| Commitments and Contingencies | Note 7. 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 March 31, 2021 and 2020,
the Company recorded a charge of $18,000 and $19,000, 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 MusclePharm in the United States District Court for the Eastern District of California,
claiming approximately $3.1 million in allegedly unpaid invoices. These invoices relate to the third and fourth quarter of 2019, and a
liability has been recorded in the books for the related periods. On September 25, 2020, the parties successfully mediated
the case to a settlement and the Company agreed to (i) pay approximately $3.1 million (“Owed Amount”) in monthly payments
(“Monthly Payments”) from September 1, 2020 through June 30, 2023 and (ii) issue monthly purchase orders (“Purchase
Orders”) at minimum amounts accepted by Nutrablend. MusclePharm agreed to issue Purchase Orders in a combined
total amount of at least (i) $1,500,000 from September 1, 2020 through November 30, 2020; (ii) $1,800,000 from December 1, 2020 through
February 28, 2021; (iii) $2,100,000 from March 31, 2021 through May 31, 2021; (iv) $2,100,000 from June 1, 2021 through August 31, 2021;
and (v) $1,400,000 from September 1, 2021 through October 30, 2021. Beginning on November 1, 2021, MusclePharm will be required to issue
monthly Purchase Orders to Nutrablend in a minimum amount of $700,000 until the Owed Amount is paid in full to Nutrablend. In the event
that MusclePharm pays the Owed Amount in full before September 1, 2021, MusclePharm is entitled to a rebate on all completed Purchase
Orders. Further, once the monthly payments, and any additional payments that MusclePharm has made on the Owed Amount, reduce the outstanding
balance of the Owed Amount to below $2.0 million, MusclePharm is eligible for an extension of a line of credit from Nutrablend in an amount
of up to $3.0 million. The Company determined that approximately $1.0 million
dollars of the Owed Amount was due within a year, and this amount was recorded in “Accrued and other liabilities” in the consolidated
balance sheets. The present value of the remaining Owed Amount that was due after a year was $1.2 million, and the amount was recorded
in “Other long-term liabilities” in the consolidated balance sheets. The Company made payments of $0.5 million as of March
31, 2021. During the period ended March 31, 2021, the Company
recorded interest expense of $64,000, in the consolidated statements of operations. 4Excelsior Matter On March 18, 2019, Excelsior Nutrition, Inc. (“4Excelsior”),
a manufacturer of MusclePharm products, filed an action against MusclePharm in the Superior Court of the State of California for the County
of Los Angeles, claiming approximately $6.2 million in damages relating to allegedly unpaid invoices, as well as approximately $7.8 million
in consequential damages. On January 27, 2020, MusclePharm filed a counterclaim against 4Excelsior seeking unidentified damages relating
to, among other things, 4Excelsior’s failure to fulfill a purchase order. MusclePharm also moved to strike 4Excelsior’s consequential
damages on the grounds that they are unrecoverable under the Uniform Commercial Code. The court denied that motion, and the action proceeded
to discovery. On November 16, 2020, the Company and 4Excelsior entered
into a stipulation of settlement that provided that the Company would pay to 4Excelsior a total of $4.75 million in four monthly payments
of $70,000, beginning January 5, 2021, and thereafter in monthly payments of $0.1 million. On December 16, 2020, MusclePharm and 4Excelsior entered
into a Settlement Agreement and Mutual Release (“the Agreement”), pursuant to which the parties resolved and settled the civil
action pending in the Superior Court of the State of California for the County of Los Angeles (the “Litigation”). The parties
agreed to a mutual general release of claims and to jointly file within 10 business days of the effective date of the Agreement a stipulation
and proposed order of dismissal, dismissing with prejudice all claims and counterclaims asserted in the Litigation. MusclePharm agreed
to pay $4.75 million (the “Settlement Amount”) in four monthly payments of $70,000, beginning January 5, 2021, and thereafter
in monthly payments of $0.1 million until the Settlement Amount is fully paid. MusclePharm may prepay all or any portion of the Settlement
Amount at any time without penalty or premium. The Agreement provides that, in the event of a Default (as defined in the Agreement) by
MusclePharm, the entire outstanding balance of the Settlement Amount will become immediately due and payable, plus accrued interest at
a rate of 18% per annum, commencing from the date of default. The Company determined that approximately $1.1 million
dollars of the Settlement Amount was due within a year, and this amount was recorded in “Accrued and other liabilities” in
the consolidated balance sheets. The present value of the remaining Settlement Amount that was due after a year was $2.4 million, and
the amount was recorded in “Other long-term liabilities” in the consolidated balance sheets. The Company made payments of
$0.2 million as of March 31, 2021. During the period ended March 31, 2021, the Company
recorded interest expense of $0.1 million, 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 March 31, 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 MusclePharm, filed a complaint against us in Arizona state court. ThermoLife alleged that we failed to meet
minimum purchase requirements contained in the parties’ supply agreement. In March 2016, we filed counterclaims alleging that ThermoLife’s
products were defective. Through orders issued in September and November 2019, the court dismissed MusclePharm’s counterclaims and
found that the Company was liable to ThermoLife for failing to meet its minimum purchase requirements. The court held a bench trial on the issue of damages
in October 2019, and on December 4, 2019, the court entered judgment in favor of ThermoLife and against the Company in the amount of $1.6
million, comprised of $0.9 million in damages, interest in the amount of $0.3 million and attorneys’ fees and costs in the amount
of $0.4 million. The Company recorded $1.6 million in accrued expenses in 2018. As of December 31, 2020, the total amount accrued, including
interest, was $1.8 million. In the interim, the Company filed an appeal and posted bonds in the total amount of $0.6 million in order
to stay execution on the judgment pending appeal. Of the $0.6 million, $0.25 million (including fees) was paid by Mr. Drexler on behalf
of the Company. See “Note 8. Debt” for additional information. The balance of $0.35 million was secured by a personal guaranty
from Mr. Drexler, while the associated fees of $12,500 were paid by the Company. 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 MusclePharm’s
appeal bond to the full amount of the judgment, or $1.8 million, which MusclePharm intends to vigorously oppose. For both the three months ended March 31, 2021 and
2020, interest expense recognized by the Company on the awarded damages was $22,000. The Company intends to vigorously continue pursuing
its defenses, including an appeal to the Arizona Supreme Court, which it has until June 25, 2021 to file a 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
MusclePharm 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 MusclePharm 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 MusclePharm, 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 MusclePharm
executive, as a plaintiff (together with White Winston, the “White Winston Plaintiffs”). On December 9, 2019, the White Winston
Plaintiffs filed a Second Amended Complaint, in which they added allegations relating to the resignation of MusclePharm’s auditor,
Plante & Moran PLLC (“Plante Moran”). MusclePharm has moved to dismiss the Second Amended Complaint. That motion has not
yet been fully briefed. Along with its complaint, White Winston also filed
a motion for a temporary restraining order (“TRO”) and preliminary injunction enjoining the exercise of 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, MusclePharm filed a motion seeking to recoup the legal fees and costs it incurred in responding to the preliminary
injunction motion. On October 31, 2019, the court awarded MusclePharm $56,000 in fees and costs. Due to the uncertainty associated with determining
our liability, if any, and due to our inability to ascertain with any reasonable degree of likelihood, as of the date of this report,
the outcome of the trial, the Company has not recorded an estimate for its potential liability. On June 17, 2019, White Winston moved for the appointment
of a temporary receiver over MusclePharm, citing Plante Moran’s resignation. The court granted White Winston’s request to
hold an evidentiary hearing on the motion, but subsequently stayed the action pending the parties’ attempts to resolve their dispute.
Although the parties have been unable to reach a resolution, the litigation has not yet resumed. On July 30, 2019, White Winston filed
an action in the Superior Court of the State of California in and for the County of Los Angeles, seeking access to MusclePharm’s
books and records and requesting the appointment of an independent auditor for the company. On February 25, 2021, the court ordered MusclePharm
to produce certain documents, denied White Winston’s request for an auditor, and ordered MusclePharm to pay a $1,500 penalty. White
Winston also seeks its attorneys’ fees and cost relating to the books-and-records action. MusclePharm intends to challenge White Winston’s
request for fees and costs. IRS Audit On April 6, 2016, the Internal Revenue Service (“IRS”)
selected our 2014 Federal Income Tax Return for audit. As a result of the audit, the IRS proposed certain adjustments with respect to
the tax reporting of our former executives’ 2014 restricted stock grants. Due to the Company’s current and historical loss
position, the proposed adjustments would have no material impact on the Company’s Federal income tax. On October 5, 2016, the IRS
commenced an audit of our employment and withholding tax liability for 2014. The IRS contends that the Company inaccurately reported the
value of the restricted stock grants and improperly failed to provide for employment taxes and Federal tax withholding on these grants.
In addition, the IRS is proposing certain penalties associated with the Company’s filings. On April 4, 2017, the Company received
a “30-day letter” from the IRS asserting back taxes and penalties of approximately $5.3 million, of which $4.4 million related
to withholding taxes, specifically, income withholding and Social Security taxes, and $0.9 million related to penalties. Additionally,
the IRS asserts that the Company owes information reporting penalties of approximately $2.0 million. The Company’s counsel has submitted a formal
protest to the IRS disputing on several grounds all of the proposed adjustments and penalties on the Company’s behalf, and the Company
has been pursuing this matter vigorously through the IRS appeal process. An Appeals Conference was held with the IRS in Denver, Colorado
on July 31, 2019. At the conference, the Company made substantial arguments challenging the IRS’s claims for employment taxes and
penalties. On December 16, 2019, a further Appeals Conference was held with the IRS by telephone. At the telephone conference, the Appeals
Officer confirmed that he agreed with the Company’s argument that the failure to deposit penalties should be conceded by the IRS.
The failure to deposit penalties total about $2 million. Thus, with this concession, the IRS’s claims have been reduced from approximately
$7.3 million to about $5.3 million. The remaining issue in dispute in this matter involves
the fair market value of restricted stock units in the Company granted to certain former officers (the “Former Officers”)
of the Company under Internal Revenue Code § 83. The Company and the IRS disagree as to the value of the restricted stock on the
date of the grants, i.e., October 1, 2014. The Company and the IRS have exchanged expert valuation reports on the fair market value of
the stock and have had extensive negotiations on this issue. The parties, however, have not been able to reach an agreement with respect
to the value of the stock. The IRS has also made parallel claims regarding the restricted stock units against the Former Officers of the
Company. The IRS has asserted that the Former Officers received ordinary income from the stock grants, and that they owe additional personal
income taxes based on the fair market value of the stock. The Former Officers’ cases, unlike the Company’s case, are pending
before the United States Tax Court. In the Tax Court litigation, the Former Officers are challenging the IRS’s determinations regarding
the fair market value of the restricted stock grants on October 1, 2014. The Former Officers have separate counsel from the Company. The
same IRS Appeals Officer and Revenue Agents assigned to the Company’s case are also involved in the cases for the Former Officers.
Throughout the proceedings, the Company has argued to the IRS that it is the Former Officers who are directly and principally liable for
the amount of any tax due, and not the Company. The Former Officers cases were scheduled for trial
in Tax Court on March 9, 2020. The trial of the cases was continued by the Court on February 4, 2020. The basis for the continuance was
that the IRS and the Former Officers had made progress toward a settlement of the valuation issue involving the grants of the restricted
stock. The outcome of these settlement negotiations will be relevant to the Company’s case. The Company is closely monitoring the
settlement discussions between the IRS and the Former Officers. The Tax Court ordered the Former Officers to file status reports regarding
progress of their settlement negotiations with the IRS on or before February 28, 2021. The IRS and the Former Officers filed status reports
with the Tax Court on February 26, 2021. After receiving the status reports, the Tax Court issued an order directing the parties to file
further status reports on or before July 9, 2021. The Tax Court has not set a trial dates in the cases of the Former Officers. Due to the uncertainty associated with determining
our liability for the asserted taxes and penalties, if any, and to our inability to ascertain with any reasonable degree of likelihood,
as of the date of this report, the outcome of the IRS appeals process, the Company has not recorded an estimate for its potential liability,
if any, associated with these taxes. During the time period of the IRS audit and Appeals
Office consideration of the Company’s case, the Company and the IRS signed a series of consents to extend the statutes of limitations
for assessment for both the employment tax and corporation income tax of the Corporation for 2014. The Company’s records show that
the last consents that the Company signed extended the statutes of limitations for employment tax and corporation income tax for 2014
through and including December 15, 2020. The Company has no record of any consents being signed by the Company and the IRS extending the
statutes of limitations beyond December 15, 2020. Based on these facts, the Company believes that the statutes of limitations for assessment
of additional employment tax and corporation income tax against the Corporation for 2014 expired on December 15, 2020. The Company does
not know whether the IRS agrees with the Corporation’s statements regarding the current status of the statutes of limitations described
herein. On August 22, 2018, Richard Estalella filed an action
against us and two other defendants in the Colorado District Court for the County of Denver, seeking damages arising out of the IRS’s
assertion of tax liability and penalties relating to the 2014 restricted stock grants. We have answered Estalella’s complaint, asserted
counterclaims against Estalella for his failure to ensure that all withholding taxes were paid in connection with the 2014 restricted
stock grants, and filed cross-claims against two valuation firms named in the action (as well as their principals) for failing to properly
value the 2014 restricted stock grants for tax purposes. Trial in the matter has been scheduled for February 7, 2022. There are no amounts
accrued related to this matter. The Company will continue to vigorously litigate
the matter. |
