| Summary of Significant Accounting Policies | Note
2. Summary of Significant Accounting Policies Basis
of Presentation and Principles of Consolidation The
accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the
United States (“U.S. GAAP”) for financial information and with the instructions to Form 10-K and Regulation S-X. 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. Use
of Estimates The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Such estimates include, but
are not limited to, allowance for doubtful accounts, revenue discounts and allowances, the valuation of inventory, the calculation of
the Company’s effective tax rate and deferred tax assets, valuation of stock based compensation, warrants, the assessment of useful
lives, recoverability and valuation of long-lived assets, likelihood and range of possible losses on contingencies and present value
of lease liabilities. Actual results could differ from those estimates. Cash The
Company considers all highly liquid investments purchased with an original maturity of three months or less at the date of purchase and
money market accounts to be cash equivalents. As of December 31, 2021 and 2020, the Company had no Accounts
Receivable and Allowance for Doubtful Accounts Accounts
receivable represents trade obligations from customers that are subject to normal trade collection terms and are recorded at the invoiced
amount, net of any sales discounts and allowance for doubtful accounts, and do not typically bear interest. The Company assesses the
collectability of the accounts by taking into consideration the aging of accounts receivable, changes in customer credit worthiness,
general market and economic conditions, and historical experience. Bad debt expenses are recorded as part of “General and administrative”
expenses in the consolidated statements of operations. The Company reserves the receivable balance against the allowance when management
determines a balance is uncollectible. The Company also reviews its customer discounts, and an accrual is made for discounts earned but
not yet utilized at each period end. The
Company performs ongoing evaluations of its customers’ financial condition and generally does not require collateral. Some international
customers are required to pay for their orders in advance of shipment. Accounts receivable consisted of the following as of December
31, 2021 and 2020 (in thousands): Schedule of Accounts Receivable
As of December 31,
2021 2020
Accounts receivable $ 7,028 $ 10,895
Less: allowance for discounts and returns (235 ) (2,525 )
Less: allowance for doubtful accounts (405 ) (882 )
Accounts receivable, net $ 6,388 $ 7,488 The
allowance for discounts and returns consisted of the following activity for the years ended December 31, 2021 and 2020 (in thousands): Schedule
of Allowance for Discount and Return
2021 2020
As of December 31,
2021 2020
Allowance for discounts and returns, beginning balance $ 2,525 $ 2,901
Charges against revenues 9,259 17,703
Utilization of Reserve (11,549 ) (18,079 )
Allowance for discounts and returns, ending balance $ 235 $ 2,525 Revenue
Recognition Revenue
is recognized when control of the promised goods is transferred to the Company’s customers in an amount that reflects the consideration
the Company expects to be entitled to in exchange for those goods.
a. Nature
of Goods The
Company sells a variety of protein products and energy drinks through a broad distribution platform that includes supermarkets, mass
merchandisers, wholesale clubs, drugstores, convenience stores, home stores, specialty stores and websites and other e-commerce channels,
all of which sell products to consumers.
b. When
Performance Obligations are Satisfied For
performance obligations related to the shipping and invoicing of products, control transfers at the point in time upon which finished
goods are delivered to the Company’s customers or when finished goods are picked up by a customer or a customer’s carrier,
depending on shipping terms. Once a product has been delivered or picked up by the customer, the customer is able to direct the use of,
and obtain substantially all of the remaining benefits from, the asset. The Company considers control to have transferred upon delivery
or customer receipt because the Company has an enforceable right to payment at that time, the customer has legal title to the asset,
the Company has transferred physical possession of the asset, and the customer has significant risk and rewards of ownership of the asset.
c. Variable
Consideration The
Company conducts extensive promotional activities with its largest customer, primarily through the use of off-list discounts, coupons,
cooperative advertising, periodic price reduction arrangements, and end-aisle and other in-store displays. The costs of such activities
are netted against sales and are recorded over the calendar year, in proportion to sales recorded during that calendar year. The reserves
for sales returns and consumer and trade promotion liabilities are established based on the Company’s best estimate of the amounts
necessary to settle future and existing obligations for products sold as of the balance sheet date. To determine the appropriate timing
of recognition of consideration payable to a customer, all consideration payable to customers is reflected in the transaction price at
inception and reassessed routinely.
d. Practical
Expedients The
Company expenses incremental direct costs of obtaining a contract (broker commissions) when the related sale takes place, since the amortization
period of the commissions paid for the sale of products is less than a year. These costs are recorded in “Selling and promotion”
expenses in the accompanying consolidated statements of operations. The Company accounts for shipping and handling costs as fulfillment
activities which are therefore recognized upon shipment of the goods. Shipping
and handling costs related to inbound purchases of raw material and finished goods are included in cost of revenues in the consolidated
statements of operations and capitalized into the value of inventory on the balance sheet. For the years ended December 31, 2021 and
2020, the Company incurred $ 1.8 1.3 3.1 2.5 The
Company excludes from its revenue any amounts collected from customers for sales (and similar) taxes. During the years ended December
31, 2021 and 2020, the Company recorded discounts, and to a lesser degree, sales returns, totaling $ 9.3 17.7 16 22 Disaggregation
of Revenue The
following shows the disaggregation of revenue by distribution channel for the years ended December 31, 2021 and 2020 (in thousands). Schedule of
Disaggregation of Revenue
For the Years Ended December 31,
2021 % of Total 2020 % of Total
Distribution Channel
Specialty $ 20,144 40 % $ 26,643 41 %
International $ 15,233 30 % $ 17,862 28 %
FDM $ 14,665 30 % $ 19,935 31 %
Total $ 50,042 100 % $ 64,440 100 % Concentrations Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution.
The cash balance at times may exceed federally insured limits. Management believes the financial risk associated with these balances
is minimal and has not experienced any losses to date. Significant customers and vendors are those that represent more than 10% of the
Company’s net revenue or accounts receivable for each period presented. During
the year ended December 31, 2021, we had three customers who individually accounted for 38 14 13 22 41 17 12 61 The
Company uses a limited number of non-affiliated suppliers for contract manufacturing its products. The Company has quality control and
manufacturing agreements in place with its primary manufacturers to ensure consistency in production and quality. The agreements ensure
products are manufactured to the Company’s specifications and the contract manufacturers will bear the costs of recalled products
due to defective manufacturing. During the year ended December 31, 2021, the Company had three vendors who individually accounted for
26 19 9 25 24 13 The
Company has a geographic concentration in the United States, with 70 72 30 28 5 Inventory Inventory
consists of finished goods and raw materials used to manufacture the Company’s products by one of our contract manufacturers as
of December 31, 2021 and 2020. The Company records charges for obsolete and slow-moving inventory based on the age of the product as
determined by the expiration date or otherwise determined to be obsolete. Products within one year of their expiration dates are considered
for write-off purposes. Inventory write-downs, once established, are not reversed as they establish a new cost basis for the inventory.
Historically, the Company has had minimal returns with established customers. The Company incurred insignificant inventory write-offs
during the years ended December 31, 2021 and 2020. The Company accounts for its inventory on a First-in First-out basis. Prepaid
Expenses and Other Current Assets Prepaid
expenses and other current assets consist of various payments the Company has made in advance for goods or services to be received in
the future. These prepaid expenses include legal retainers, giveaways, print advertising, insurance and service contracts requiring up-front
payments. Property
and Equipment Property
and equipment are stated at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated
useful lives of the respective assets. When assets are retired or otherwise disposed, the assets and related accumulated depreciation
are removed, and the resulting gains or losses are recorded in the statement of operations. Repairs and maintenance costs are expensed
as incurred. The
estimated useful lives of the property and equipment are as follows: Schedule of Estimated Useful Lives of Property, Plant, and Equipment
Property
and Equipment Estimated
Useful Life
Furniture,
fixtures and equipment 3 7 years
Manufacturing
and lab equipment 3 5 years
Vehicles 3 5 years Intangible
Assets Acquired
intangible assets are recorded at estimated fair value, net of accumulated amortization, and costs incurred in obtaining certain trademarks
are capitalized, and are amortized over their related useful lives, using a straight-line basis consistent with the underlying expected
future cash flows related to the specific intangible asset. Costs
to renew or extend the life of intangible assets are capitalized and amortized over the remaining useful life of the asset. Amortization
expenses are included as a component of “General and administrative” expenses in the consolidated statements of operations.
The estimated useful life of the intangible assets is 7 years Impairment
of Long-Lived Assets Long-lived
assets are reviewed for impairment whenever events or changes in circumstances exist that indicate the carrying amount of an asset may
not be recoverable. When indicators of impairment exist, an estimate of undiscounted future cash flows is used in measuring whether the
carrying amount of the asset or related asset group is recoverable. Measurement of the amount of impairment, if any, is based upon the
difference between the asset’s carrying value and estimated fair value. There was no 0.167 Fair
Value GAAP
defines fair value as the exchange price that would be received from selling an asset or paid to transfer a liability in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company measures its financial assets and liabilities at fair value at each reporting period using an estimated fair value hierarchy
which requires the Company to use observable inputs and minimize the use of unobservable inputs when measuring fair value. A
financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant
to the fair value measurement. Three levels of inputs may be used to measure fair value:
● Level
1 — Observable inputs are unadjusted quoted prices in active markets for identical assets or liabilities;
● Level
2 — Observable inputs are quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices
which are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially
the full term of the financial instruments; and
● Level
3 — Unobservable inputs which are supported by little or no market activity and which are significant to the fair value of
the assets or liabilities. These inputs are based on the Company’s assumptions used to measure assets and liabilities at fair
value and require significant management judgment or estimation. The
determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant
to the fair value measurement. Leases A
lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified assets for a period of
time in exchange for consideration. An entity controls the use when it has a right to obtain substantially all of the benefits from the
use of the identified asset and has the right to direct the use of the asset. The Company determines if an arrangement is a lease at
contract inception. For all classes of underlying assets, the Company includes both the lease and non-lease components as a single component
and accounts for it as a lease. Lease liabilities are recognized based on the present value of the lease payments over the lease term
at the commencement date. MusclePharm
calculates and uses the rate implicit in the lease if the information is readily available, or if not available, the Company uses its
incremental borrowing rate in determining the present value of lease payments. Lease right-of-use (“ROU”) assets are based
on the lease liability, subject to adjustments, such as lease incentives. The ROU assets also include any lease payments made at or before
the commencement date. MusclePharm excludes variable lease payments in measuring lease assets and lease liabilities, other than those
that depend on an index or a rate or are in substance fixed payments. The
Company’s lease terms include options to extend or terminate the lease when it is reasonably certain that such options will be
exercised. Operating leases are included in “Operating lease right-of-use assets,” “Operating lease liability, current”
and “Operating lease liability, long-term” on the consolidated balance sheets. Finance leases are included in “Property
and equipment, net,” “Accrued and other liabilities” and “Other long-term liabilities” on the consolidated
balance sheets. Cost
of Revenue Cost
of revenue for the Company represents costs directly related to the production, manufacturing and freight-in of the Company’s products
purchased from contract manufacturers. Advertising
and Promotion Our
advertising and promotion expenses consist primarily of digital, print and media advertising, athletic endorsements and sponsorships,
promotional giveaways, trade show events and various partnering activities with our retail partners, and are expensed as incurred. Share-Based
Payments and Stock-Based Compensation Share-based
compensation awards, including stock options and restricted stock awards, are recorded at estimated fair value on the applicable awards’
grant date, based on the estimated number of awards that are expected to vest. The grant date fair value is amortized on a straight-line
basis over the time in which the awards are expected to vest, or immediately if no vesting is required. Share-based compensation awards
issued to non-employees for services are also recorded at fair value on the grant date. The fair value of restricted stock awards is
based on the fair value of the stock underlying the awards on the grant date as there is no exercise price. The
fair value of stock options is estimated using the Black-Scholes option-pricing model. The determination of the fair value of each stock
award using this option-pricing model is affected by the Company’s assumptions regarding a number of complex and subjective variables.
These variables include, but are not limited to, the expected stock price volatility over the term of the awards and the expected term
of the awards based on an analysis of the actual and projected employee stock option exercise behaviors and the contractual term of the
awards, and estimated forfeitures. Due to the Company’s limited experience with the expected term of options, the simplified method
was utilized in determining the expected option term as prescribed in ASC 718 Compensation – Stock Compensation. The
Company recognizes stock-based compensation expense over the requisite service period, which is generally consistent with the vesting
of the awards, based on the estimated fair value of all stock-based payments issued to employees and directors that are expected to vest. Warrants In
conjunction with the Securities Purchase Agreement (“SPA”), the Company issued 18,463,511
warrants to the senior note holders. The warrants
entitle the holder to purchase one share of the Company’s common stock at an exercise price equal to $ .7794
per share at any time on or after October 13,
2021 (the “Initial Exercise Date”) and on or prior to the close of business on October 13, 2026 the “Termination Date”).
The Company determined that these warrants are free standing financial instruments that are legally detachable and separately exercisable
from the debt instruments. Management also determined that the warrants are puttable for cash upon a fundamental transaction at
the option of the holder and as such required classification as equity pursuant to ASC 470. In accordance with the accounting guidance,
the outstanding warrants are recognized as equity on the balance sheet. The proceeds from the sale of a debt instrument with stock purchase
warrants (detachable call options) shall be allocated to the two elements based on the relative fair values of the debt instrument without
the warrants, and of the warrants themselves at time of issuance. The allocation of the portion of the value resulted in a discount of
the debt instrument. The fair value of the warrants were measured using the Black Scholes option pricing model. Foreign
Currency The
functional currency of the Company’s foreign subsidiary, MusclePharm Canada, is the Canadian dollar. There are no assets or liabilities
in this foreign subsidiary and therefore, there is no accumulated other comprehensive income recorded. Revenue and expenses are translated
at average exchange rates in effect during the year. Equity transactions are translated using historical exchange rates. Foreign
currency gains and losses resulting from transactions denominated in a currency other than the functional currency are included in “Interest
income, net” in the consolidated statements of operations. Segments Historically,
the Company’s chief operating decision maker (“CODM”) reviews financial information presented on a consolidated basis
for purposes of allocating resources and evaluating financial performance. As such, the Company has had two reporting segments and operating
unit structures. During the fourth quarter of 2021, the Company introduced a functional energy beverages line under the MusclePharm and
FitMiss brands, so the CODM now reviews financial information and makes resource and opportunity decisions on a disaggregated basis with
the functional energy drink business separate from protein products. Litigation
Estimates and Accruals In
the normal course of business or otherwise, the Company may become involved in legal proceedings. The Company will accrue a liability
for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range
of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate
than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might
include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred. The
Company provides disclosures for material contingencies when there is a reasonable possibility that a loss or an additional loss may
be incurred. In assessing whether a loss is a reasonable possibility, the Company may consider the following factors, among others: the
nature of the litigation, claim or assessment, available information, opinions or views of legal counsel and other advisors, and the
experience gained from similar cases. Income
Taxes Income
taxes are accounted for using the asset and liability method. Income tax expense includes the current tax liability from operations and
the change in deferred income taxes during the year. Interest income, interest expense and penalties associated with income taxes are
reflected in (Benefit) provision for income taxes on the consolidated statements of operations. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A
valuation allowance is required to be established unless management determines that it is more likely than not that the Company will
ultimately realize the tax benefit associated with a deferred tax asset. The
Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income
tax positions are measured at the largest amount that is greater than 50% likely to be realized. Changes in recognition or measurement
are reflected in the period in which the change in judgment occurs. 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 In
March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform
on Financial Reporting In
August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) Derivatives
and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) 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) In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Reclassifications Certain
prior period amounts have been reclassified to conform to the current period financial statement presentation, including classification
of certain operating expenses. |
