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Summary

  • MusclePharm has once again shown impressive growth for sales, profit, and income.
  • When looking at past quarters, it is evident the company was run by amateurs with connections in the sports industry.
  • The growth of the company comes because of the great product lineup and connections in the sporting industry, not because of the great business acumen of the leadership.

When MusclePharm Corp. (OTCQB:MSLP) released its latest quarter's earnings, the company once again showed how strong it is becoming:

  • Net Sales: $46.7M (+831%)
  • Gross Profit: $15.6M (+97.5%)
  • Operating Expenses: $15.2M (+42.1%)
  • Operating Income: $479.5K (+118.5%)
  • Net Income: $408.3K (+166.7%)
  • EPS: $0.03 (+108.8%)

While many are highly optimistic about the results, there was one comment that was quickly posted by J Mintzmyer:

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While some contributors quickly came back with comments on how the company has rewarded investors over the past six months, I have to say that I agree with J Mintzmyer. I've been following the company for over two years, and while it has a fantastic product, at times it seemed like the company was being run from a fraternity house. One of the best things that happened to this company over the past six months was when Brad Pyatt resigned as president.

Over his tenure as president, the company has come under an SEC investigation. While the investigation covers a few focus areas, one of those areas related to share issuance and executive compensation. By any standard, the amount paid to the leadership of the company was excessive.

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(Source: Data compiled from FY13 10-Q)

Under the "All Other Compensation" were included items like club memberships, cell phone charges, cars, clothes, travel and promotional expenses. While I don't like the leadership, and feel that for much of the past few years they ran it with their compensation as the focus, I have to admit they have built an awesome brand.

What Brad Pyatt lacked in business acumen and vision, he made up for with networking, marketing, and obtaining sponsorship. The company has secured the likes of LaRon Landry, Colin Kaepernick, Johnny Manziel, Tiger Woods, and Arnold Schwarzenegger. None of this has come cheap, and the company currently has commitments out to 2018 totaling just over $37 million.

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(Source: Q2'14 10-Q)

The company has been able to secure spaces in GNC, Walgreens, and Cosco that will help increase the volume sold and revenue taken in. However, I feel that the real relationship that helped build this company was with Bodybuilding.com. From the earnings release:

Note 12: Related Party Transactions

Ryan DeLuca, the Chief Executive Officer of Bodybuilding.com, is the brother of Jeremy DeLuca, MusclePharm's EVP, MusclePharm Brand and Global Business Development. The Company maintained a business relationship with Bodybuilding.com prior to hiring Mr. DeLuca. The Company does not offer preferential pricing of our products to Bodybuilding.com based on these relationships. Sales of products to Bodybuilding.com were $7,276,542 and $6,933,056, respectively, for the three months ended June 30, 2014 and 2013; and $15,499,998 and $14,953,845 for the six months ended June 30, 2014 and 2013, respectively. Bodybuilding.com owed the Company approximately $1,720,719 and $2,051,265 in trade receivables as of June 30, 2014 and December 31, 2013, respectively. The Company purchased marketing services from Bodybuilding.com during the three and six months ended June 30, 2014 in the amount of $338,877 and $688,885, respectively.

While the company maintains it doesn't receive any preferential pricing, the marketing done by Bodybuilding.com does serve as a secondary promotion. I don't think a day goes by that I don't receive a Bodybuilding.com email without a mention of MSLP in it, either a sale or promotion.

For athletes and weightlifters, Bodybuilding.com is the go-to website for both products and information on working out. So while the sales from the website represent a small portion of revenue, the impact from the relationships is much bigger.

The company disclosed in the recent filing, the amount of support it gets from sales through Bodybuilding.com:

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While the company still has less than 10% of its accounts receivable from the company and 15% of revenue for the quarter, the promotion does help to compound sales in other places.

All this has led the company to record growth, especially over the last 12 months, as the company has begun to show profitability:

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Cautions

The main downside for the company is the risk of a potential coming dilution:

  • Low cash position
  • Outcome of the SEC investigation

The company is starting to get short on cash. Over the past six months, it has burned through $1.7 million, about 30% of its cash position, down to $3.7 million. The company has significant accounts receivable of almost $20 million, and almost $20 million in inventory. While the company has money due to it, and product to sell, getting that close to "empty" can be concerning. Especially with over $6 million due this year in the Sponsorship and Endorsement categories. The company has issued shares from time to time, so investors should be prepared for the possibility of an offering. Again, to me, this is an example of the poor business abilities of the leadership, as other companies would have forecasted for this long before it was needed.

As for the SEC investigation, it's difficult to say at this time where the company is with it and what the outcome will be. From the conference call:

Keay Nikae - Ascendiant Capital: And then just one final question, and I'll get back in queue. Any update on the SEC investigation?

Brad Pyatt: At this time Keay, we're currently working at it, the process, but at this time we can't really comment on it. You should consult the Company statements about the investigation in 10-Q and prior files.

Keay Nikae - Ascendiant Capital: Is it fair to say that the ball is still in the SEC's court or has there been any other further requests by them for information from you related to the prior disclosed issues?

Brad Pyatt: Since the last quarter I can tell that we're further ahead in the process. Again it's a process and we're being very diligent with them and very transparent and very forthcoming. So every time they ask for requests, we're following what they're asking. So we're further in the process than we were last quarter, I can just tell you that.

The company has already made significant leadership changes since the investigation began; however, it appears that everyone just changed chairs.

  • Brad Pyatt resigned as president, but continues to serve as CEO and COB
  • L. Gary Davis resigned as CFO
  • Donald Prosser resigned from the board to serve as the CFO
  • Richard Estalella resigned as COO, but continues to serve as the president
  • Jim Greenwell resigned from the Board to serve as the COO

The SEC will likely levy a fine against the company, which will further cut into the company's already low cash coffers.

Nasdaq uplisting
I've previously written about the uplisting the company is seeking to the Nasdaq. While the company didn't mention the subject during the recent conference call, it has previously stated that it believed it would happen this year. The absence of the topic is likely due to the ongoing investigation, as any action would likely have to wait until the investigation is closed. However, as stated in the recent filing:

Our common stock is quoted on the OTCBB. The OTCBB is a significantly more limited market than the New York Stock Exchange or the NASDAQ Stock Market.

Conversely, if the company is uplisted, it will enter a more liquid market. The company currently trades with an Average Daily Volume of around 40K shares. This will open up the company to larger holdings and funds.

Conclusion

I feel like this company has a great product lineup, but has been run with incompetence. Sometimes, success is guaranteed in spite of everything management does, as is the case with this company. And I feel like it will continue to appreciate in the future as endorsements, sponsorships, and retail placements continue to increase revenue. Investors should be prepared for potential dilution, but when there is a pullback, it would be an excellent time to enter the company.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: MusclePharm Corp.: Successful Despite Management's Best Efforts