plan, we terminated the majority of these contracts in a strategic shift away from such costly arrangements and moved toward more cost-effective programs, including digital advertising, ambassador programs and sampling/promotional materials.

Selling and promotion expense increased 62% to $1.0 million for the three months ended September 30, 2021, or 8% of revenue, net compared to $0.6 million, or 4% of revenue, net for the same period in 2020. The increase for 2021 expenses is primarily related to an increase in freight out expenses of 28% compared to the same period in 2020.

Selling and promotion expense increased 52% to $3.2 million for the nine months ended September 30, 2021, or 8% of revenue, net compared to $2.1 million, or 4% of revenue, net for the same period in 2020. The increase for 2021 is related to an increase in club demonstrations and sampling due to the launch of a new flavor for our performance powders with one of our largest customers during the first quarter of 2021 and an increase in freight out expenses of 34% compared to the same period in 2020.

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, director’s fees, legal fees, accounting and audit fees, consulting fees, which includes both cash and stock-based compensation, and investor relations costs, insurance, rental expenses related to equipment leases, supplies, legal settlement costs, and other corporate expenses.

General and administrative expenses decreased 32% to $2.5 million, for three months ended September 30, 2021, or 20% of revenue, net compared to $3.6 million, or 22% of revenue, net for the same period in 2020 primarily due to a decrease in salaries and benefits, reduction in headcount as we have focused on reducing operating costs and reduction in board member compensation and office expenses associated with closure of headquarters and warehouses.

General and administrative expenses decreased 31% to $7.6 million, for the 9 months ended September 30, 2021 or 19% of revenue, net compared to $11.0 million, or 22% of revenue, net for the same period in 2020 primarily due to a reduction a reduction in headcount as we have focused on reducing operating costs and in board member compensation and office expenses associated with closure of headquarters and warehouses.

During the second quarter of 2021, a customer filed bankruptcy without giving prior indication or notice. The event accounted for approximately $133,000 of bad debt expense, elevating bad debt expense to 87% for the first nine months of 2021 over the first 9 months of 2020.

Interest and other income (expense), net

For the three and nine months ended September 30, 2021 and 2020, “Interest and other expense, net” consisted of the following (in thousands):