Summary of Significant Accounting Policies (Policies) | 12 Months Ended |
Dec. 31, 2014 |
Accounting Policies [Abstract] | |
Principles of Consolidation | Principles of Consolidation |
The consolidated financial statements include the accounts of MusclePharm Corporation and its wholly-owned subsidiaries. Acquisitions are included in the consolidated financial statements from the date of the acquisition. All significant intercompany balances and transactions have been eliminated in consolidation. |
Use of Estimates | Use of Estimates |
The preparation of consolidated financial statements in conformity with 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 and sales reserves, inventory write-downs, valuations of intangible assets, fair value of derivatives and fair values of warrants and options, among others. Actual results could differ from those estimates. |
Concentration | |
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 are those which represent more than 10% of the Company’s net revenue for each period presented, or the Company’s net accounts receivable balance as of each respective balance sheet date. |
During the year ended December 31, 2014, our two largest customers, Costco and Bodybuilding.com, accounted for 29% of our net revenue. During the year ended December 31, 2013, our two largest customers, Bodybuilding.com and Europa, accounted for 35% of our net revenue. During the year ended December 31, 2012, our two largest customers Bodybuilding.com and General Nutrition Corp. (GNC), accounted for 45% of our net revenue. |
At December 31, 2014, our two largest customers, Costco and Bodybuilding.com, accounted for 33% of our net accounts receivable balance. |
At December 31, 2013 our three largest customers, Costco, Bodybuilding.com and Europa accounted for 54% of our net accounts receivable balance. |
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 support its growth and 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 any recalled product due to defective manufacturing. |
The Company had the following concentration of purchases with contract manufacturers for years ended December 31, 2014, 2013 and 2012: |
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| | Year Ended December 31, | | |
Vendor | | 2014 | | | 2013 | | | 2012 | | |
Capstone Nutrition | | | 44% | | | | 67 | % | | | 100 | % | |
Nutra Blend | | | 50% | | | | 32 | % | | * | | |
* Represents less than 10% of total purchases |
Risk and Uncertainties | Risk and Uncertainties |
The Company operates in an industry that is subject to rapid change and intense competition. The Company’s operations are subject to significant risk and uncertainties including financial, operational, technological, regulatory and other risks, including the potential risk of business failure. |
Management’s Plans with Respect to Liquidity and Capital Resources | Management’s Plans with Respect to Liquidity and Capital Resources |
The Company’s management believes that with increased sales expansion and the opening of the Pittsburg, California distribution center and international sales expansion, there will be opportunities to increase revenue; however, the Company may need to continue to raise capital in order to execute the business plan, which includes more inventory and new product releases. There can be no assurance that such capital will be available on acceptable terms or at all. |
Cash | 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, 2014 and 2013, the Company had no cash equivalents and all cash amounts consisted of cash on deposit. |
Restricted Cash | Restricted Cash |
The Company segregates cash that is restricted in its use based on contractual provisions from unrestricted cash balances. See Note 8 for further discussion on the Company’s restricted cash balance as of December 31, 2013. There were no restricted cash balances as of December 31, 2014. |
Accounts Receivable and Allowance for Doubtful Accounts | 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 allowance for doubtful accounts, and do not bear interest. The Company assesses the collectability of the accounts by taking into consideration of 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 selling, general and administrative expenses in the consolidated statements of operations. The Company writes off 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, 2014 and 2013 (in thousands): |
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| | As of December 31, | | | | | | |
| | 2014 | | | 2013 | | | | | | |
Accounts receivable | | $ | 18,665 | | | $ | 14,830 | | | | | | |
Less: allowance for discounts | | | (1,862 | ) | | | (1,060 | ) | | | | | |
Less: allowance for doubtful accounts | | | (159 | ) | | | (29 | ) | | | | | |
Accounts receivable, net | | $ | 16,644 | | | $ | 13,741 | | | | | | |
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The allowance for discount for the years ended December 31, 2014, 2013 and 2012 consisted of the following activity (in thousands): |
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| | | Year Ended December 31, | |
| | | 2014 | | | 2013 | | | 2012 | |
Allowance for discount, beginning balance | | | $ | 1,060 | | | $ | 1,089 | | | $ | — | |
Charges against revenues | | | | 28,200 | | | | 17,441 | | | | 10,713 | |
Utilization of sales return reserve | | | | (27,398 | ) | | | (17,470 | ) | | | (9,624 | ) |
Allowance for discount, ending balance | | | $ | 1,862 | | | $ | 1,060 | | | $ | 1,089 | |
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The allowance for doubtful accounts for the years ended December 31, 2014, 2013 and 2012 consisted of the following activity (in thousands): |
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| | | Year Ended December 31, | |
| | | 2014 | | | 2013 | | | 2012 | |
Allowance for doubtful accounts, beginning balance | | | $ | 29 | | | $ | 25 | | | $ | 197 | |
Charges to costs and expenses | | | | 201 | | | | 242 | | | | 10 | |
Recoveries | | | | — | | | | 1 | | | | — | |
Deductions (write‑offs) | | | | (70 | ) | | | (239 | ) | | | (182 | ) |
Foreign currency translation adjustment | | | | (1 | ) | | | — | | | | — | |
Allowance for doubtful accounts, ending balance | | | $ | 159 | | | $ | 29 | | | $ | 25 | |
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Marketable Securities | Marketable Securities |
The Company purchased convertible notes from unrelated public companies that it classified as trading securities which were carried at fair value with changes recognized through net loss. The marketable securities purchased included warrants to purchase shares of the issuer’s common stock which were recorded as discounts against the carrying value of the related marketable securities based on their fair values upon issuance. See Notes 3 and 5 for further discussion of the Company’s marketable securities. |
Inventory | Inventory |
MusclePharm products have historically been produced through third party manufacturers (see Note 20 for subsequent events), and the cost of product inventory is recorded using actual cost on a first-in, first-out basis. BioZone products are manufactured in the Company’s production facilities in Pittsburg, CA, and the cost of inventory is recorded using an average cost basis. Inventory is valued at the lower of cost or market value. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, and estimates are made for obsolescence, excess or slow-moving inventories, non-conforming inventories and expired inventory. These estimates are based on management’s assessment of current future product demand, production plan, and market conditions. |
Prepaid Giveaways | Prepaid Giveaways |
Prepaid giveaways represent non-inventory sample items which are given away to aid in promotion of the brand. Costs related to promotional giveaways are expensed as a component of advertising and promotion expenses in the consolidated statements of operations when the product is either given away at a promotional event or shipped to the customer. |
Prepaid Stock Compensation | Prepaid Stock Compensation |
Prepaid stock compensation represents amounts paid with restricted stock awards for future contractual benefits to be received. We record the fair value of these awards upon issuance to additional paid-in capital and then amortize these contractual benefits to the consolidated statements of operations over the life of the contracts using the straight-line method. |
Prepaid Sponsorship and Endorsement Fees | Prepaid Sponsorship and Endorsement Fees |
Prepaid sponsorship and endorsement fees represent fees paid in connection with Company sponsorships of certain events and trade shows as well as prepaid athlete endorsement fees, which are expensed over the period the fees are earned. A significant amount of the Company’s promotional expenses results from payments under endorsement and sponsorship contracts. Accounting treatment for endorsement and sponsorship payments is based upon specific contract provisions. Generally, endorsement payments are expensed straight-line over the performance period(s) of the contract after giving recognition to periodic performance compliance provisions of the contract. Prepayments made under the contracts are included in either current or long-term prepaid expenses depending on the period for which the prepayment applies. |
Prepaid Expenses and Other Current Assets | Prepaid Expenses and Other Current Assets |
Prepaid expenses and other current assets consist of various payments that the Company has made in advance for goods or services to be received in the future. These prepaid expenses include legal retainers, print advertising, insurance and service contracts requiring up-front payments. |
Property and Equipment | Property and Equipment |
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed on a straight-line basis over the estimated useful lives of the respective assets or, in the case of leasehold improvements, the remaining lease term, if shorter. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed and the resulting gains or losses are recorded as part of other income or expense in the statements of operations. Repairs and maintenance costs are expensed as incurred. |
The estimated useful lives of the property and equipment are as follows: |
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Property and Equipment | | Estimated Useful Life | | | | | | | | | | | |
Furniture, fixtures and equipment | | 3 - 7 years | | | | | | | | | | | |
Leasehold improvements | | Lesser of estimated useful life or remaining lease term | | | | | | | | | | | |
Manufacturing and lab equipment | | 3 - 5 years | | | | | | | | | | | |
Vehicles | | 3 - 5 years | | | | | | | | | | | |
Displays | | 5 years | | | | | | | | | | | |
Website | | 3 years | | | | | | | | | | | |
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Intangible Assets | Intangible Assets |
The Company capitalizes the costs incurred in obtaining certain trademarks. Acquired intangible assets are recorded at estimated fair value, net of accumulated amortization, and are amortized over their related useful lives, using a straight-line basis consistent estimated 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 selling, general and administrative expenses in the consolidated statements of operations. |
Impairment of Long-Lived Assets | 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. The Company did not recognize any impairment charges on its long-lived assets during the years ended December 31, 2014, 2013 and 2012. |
Issuance Costs and Debt Discount | Issuance Costs and Debt Discount |
The Company recognizes issuance costs related to the issuance of certain debt and equity instruments. Depending on the nature of the instrument, these costs are either carried as an asset on the balance sheet or recorded as a discount to the related debt or equity issuance. These costs are amortized using the effective interest method over the life of the debt to interest expense, or not amortized if related to an equity issuance. If a conversion of the underlying debt occurs, a proportionate share of the unamortized cost or discount is immediately expensed. |
Derivative Liabilities | Derivative Liabilities |
Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in equity instruments and warrants granted, and measurement of their fair value. In determining the appropriate fair value, the Company uses Black-Scholes or lattice option-valuation models. Derivatives are adjusted to reflect fair value at the end of each reporting period with any increase or decrease in the fair value being recorded in other income (expense), on the consolidated statements of operations. Once a derivative liability ceases to exist, any remaining fair value is reclassified to additional paid-in capital if redeemed or through earnings if forfeited or expired. |
Revenue Recognition | Revenue Recognition |
Revenue is recognized when all of the following criteria are met: |
· | Persuasive evidence of an arrangement exists. Evidence of an arrangement consists of an order from the Company’s distributors, resellers or customers. | | | | | | | | | | | | |
· | Delivery has occurred. Delivery is deemed to have occurred when title and risk of loss has transferred, either upon shipment of products to customers or upon delivery. | | | | | | | | | | | | |
· | The fee is fixed or determinable. The Company assesses whether the fee is fixed or determinable based on the terms associated with the transaction. | | | | | | | | | | | | |
· | Collection is reasonably assured. The Company assesses collectability based on credit analysis and payment history. | | | | | | | | | | | | |
The Company’s standard terms and conditions of sale do not allow for product returns. However, the Company grants an informal seven day right of return to its customers. Estimates of expected future product returns are recognized at the time of sale based on analyses of historical return trends by customer class. Upon recognition, the Company reduces revenue and cost of revenue for the estimated return. Return rates can fluctuate over time, but are sufficiently predictable with established customers to allow the Company to estimate expected future product returns, and an accrual is recorded for future expected returns when the related revenue is recognized. Product returns incurred from established customers during the years ended December 31, 2014, 2013 and 2012 are insignificant. |
The Company offers sales incentives through various programs, consisting primarily of advertising related credits and volume incentive rebates. The Company records advertising related credits with customers as a reduction to revenue as no identifiable benefit is received in exchange for credits claimed by the customer. Volume incentive rebates are provided to certain customers based on contractually agreed upon percentages once certain thresholds have been met. The Company records sales incentive reserves, and volume rebate reserves as a reduction to revenue. |
During the years ended December 31, 2014, 2013 and 2012, the Company recorded discounts, and to a lesser degree, sales returns, totaling $28.2 million, $17.4 million and $10.7 million, which accounted for 14% of gross revenue in each period. |
Cost of Revenue | Cost of Revenue |
Cost of revenue for MusclePharm, MusclePharm Canada and MusclePharm Ireland represents costs directly related to the production, manufacturing and freight-in of the Company’s products purchased from third party manufacturers. The Company ships customer orders from multiple locations. The facilities are operated with the Company’s equipment and employees, and inventory is owned by the Company. The Company also utilizes contract manufacturers to drop ship product directly to customers. |
Cost of revenue for products produced by Biozone Labs consist of raw material, direct labor, freight-in, and other supply and equipment rental expenses. The Company mainly ships customer orders from its distribution center in Pittsburg, California. |
Advertising and Promotion | Advertising and Promotion |
Advertising and promotion expenses include digital and print advertising, trade show events, athletic endorsements and sponsorships, and promotional giveaways. Advertising costs are expensed as incurred. For major trade shows, the expenses are recognized within a calendar year over the period in which the Company recognizes revenue associated with sales generated at the trade show. Some of the contracts within a calendar year provide for contingent payments to endorsers or athletes based upon specific achievement in their sports (e.g. winning a championship). The Company records expense for these payments if and when the endorser achieves the specific achievement. |
Share-Based Payments | Share-Based Payments |
Share-based compensation awards, including stock options and restricted stock, are recorded at estimated fair value on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest. The grant date fair value is then amortized on 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 rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payments whichever is more readily determined. The fair value of restricted stock are based on the fair value of the stock underlying the awards on the grant date as they do not have an exercise price. The fair value of stock options is estimated using the Black-Scholes option-pricing model but these amounts have been insignificant during the periods included herein. |
Foreign Currency | Foreign Currency |
The functional currency of the Company’s foreign subsidiaries, MusclePharm Canada and MusclePharm Ireland, is its local currency. The assets and liabilities of the foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at each balance sheet date. Revenue and expenses are translated at average exchange rates in effect during the year. Equity transactions are translated using historical exchange rates. The resulting translation adjustments are recorded to a separate component of accumulated other comprehensive income (loss) within stockholders’ equity. |
Foreign currency gains and losses resulting from transactions denominated in a currency other than the functional currency are included in other income (expense), net in the accompanying consolidated statements of operations. |
Comprehensive Income (Loss) | Comprehensive Income (Loss) |
Comprehensive income (loss) is composed of two components: net loss and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains, and losses that under GAAP are recorded as an element of stockholders’ equity, but are excluded from the Company’s net income (loss). The Company’s other comprehensive income (loss) is made up of foreign currency translation adjustments for all periods presented. |
Segments | Segments |
Management has determined that it currently operates in one segment. The Company’s chief operating decision maker reviews financial information on an aggregated and consolidated basis, together with certain operating and performance measures principally to make decisions about how to allocate resources and to measure the Company’s performance. |
Income Taxes | Income Taxes |
Income taxes are accounted for using the asset and liability method. 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, 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. 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. |
The Company records interest and penalties related to unrecognized tax benefits in income tax expense. There were no interest or penalties related to unrecognized tax benefits for the years ended December 31, 2014, 2013 and 2012. |
Recent Accounting Pronouncements | Recent Accounting Pronouncements |
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification Topic No. 718, “Compensation – Stock Compensation”, as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in ASU 2014-12 either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of ASU 2014-12 is not expected to have a material effect on the Company’s consolidated financial statements or disclosures. |
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition- Construction-Type and Production-Type Contracts.” ASU 2014-09’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the Company beginning January 1, 2017 and, at that time, the Company may adopt the new standard under the full retrospective approach or the modified retrospective approach. Early adoption is not permitted. The Company has not yet selected a transition method nor has determined the effect of ASU 2014-09 on its ongoing financial reporting. |
In April 2014, the FASB issued ASU 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 changes the criteria for reporting a discontinued operation. Under the new pronouncement, a disposal of a part of an organization that has a major effect on its operations and financial results is a discontinued operation. The Company is required to adopt ASU 2014-08 prospectively for all disposals or components of its business classified as held for sale during fiscal periods beginning after December 15, 2014. The adoption of ASU 2014-08 is not expected to have a material effect on the Company’s consolidated financial statements or disclosures. |
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period ending after December 15, 2016. Earlier adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2014-15. |
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