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 Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. See "Forward Looking Statements" and "Item 1A. Risk Factors." 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. The Company is headquartered in Burbank, California and, as of December 31, 2019, had the following wholly-owned operating subsidiaries: MusclePharm Canada Enterprises Corp., MusclePharm Ireland Limited and MusclePharm Australia Pty Limited.

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, including Amazon, Costco, Kroger, Walgreens, 7-Eleven, and many others. Our primary distribution channels are Specialty, International and FDM.

Our consolidated financial statements are prepared using the accrual method of accounting in accordance with generally accepted accounting principles in the United States ("GAAP") and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred significant losses and experienced negative cash flows since inception. In response to the Company's continued losses, in 2018, management implemented the following plans to improve the Company's operating costs:

1)


reduced our workforce;
2)
renegotiated or terminated a number of contracts with endorsers in a strategic
shift away from such arrangements and toward more cost-effective marketing and
advertising efforts; and
3)
discontinued a number of stock keeping units ("SKUs") and wrote down inventory
to net realizable value, or to zero in cases where the product was discontinued.


                                       17


In addition, during the fourth quarter of 2019, management implemented the following additional measures to improve gross margin:

1)


reduced or eliminate sales to low or negative margin customers;
2)
reduced product discounts and promotional activity;
3)
implemented a more aggressive SKU reduction; and
4)
formed a pricing committee to review all orders to better align gross margin
expectations with product availability.

As a result of these measures, as well as a reduction in protein prices, the Company realized increased gross margins in the fourth quarter of 2019, a trend which continued through the first and second quarters of 2020. Beginning in April 2020, the Company began to experience a slowdown in sales from its retail customers, including its largest customer. This decline has been offset by a growth in sales to our online customers, including our largest online customer, although there can be no assurances that such growth will continue, or that the Company will have the financial resources to produce the additional quantities required by this customer. Management believes reductions in operating costs, and continued focus on gross margin, primarily pricing controls and a reduction in product discounts and promotional activity with the Company's customers, will allow us to ultimately achieve profitability, however, we can give no assurances that this will occur.

See "Liquidity and Capital Resources" for a further discussion of management's plans.

COVID-19

Our 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 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.

While we expect our revenue for 2020 to be down compared to 2019, there are multiple factors contributing to this decline. While revenue for April 2020 was lower due to COVID-19, as evidenced by a decline in the Company's FDM sales, sales in other months were in line with the Company's expectations. 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.

Outlook

As we continue to execute our growth strategy and focus on our core products, we believe that we can, over time, continue to improve our operating margins and expense structure. In addition, we have implemented plans focused on cost containment, customer profitability, product and pricing controls that we believe will improve our gross margin and reduce our losses.



We expect that our advertising and promotion expense will continue to decrease
as we focus on reducing our
expenses and shifting our promotional costs, in part, from general branding and
product awareness to acquiring
customers and driving sales from existing customers. We expect that our
discounts and allowances will continue to decrease, both overall and as a
percentage of revenue, as we further reduce certain discretionary promotional
activity that does not result in a commensurate increase in revenues. In
addition, we expect our gross margin to increase in future periods due to a
decrease in protein prices which began in the fourth quarter of 2019, although
protein prices will continue to fluctuate.


                                       18


Results of Operations

Comparison of the Year Ended December 31, 2019 to the Year Ended December 31,
2018


                                           For the Years Ended
                                           December 31,
($ in thousands)

                                           2019       2018       $ Change     % Change

Revenue, net                                $79,667    $88,113    $(8,446)     (10)%
Cost of revenue                             70,979     69,719     1,260        2
Gross profit                                8,688      18,394     (9,706)      (53)
Operating expenses:
Advertising and promotion                   2,487      2,939      (452)        (15)
Salaries and benefits                       7,910      8,328      (418)        (5)
Selling, general and administrative         8,899      11,610     (2,711)      (23)
Research and development                    893        751        142          19
Professional fees                           3,606      2,598      1,008        39
Total operating expenses                    23,795     26,226     (2,431)      (9)
Loss from operations                        (15,107)   (7,832)    7,275        93
Other (expense) income:

(Loss) gain on settlement of obligations (125) 1,074 (1,199) (112)


  Interest and other expense, net           (3,609)    (3,897)    (288)        (7)
Loss before provision for income taxes      (18,841)   (10,655)   8,186        77
Provision for income taxes                  86         100        (14)         (14)
Net loss                                    $(18,927)  $(10,755)  $8,171       76%




                                       19

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




                                       For the Years Ended
                                       December 31,


                                       2019       2018

Revenue, net                            100%       100%
Cost of revenue                         89         79
Gross profit                            11         21
Operating expenses:
Advertising and promotion               3          3
Salaries and benefits                   10         9
Selling, general and administrative     11         13
Research and development                1          1
Professional fees                       5          3
Total operating expenses                30         29
Loss from operations                    (19)       (8)
Other (expense) income:

(Loss) gain on settlement obligations - 1


  Interest and other expense, net       (5)        (4)
Loss before provision for income taxes  (24)       (11)
Provision for income taxes              -          -
Net loss                                (24)%      (11)%




                                       20


Revenue, net

We derive our revenue through the sales of our various branded sports nutrition products and nutritional supplements. Revenue is recognized when control of a promised good is transferred to a customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for the 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.

Net revenue reflects the transaction prices for contracts, which includes goods 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 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.

MusclePharm brands are marketed across major global retail distribution channels - Specialty, International, and Food, Drug, and Mass ("FDM"). Below is a table of net revenue by our major distribution channel:




                     For the Years Ended December 31,


                     2019      % of Total 2018      % of Total



Distribution Channel
Specialty             $35,812   45%        $35,690   41%
International         22,691    28%        32,143    36%
FDM                   21,164    27%        20,280    23%
Total                 $79,667   100%       $88,113   100%


Net revenue decreased $8.4 million, or 10%, to $79.7 million for the year ended December 31, 2019, compared to $88.1 million for the year ended December 31, 2018. Net revenue from our international customers decreased by $9.5 million, or 29%, year over year. The decrease in international sales related primarily to a general shift to domestic and online marketing. Net revenue from FDM increased $0.9 million, or 4%, and net revenue from Specialty lines increased $0.1 million, or 0.3%, year over year. The increase in Specialty was due to increased promotional activity with iHerb and Amazon, resulting in higher revenues. The increase in FDM was due to an increase in Costco domestic sales, the result of an additional promotional event in 2019 as compared to 2018. During 2019, we lowered our sales price to select customers, including certain large customer, contributing to the revenue decline. The Company significantly increased expenditures on partnerships advertising, online impressions and click advertising with its online customers, while reducing end-aisle and front of the store promotions with its retail customers. Despite these measures, gross revenues declined as the Company did not realize a significant increase in its online revenues. Finally, we continue to monitor the profitability of each customer, and in the event that customers have negative or low margins, sales activities with such customers are reduced.

Discounts and sales allowances decreased to 25% of gross revenue, or $26.9 million, for the year ended December 31, 2019 from 28% of gross revenue, or $33.5 million for 2018. Discounts and sales allowance fluctuate based on customer mix and changes in discretionary promotional activity. Further, we will continue to monitor our discounts and reduce where practical to ensure we continue to meet our gross margin expectations.

During the year ended December 31, 2019, our largest customers, Costco, Amazon, and iHerb, accounted for approximately 33%, 13%, and 17%, respectively, of our net revenue. During the year ended December 31, 2018, our largest customers, Costco, Amazon, and iHerb accounted for approximately 29%, 13%, and 13% respectively, of our net revenue.




                                       21


Cost of Revenue and Gross Margin

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 mainly ship customer orders from our distribution center in Spring Hill Tennessee. The facility is operated with our equipment and employees, and we own the related inventory. We also use contract manufacturers to drop ship products directly to our customers.

Our gross profit fluctuates 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, pricing, and inventory write-downs. Cost of revenue will continue to fluctuate, primarily due to changes in protein prices, which prices are impacted, in part, by our ability to negotiate better pricing with our manufacturers. Protein prices increased for most of 2019, only declining at the end of the year.

Costs of revenue increased 2% to $71.0 million for the year ended December 31, 2019, compared to $69.7 million for 2018. Accordingly, gross profit for the year ended December 31, 2019 decreased $9.7 million to $8.7 million compared to $18.4 million for 2018. Gross profit margin was 11% and 21% for the years ended December 31, 2019 and 2018, respectively. Our gross margin decreased for the year ended December 31, 2019, compared to 2018 due to a significant increase in protein prices, lower sales prices, partially offset by a decrease in discounts and allowances as a percentage of revenues.

Operating Expenses

Operating expenses for the year ended December 31, 2019 were $23.8 million, compared to $26.2 million 2018. Our operating expenses were 30% and 29% of net revenue for the years ended December 31, 2019 and 2018, respectively. We continue to focus on reducing our operating expenses in response to our continued losses, including as discussed in "--Outlook." Changes to operating expenses in 2019 were as follows:

Advertising and Promotion

Our advertising and promotion expense consists primarily of digital, print and media advertising, athletic endorsements and sponsorships, promotional giveaways, trade show events and various partnering activities with our trading partners. 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 brand partnerships as well as grass-roots marketing and advertising efforts. We expect our advertising and promotion expenses to remain relatively constant in future periods as we continue to leverage existing brand recognition and move towards lower cost advertising outlets including social media and trade advertising.

Advertising and promotion expense decreased $0.5 million or 15% to $2.5 million for the year ended December 31, 2019, or 3.0% of net revenue, compared to $2.9 million, or 3% of net revenue, for 2018. Advertising and promotion expense for the years ended December 30, 2019 and 2018 included expenses related primarily to advertising, sponsorships and endorsements and trade shows. The decrease in spending for the year ended December 31, 2019 primarily included decreases to trade shows and events of $0.6 million, decreases to sponsorship fees of $0.3 million, decreases to other advertising of $0.2 million, offset by increased print advertising of $0.6 million.

Salaries and Benefits

Salaries and benefits consist primarily of salaries, bonuses, benefits and stock-based compensation paid or provided to our employees.

Salaries and benefits continued to decrease due to additional headcount reductions and limited headcount additions, as well as a reduction of restricted stock awards and a reduction in amortization of existing stock-based grants through the end of 2019.

Salaries and benefits decreased by $0.4 million or 5% to $7.9 million, or 9% of net revenue, for the year ended December 31, 2019 compared to $8.3 million, or 10% of revenue, for 2018. Stock-based compensation expense decreased $0.2 million and bonuses and commissions decreased by $0.6 million, partially offset by increased severance costs of $0.4 million. Bonus expense decreased compared to the year ended December 31, 2018, as we eliminated most discretionary bonuses due to our continued losses.




                                       22


Selling, General and Administrative

Our selling, general and administrative expenses consist primarily of depreciation and amortization, information technology equipment and network costs, facilities related expenses, director's fees, which include both cash and stock-based compensation, insurance, rental expenses related to equipment leases, supplies, legal settlement costs, broker fees and other corporate expenses.

Selling, general and administrative expenses decreased by 23% to $8.9 million, or 11% of net revenue, for the year ended December 31, 2019 compared to $11.6 million, or 13% of net revenue, for the same period in 2018. The decrease was primarily due to lower provisions for bad debts of $1.8 million, lower freight expense of $0.4 million, lower travel expenses of $0.2 million and lower depreciation of $0.2 million. These expenses were partially offset by an increase of $0.2 million in rent expense.

Research and Development

Research and development expenses consist primarily of R&D personnel salaries, bonuses, benefits, and stock-based compensation, product quality control, which includes third-party testing, and research fees related to the development of new products. We expense research and development costs as incurred.

Research and development expenses increased 19% to $0.9 million, or 1% of net revenue, for the year ended December 31, 2019 compared to $0.8 million, also 1% of net revenue, for 2018. The increase was primarily due to an increase in R&D related salaries and benefits.

Professional Fees

Professional fees consist primarily of legal fees, accounting and audit fees, consulting fees, which include both cash and stock-based compensation, and investor relations costs.

Professional fees increased 39% to $3.6 million, or 5% of net revenue, for the year ended December 31, 2019, compared to $2.6 million, or 3% of net revenue, for the same period in 2018. The increase was primarily due to an increase in legal fees of $0.8 million and an increase in accounting fees of $0.2 million. The significant increase in legal fees is as a result of increased litigation and costs related to the restatement of our 2017 and 2018 financial results.

To the extent our ongoing legal matters are reduced, in addition to this resulting in a reduction in professional fees, we expect to see a further decline in legal costs for specific settlement activities. We intend to continue to invest in strengthening our governance, internal controls, and process improvements, which is expected to require support from third-party service providers.

Settlement of obligations

For the year ended December 31, 2019, we recorded settlement expenses of $0.1 million compared to a gain of $1.1 million for the year ended December 31, 2018.

Interest and other expense, net

For the years ended December 31, 2019 and 2018, "Interest and other expense, net" consisted of the following (in thousands):




                                       23




                                                For the Year Ended December 31,


                                                2019             2018




Interest expense, related party                  $(1,597)         $(2,160)
Interest expense, related party debt discount    (60)             (60)
Interest expense, other                          (894)            (486)

Interest expense, secured borrowing arrangement (1,205) (1,094) Foreign currency transaction loss

                (236)            (115)
Other                                            383              18
Total interest and other expense, net            $(3,609)         $(3,897)

"Other" for 2019 includes sublease income and interest income.

Interest and other expense, net for the year ended December 31, 2019 decreased 7%, or $0.3 million, compared to 2018. The decrease in interest and other expense, net was primarily related to reduced interest on a related party note together with an increase in other income, primarily due to sublease income, partially offset by increased other interest.

Provision for income taxes

Provision for income taxes consists primarily of federal and state income taxes in the U.S. and income taxes in foreign jurisdictions in which we conduct business. Due to uncertainty, as to the realization of benefits from our deferred tax assets, including net operating loss carryforwards, research and development and other tax credits, we have a full valuation allowance reserved against such assets. We expect to maintain this full valuation allowance at least in the near term.

Liquidity and Capital Resources

The Company has incurred significant losses and experienced negative cash flows since inception. As of December 31, 2019, we had cash of $1.5 million, a decline of $0.8 million from the December 31, 2018 balance of $2.3 million. This decline is due to a net loss of $18.9 million, offset by non-cash adjustments of $2.0 million, cash provided by a change in operating assets and liabilities of $10.4 million and cash provided by financing activities of $5.7 million. As of December 31, 2019, we had a working capital deficit of $29.4 million, a stockholders' deficit of $28.0 million and an accumulated deficit of $195.9 million resulting from losses from operations. During 2019, we incurred an additional substantial loss. 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 ability to continue as a going concern is dependent upon us achieving profitable operations in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities when they come due. Management is on an ongoing basis evaluating strategies to obtain financing to fund our expenses and achieve a level of revenue adequate to support our current cost structure. Financing strategies may include, but are not limited to, private placements of capital stock, debt borrowings, partnerships and/or collaborations. There is no assurance that we will be able to obtain additional financing on acceptable terms or at all or to generate an adequate level of revenues.

In response to the Company's continued losses, in 2018, management implemented the following plans to improve the Company's operating costs:

1)


reduced our workforce;
2)
renegotiated or terminated a number of contracts with endorsers in a strategic
shift away from such arrangements and toward more cost-effective marketing and
advertising efforts; and
3)
discontinued a number of stock keeping units ("SKUs") and wrote down inventory
to net realizable value, or to zero in cases where the product was discontinued.


                                       24


Despite these measures, during 2019, the Company continued to incur substantial losses.

In addition, during the fourth quarter of 2019, management implemented the following additional measures to improve gross margin:

1)


reduced or eliminate sales to low or negative margin customers;
2)
reduced product discounts and promotional activity;
3)
implemented a more aggressive SKU reduction; and
4)
formed a pricing committee to review all orders to better align gross margin
expectations with product availability.

As a result of these measures, as well as a reduction in protein prices, the Company realized increased gross margins in the fourth quarter of 2019, a trend which continued through the first and second quarters of 2020. Beginning in April 2020, the Company began to experience a slowdown, which has continued to date, in sales from its retail customers, including its largest customer. This decline has been offset by growth in online customers, including sales to our largest online customer, although there can be no assurances that such growth will continue, or that the Company will have the financial resources to produce the additional quantities required by this customer.

Management believes reductions in operating costs, and continued focus on gross margin, primarily pricing controls and a reduction in product discounts and promotional activity with the Company's customers, will allow us to ultimately achieve profitability, however, we can give no assurances that this will occur.

Cash Flows

Our net consolidated cash flows are as follows (in thousands):



                                                             For the Years Ended
                                                             December 31,


                                                             2019      2018



Consolidated Statements of Cash Flows Data:
Net cash (used in) provided by operating activities           $(6,524)  $1,981
Net cash used in investing activities                         (13)      (132)
Net cash provided by (used in) financing activities           5,742     (5,726)
Effect of exchange rate changes on cash                       10        (34)
Net change in cash                                            $(785)    $(3,911)



Operating Activities

Our cash (used in) provided by operating activities is driven primarily by sales of our products and vendor-provided credit limits. Our primary uses of cash from operating activities have been for inventory purchases, advertising and promotion expenses, personnel-related expenditures, manufacturing costs, professional fees (including legal fees), and costs related to our facilities. Our cash flows from operating activities is expected to continue to be affected principally by results of operations and the extent to which we increase spending on personnel expenditures, sales and marketing activities, and our working capital requirements.

Our operating cash outflows were $8.5 million higher for the year ended December 31, 2019, due to net cash used in operating activities of $6.5 million for the year ended December 31, 2019, compared to a net cash provided of $2.0 million for 2018.The variance primarily relates to net loss of $18.9 million, adjusted for non-cash charges, which resulted in a use of cash of $16.9 million for the year ended December 31, 2019 compared to a use of cash of $7.7 million for the same period in 2018. This variance also includes a net change in net operating assets and liabilities, which resulted in a source of cash of $10.4 million for the year ended December 31, 2019 compared to a source of cash of $9.7 million for 2018.




                                       25


The source of cash of $10.4 million provided by net operating assets and liabilities was the result of a decrease in our inventory balance of $8.9 million, a decrease in our accounts receivable balance of $1.4 million, and a decrease in prepaid expenses and other assets of $0.2 million, which together provided a source of cash, partially offset by a decrease in our accounts payable and accrued liabilities balance of $0.1 million, which reduced cash flows. During the year ended December 31, 2018, the source of cash of $9.7 million provided by net operating assets and liabilities included a decrease in accounts receivable of $1.9 million, a decrease in prepaid expenses and other assets of $0.4 million, and an increase in accounts payable and accrued liabilities of $11.5 million, resulting in a source of cash, offset in part by an increase in our inventory balance, which decreased cash flows by $3.9 million. For the year ended December 31, 2018, our accounts payable provided a use of cash due to an increase in our past due accounts payable

Investing Activities

Cash used in investing activities was $13,000 for the year ended December 31, 2019 for the purchases of property and equipment.

Cash used in investing activities was $0.1 million for the year ended December 31, 2018 for the purchases of property and equipment.

Financing Activities

Cash provided by financing activities was $5.7 million for the year ended December 31, 2019, primarily due to net borrowings from our line of credit of $2.7 million, net borrowings from our secured borrowing arrangement of $3.2 million less repayments on equipment financing of $0.1 million.

Cash used in financing activities was $5.7 million for the year ended December 31, 2018, primarily due to repayments of $1.5 million on our line of credit, $4.1 million in net repayments on our secured borrowing arrangement, and repayments on equipment financing of $0.1 million.

To manage cash flow, we have entered into numerous financing arrangement outlined below.

Indebtedness Agreements

Related-Party Refinanced Convertible Note

On November 3, 2017, the Company entered into the refinancing with Mr. Ryan Drexler, the Company's Chairman of the Board of Directors, Chief Executive Officer and President (the "Refinancing"). As part of the Refinancing, the Company issued to Mr. Drexler an amended and restated convertible secured promissory note (the "Refinanced Convertible Note") in the original principal amount of $18,000,000, which amended and restated (i) a convertible secured promissory note dated as of December 7, 2015, amended as of January 14, 2017, in the original principal amount of $6,000,000 with an interest rate of 8% prior to the amendment and 10% following the amendment (the "2015 Convertible Note"), (ii) a convertible secured promissory note dated as of November 8, 2016, in the original principal amount of $11,000,000 with an interest rate of 10% (the "2016 Convertible Note") , and (iii) a secured demand promissory note dated as of July 27, 2017, in the original principal amount of $1,000,000 with an interest rate of 15% (the "2017 Note", and together with the 2015 Convertible Note and the 2016 Convertible Note, collectively, the "Prior Notes"). The due date of the 2015 Convertible Note and the 2016 Convertible Note was November 8, 2017. The 2017 Note was due on demand.

The $18.0 million Refinanced Convertible Note bears interest at the rate of 12% per annum. Interest payments are due on the last day of each 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 note or by converting such interest amount into an equivalent amount of the Company's common stock. Any interest not paid when due shall be capitalized and added to the principal amount of the Refinanced 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 the interest under the Refinanced Convertible Note were due on December 31, 2019, unless converted earlier. Mr. Drexler may convert the outstanding principal and accrued interest into shares of the Company's common stock at a conversion price of $1.11 per share at any time. The Company may prepay the Refinanced Convertible Note by giving Mr. Drexler between 15 and 60 days' notice depending upon the specific circumstances, subject to Mr. Drexler's conversion right.

The Refinanced 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, interest will accrue at the rate of 14% per annum. In addition, following an event of default, any conversion, redemption, payment or prepayment of the Refinanced Convertible Note will be at a premium of 105%. The Refinanced 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 Refinanced Convertible Note. The Refinanced Convertible Note is subordinated to certain other indebtedness of the Company.

As part of the Refinancing, the Company and Mr. Drexler entered into a restructuring agreement (the "Restructuring Agreement") pursuant to which the parties agreed to amend and restate the security agreement, resulting in a Third Amended and Restated Security Agreement (the "Amended Security Agreement") in which the Prior Notes were secured by all of the assets and properties of the Company and its subsidiaries whether tangible or intangible. Pursuant to the Restructuring Agreement, the Company agreed to pay, on the effective date of the Refinancing, all outstanding interest on the Prior Notes through November 8, 2017 and certain fees and expenses incurred by Mr. Drexler in connection with the Restructuring.




                                       26


On September 16, 2019, Mr. Ryan Drexler, the Chief Executive Officer, President and Chairman of the Board of Directors of MusclePharm Corporation, a Nevada corporation (the "Company"), delivered a notice to the Company and its independent directors of his election to convert, effective as of September 16, 2019 (the "Notice Date"), $18,000,000 of the amount outstanding under that certain Amended and Restated Convertible Secured Promissory Note, dated as of November 8, 2017 (the "Note"), issued by the Company to Mr. Drexler, into shares of the Company's common stock, par value $0.001 per share (the "Common Stock"), at a conversion price of $1.11 per share, pursuant to the terms and conditions of the Note (the "Partial Conversion"). As of the Notice Date, the total amount outstanding under the Note (including principal and accrued and unpaid interest) was equal to $19,262,910. Pursuant to the terms of the Note, the Company instructed the transfer agent for its shares to issue to Mr. Drexler 16,216,216 shares (the "Shares") of its Common Stock in respect of the Partial Conversion.

The outstanding principal and the interest, due on December 31, 2019, were refinanced under a new agreement on July 1, 2020. See additional information in "Note 17. Subsequent Events."

For the years ended December 31, 2019 and 2018, interest expense, including the amortization of debt discount, related to the related party convertible secured promissory notes was $1.7 million and $2.2 million, respectively. During the years ended December 31, 2019 and 2018, $0.8 million and $1.9 million, respectively, in interest was paid in cash to Mr. Drexler.

Related-Party Revolving Note

On October 4, 2019, we entered into a secured revolving promissory note (the "Revolving Note") with Mr. Drexler. Under the terms of the Revolving Note, we can borrow up to $3.0 million. The Revolving Note bears interest at the rate of 12% annually. The use of funds will be solely for the purchase of whey protein to be used in the manufacturing of MusclePharm products. We may repay the Revolving Note by giving Mr. Drexler one days' written notice.

The Revolving 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, Mr. Drexler is entitled to accelerate the entire indebtedness under the Revolving Note. The Revolving 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. The Revolving Note is subordinated to certain other indebtedness of the Company held by Crossroads.

In connection with the Revolving Note, the Company and Mr. Drexler entered into a security agreement dated October 4, 2019 pursuant to which the Revolving Note is secured by all of the assets and properties of the Company and its subsidiaries whether tangible or intangible. As of December 31, 2019, the outstanding balance on the revolving note was $1.2 million. Both the outstanding principal and all accrued interest, which became due on March 31, 2020, were refinanced under a new agreement on July 1, 2020. The revolving note is included in "Line of credit" in the consolidated balance sheets. See additional information in "Note 17. Subsequent Events."

Related-Party Note Payable

The Company entered into a collateral receipt and security agreement with Mr. Drexler, dated December 27, 2019 pursuant to which Mr. Drexler agreed to post bond relating to the judgment ruled on the ThermoLife case, pending the appeal. The amount paid by Mr. Drexler on behalf of the Company, including fees, was $0.3 million. The amount, which was outstanding as of December 31, 2019, was refinanced under a new agreement on July 1, 2020. The note payable is included in "Convertible note with a related party, net of discount" in the consolidated balance sheets. See additional information in "Note 17. Subsequent Events."

Line of Credit - Inventory Financing

On October 6, 2017, the Company entered into a Security Agreement with Crossroads. Pursuant to the Security Agreement, the Company may borrow up to 70% of its Inventory Cost or up to 75% of Net Orderly Liquidation Value (each as defined in the Security Agreement), up to a maximum amount of $3.0 million at an interest rate of 1.5% per month, subject to a minimum monthly fee of $22,500. The Security Agreement contains customary events of default, including, among others, the failure to make payments on amounts owed when due, default under any other material agreement or the departure of Mr. Drexler. The Security Agreement also contains customary restrictions on the ability of the Company to, among other things, grant liens, incur debt and transfer assets.

Under the Security Agreement, the Company has agreed to grant Crossroads a security interest in all our present and future accounts, chattel paper, goods (including inventory and equipment), instruments, investment property, documents, general intangibles, intangibles, letter of credit rights, commercial tort claims, deposit accounts, supporting obligations, documents, records and the proceeds thereof. As of December 31, 2019 and 2018, we owed Crossroads $3.0 million and $1.5 million, respectively, and the amount is included in "Line of credit" in the consolidated balance sheets.

On April 1, 2019, the Company and Crossroads amended the terms of the agreement. The agreement was extended until March 31, 2020, the rate was modified to 1.33% per month, and the amount the Company can borrow was increased from $3.0 million to $4.0 million.

On February 26, 2020, the Company and Crossroads further amended the terms of the agreement. The agreement was extended until April 1, 2021 and the amount the Company can borrow was decreased from $4.0 million to $3.0 million.




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Secured Borrowing Arrangement

In January 2016, we entered into the Purchase and Sale Agreement with Prestige Capital Corporation ("Prestige") pursuant to which we agreed to sell and assign and Prestige agreed to buy and accept, certain accounts receivable owed to us ("Accounts"). Under the terms of the Purchase and Sale Agreement, upon the receipt and acceptance of each assignment of Accounts, Prestige will pay us 80% of the net face amount of the assigned Accounts, up to a maximum total borrowings of $12.5 million subject to sufficient amounts of accounts receivable to secure the loan. The remaining 20% will be paid to us 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 us 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, we granted Prestige a continuing security interest in and 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. The Purchase and Sale Agreement's term previously was extended to April 1, 2020 and renews automatically for successive one-year periods unless either party receives written notice of cancellation from the other, at minimum, thirty-days prior to the expiration date. At December 31, 2019 and 2018, we had outstanding borrowings of approximately $4.4 million and $1.3 million, respectively.

On April 10, 2019, the Company and Prestige amended the terms of the agreement. The agreement was extended until April 1, 2020. Thereafter the agreement shall renew itself automatically 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. The new agreement also modified certain rates and allows for increased borrowing on foreign borrowings.

For the years ended December 31, 2019 and 2018, the Company assigned to Prestige, accounts with an aggregate face amount of approximately $55.1 million and $46.2 million, respectively, for which Prestige paid to the Company approximately $44.1 million and $36.9 million, respectively, in cash. During the years ended December 31, 2019 and 2018, $40.9 million and $41.0 million, respectively, was repaid to Prestige, including fees and interest.

HSBF Note

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. No payments are due on the Note until November 16, 2020 (the "Deferment Period"). However, interest will continue to accrue during the Deferment Period. The Note will mature on May 16, 2022. The Note includes forgiveness provisions in accordance with the requirements of the Paycheck Protection Program, Section 1106 of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The Company has not determined the amount of forgiveness in connection with the loan, partly due to the ongoing routine changes in the method of calculating the amount.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2019.

Non-GAAP Adjusted EBITDA

In addition to disclosing financial results calculated in accordance with GAAP, this Form 10-K discloses Adjusted EBITDA, which is net loss adjusted for stock-based compensation, gain on settlement of accounts payable, loss on disposal of property and equipment, amortization of prepaid sponsorship fees, interest and other expense, net, depreciation of property and equipment, amortization of intangible assets, provision for doubtful accounts, settlement related charges (including legal) and taxes.

Management uses Adjusted EBITDA as a supplement to GAAP measures to further evaluate period-to-period operating performance, as well as the Company's ability to meet future working capital requirements. The exclusion of non-cash charges, including stock-based compensation and depreciation and amortization, is useful in measuring the Company's cash available for operations and performance of the Company. Management believes these non-GAAP measures will provide investors with important additional perspectives in evaluating the Company's ongoing business performance.

The GAAP measure most directly comparable to Adjusted EBITDA is net loss. The non-GAAP financial measure of Adjusted EBITDA should not be considered as an alternative to net loss. Adjusted EBITDA is not a presentation made in accordance with GAAP and has important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because Adjusted EBITDA excludes some, but not all, items that affect net loss and is defined differently by different companies, our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies.



Set forth below are reconciliations of our reported GAAP net loss to Adjusted
EBITDA (in thousands):


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                                                               Year       Year
                                                             ended      ended


                                                               Dec. 31,   Dec. 31,
                                                             2019       2018

Net loss                                                      $(18,927)  $(10,755)

Non-GAAP adjustments:
Stock-based compensation                                      284        496
Loss on disposal of property and equipment                    5          -
Interest and other expense, net                               3,609      3,897

Depreciation and amortization of property and equipment 339 529 Amortization of intangible assets

                             320        320
Bad debt expense                                              21         1,848
Income taxes                                                  86         100

Adjusted EBITDA                                               $(14,263)  $(3,565)

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with GAAP and form the basis for the following discussion and analysis on critical accounting policies and estimates. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates and those differences could have a material effect on our business, financial condition and results of operations.

Inventory

MusclePharm products are produced through third party manufacturers, and the cost of product inventory is recorded using a standard cost methodology. This standard cost methodology closely approximates actual cost. Inventory is valued at the lower of cost or net realizable 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.




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Revenue Recognition

Our revenue represents sales of finished goods inventory and 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 or services. The reserves for trade promotions and product discounts, including sales incentives, are established based on our best estimate of the amounts necessary to settle future and existing credits for product sold as of the balance sheet date.

All such costs are netted against sales. These costs include end-aisle or other in-store displays, contractual advertising fees and product discounts, and other customer specific promotional activity. We provide reimbursement to our customers for such amounts as credits against amounts owed. To determine the appropriate timing of recognition of consideration payable to a customer, all consideration payable to our customers is reflected in the transaction price at inception and reassessed routinely.

For the years ended December 31, 2019 and 2018, our revenue is recorded net of discounts, and to a lesser degree, sales returns, where discounts for each year total $26.9 million and $33.5 million, respectively. Total discounts accounted for 25% and 28% of gross revenue in each period, respectively.

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 awards' grant date, based on the estimated number of shares 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 our 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. We recognize 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.

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. Expected future cash flows are subject to management estimation. 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.

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.

MusclePharm'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.




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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 trading partners, and are expensed as incurred. For major trade shows, the expenses are recognized within a calendar year over the period in which we recognize revenue associated with sales generated at the trade show. Some of the contracts provide for contingent payments to endorsers or athletes based upon specific achievement in their sports, such as winning a championship. We record expense for these payments if and when the endorser achieves the specific achievement.

Contingencies

The Company records loss contingencies when management determines that the outcome of future events is probable of occurring and when the amount of the loss can be reasonably estimated. Gain contingencies are recognized in the consolidated financial statements when they are realized. The determination of an accrual for a loss contingency is based on management's judgment and estimates with respect to the likely outcome of the matter. Liabilities are recorded or adjusted when events or circumstances cause these judgments or estimates to change.

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.

See additional information in "Note 9. Commitment and Contingencies."

Recently Issued Accounting Pronouncements

See Note 2 to the to the accompanying Consolidated Financial Statements for a discussion of recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance, to us.

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