Annual report pursuant to Section 13 and 15(d)

Note 12 - Stock-Based Compensation

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Note 12 - Stock-Based Compensation
12 Months Ended
Dec. 31, 2016
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
Stock-Based Compensation

Note 12. Stock-Based Compensation

 

Stock Incentive Plans

 

In 2015, the Board adopted the MusclePharm Corporation 2015 Incentive Compensation Plan (the “2015 Plan”). The 2015 Plan provides for the issuance of incentive stock options, non-qualified stock options, restricted stock, stock appreciation rights, restricted stock units, dividend equivalent right, other share-based awards, and stock-based and cash-based awards that qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986 (the “IRS Code”) to employees, consultants and directors of the Company or its subsidiaries.

 

The 2015 Plan is administered by the Board, unless the Board elects to delegate administration responsibilities to a committee (the “Committee”), and will continue in effect until terminated by the Board. The 2015 Plan may be amended by the Board, without the approval of stockholders, but no such amendments may increase the number of shares available under the 2015 Plan or materially and adversely affect any outstanding awards without the consent of the holders thereof. The total number of shares that may be issued under the 2015 Plan cannot exceed 2,000,000, subject to adjustment in the event of certain changes in the capitalization of the Company. As of December 31, 2016, 1,374,519 shares were available to grant under the 2015 Plan.

 

The Committee determines the methods by which the exercise price of options is paid, including in cash or check, in shares, through a broker-dealer sale and remittance procedure and a net exercise arrangement. The Committee may allow a participant, provided that the participant is not an executive officer or member of the Board, to deliver an interest-bearing full recourse promissory note or through a third-party loan guaranteed by the Company in the amount of the exercise price and any associated withholding taxes. The Committee also determines the eligible individuals who will receive grants and the precise terms of the grants including accelerations or waivers of any restrictions, and the conditions under which such accelerated vesting or waivers occur, such as in connection with a participant’s death, subject to certain limitations in the case of performance-based awards that are intended to qualify as qualified performance-based compensation under Section 162(m) of the IRS Code.

 

Section 162(m) of the IRS Code requires, among other things, that the maximum number of shares awarded to an individual during a specified period must be approved by the stockholders in order for the awards granted under the plan to be eligible for treatment as performance-based compensation that would not be subject to the IRS Code’s limitations on tax deductibility for compensation paid to certain specified senior executives. In any calendar year, the maximum number of shares with respect to one or more awards that may be granted to any one participant during the year under the 2015 Plan is 350,000 shares, subject to adjustment in the event of specified capitalization events of the Company, and the maximum amount that may be paid in cash during any calendar year with respect to any award is $1.5 million. The shares subject to cancelled options will continue to count against the maximum number of shares with respect to which the option may be granted to a participant.

 

Restricted Stock

 

The Company’s stock-based compensation for the years ended December 31, 2016 and 2015 consist primarily of restricted stock awards. The activity of restricted stock awards granted to employees, executives and Board members was as follows:

 

    Unvested Restricted Stock Awards
   

Number of

Shares

   

Weighted Average

Grant Date Fair

Value

Unvested balance – December 31, 2014     2,631,987     $ 11.67
Granted     299,828       4.25
Vested     (1,805,816 )     10.54
Cancelled     (100,000 )     4.29
Unvested balance – December 31, 2015     1,025,999       12.34
Granted     572,154       2.39
Vested     (843,643 )     9.94
Cancelled     (260,000 )     13.00
Forfeited     (116,085 )     8.65
Unvested balance – December 31, 2016     378,425       3.45

 

The total fair value of restricted stock awards granted to employees and the Board was $1.4 million and $1.3 million for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, the total unrecognized expense for unvested restricted stock awards, net of expected forfeitures, was $1.1 million, which is expected to be amortized over a weighted average period of 1.4 years.

 

 

Restricted Stock Awards Issued to Ryan Drexler, Chairman of the Board, Chief Executive Officer and President

 

In December 2016, the Company issued Mr. Ryan Drexler 200,000 shares of restricted stock pursuant to an Amended and Restated Executive Employment Agreement (“Employment Agreement”) with a grant date value of $0.5 million based upon the closing price of the Company’s common stock on the date of issuance. These shares of restricted stock vest in full upon the first anniversary of the grant date.

 

In October 2015, the Company entered into loan modification agreements with the banking institution under its line of credit and term loan to: (i) change the maturity date of the loans to January 15, 2016, (ii) prohibit the loans to be declared in default prior to December 10, 2015, except for defaults resulting from failure to make timely payments, and (iii) delete certain financial covenants from the line of credit. In consideration for these modifications, Ryan Drexler, and a family member, provided their individual guaranty for the remaining balance of the loans of $6.2 million. In consideration for executing his guaranty, the Company issued to Mr. Drexler 28,571 shares of common stock with a grant date fair value of $80,000, based upon the closing price of the Company’s common stock on the date of issuance.

 

Accelerated Vesting of Restricted Stock Awards Related to Termination of Employment Agreement with Brad Pyatt, Former Chief Executive Officer

 

In March 2016, Brad Pyatt, the Company’s former Chief Executive Officer, terminated his employment with the Company. Pursuant to the terms of the separation agreement with the Company, in exchange for a release of claims, the Company agreed to pay severance in the amount of $1.1 million, payable over a 12-month period, a lump sum of $250,000 payable in March 2017 and reimbursement of COBRA premiums. In addition, the remaining unvested restricted stock awards held by Brad Pyatt of 500,000 shares vested in full upon his termination in accordance with the original grant terms. In connection with the accelerated vesting of these restricted stock awards, the Company recognized stock compensation expense of $3.9 million, which is included in “Salaries and benefits” in the accompanying Consolidated Statements of Operations for the year ended December 31, 2016.

 

Restricted Stock Awards Issued Related to Attempted Financing Agreement

In May 2015, the Company negotiated the termination of an attempted financing agreement with a lending institution and issued 50,000 shares of its common stock. The fair value of the common stock was $325,000 based upon the closing price of the Company’s common stock on the date of issuance, and was recorded as “Selling, general and administrative” expense in the accompanying Consolidated Statements of Operations.

 

Restricted Stock Awards Issued Related to Consulting/Endorsement Agreement

 

In May 2015, the Company entered into consulting and endorsement agreements with William Phillips. In connection with the endorsement agreements, the Company agreed to issue a total of 50,000 shares of its restricted common stock. The restricted common stock issued had a grant date fair value of $292,000, which was included as a component of prepaid stock compensation and “Additional paid-in capital” in the Consolidated Balance Sheet upon issuance. The prepaid stock compensation was originally amortized over the performance period of three years. In connection with the restructuring disclosed in Note 5, the Company terminated the consulting and endorsement agreements with William Phillips and wrote off the unamortized prepaid stock compensation balance of $268,000 in August 2015. In connection with the consulting agreement, the Company also agreed to issue restricted shares worth $25,000 (based upon the weighted average stock price during the 15-day-period prior to issuance) within 10 days after each subsequent three-month period term. In July 2015, the Company issued 5,189 shares of its common stock to William Phillips. The fair value of the common stock was $28,000 based upon the closing price of the Company’s common stock on the date of issuance, and was recorded as “Advertising and promotion” expense in the accompanying Consolidated Statements of Operations. No additional common stock will be issued to William Phillips under this agreement.

 

 

In July 2014, in connection with an endorsement agreement, the Company issued 446,853 shares of its restricted common stock to ETW with an aggregate market value of $5.0 million, as further described in Note 15. In September 2014, the Company entered into a consulting agreement with a third-party service provider and issued 30,000 shares of its restricted common stock with an aggregate market value of $402,000. These restricted stock awards granted to non-employees were initially included as a component of “Prepaid stock compensation” and “Additional paid-in capital” in the Consolidated Balance Sheet upon issuance. The prepaid stock compensation was originally amortized over the performance period. In connection with the restructuring plan disclosed further in Note 5, the Company wrote off the unamortized prepaid stock compensation balance related to these restricted stock awards to non-employees of $3.8 million in August 2015.

 

Restricted Stock Awards Related to Energy Drink Agreement

 

In January 2015, the Company entered into an energy drink agreement with Langer Juice and Creative Flavor Concepts to expand into a new product line. In connection with the agreement, the Company issued a total of 150,000 shares of its restricted common stock with trade restrictions for a period of three years. The restricted stock awards issued had a grant date fair value of approximately $1.2 million, which was initially included as a component of “Prepaid stock compensation” and “Additional paid-in capital” in the Consolidated Balance Sheet upon issuance. The prepaid stock compensation was originally amortized over the performance period of ten years. In connection with the restructuring plan disclosed further in Note 5, the Company discontinued this product and wrote off the unamortized prepaid stock compensation balance of $1.1 million in August 2015.

 

Stock Options

 

The Company may grant options to purchase shares of the Company’s common stock to certain employees and directors pursuant to the 2015 Plan. Under the 2015 Plan, all stock options are granted with an exercise price equal to or greater than the fair market value of a share of the Company’s common stock on the date of grant. Vesting is generally determined by the Compensation Committee of the Board within limits set forth in the 2015 Plan. No stock option will be exercisable more than ten years after the date it is granted.

 

In December 2016, the Company issued options to purchase 139,277 shares of its common stock to Mr. Peter Lynch, the Company’s Chief Financial Officer. These stock options have an exercise price of $2.39 per share, a contractual term of 10 years and a grant date fair value of $2.09 per share, or $0.3 million, which is amortized on a straight-line basis over the vesting period of three years. In February 2016, the Company issued options to purchase 137,362 shares of its common stock to Mr. Drexler, the Company’s Chief Executive Officer, President and Chairman of the Board, and 54,945 to Michael Doron, the Lead Director of the Board. These stock options have an exercise price of $1.89 per share, a contractual term of 10 years and a grant date fair value of $1.72 per share, or $0.3 million, which is amortized on a straight-line basis over the vesting period of two years. The Company determined the fair value of the stock options using the Black-Scholes model.  The table below sets forth the assumptions used in valuing such options.

 

For the Year Ended 

December 31, 2016

 
Expected term of options 6.5 years  
Expected volatility-range used 118.4%-131.0%  
Expected volatility-weighted average 125.7%  
Risk-free interest rate-range used 1.27%-1.71%  

 

 

For the year ended December 31, 2016, the Company recorded stock compensation expense related to options of $0.2 million. There were no options granted nor outstanding during the year ended December 31, 2015.

 

 

Stock Options Summary Table

 

The following table describes the total options outstanding, granted, exercised, expired and forfeited as of and during the years ended December 31, 2016 and 2015, as well as the total options exercisable as of December 31, 2016. Shares obtained from the exercise of our options are subject to various trading restrictions.

 

  Options Pursuant to the 2015 Plan     Weighted Average Exercise Price Per Share     Weighted Average Fair Value of Options Granted During the Year     Weighted Average Remaining Contractual Life (Years)       Aggregate Intrinsic Value
Issued and outstanding as of December 31, 2015   $   $         $
Granted 331,584     2.10     1.88              
Exercised                      
Forfeited                      
Issued and outstanding as of December 31, 2016 331,584     2.10     1.88     9.48      
Exercisable as of December 31, 2016 72,114   $ 1.89     1.72     9.15      

 

As of December 31, 2016, the total unrecognized expense for unvested stock options was $0.5 million, which is expected to be amortized over a weighted average period of 1.6 years.

 

Other Stock-Based Compensation- Agreements with Worldwide Apparel, LLC – MusclePharm Apparel Rights

 

In February 2015, the Company entered into an agreement with Worldwide Apparel, LLC (“Worldwide”) to terminate Worldwide’s right to use MusclePharm’s brand images in apparel effective March 28, 2015. The brand rights were originally licensed in May 2011, and amended in March 2014 prior to the termination. The consideration related to the acquisition of the MusclePharm apparel from Worldwide consisted of a cash consideration of $850,000 and 170,000 shares of MusclePharm common stock with an aggregate fair value of $1.4 million. The total cost of the MusclePharm apparel acquisition of $2.2 million is included in the caption brand within “Intangible assets, net” in the Consolidated Balance Sheets, and is subject to amortization over a period of seven years.