| Commitments and Contingencies | Note 8: Commitments and Contingencies
Operating Leases and Capital Leases
The Company leases office and warehouse facilities under operating
leases which expire at various dates through 2029. For lease
agreements that contain escalating rent provisions, lease expense
is recorded on a straight-line basis over the lease term. Rent
expense was $384,000 and $336,000 for the three months ended
June 30, 2015 and 2014, respectively, and $767,000 and
$633,000 for the six months ended June 30, 2015 and 2014,
respectively.
In December 2014, the Company entered into a capital lease
agreement providing for approximately $1.8 million in credit to
lease up to 50 vehicles as part of a fleet lease program. As of
June 30, 2015, the Company acquired 16 vehicles under the
capital lease, which are included in the caption property and
equipment, net in the accompanying consolidated balance sheets.
The Company also leases manufacturing and warehouse equipment under
capital leases, which expire at various dates through May 2019. As
of June 30, 2015 and December 31, 2014, the Company had
an outstanding balance on capital leases of $560,000 and $265,000,
respectively, which were included as a component of accrued
liabilities and other long-term liabilities in the consolidated
balance sheets. As of June 30, 2015, the Company’s
future minimum lease payments are as follows (in thousands):
Year Ending December 31,
The remainder of 2015 $ 112
2016 216
2017 136
2018 102
2019 42
Total minimum lease payments 608
Less amounts representing interest (48 )
Present value of minimum lease payments $ 560
Contingencies
In the normal course of business, 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 losses can be established, the most probable amount in the
range is accrued. If no amount within this range is a better
estimate than any other amount within the range, the minimum amount
in the range is accrued. The accrual for a litigation loss
contingency might include, for example, estimates of potential
damages, outside legal fees and other directly related costs
expected to be incurred. As of June 30, 2015 and
December 31, 2014, the Company was not involved in any
material legal proceedings, except for the SEC investigation
discussed below and routine litigation experienced in the ordinary
course of its business.
SEC Investigation
In July 2013, the Company received a formal order of investigation
(the “Investigation”) from the Denver Regional Office
of the SEC which is actively investigating various areas of
potential violation of the federal securities laws involving the
Company and its management. The SEC has issued subpoenas for
documents and testimony and has deposed numerous witnesses in
connection with the Investigation. As a result of a review
undertaken by the Company’s personnel in conjunction with the
Audit Committee of the Board of Directors during 2014, the Company
amended certain prior reports to revise various disclosures
concerning executive compensation and disclosure of perquisites,
among other things, and filed amendments to the annual reports on
Form 10-K for the fiscal years ended December 31, 2013, 2012
and 2011. The Investigation remains ongoing. The Investigation
could lead to the SEC seeking fines, penalties, injunctive relief
and the adoption of corrective plans to establish reporting and
other practices affecting the Company. The Company has reached an
agreement in principle with the staff of the Enforcement Division
of the SEC Denver Regional Office to resolve the investigation by
the SEC, however, such agreement must be approved by the SEC
Commissioners. Neither the nature of the relief, the amount of any
monetary relief, nor the nature of the corrective actions, whether
voluntary or imposed as a result of court proceedings that could be
sought by the SEC, can be predicted. The result of any of the
foregoing could have a material adverse effect on the Company or
its management.
Insurance Carrier Lawsuit
In an effort to recover SEC legal defense costs, the Company
engaged with outside counsel to review, evaluate and advise on the
current Director and Officer policy and corresponding coverages. On
February 12, 2015, the Company filed a complaint and jury
demand in the District Court, City and County of Denver, Colorado
against Liberty Insurance Underwriters, Inc. This action arises
from the wrongful and unreasonable denial of coverage by Liberty
for the cost and expenses that the Company has incurred and will
continue to incur in connection with the SEC investigation under
the Company’s Directors and Officers Insurance policies.
Product Liability
Additionally, as a manufacturer of nutritional supplements and
other consumer products that are ingested by consumers, the Company
may be subject to various product liability claims. The Company
currently maintains product liability insurance with a
deductible/retention of $10,000 per claim with an aggregate cap on
retained loss of $20.0 million. As of June 30, 2015 and
December 31, 2014, the Company had not recorded an accrual for
product liability claims. There can be no assurance that insurance
coverage will be available for product liability claims or other
claims experienced in the ordinary course of the Company’s
business.
Sponsorship and Endorsement Contract Liabilities
The Company has various non-cancelable endorsement and sponsorship
agreements with terms expiring through 2022. The total future
contractual payments as of June 30, 2015 are as follows (in
thousands):
Year Ending
December 31,
Remainder 2016 2017 2018 2019 2020 Thereafter Total
Future Contractual Payments:
Endorsement $ 4,762 $ 8,482 $ 9,117 $ 6,000 $ 4,167 $ 5,000 $ 6,667 $ 44,195
Sponsorship 3,054 4,563 3,205 2,830 985
—
— 14,637
Total future payments $ 7,816 $ 13,045 $ 12,322 $ 8,830 $ 5,152 $ 5,000 $ 6,667 $ 58,832
The following agreements signed during the second quarter 2015 are
included in the table above:
In April 2015, the Company entered a partnership with the Cleveland
Cavaliers of the National Basketball Association. Under the
agreement, MusclePharm Combat Crunch will be the premier partner of
the Cleveland Cavaliers and the exclusive presenting partner of the
“Fourth Quarter Combat Crunch Time” in-game feature
during select home games at Quicken Loans Arena. The partnership
also includes in-arena signage and branding, digital promotions and
sweepstakes, and product sampling at designated Cavaliers games.
The MusclePharm Combat Crunch partnership and its associated
branded elements extend to other Cleveland Cavaliers and Quicken
Loans Arena properties, including the Cleveland Gladiators (Arena
Football League), the Lake Erie Monsters (American Hockey League)
and the Canton Charge (Cavalier’s NBA D-League affiliate). In
addition to digital promotions and in-game activation for each of
the franchises, the Gladiators will have an official “Combat
Crunch of the Game” presented on the Humongotron, a massive
four-sided center-hung scoreboard, during each home game. The total
future contractual payments under the agreement at June 30,
2015 are approximately $2.4 million with additional payments for
potential playoff games.
In May 2015, the Company entered into a multi-year partnership with
City Football Group and its four clubs: Manchester City Football
Club (including the Continental Cup-winning Manchester City
Women’s Football Club), Melbourne City Football Club, New
York City Football Club, and Yokohama F. Marinos Football Club. The
total contractual payments under the agreement at June 30,
2015 are approximately $8.4 million.
In June 2015, the Company entered into sponsorship and endorsement
agreements with bodybuilding pioneer Bill Phillips as Strategic
Advisor and Chief Editor of Content. The minimum future contractual
payments under the agreements as of June 30, 2015 are
approximately $1.0 million, of which $250,000 has been paid and
$750,000 is due by December 31, 2015 and serves as advanced
royalties. |
