Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.
August 14th MusclePharm (OTCQB:MSLP) released Q2 earnings and hosted a conference call, which showed that the company is continuing to increase sales at a blistering pace. The company reported net sales (which accounts for discounts offered) of $25.5M, compared to $22.6M the previous quarter and $15.4M the year ago quarter. These figures equate to a 13% increase from last quarter's sales and a 66% increase from the same period a year ago. While the revenue growth of the company is impressive in and of itself, management gave several more reasons to get excited about the company's future during the second quarter conference call.
Partnership with Costco
MusclePharm recently announced a partnership with Costco (COST) and elaborated upon this in the conference call. Costco will begin stocking 5 pound tubs of MusclePharm's Combat protein supplement in all 430 of its domestic locations beginning in October. The implications of this agreement are huge for MusclePharm because it will take their products from the niche market of hardcore fitness fanatics and serious athletes and significantly increase exposure to the mass of consumers that shop at Costco. The placement on Costco shelves should serve as an immediate boost to sales figures and will also have the spillover effect of increasing brand awareness, which management expects to drive sales of other MusclePharm products that Costco will not be carrying.
Partnership with Arnold Schwarzenegger
MusclePharm has announced a partnership with body building legend Arnold Schwarzenegger, in which they will develop a mass-market product together. This partnership will use Arnold's expertise and pre-existing image to create a product that will appeal to a larger market than previous MusclePharm products, which should serve as yet another catalyst to fuel more explosive growth from the company. Arnold is internationally recognized as a fitness icon and could serve to boost international sales, which came in at $9.8M for the quarter (56% higher than international sales in Q2 2012).
"FitMiss" line for Women
The company continues to add to its product offerings in order to appeal to new markets. The "FitMiss" line of products are made and marketed to women, which is an underserved market segment in the sports nutrition area. Management reported that they did a soft launch of the product line and received good feedback from customers. Serving the market for active women could turn out to be another major driver of revenue for MusclePharm.
MusclePharm gave an update on its application to be uplisted to the NASDAQ exchange from the OTC market. Management said they should know whether this will go through later in Q3 or in Q4. An uplisting would be very good for MSLP because it would give the stock more coverage and likely a more predictable stock price. I think that being on the OTC market has hurt MSLP's stock price and that an uplisting could create a catalyst for the stock to move higher. A recent example of this would be biotech company Organovo (ONVO), which was mostly trading between $2-3 before being uplisted to the NYSE in July, and since then its shares have mostly traded between $5-7 despite little change in the business itself.
Closer to Profitability than ever
MusclePharm reported a net loss of $2.6M in Q2, which would have been a small profit if not for one-time consulting fees totaling over $3m. The company also ran into expenses as they made the decision to handle and manage their own inventory, a move that will give the company more control over their inventory and supply chain as well as bring down costs. In the future they said their margins should increase to Q1 levels (gross margin of 36% of net sales).
As with any stock, no matter how bright the future looks it is also extremely important to consider the risks that are present. The risk that is putting the most pressure on shares right now is that of raising funds by diluting the shares. This is a very valid concern considering that MSLP's outstanding share count (adjusted for the reverse split) was less than 1M going into 2012 and has since ballooned to 10.6M fully-diluted shares. This company has been experiencing heavy growth and has been reinvesting all its funds into more growth, which has not allowed the company to post any profits yet. They have had the tendency to raise money through selling shares to insiders, and several analysts called them out on this in the Q2 conference call. Management said they are looking at other methods for raising cash which would not dilute the shares any further, but whether this will actually happen remains to be seen.
Another potential risk is that the explosive revenue growth we have seen thus far in MSLP's short tenure as a company will slow down. This is unlikely in my opinion, given the growth catalysts I've shared above, but it is always a possibility when the growth from the past has set the bar so incredibly high. I think that any signs of slowing could have a negative effect on the stock price, especially given that the company has yet to turn a profit.
It is my opinion that the upcoming catalysts and opportunities MusclePharm is tapping into mean that this stock has a favorable risk/reward outlook at current prices. The possibilities from the new partnerships, new product lines, and potential uplisting could send the stock significantly higher for patient investors who are willing to wait and see if the company will be successful in reducing costs enough to produce profits. That being said it is still a volatile OTC stock at this time and it may be subject to further unpredictable price fluctuations, so this stock requires a high tolerance for risk.