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Executives

Robert Prag - President, Del Mar Consulting Group, Inc.

Brad Pyatt - Co-Chairman, Chief Executive Officer and President

Gary Davis - Chief Financial Officer

Richard Estalella - Chief Operating Officer

Sydney Rollock - Chief Marketing Officer

Analysts

Jack Wallace - Sidoti & Company

Philip Anderson - Pinnacle Fund

Keay Nikae - Ascendiant Capital

Nelson Obus - Wynnefield Capital

Jeff Corrado - Furey Research

Wilson Jaeggli - Southwell Partners

Peter Black - Wynnefield

MusclePharm Corp. (OTCQB:MSLP) Q3 2013 Earnings Call November 15, 2013 11:00 AM ET

Operator

Greetings. Welcome to the MusclePharm Corporation third quarter 2013 conference call. (Operator Instructions) It is now my pleasure to introduce your host, Bob Prag, President of Del Mar Consulting Group. Thank you, Mr. Prag, you may begin.

Robert Prag

Thank you. Today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to MusclePharm's future business prospects and opportunities as well as anticipated results of operations. Forward-looking statements represent only the company's estimates on the date of this conference call and are not intended to give any assurances as to the actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could cause MusclePharm's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These risk factors include those contained in MusclePharm's Annual Report on Form 10-K most recently filed with the SEC. Please note that the company assumes no obligation to update any forward-looking statements after the date of this conference call to conform with the forward-looking statements actual results or to changes in its expectations.

At this point, I am proud to introduce the CEO of MusclePharm, Brad Pyatt. Go ahead, Brad.

Brad Pyatt

Thank Bob, and hello, everybody. I am pleased with Q3. It was another very strong quarter for MusclePharm. Our results show the power of our strategy to manage the pace and the quality of our growth. Topline Q3 delivered 9% growth sequentially and 51% growth year-over-year. This puts us on pace for another record growth quarter and on pace for another record year.

We continue to demonstrate strength across our sales and distribution channels, while dramatically improving our operation an additions to our executive team. Our balance sheet continues to improve with $22.7 million shareholder equity versus a negative $9.8 million in shareholder equity in 2012.

We are excited to announce for the first time, MusclePharm will be giving a comprehensive guidance for 2014. Shareholders can expect this to take place sometime in mid-January.

My leadership team is fully in place and remains laser focused on managing the portfolio to capture the opportunities it creates. This was on full display in Q3 with the successful launch of the Arnold Schwarzenegger series that outperformed our original projections.

In addition, the most of our brands continue to expand the market and gain share domestically and internationally. We will continue to execute our aggressive growth strategy and stay focused on adding sophistication to MusclePharm with continued innovation, science, while leveraging our sales and distribution channel, which will result in sustainable growth.

We recently announced an agreement to acquire the assets of BioZone. This opportunity provides cutting-edge technology in QuSomes that will allow us to bring sophistication and innovation to the sports nutrition market with new delivery systems. Richard will elaborate on the operational opportunity that this new acquisition presents for the future of MusclePharm. I can also report we're in current and active discussions with NASDAQ with respect to potential uplifting and hope to bring this to a conclusion shortly.

I would like to now turn this over to our CFO, Gary Davis.

Gary Davis

Thank you, Brad. MusclePharm is pleased to report that in 2013 quarter-over-quarter, we have continue to strengthen our P&L and balance sheet. For the three months ended September 30, our net sales of $25.3 million, is 36.4% stronger than the same three months of 2012. For the nine months ended, our net sales of $73.4 million, is 45.2% over the first nine months of 2012.

For operation expenses, we had $12.3 million of operating expenses in the first three months and $31.8 million for the nine months ended. For the quarter ending September 30, 2013, the company had an operating loss of $4.8 million. $4.2 million of the $4.8 million was non-cash charges.

Our balance sheet continues to grow and improve, and at September 30, our total asset was $41.5 million compared to $6.8 million at December 31, 2012. Our cash position continued to strengthen with $5.7 million compared to only $10,000 at the end of 2012. We've acquired $9.6 million of inventory and our shareholders equity finished positive at $22.7 million. As Brad Pyatt mentioned, we are planning to give comprehensive guidance in 2014 in the month of January.

Now, I'll turn this over to Richard Estalella, our Chief Operating Officer.

Richard Estalella

Thanks Gary. Gross margins for the quarter came in at 29.2%. Gross margin was affected by our Assault end-of-life inventory management plan and an aggressive promo funding program with our customers to drain any remaining old inventory in the field. Absent of these two initiatives, we would have had gross margin in excess of 33%.

Significant growth from 2012 gross margin of under 22%. We've established a solid foundation to continue to grow margins in Q4 and 2014. We will have a keen focus on increasing gross margin dollars from quarter-to-quarter. You may see gross margin percent bounce around as we expand placement of all of our brands, but we will definitely hit our 2013 goal of gross margin percent at 30%.

Inventory build, we successfully transitioned from a consignment inventory model to owning $9.6 million of inventory. We accomplished this without increasing any debt, while maintaining cash balances at all times between $5 million and $7 million. We now have the safety stock required to generate best practice fill rates and support topline growth for 2014.

Some of the key highlights for the quarter include successful production to support the Costco chain-wide launch of our Combat product, successful distribution of our new Arnold Schwarzenegger line and record distribution internationally.

Next category I want to just kind of quickly chat with you about is continued focus on cost controls. Centered around headcount management, analysis of advertising and promo discount spend, which Sid will talk further in his update. This will allow us to meet our 2014, net revenue, EBITDA and earnings per share targets. We're in the midst of negotiating a line of credit with a private equity firm, that we're building a strategic relationship with. We plan to have that completed in early December.

BioZone Labs, some of the highlights of what that brings to the MusclePharm family; it speeds of our ability to launch a West Coast distribution center, which we didn't have planned until middle of next year; we will not be able to do that sooner; comes with innovative IP and technology that will allow us to incorporate into our existing products and new products in our pipeline; ability to support our expansion into the liquids and gels category; provides us the ability to further diversify our current product offerings; and add significant staff in the areas of research and development and quality control, to support our new product pipeline for 2014.

So we continue to build an infrastructure to have us well-positioned for future growth across all businesses without any constraints related to capacity or systems.

With that, I'm going to turn it over to Sid Rollock, our Chief Marketing Officer, for his update. Sid?

Sydney Rollock

Thank you very much, Richard. I am glad to be a member of the team. And like Richard, I had the opportunity to meet Brad, to my venture, and came away totally impressed with his vision and passion to match the global market opportunity with the MP brand.

My track record, over the last 20 years and passion for building iconic brand portfolio with such notable Fortune 500 companies and GlaxoSmithKline Consumer Healthcare, Campbell Soup and General Mills Inc. have positioned me to help the team expand on the tremendous growth opportunity prevented today within the nutritional supplement space.

We operate in an exciting sector that is experiencing dynamic global growth. The global demographics are moving into MusclePharm space, attracting young and mature consumers, leading active lifestyle. We believe our brands are poised to compete in the global $75 billion-plus vitamin and supplement sector. And 2013 continues to illustrate our growth strategy is working.

Total sales are on pace for year-on-year growth to exceed our $100 million guidance. The Arnold line as share from MP is gaining great trial with only two months of sale. International is on pace to work with an over 30% of our total business in just three short years and is going to be up over 85% year-on-year. And most importantly, the innovation pipeline is well-positioned for 2014 and beyond.

As Brad alluded to, at the beginning of the call, we are excited with the progress that we continue to make against our 2013 objectives. As Brad, stated at the beginning of the year, the first priority, we're going to improve our balance sheet position and we have done that. Our second priority was to bring on board an executive leadership team to transition the company to a professional organization. We have done that.

The third priority is to build operational capabilities and efficiency, to be a world class operator. We are in progress of doing that with addition of Richard and the tremendous strive that he has made with his team in a manner of just four short months. And that we will continue to deliver innovation and growth that would represent first-to-market entries within the category space. And last but not least that we will continue to demonstrate aggressive growth in the category.

In closing, I'd like to say, that MusclePharm is poised to be best in shelf, with the superior product, science, safety and efficacy, customer partners and our unique brand experiences, that connect us with our consumers.

I am really excited to share that in January of 2014, we will come back to you with our first long-term strategic plan that outlined our objectives and our strategic growth platform. We want to thank you all for joining us today and we're really excited that you are a member of the MP Nation.

Robert Prag

Thanks. Sydney. Operator, that concludes the presentation. So if you could please open up for Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from the line of Jack Wallace with Sidoti & Company.

Jack Wallace - Sidoti & Company

Question for you, the Assault, blowout here in the third quarter, heavily discounted. You talked about changing formulas on, I guess, a more regular basis than some of your competitors. How often will this happen and how often will you have an impact such as we've seen here in Q3?

Sydney Rollock

Jack, one of the things that we've implemented in just last three or four months is that a full product pipeline schedule, so that we can properly manage end of life on any transitions like this. So the transition from the old Assault to the new Assault and the next level of technology was definitely the right decision.

And as you know historically both Brad and MP in general, has always known how to get the right product out at the right time. I think the missing piece for us was understanding how much product on a category that was a large percentage of our business was sitting out there and how long it would take the transition out of it.

So now we've got a track record for that and we'll be planning further out. So the answer is we'll do it as often as it will keep us cutting edge with our products. The big difference going forward will be, we'll plan an end of life strategy that basically phases out not only our on hand in victory, but our customers on hand in victory.

And quite frankly I think that because of the fact that earlier in the year, and previous launches has not gone as effective as this one did, I think everybody went a little happier, and kind of just in case the launch got delayed, and when we launched on time and on target, I think that that left a bit more inventory up in the marketplace, and we made this strategic decision to not have this product come back to us, but rather sell it through in the marketplace. I still think that was the right thing to do, even though it may have given us a short year hit against margin, but it got a lot more product in the hands of end-users.

And again, the folks that took and bought back Assault at a lower price, many of those were first time users, and now they'll come back and buy the new product. So long-term it will pay off. In the short term, I know that a lot of folks are just pointing about it, but rest assured that we understand the end-of-life strategy, and next time we will do it much more effectively.

I'll give you a perfect example, we are in the midst right now of transitioning one of our flavors on the Combat line and that the new flavor will roll out in December. We've totally managed our inventories, and the new flavor will come out with basically a phase-in that will create none of this issue that we dealt with here. That's how we'll manage future product transitions.

But again, the secret to what we've been able to deliver in the topline growth that we delivered is not being concerned or scared about going to the next level of technology or letting somebody else beat us too. So we can't let that be a shutdown or slowdown or things like this. We just have to plan better and I think we've got the plan in place how to make sure that the one thing that we were weak on, we're never weak on again.

Jack Wallace - Sidoti & Company

And then as a follow-up there to the discounting figure. You have here another early quarter, maybe your first full quarter with Arnold and then the fitness nationwide launch in Q1. Can you talk to us little bit about what you expect to have the discounted growth revenue to be in Q1, Q2, Q3, is it going to be somewhere in that 13, 12 range or are we going to see it maybe sneak back up into the mid-teens?

Richard Estalella

So I'll start out, then I'll transfer it over to Sid, because he's been doing a great job, kind of getting the sales team and our customer base kind of align on pricing programs, but one of the things that we're real happy about is again, the way we've launched these lines, again especially with the fitness where it's a very unique line designed towards women, and also the Arnold line that has such an icon name catch to it. It really are as aligned as a commodity brand, like MP would be with pre-workout, et cetera, et cetera. So it's just a bit of competitive advantage there.

So I think that although your [ph] OE is a bit more aggressive in new placement, I think you've build a solid foundation and the excitement around on the Arnold line has allowed us to get in a lot faster and a lot more effectively than most brands would, and I think again it's starting to gain extreme momentum. I'm sure you've probably all seen that the Walgreen has just taken the line chain-wide, picking some of the products and is expanding on the line chain-wide.

So again, we're really, really accomplishing things that normally take most companies years to do. But again, I think will be very effective and it will be within our discount targets. But Sid, I don't know if you expand a little bit about, you're being head of the sales team, I know it's pretty sharp.

Sydney Rollock

Thank you for that, Richard. I think Richard elaborated on that quite well. What I will represent is that you will find our discounts coming down and we will share more with you in Q1, in January 2014, in terms of those strategic targets. But we don't anticipate those discount rates getting back to the historical levels that they have been. And we're working aggressively now to give the team, what I call meaningful targets, setting consistent pricing strategy across business channels and making sure that we promote the premium aspect of all of our products.

Operator

Our next question comes from the line of Philip Anderson with Pinnacle Fund.

Philip Anderson - Pinnacle Fund

I appreciate that disclosure about Arnold. It's about $3.6 million of sales in the first two months, which just doing the simple extrapolation, suggest it's under $22 million annualized revenue run rate. But can you give us some granularity on the plan to broaden distribution of the Schwarzenegger products next year and particularly in brick and mortar stores, what type of stores you're looking to go into, whether it's change or mom and pops, how you'd most effectively distribute and can you give us some expectations or some thoughts regarding how many doors, Arnold maybe in, say by mid-2014 or end of 2014?

Brad Pyatt

I'll take a first crack at that, Richard. I think at this point in time, we've been focused on what our traditional specialty channel have been and also international, and we've met with great, great acceptance and we're only now starting to get into what I would call strategic talks with the some very, I'd called them strategic partners, on the brick and mortar front or the traditional FDM front.

And I think it's a little too early to disclose those type of specific numbers, but we will have I think a little bit more granularity in January, that's why we're so excited. All of these irons are in the fire, and by January, I think we'll be able to put some parameters around them, so that it can help you do what you do. And at the same time, not have us over-promised. So if you could wait until January, we'll be excited to start to reveal a little bit more of the plan on the brick and mortar front.

Philip Anderson - Pinnacle Fund

Any idea at this point, whether it's early January or late January that I will have to wait?

Sydney Rollock

Not too long, I think we're shooting for, I would say, mid-to-late January.

Brad Pyatt

So just to kind of add to what Sid said, again I think that we launched with the real sharp strategy here. We've partnered on the brick and mortar side with GNC and they've really committed to the brand. We're partnering extremely well on kind of getting that -- they've got the prominence of doors in that arena. So I think it was the right strategy.

And on the distributor side, we've launched exclusively with Europa, again the largest distributor in our space. And they've had an incredible success of getting to a very high-paced percentage of their doors, right off the bat. So we're really hitting it from all angles. And of course, the area was on the online sites. We gave exclusivity to our bodybuilding.com.

So we've really got that three of the major players in each one of those segments, very aligned strategically to launch this product successfully. So don't think that we're loosing anytime, its part of this. It's actually going extremely well. And internationally, actually we're wide open, because I think that it just demanded that and we've been very, very, very surprised of the growth and opening orders outside of the U.S. borders.

Philip Anderson - Pinnacle Fund

I would say the $3.6 million of sales in the first two months, certainly is indicative, that you're having the great reception. On other question, on some of the advertising spent with variable costs, it doesn't necessarily have a direct definable contribution to the company. How do you plan for your advertising spend and monitor it's results and try to determine, if you're achieving a satisfactory return on invested capital, the return on investment for advertising. Can you help us understand how this is being controlled and run in a methodical businesslike manner.

Brad Pyatt

Yes. We're in the early stages of I'd say putting, bringing the marketing mix analysis models into our fold. We're in the process right now of creating the right disciplines, systems and tools, so what I see as establishing the proper baseline. Once we now have the proper baselines across the MP brand portfolio, now to include Arnold as well as FitMiss, we'll be better able to start to articulate what those ROI expectations are. The company has been growing so fast across, I would call it, multiple brands within the context of the MP line, and now with the addition of two great sub-lined that what we have to do is make sure that; one, we've got the right baseline metrics in place; and then secondly, that we're appropriating the right time horizon in terms of what that payback looks like.

As you know, advertising can have an ROI in terms of a negative upfront return, but definitely have a longer-term payback and at an aggressive growth company, that's what we're looking for. But rest assured that as you can you see, our advertising tends to be the type of more effective, which is definitely more in terms of word of mouth and consumer experiences, and sharing what I call the actual results of the product.

As you know, one of the cofounder, Cory, who's got a tremendous following online, and for example, we're starting to put in place the tools and metrics to help us understand or soak the power of our social marketing scores. And the early indication are, which we'll share more in January that we compare very favorably to what I would call the giants in the industry.

So rest assured moving forward that you'll see us talk a little bit more about ROI. But keep in mind that our objective continues to be aggressive growth. We're looking for long-term payback versus short-term returns on investment.

Richard Estalella

Just to add to that again, a little bit is that, again we're always going to and especially in the year-over-years here, our advertising expense is always going to be much higher than those companies in our space. Because again, don't forget that our goal is to grow topline to get as much market share as we can.

But again, the big difference now would sit onboard, even though we've been trying to really monitor it imperially, we needed somebody with this expertise to be able to really drive the calculation of ROI on that spend. And again, it's really gone to another level just in the short period of time than it's been here and in '14 it will be incredible we'll be able to do with those dollars.

Operator

Our next question is from the line of Keay Nikae of Ascendiant Capital.

Keay Nikae - Ascendiant Capital

Can you tell us what the mix was between U.S. and o U.S. sales?

Brad Pyatt

Richard, would you like to take that?

Richard Estalella

We've been trending on an international basis. We've been trending at about 30%, again super year-over-year growth. And quite frankly the nice thing about those type of numbers is that, our Head of International Sales has really expanded into topnotch distributors and new markets that we haven't seen the annualized effect of yet, because he has been building it all year along. So we expect that number to stay that strong going forward, even though he's had a very high growth rate this year, year-over-year. So about 30% internationally and of course the remainder spent is over the domestic pieces of our business.

Keay Nikae - Ascendiant Capital

And just an accounting question, but now that you've substantially acquired all the assets of BioZone, how are you going to treat? And what's a status of the convertible promissory note and the warrants you have?

Richard Estalella

Garry, do you want to take that one?

Gary Davis

I could make around that. We had $2 million notes of which BioZone returned $1 million plus about $32,000 of interest. And then the other $1 million of our note we converted into 5 million shares of BioZone common stock. And on November 7, we began selling those 5 million shares for approximately $1.5 million. So strategically we try to bring in some people who wanted to be a part of the BioZone deal with us and looking forward to the growth that comes from there.

Keay Nikae - Ascendiant Capital

So you're still on some additional shares of BioZone?

Gary Davis

We still own the warrants.

Keay Nikae - Ascendiant Capital

And then just finally, on the OpEx, I appreciate that you broke out the non-cash portion of that, but when we think about your OpEx, in general in Q3, what part of that is one-time in nature?

Gary Davis

We had about $1.1 million of what we considered one-time non-recurring expenses, some of that varied over between legal expense. And we've been satisfying the SEC enquiry and so this is basically considered one-time. We're almost backed up with that issue.

Richard Estalella

And just to add to that also on the ongoing operational expenses. Again, as we mentioned we're really putting an infrastructure in place from an IT perspective and even a staffing perspective to be able to deal with the expected growth in 2014. So you're seeing the effect of some of that now that we'll see the leverage in the coming years.

Keay Nikae - Ascendiant Capital

And then just your other comment this morning about the audit committee's review of the past financials, and their view of no need to restate, where does this stand with the SEC?

Richard Estalella

I think we're very comfortable that we provided the SEC with everything they've requested. And again that everything that we've submitted has not pointed out any major concerns. Again, it's still ongoing, but we feel very comfortable, number one, that current year 2012 is not an issue, which really again past years, and its pre-Gary, it's pre-occur in auditors. I think that we've got a very solid process in place now. We just have to work through some of this. And Gary, I'll turn it over to you.

Gary Davis

I mean, this in SEC enquiry was really revolved around the reporting of 2010 and 2011. And as Richard said, we've been having meetings and the correspondence that we've had from the SEC to date is showing that there is nothing that will have a material impact on the company. So it's all looking good. It's going to come forward without any impact.

Operator

Our next question is from the line of Nelson Obus of Wynnefield Capital.

Nelson Obus - Wynnefield Capital

Well, two questions, one is, and we've been talking around it, but let's look ahead say nine months, and you're in a lot of channels. But can you make a couple of generalizations about what point of sale data you're going to have on a regular basis?

Brad Pyatt

As Richard alluded to, that's one of the priorities that have put in place, in terms of making sure that we are now what I call intelligent, as it relate to our consumption sales and not just our X-factor shipment sales. So we are in the process now. I'll say we put out -- we're in the process of putting out RFP for some of the big data providers folks like Nielsen as well as Euromonitor, have a meeting next week, with one of those providers.

And just to let you know that's the type of sophistication we'll be looking to implement in 2014, which again will help us to get to better ROI metrics using sophisticated marketing mix analysis model. So we're really excited. And I hope that answers your questions. But I would say that by mid-year 2014, it's my anticipation and the team's anticipation, when I say my, the collective team's anticipation, that we'll have that data provider on board and partnering with us to maximize our sales as well as understand our consumer base much more smartly.

Nelson Obus - Wynnefield Capital

And let me play skeptical for a minute, because you started the call by -- actually, let me get it clear. I'm not exactly clear what you said. But you said in January you'd give us a strategic update, right. Now, I'm not sure whether that update will involve anytime the financial projections. I mean if that doesn't, than that's the answer, but if you do plan to give us some kind of financial sets of where you think the company can go, can you do that without having that point of sale IT network in place?

Brad Pyatt

Let me take a crack at that first, guys. It's a two part question. First of all, strategic guidance usually involves financial guidance, right. So let's take that that's the new point. Secondly, as it relates to being able to project, the company has done a brilliant job of projecting to date without some of that data.

As we now expand into the FDM channel, which is heavily monitored using those data providers. We now have to align our systems to be able to look at the consumption in those channels. We do a great job in shifting and we know on our reorder patterns, how things are moving. But we want to make sure that we also understand what the consumption flows look like relative to FDM, which is outside, which is a new channel that we are now getting into.

So please understand that we'll continue to do a great job of forecasting our business. But what we're dong is adding a level or layer of sophistication that now looks a consumption data that monitors the new channel i.e., the Costcos that we're going into in a much more, how would we say, consistent and detailed basis. And many of the analysts that follow us will also have access to that data.

Nelson Obus - Wynnefield Capital

Let me just turn to BioZone for a second here. My original thinking was that you wanted some assistance from them to create the kind of medical and pharmacological backup that would add to the scientific and physiological credibility of the product, which made a fair amount of sense. Now you've bought the whole thing, so before I was thinking, well BioZone would be a big product or would be a big customer of yours and you would work with them on that, but they would have third-party customers also. Now I'm a little bit confused. I mean is BioZone going to be proprietary or you're going to have another business there that does the same work for other entities, how that's going to play out?

Sydney Rollock

So you're exactly right on what the primary goal is with BioZone. It's leveraging the technology, patented technology that they have across our product base. And again, leveraging their R&D staff and their quality control staff, really strengthens the team we were building internally already. So both of those are big opportunities for us, that now we're much stronger in, once this transaction and when this transaction is completed.

And by the way, we've built a pretty solid network right now of contract manufacturing partners that can handle powders, capsules, tablets for us. Our weakness has been in the liquids and gels. And now we've got back the ability to really expand and diversify our line more, so that's a very important piece to us. Now with that said, they have an existing contract manufacturing business. It's a business that we plan to embrace and it helps diversify and cover overhead. So I don't see anything changing there, and if anything, maybe we can help expand that.

Nelson Obus - Wynnefield Capital

So actually you could develop that into a separate cash, call it, segment if depending how things go.

Sydney Rollock

Exactly right.

Gary Davis

One more thing to that point, investing into BioZone also opens up opportunities for us to be distributing from the West Coast rather than just from Tennessee. Our main facility right now for distribution is in Franklin, Tennessee. But we're looking at this as new avenue for distribution of the West Coast.

Richard Estalella

And again, from a quality perspective, we've really started to set the bar in our industry of the free testing we do of our products before we launch those products into the field and now we've got in-house laboratories that can do that, even further than what we're able to do at our research and development center in Denver, so again it allows us to manage a lot more of this in-house than currently what we've been doing what we outsource a lot of this, and it puts us in control of more of the process.

Operator

Our next question is from the line of Jeff Corrado of Furey Research.

Jeff Corrado - Furey Research

I just wanted to congratulate you guys beforehand on what looks like a fantastic start to your next growth phase of the company and I wanted to acknowledge Brad, I mean despite the growing pains of the early start of the company you have seem to surround yourself with an amazing support cash just listening to the call today. I just have two quick questions. The first one has to do with Arnold versus the main product line. Obviously shareholders are concerned whenever you have a new product of cannibalization, I guess I just wanted to get a brief description of how you differentiate between the two products and how you sort of plan to target different markets between those, and whether you think, whether or not there is any cannibalization that can incur?

Sydney Rollock

I'll take the first crack at it from what I call a new product perspective, and I know Richard will probably have a view as well, but my first three weeks here, we've now partnered with a couple of our customers to help us start to get behind the data in a way that they haven't even looked at the data before, and very, very early on. And I don't want us to take this beyond this point, but in the spirit of just sharing and helping you understand how we're looking at the business.

Arnold is looking to be nicely incremental to not only our brand, but to the category. So when we get together again in January, we'll be able to elaborate a little bit more, because keep in mind we just launched that brand and what we're starting to learn now is the interaction between the master brand, that being MusclePharm. So we're very, very pleased, but I'd like to term this phase, the trial phase.

And what's going to be equally important, as you know, will be around the repeat. And that's what we're trying to get a good handle on, whereby we can really start to talk about, what I call the sustainability of the Arnold business and how that will be positioned against the base business of MusclePharm. So bear with us for the next couple of months as we continue to gather the data to allow us to have, I'll call it, an intelligent discussion around that, but know that early on it looks to be incremental not only to MusclePharm, but also to the category. Richard, do you want to add anything to that.

Richard Estalella

I think that the key addition would be Arnold line, as it expands to a much larger demographic, both young and old. And really I think that the MP brand has had a more different demographic, so I think we've opened it up to a lot more potential buyers, number one. Number two, in a lot of our categories like our pre-workout Assault brand, it's not unusual for a heavy user to want to transition from one product to another, just to kind of keep it fresh.

And it some times even more than just within flavors, they go from one to the other. So the fact that now we can take a customer from Assault to Pump and back, really it prevents cannibalization, where today we maybe sharing four or five of the order cycles with another brand. Better to keep it in-house with us.

So I think that's kind of something that I know Sid's looking at analyzing. And we've also launched some products that we didn't have in our assortment before, that are now under the Arnold brand that I think will do very well under that planned. Although, they would have under the MP brand, I think it just carries an iconic symbol to get it off the ground faster.

Jeff Corrado - Furey Research

Perhaps I'll follow-up again on that and see how things are going in January.

Brad Pyatt

Now, we're just going to say, we look forward to your question on that.

Jeff Corrado - Furey Research

I guess, I have one more, and then just a really quick one that you can answer really quick. Any timeline just for when we can expect, I'd say, the allowances to go back to what seem to be the average earlier on in the year and then it get some gross margin expansion here?

Brad Pyatt

I think we alluded to that a little bit earlier on the call. And as Richard alluded to, you saw the spike reoccur because of the end-of-life discounting associated with our older sole product and a relaunch with the new product, which is off to a fabulous start, for it was the right thing to do. But as I said earlier, I think our goal is to get that back in line with where we were and to hopefully do better, and again we'll elaborate on that a little bit more in January, just for consistency.

Richard Estalella

And just to add to that, also keep in mind that you've seen what the company has done in its first few years, and we really thought most of the trends and we thought most of the typical processes, I think that's what makes us special. And the fact that we're very agile in seizing the moment, I think is a very key strength that we don't want to walk away from to hit a discount percent.

So what I mean by that and going back to Nelson's earlier question, some of the internal and the trends analysis that we're doing is the number of doors that we're adding on a monthly basis, and the penetration of each individual door that were already hit and how we're improving that. As we do that, we need to go after a very, very large account or a new segment of doors or something that really gets us to the next level longer-term, we may have to take a short-term investment against that.

Again, if you're talking about a few months that then turns into some incredible returns, every time that comes up we're going to do it every single time we can. So I guess what I'm trying to say is that you may see some things moving around, but it's not because we're not controlling what we're doing, because strategically we're making the right decisions long-term for the company.

Jeff Corrado - Furey Research

And really quick, last time, I'm in Boston, I was under the understanding, you've already started airing the Kaepernick commercials on the West Coast. I was wondering, if you could just give me a quick timeline about, when that might go nation-wide? And whether or not we can expect to see Arnold at any point show up on the television screen?

Brad Pyatt

All I'll is you can wait until January. I don't want to tip or add on anything. We're actually giving some early reads on Kaepernick. Depending on those read, we'll dictate how we extrapolate that nationally and/or continue advance it regionally. But again, those are the kind of initiatives we'll be able to talk to a little bit more in detail come January.

Operator

Our next question is from the line of Wilson Jaeggli of Southwell Partners.

Wilson Jaeggli - Southwell Partners

Couple of questions here. On the BioZone, to make sure I understand what you said, you basically sold off, either converted the notes into cash or common, and the common that you owned at one time you have sold in the marketplace and you only own warrants, is that correct?

Brad Pyatt

That's correct.

Wilson Jaeggli - Southwell Partners

And tell me the terms of the warrants and how much do we own?

Brad Pyatt

Richard, you know how the warrants are.

Richard Estalella

Again, I don't have the exact number. I think it's in the 5 million share range at a specific strike price. Again I don't know exactly. Again, we've transitioned this from a short-term investment into a much longer-term investment. So really, as you can see what we've already done would be original loan and stock has been extremely accretive for the company.

Wilson Jaeggli - Southwell Partners

Can you give us an estimate of what the conversion price is?

Gary Davis

I think it's $0.20. The reason where somewhat has been on this is because we have not yet finished all of the terms for the purchase agreement.

Brad Pyatt

We're still in negotiation.

Gary Davis

I think until all of that finalizes, it's kind of difficult to answer all of it.

Wilson Jaeggli - Southwell Partners

One other question on the BioZone, and then I'll go somewhere else here with some other questions. I understood you had to sell the stock basically 1 million shares for $1.5 million. That means you sold the stock at $1.5 for above the current price. Can you explain that transaction?

Richard Estalella

I think there was an error in that calculation. It was actually 5 million shares for $1.5 million.

Wilson Jaeggli - Southwell Partners

You sold 5 million shares for $1.5 million?

Gary Davis

And we are amending the 10-Q this morning. That was a typographical error, when we send in to enter.

Wilson Jaeggli - Southwell Partners

Then moving on from BioZone and here, it looks like that we've gotten this SEC situation behind us and the report on the audit committee. First of all, did your auditors agree with the conclusion of the audit committee?

Gary Davis

Yes, they did.

Wilson Jaeggli - Southwell Partners

And who are your auditors?

Gary Davis

EKS&H from Denver, Colorado.

Wilson Jaeggli - Southwell Partners

Say that again please?

Gary Davis

EKS&H from Denver, Colorado.

Wilson Jaeggli - Southwell Partners

Say that again, please?

Gary Davis

EKS&H from Denver, Colorado.

Wilson Jaeggli - Southwell Partners

Another question in here on Combat being stocked in here at Costco. Is your initial stocking order complete? Are you completely inventoried properly at the Costco stores now?

Sydney Rollock

That's correct. In the early weeks of October, we distributed to all their distribution centers, and may in turn distributed to all of their stores. It's now selling. It will be starting its third week as we come forward here, fully in stock everywhere. I think Costco is very happy with the weekly sales. Based on their original forecasting fact, we've actually seen an increase in our forecast going into Q1. So I think so far it's going extremely well.

Wilson Jaeggli - Southwell Partners

Have you actually had restocking orders here?

Sydney Rollock

So we've done select stores, select distribution centers, as they're kind of putting some of it in their pipeline. But again, our commitment to them is that it's a very fast turnaround just in time. And I think they're very happy with how we're executing. So again, I guess the big message is they are not stockpiling a lot of product. They rely on us to replenish it very quickly. And we're fully capable of doing that.

Wilson Jaeggli - Southwell Partners

Moving on to another major retailer that you've had success here, Walgreens. I assume, the Walgreen initial stocking order will be done here in the fourth quarter?

Sydney Rollock

It will actually probably be either late fourth quarter or early first quarter. It all depends on the timing of their set. So we're prepared to do it either way. It's really going to be driven by when they are able to set it in their stores.

Wilson Jaeggli - Southwell Partners

Could you give us a current share count? You gave us an average share count, but share counts been increasing substantial, as you brought on new executives and the agreement with Arnold, who is now the largest shareholder. So first of all, what is your current total share count outstanding all-in-all diluted?

Gary Davis

We have 8,865,990 in open shares and right at about 10.4 million in the fully diluted position.

Wilson Jaeggli - Southwell Partners

10.4 million, including fully dilution all exercise warrants or whatever?

Gary Davis

Correct.

Wilson Jaeggli - Southwell Partners

And let me ask you, with your compensation program going forward, which you're using share count in here. What would share count look like here say toward the yearend or have we reached a stabilization in share count currently?

Brad Pyatt

This is an interesting question, because we're a growing company and we believe that there'll probably would be more share issuances in the future. We're not exactly sure how many. So I think it's understood that a growing company will have more issuance as they continue to grow. We know that we'll probably have to have more for the executive team and certain directors.

Wilson Jaeggli - Southwell Partners

What are you contractually obligated to issue new shares in the future? How do you stand currently?

Richard Estalella

Contractually, we're not. This will be for as a retention tool and something to really, really drive the efforts that it takes to take a company, where we are today to where we want to be tomorrow. So contractually there isn't anything else. There is going to be strategic, and I know that Brad has said that the next time that we do an RSA grant, it's not going to be internally, its going to be through a proxy. And we want all of you to come in and agree with what we're doing and support our game plan. So that's how you'll see future issuances when it comes to anything that we're doing internally.

Gary Davis

One more thing in answer to your question, you asked about the number of warrants outstanding, while that all of the terms we have completed, there is a $10 million share warrant and the strike price is $0.40.

Operator

Our next question is a follow-up from Jack Wallace from Sidoti & Company.

Jack Wallace - Sidoti & Company

Quick one, with the stocks and comp amortization charge in the third quarter here, what can we expect as a normalized go-forward on a quarterly basis?

Brad Pyatt

Gary, do you want to take that one?

Gary Davis

Can you repeat the question again please?

Jack Wallace - Sidoti & Company

With the share grants for both Arnold and management here, what is the normalized quarterly rate for the stock amortization that you saw here as part of the non-cash charges in the quarter?

Gary Davis

In the third quarter the amortization was $2.36 million.

Jack Wallace - Sidoti & Company

And is that going to be the rate going forward on a quarterly basis, right. I assume that this x amount amortized over was three years or so?

Gary Davis

Three years. Arnold Schwarzenegger is from 2013 to 2016, the executives RSU is until 2014 and the RSA's are until December 2015. So right now the amortization run rate is about $2.39 million. So without adding anymore shares to that, that would be expiring through 2014, 2015 and 2016.

Brad Pyatt

And Jack, just to kind of tell you what the strategy is, and again, we've all worked very closely as a team, is for that number to remain constant and an additional RSUs or anything else we do to kind of time in as previous warrants are fully amortized, and of course with our topline growth that number will leverage down. So we'll be able to accomplish exactly the same thing that we're trying to do and hopefully have a lot of leverage from topline growth.

Operator

Our next question is a follow-up from the line of Philip Anderson with Pinnacle.

Philip Anderson - Pinnacle

Your answer to my earlier question regarding advertising and focus on growing topline, kind of sparked my little grey cells from the early morning lethargy. I recall that some doing work on the industry before we invested, I've come across four companies that had been acquired in the three years or so and they have a few things in common, there is optimum nutrition, PES nutrition, shift nutrition and max nutrition.

Now, in addition to having nutrition in the name of all four companies, they all required for 3.5 times enterprise value to revenue. And based upon the current enterprise value of MusclePharm, looking at Sidoti's estimate of $158 million for next year, MusclePharm is trading for about 0.5 times or at one-seventh of the [ph] ticket valuations of those companies and their revenues averaged to $165 million, at the time that they required or approximately what MusclePharm is expected to do next year according to Sidoti.

Now, we go to the setup, the company appears to be massively undervalued and now that the SEC issue is almost entirely behind the company, which presumably clears the way for an uplift in not too distant future, what is the company's management intentions to create broader awareness on Wall Street of the quality of this business here and the valuations going forward?

Richard Estalella

Well, I think it starts us, with our ability to again give you guidance next year on what we're going to do, beyond just topline and then executing to that standard. And you're exactly right, you hit it on the head, we're extremely undervalued. We all know it. It's not indicative of what we're making happen at the marketplace, but what we're putting into this business from a sweat equity standpoint. So our goal is to make sure that in 2014,we have a much clearer picture of where we're heading and hopefully you can all help us to have everybody else recognize that.

Gary Davis

The only thing I would add to what Richard said is we just got to continue to demonstrate that we can now deliver quality growth which will drive both the topline and the bottomline and that will get the story out real quick.

Operator

Our next question is a follow-up from the line of Keay Nikae of Ascendiant Capital.

Keay Nikae - Ascendiant Capital

Really for Richard, but any of you, Richard, know that you've done there about six months, I'm sure you've seen what the low hanging fruit is. There is a possible improvements in the supply chain, but in terms of longer-term initiatives that you might be implementing soon, can you highlight what you're focused on?

Richard Estalella

Again expanding distribution domestically, which will be self-funding from a freight savings and time to market standpoint is something that we want to do next year. Beyond that, we would like to expand distribution capabilities outside of the U.S. in key markets, so that's something that we'll be looking at over the next 12 to 24 months.

And then of course, the largest portion that what we're doing is, it's making sure that we continue to expand our product base and continue to add categories that are accretive to our overall offering versus again sharing the pie of the same type of product line. So those are the key things that we're focused on. And then again, as we can grow that topline, then I'll turn it over to Sid, I mean the type of things that he can do and still experience leveraged are pretty significant.

Sydney Rollock

I think Richard hit on all the key strategic platforms, but again in January we'll outline those things, I think in my four, quarter-three-and-a-half short weeks of doing a deep dive. As I said before, I think the company is well poised to capture the global demographic growth within this sector, and to compete on what I consider a massive sector, which is the vitamin and the supplement category, which is measured anywhere at least to be $75 billion worldwide and we're just approaching $100 million. So we're very encouraged across those strategic platforms that Richard alluded too and we'll be excited to comeback in January and lay those out in a little bit more detail.

Operator

Our next question comes in line as follow-up of Nelson Obus of Wynnefield.

Peter Black - Wynnefield

This is actually Peter Black. I just wanted to clarify one gentlemen's comment that, I think he said $10 million warrant outstanding with a exercise price of $0.40. Is that true, because I'm just thinking that then that would take your diluted share count to about 18 million shares, is that the right number?

Gary Davis

No, I think here you're coming back with the comment on the BioZone warrants.

Peter Black - Wynnefield

Right.

Sydney Rollock

That's not our warrants, that's BioZone warrants, that was the remainder of the note that we took for $2 million. So they bought back their note. They it's $1 million, plus 32,000 of interest and then the other $1 million was converted to 5 million shares of BioZone common stock, which we turned around and sold for $1.5 million. The remains are $10 million BioZone warrants from the note with a strike price of $0.40. The remainder of the transaction is still being worked out in the details here, so that we can finish up the purchased agreement.

Operator

Ladies and gentlemen, we've reached the end of our question-and-answer session for today. I will turn the floor back to management for closing comments.

Brad Pyatt

Guys, thank you very much for all your comments. And I hope we provided you the valid responses that you need. If by any chance there is anything else, we've emptied the queue on questions, but if there is anything else that comes up, you know how to reach us through Bob or directly. We'd be happy to continue to answer the question. So this is a partnership that we want to continue to develop and grow, so we want to make sure that we share everything we can with you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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