With restructuring charges put to rest, MusclePharm’s turnaround plan gains credence

By Hank Schultz

- Last updated on GMT

With restructuring charges put to rest, MusclePharm’s turnaround plan gains credence
Embattled sports nutrition brand MusclePharm has turned a corner in its recovery efforts, according to CEO Ryan Drexler. The company, whose continued existence at one time seemed to hang in the balance, is on a solid growth curve, he said.

In a recent year end earnings call with analysts, Drexler said MusclePharm is becoming “a disciplined healthy company with progress towards constant profitable growth.”​ The call was posted in transcript form on the site seekingalpha.com​.

MusclePharm was once a wunderkind among sports nutrition brands. The company, co founded by former CEO Brad Pyatt in 2008, grew at a frenetic pace that included launching hundreds of SKUs and inking dozens of high profile endorser deals. At one time, the company had promotional deals with the likes of Arnold Schwarzenegger, Tiger Woods and the Manchester City Football Group, operator of current Premiere League champions Manchester City FC.

The company’s revenues expanded rapidly, but expenses rose even faster, and for all its sales and marketing prowess, profitability remained elusive. In 2015, MusclePharm reported more than $166 million in revenue, but also chalked up $51 million in losses.

And not all of those expenses were properly accounted for, according to the US Securities and Exchange Commission​. SEC charged that the company did not properly disclose nearly $500,000 in perks paid to officers including Pyatt, failed to disclose Pyatt’s personal bankruptcy in 2008, as well as other violations. Pyatt was ousted as CEO in 2015 after agreeing to pay a $150,000 fine.

Stopping the bleeding

Drexler said the company has been engaged in a restructuring plan since Pyatt’s ouster. This included cutting out more than two-thirds of the existing SKUs and unwinding the high ticket endorsement deals. The company’s management also had to put the supply end of the picture in order. In 2016 MusclePharm settled a legal dispute with contract manufacturer Capstone​.

As part of the restructuring plan MusclePharm has relocated its base of operations from Denver, CO to Burbank, CA. The move resulted in a reduction in headcount, which cut the company’s salary and benefits bill by more than 50%.

“While there’s still work to do, today, we are reporting a strong fourth quarter that reflects the positive impact of the company’s restructuring we began in 2015. . . . Revenues were $25.6 million, which is an increase of 5% over the third quarter and represents our first consecutive quarter revenue growth since our restructuring. Our operating loss narrowed by 28% over third quarter and our adjusted EBITDA including onetime event for the quarter was $1.3 million, which we believe is a clear indication of our performance momentum,”​ Drexler said.

Among the work that still needs to be done is paying off a settlement with Manchester City. In July 2017, the company agreed to pay $3 million to settle what the football club alleged was a breached sponsorship agreement.  MusclePharm has already paid $1 million with two more installments due this year and next. Also, the company is in a continued legal dispute with its insurance carrier relating to the costs of the SEC enforcement action​.

Looking to the future

Significantly, however, Drexler said there were no restructuring charges to report in the fourth quarter, bolstering the assertion that the worst of the pain is over.

“With the restructuring behind us, we have crafted a strategy focused on four key areas: Number one, diversifying our customer base; number two, building out a world-class consumer-based marketing capability; number three, investing in new product development; and number four, managing costs to ensure profitable revenue,”​ he said.

Among the new products the company has launched an MP Natural line, which has an organic, non GMO positioning. And MusclePharm has dipped its toe again into the endorsement pool, having signed contracts earlier this month with two prominent UFC fighters​.

As far as the company’s book value is concerned, the restructuring effort still has a long way to go. MusclePharm’s stock once traded as high as $14 a share in 2014 before the SEC problems came to light and the scale of the losses it was incurring became apparent. It trades at about 65 cents a share today.

Earnings details

For the fourth quarter, MusclePharm recorded $25.6 million in revenue, down from $26 million in the fourth quarter of 2016. The company reported no restructuring-related charges in the fourth quarter of 2017 compared with a reversal of $898,000 for the fourth quarter of 2016. Net revenue for 2017 was $102.2 million, compared with $132.5 million for 2016.


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