MusclePharm settles Capstone suit, makes progress on restructuring

By Hank Schultz contact

- Last updated on GMT

MusclePharm settles Capstone suit, makes progress on restructuring

Related tags: Contract

Struggling sports nutrition brand MusclePharm and its contract manufacturer Capstone Nutrition have settled a breach of contract suit.  Capstone reportedly settle for an $11 million payment from MusclePharm and dismissal of MusclePharm’s countersuit.

MusclePharm was at one time one of the fastest-growing sports nutrition brands in the dietary supplement industry.  The company was founded in Denver, CO in 2008 by former NFL player Brad Pyatt.  The company reported revenues of as much as $166 million in fiscal 2015, but it was a castle built on air, as the company lost more than $51 million that year, too. Pyatt, who was ousted as CEO earlier this year, had entered into a wide array of high-ticket endorsement and product development deals with athletes and celebrities such as Tiger Woods, NFL players Johnny Manziel and Colin Kaepernick and bodybuilding legend (and former California governor) Arnold Schwarzeneggar. Unwinding those deals has cost the company significant amounts of capital.

Pyatt was replaced as CEO and chairman on an interim basis by Ryan Drexler, who owns a significant share of the company's stock and holds $6 million of the company’s debt. Drexler is a former executive at Country Life Vitamins, founded by his father, Halbert Drexler. The $11 million payment to Capstone was reportedly funded by a loan from Ryan Drexler to the company.

Laying it off on the suppliers

Part of the financial fallout, according to Capstone, was MusclePharm was not paying on its production contracts. In Capstone’s complaint, filed in District Court for the District of Colorado, Capstone was seeking more than $65 million in damages resulting from breach of the parties’ manufacturing contract. Capstone said it filed the complaint following numerous attempts to resolve the matter with MusclePharm. Capstone, based in Ogden, UT, said it was seeking damages for multiple contractual breaches by MusclePharm, including non-payment of more than $22.5 million for product that MusclePharm ordered and accepted delivery of without payment and more than $40 million for MusclePharm’s failure to meet its minimum volume requirements. 

MusclePharm, for its part, alleged in its countersuit that Capstone’s suit mischaracterized the breach between the two parties in that it was Capstone that was unable to meet its contractual obligations to MusclePharm. Shortly after MusclePharm and Capstone signed their first contract, Capstone merged with another contract manufacturer called Cornerstone. Capstone and its parent company, IRI, assured MusclePharm that it would be able to deliver MusclePharm’s orders on time even with the simultaneous burden of merging the two manufacturing systems and building a new plant in Spring Hill, TN to meet MusclePharm’s production needs. MusclePharm’s suit alleged that IRI and Capstone knew all along that the manufacturing targets would not be met.

MusclePharm digs out

The settlement of the suit marks a waypoint in MusclePharm’s effort to dig out of the hole it found itself in after the previous regime’s profligate spending ways. In its most recent earnings statement the company said it reduced its net loss from $27.6 million to $1.6 million and reduced total operating expenses by 67%.  It’s a longer row to hoe to help the stock price recover.  MusclePharm’s high point was $14 a share in 2014;  the company’s stock is trading at about $2 a share today.

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