MusclePharm Corporation (OTCQB:MSLP) Q2 2018 Results Earnings Conference Call August 14, 2018 4:30 PM ET
Kevin McCabe - Investor Relations Contact, LHA Investor Relations
Ryan Drexler - Chairman, President and Chief Executive Officer
Kevin Harris - Interim Chief Financial Officer
Brian Casutto - Executive Vice President, Sales and Operations
Walter Morris - Baraboo Growth
Ed Woo - Ascendiant Capital
Good day, ladies and gentlemen, and welcome to the MusclePharm 2018 second quarter conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Jody Cain. Please go ahead, sir.
This is Kevin McCabe with LHA. Thank you all for participating in today's call. Joining me from MusclePharm are Ryan Drexler, Chairman, President and CEO; Brian Casutto, EVP of Sales and Operations; and Kevin Harris, the Company's Interim CFO.
During this call, management will be making a number of forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. To the extent that statements made by management are not descriptions of historical facts regarding MusclePharm, they're forward-looking statements reflecting current beliefs and expectations as of August 14, 2018.
You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the company's control and can materially affect actual results.
For details about these risks, please see the quarterly news release that accompanies this call and the company's SEC filings. MusclePharm expressly disclaims any intent or obligation to update forward-looking statements except as by law.
During today's call, MusclePharm will refer to non-GAAP adjusted EBITDA. MusclePharm has provided a reconciliation of GAAP net loss and adjusted EBITDA in its press release issued today.
With that, I'd like to turn the call over to Ryan Drexler. Ryan?
Thank you, Kevin. Good afternoon, everyone, thank you for joining us.
Today, I'm pleased to report another exceptional quarter as we report our third consecutive quarter of revenue growth.
As a summary of our financial results, I'd like to highlight the following points. Revenue – MusclePharm's revenue reached $27.2 million for Q2, up from $26.2 million in the second quarter of 2017, which represented our third consecutive period of quarter-over-quarter revenue growth since our restructuring in late 2015 and the highest quarterly revenue reported since Q3 of 2016.
Profit – with regard to gross margin, we've improved our margin to 30% in Q2 2018, which is up from 29% in prior-year period.
During our recent Q4 2017 call, and updated during our Q1 call, I laid out MusclePharm's four strategic pillars that are aimed at driving and supporting profitable growth.
To recap, they are, one, diversifying our customer base; two, building a world-class consumer base marketing capability; three, investing in new product development; and four, managing costs to ensure profitable revenue.
Brian Casutto and Kevin Harris will touch on each of these in greater detail later in the call. However, I'd like to spend a few moments on the second strategic pillar, our marketing capability.
We continue to invest in ROI-driven advertising and marketing with our key trade partners, including Amazon, Costco, iHerb and Bodybuilding.com. As you can see from our revenue mix, we saw increase quarter-over-quarter and year-over-year from our domestic customers, much of this is driven by the investment we are making in these partners.
As shared through our various social media feeds, MusclePharm's state-of-the-art training and recovery facility is fully functioning and hosting professional athletes, celebrities, social media influencers and expert trainers on a daily basis.
All this translates into a cost effective way of generating maximum exposure and credibility for the MusclePharm brands and products.
At this time, I'd like to turn the call over to Kevin Harris to review our financial results. Kevin?
Thanks, Ryan. Good afternoon, everyone. As Ryan mentioned, net revenue for the second quarter of 2018 was $27.2 million, up 3.5% from $26.2 million for the second quarter of 2017 and up 2% from $26.5 million in the first quarter of 2018.
The increase from the prior-year quarter was primarily due to an increase in domestic sales, coupled with a decrease in discounts and sales allowances as we shift away from traditional discounts and allowances and toward partnership advertising and marketing efforts with our key trading partners.
In reviewing revenue by distribution channel for the first quarter, 48% came from specialty markets, which includes Amazon and other online retailers, 36% came from international including Costco sales outside of the US, and 16% came from food, drug and mass.
Gross profit margin for the second quarter of 2018 improved to 30% from 29% for the prior-year period. This was due primarily to improved revenue per unit, which resulted in an overall increase in revenue, with a lower cost of goods sold than in the previous period, coupled with an overall decrease in the cost of protein products.
Operating expenses for the quarter were $8 million, down from $10 million for the same quarter of 2017. This decrease primarily resulted from a $2.7 million reversal of amounts accrued related to pending litigation with a former executive that was favorably settled during the quarter.
As highlighted on previous calls, it is important to note that we have shifted expenses away from SG&A and toward advertising and promotions with our trading partners, which is in line with our new strategy.
Advertising and promotion expenses for the quarter were $5 million compared with $2.2 million for the prior-year period, with the increase primarily associated with higher costs related to store support and partnership advertising with our key trading partners.
Salaries and benefits expenses were $2.3 million, down from $2.6 million for the prior-year period, with the decrease primarily due to lower stock-based compensation and a reduction in headcount.
SG&A expenses were $2.7 million, down from $2.8 million for the prior-year period. The decrease was primarily due to lower office expenses, lower depreciation and amortization, and lower information technology expenses, partially offset by increases in rent, freight and bad debt expense.
R&D expenses were $208,000 and $152,000 for the second quarters of 2018 and 2017 respectively. Professional fees of $626,000 for the second quarter of 2018 were down from $727,000 for the prior-year period, due mainly to lower legal fees associated with reduced litigation.
As I mentioned, settlement obligation resulted in a recovery of $2.7 million for the second quarter of 2018 compared to a charge of $1.5 million in the second quarter of 2017. The recovery resulted primarily from the successful settlement of pending litigation with a former executive.
Settlement obligation in Q2 of last year included expenses related to the settlement of the City Football Group litigation.
Other expense net for the second quarter of 2018 was $1.2 million compared with $690,000 for the second quarter of 2017, with the increase primarily due to interest expense related to higher borrowing amounts in the current period and the non-cash amortization of debt discount associated with our related party notes.
The net loss for the second quarter of 2018 was $1.1 million or $0.07 per share compared with a net loss of $3.1 million or $0.23 per share for the second quarter of 2017.
Adjusted EBITDA for Q2 of 2018 was $1.5 million compared with $702,000 for the second quarter of 2017, with the improvement mainly related to the improved operating results in the second quarter of 2018.
A reconciliation of GAAP to non-GAAP measures is provided in the earnings release issued earlier today.
Turning to year-to-date financial results, net revenues for the first six months of 2018 were $53.7 million, up 32.8% from $52.2 million for the first six months of 2017. The increase was due to growth in both domestic and international sales as well as the decrease in discounts and sales allowances.
Gross profit margin for the first six months of 2018 was 30.5%, an improvement from 27% for the first six months of 2017.
Operating expenses for the first six months of 2018 were $17.2 million, down from $19.1 million for the first six months of 2017 and represented 32% of net revenue compared with 37% for the first six months of 2017.
We continue our focus on instituting new strategies centered on advertising and promotions, while at the same time reducing other operating expenses.
In reviewing operating expenses for 2018 year-to-date by line item, advertising and promotion expenses were $8.7 million, salaries and benefits expenses were $4.4 million, and SG&A expenses were $5.2 million. R&D expenses were $420,000 for the first six months of 2018 and professional fees were $1 million [ph].
The net loss for the first six months ended June 30, 2018 was $3.4 million or $0.23 per share compared with a net loss of $6.3 million or $0.46 per share for the first six months of 2017.
We had cash and cash equivalents as of June 30, 2018 of $2.4 million compared with $6.2 million as of December 31, 2017. The primary use of cash during the first half of 2018 related to the repayment of borrowings.
We used $39,000 in cash to fund operations during the six-month ended June 30, 2018, which is a significant improvement from the $1.8 million used in the same period of 2017.
Our entire team continues to work diligently against the four strategic pillars, managing cost to ensure profitable revenue as we continue toward sustained profitable growth. I look forward to sharing continued progress on future call.
With that, I'll turn the call over to Brian Casutto. Brian?
Thank you, Kevin. Our operational progress plus establishing MusclePharm as the must-have brand for elite athletes and fitness enthusiasts continues.
At this time, I'd like to take the opportunity to discuss our progress as it relates to our strategic pillars aimed at profitable growth.
In regards to diversifying our customer base, we continue to experience further wins and category expansions in not only the food, drug and mass channel, but also with our online partners.
Beginning food, drug and mass, I'd like to highlight the following. In grocery, we secured Giant Food stores, with 3 SKUs and an estimated 300 locations.
Giant is one of several grocery banners under the Ahold Delhaize family of brands. Ahold, one of the nation's largest retailers, operates more than 2,100 stores nationwide and represents a significant addition to MusclePharm's increasing visibility in grocery.
In drug, we are proud to announce the launch of six SKUs in approximately 300 Uniprix locations. Founded in 1977, Uniprix is one of Québec's largest drugstore retailers and represent expanded distribution in the Canadian market.
In mass, we enjoyed a tremendous start our Walmart Canada launch. We are proud to report that all new items are performing above category hurdle rates.
In online, we experienced significant revenue growth from one of our strategic partners, iHerb.com, a global leader in bringing the best overall value in natural products to customers all over the world.
As noted by Ryan, we are investing in strategic marketing initiatives with iHerb to drive incremental growth and awareness of MusclePharm in a global platform.
In regards to investing in new product development, and as mentioned on our Q1 call, our R&D and operations teams organized a supplier-led innovation summit, which resulted in the expansion of our successful Combat franchise, with the addition of a pre-workout and BCAA plus recovery formulations which were launched at the end of Q2.
I look forward to updating you on our progress as well as product innovations on future calls. With those comments, I'd like to turn the call back to Ryan.
Thank you, Brian. In summary, it is clear that our strategy is working. Revenue is growing, while working aggressively to decrease SG&A costs and investing wisely in advertising to ultimately achieve profitability.
We're diversifying and expanding our customer mix. We are creating new products and campaigns and we are constantly aligning with key trade partners to expand distribution on a global basis.
All of this sharpens our focus on profitable growth and enhancing shareholder value.
With the overview of our performance and our plans, we're ready to take questions. Operator?
While we're waiting for the first question, I'd like to mention that we will be presenting at the MicroCap Conference on October 2 in New York City. A webcast of our presentation will be available in the events section of our corporate website, which can be found at musclepharmcorp.com. We look forward to seeing some of you there.
Okay, operator. We're ready for our first question.
Your first question comes from the line of Walter Morris with Baraboo Growth.
Good afternoon, gentlemen.
If we remove the non-recurring settlement obligation of $2.7 million from second quarter results, your operating loss is almost $2.6 million in this quarter compared to an operating loss in the first quarter of $800,000. Is my math correct?
Yeah. I don't have that number right in front of me, but that sounds about right.
What are the plans to reduce that operating loss in the second half?
So, right now, as you'll see from the increase on the advertising line, and as we talked about during the call, we are investing strategically with our key partners to really grow the awareness of our products and our brand, especially when we're seeing a return on that investment. So, right now, we're really being opportunistic and looking for those opportunities. So, we're investing back in the business.
As we also mentioned on the call, you'll see reductions in SG&A, in salaries and benefits and professional fees, and we're taking those savings and investing those in future growth. So, we expect to see continued investment in marketing, but we expect, as an overall percentage of revenue, for that number to start coming down, especially if some of our new distribution points come online that we talked about this quarter and last quarter in the second half of the year and into 2019.
So, we benefited from improved terms with our suppliers and a bunch of things to allow us to make these investments, which we believe are really going to help to grow our overall revenue base and, ultimately, to profitability.
Thank you. I have one other question on calculation of adjusted EBITDA.
The other expense net category, does that include the non-recurring gain of $2.7 million on the settlement of the legal obligation?
Yeah. That's included under the one-time – on the adjusted EBITDA under one-time events under executive severance, so that's what it is related to.
But since you started with net loss of $1 million, which already included the $2.7 million gain from the legal settlement, that should have been further deduction in the EBITDA calculation. The fact that other expense of positive $1.2 million is shown in your EBITDA calculation presumably means there were $3.8 million of other, which you consider to be non-recurring costs.
No, the other expense doesn't include that. You'll see it down below in the one-time events section.
The other expense relates to primarily interest expense.
Okay. Okay, I'll take a look at that.
All right. Great. Thanks, Walter.
Your next question comes from the line of Ed Woo with Ascendiant Capital.
Yeah. Congratulations on the quarter. Looking into the back half of this year, particularly in the holiday season, does your business have any seasonality and what's your outlook for the holidays?
Thanks, Ed. This is Brian. Absolutely. Historically, in our space, the strongest quarters of the year are typically earlier on that we do indeed see a slowdown in certain channels during the holiday time.
So, you have less sales in certain channels for the fourth quarter, [indiscernible] spending money elsewhere?
Some channels do experience greater slowdown than others. Though here, domestically, in some of our channels, yes; internationally, not the case.
Great. And are you seeing anything so far, heading into this back half, that's different than what you are expecting? Are you seeing any type of skittishness from retailers in terms of either the tariff issues, China issues, economic issues or anything like that?
No, nothing like that, Ed.
Okay. Well, great. Well, thanks for answering my question and good luck. Thank you.
[Operator Instructions]. And there are no further questions at this time.
Thank you again for participating in today's call. We have transitioned MusclePharm into a disciplined healthy company and on the path to consistent and profitable growth. We look forward to updating you on our progress during our third quarter call in November. Have a great day.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.