MusclePharm Corporation (MSLP) Q3 2021 Earnings Conference Call November 15, 2021 4:30 PM ET
John Mills - Managing Partner-ICR, Inc.
Ryan Drexler - Chairman & Chief Executive Officer
Jason May - Executive Business Partner, MP Beverage
Sabina Rizvi - President and Chief Financial Officer
Conference Call Participants
Good afternoon, everyone. Thank you for participating on today’s Third Quarter 2021 Business Update Call for MusclePharm. Joining us today is MusclePharm’s Chairman and CEO, Ryan Drexler; the company’s new Business Partner, working with the MP Beverage Team, Jason May; and the company’s President and CFO, Sabina Rizvi.
Following prepared remarks, we will take your questions. As a reminder, in order to ask a question, please go to the Investor Relations section of the company’s website at www.musclepharm.com and you will be able to submit your name and questions on the webcast link.
The discussion today will include forward-looking statements except for historical information herein matters set forth on this call are forward-looking within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements about the company’s commercial progress, success of its strategic relationships and projections of future financial performance.
These forward-looking statements are identified by the use of words such as grow, expand, anticipate, intend, estimate, believe, expect, plan, should, hypothetical, potential, forecast, and project, continue, could, may, predict, and will, and variations of such words and similar expressions are intended to identify such forward-looking statements.
All statements other than the statements of historical facts that address activities, events or developments that the company believes or anticipates will or may occur in the future are forward-looking statements. These statements are based on current assumptions made based on experience, expected future developments and other factors that the company believes are appropriate under the circumstances.
Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the company. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements.
Accordingly, investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they’re made. The contents of this call should be considered in conjunction with the company’s recent filings with the Securities and Exchange Commission, including its annual report on Form 10-K and the quarterly reports on Form 10-Q and current reports on Form 8-K, including any warnings, risk factors and cautionary statements contained therein.
Furthermore, the company expressly disclaims any current intentions to update publicly any forward-looking statements after this call, whether as a result of new information, future events, changes in assumptions or otherwise.
In order to aid in the understanding of the company’s business performance, the company is also presenting certain non-GAAP measures, including adjusted EBITDA, which are reconciled in a table in today’s press release announcing our third quarter 2021 results to the most comparable GAAP measures.
Management believes that adjusted EBITDA provides useful information to the investor, because management uses adjusted EBITDA, as a supplement to GAAP measures to further evaluate period-to-period operating performance, as well as the company's ability to meet future working capital requirements.
The exclusion of non-cash charges including stock-based compensation, depreciation and amortization is useful in measuring the company's cash available for operations and performance of the company.
Now, I will turn the call over to the CEO of MusclePharm, Ryan Drexler. Please go ahead.
Thank you. Good afternoon. On the call today, I will provide a brief overview of our fully functional Energy Drink Line and our base business. And then, Jason May will talk about his role, within our MP beverage team and the market opportunity. And then, Sabina will review the financial results in more detail. After that, we'll open-up the call and take your questions.
The reactions to our beverage line can used to be fantastic. This summer, in two months, we doubled our pre-production sales for MP Energy. And at the end of August, announced we have reached our sales goal of 1 million in pre-orders.
Through the help of our eight distributors, it's almost unheard of to sign distributors and secure such a large volume of pre-orders before products even launched. And it's a testament to the power of MusclePharm's name and our team strong industry contacts.
Additionally, we successfully sold 100% of our of our MP Combat Energy during our first production run, this past month and we are gearing up for our second production run in December.
The early reactions from one of our lead accounts muscle strength has been that this has been one of the best product launches they've seen in an early customer feedback, it's been very impressive. Quality and taste profile with early customer ratings are close to 80%, up 4.6 stars.
I'm incredibly proud of our MP Beverage team and I share my excitement and optimism for success of this brand. As you will hear momentarily from our newest member, Jason May, Jason like Joe Cannata, who heads up MP performance team is a longtime veteran of Rockstar energy.
He spent over two decades at Rockstar working is Executive Vice President of Marketing. Jason was responsible for helping and developing and designing the image of Rockstar from the initial sales strategy, and then keeping the brand authentic as it matures.
Joe and Jason were key players in propelling Rockstar into a billion dollar energy Drink Company. And we are extremely fortunate to have them leading our MP performance team. We are getting back to our marketing roots with the hiring of Jason as well as hiring T.J. Dillashaw, in due time the Bantamweight UFC champions for marketing and business development. TJ has an unbelievable set of marketing skills that he used to build his social media following to over 1.4 million. And we have already seen him making a significant impact in our business, through the formation of marketing partnerships that we will refuel our expected growth.
We have a powerhouse team leading our new venture. And I have no doubt in our ability to succeed more than ever and our ability to hit 30 million in annual sales in 2023. We are also continuing to strengthen our base business. And in the quarter, we reformulate two of our top selling products, Combat 100% Whey and Combat Protein Powder with improved taste and mixability for our consumer.
Our company is committed to bring award-winning nutritional products. And we will always keep product innovation at the forefront, so that we can stay in the leading sports nutrition and lifestyle company.
I will now turn over the call to Jason.
Thanks, Ryan. As Ryan shared, I previously spent 20 years at Rockstar Energy, leading the company's marketing and production efforts. I worked closely with Joe Cannata, during my time to Rockstar, and I'm extremely excited to be reunited with Joe and working together to bring the same success we garnered at Rockstar Energy to MusclePharm.
When I consider the opportunity for building an MP beverage portfolio, two things stood out to me. First, the strength of the MusclePharm name and historical success of the brand in nutritional supplements. To me the trademark is a natural for line extension into functional beverages.
Secondly, I was highly impressed to hear Joe's team that already signed on to top-tier national DSD distributors, and had recorded an impressive number of pre-orders before even launching the product line. Once I reviewed the product design, the amazing taste profiles I instantly understood MusclePharm Combat Energy was a winner.
To succeed in the energy drink market, you must have excellent tasting and effective products plus the support of a world-class trademark. MusclePharm has both. In a very short period of time, the MP Performance team has secured distribution and sales in very important energy markets within the United States, Australia, New Zealand and online. This speaks to the strength of the company's reputation, the brand and product offerings. And it is only the beginning of a very exciting chapter for the company.
I'll be working with the MP Performance teams to bring a strong brand and marketing focus to our energy drink lines. With highly focused initiatives in digital, experiential and channel marketing. We expect to have announcements regarding the specific details of those programs very soon, and with the announce raise, the investments for our marketing programming will net out as follows.
Our work closely with T.J. Dillashaw, to build out a dynamic ambassador program focused on driving positive messaging in brand building via social media channels. We will utilize a newly planned Las Vegas-based fitness facility as the headquarters for our content generation to drive our digital advertising and social initiatives. Experiential marketing will take place in the form of event sponsorships, complemented by a massive consumer sampling initiative.
Our channel marketing programs will be built out specific to traditional retailer environments to engage consumers at point of purchase with sweepstakes, giveaways and discount programs. It is a tried and true formula that will be specifically dialed in to capitalize on MusclePharm engagement with the sport and fitness community, as well as those who aspire to be part of it.
As Ryan said, the feedback from distributors, retailers, and now consumers, have been nothing short of encouraging. And I speak for the entire MP performance team. When I say we are confident, we have the right proposition to win within the beverage sector.
I'll now turn the call over to Sabina.
Thank you, Jason. Good afternoon, everyone, and thank you for joining the call. We made strategic operational decisions this quarter to set our company up for success and strong sales growth in the fourth quarter and subsequent years.
This combined with a supply chain shortages, across our industry, did however, come at the expense of our top and bottom line in the third quarter. However, we feel these decisions are in the best interest of our company and our shareholders. And we are already seeing the benefits of these actions halfway through the fourth quarter.
Additionally, at the beginning of October, we close the $7 million senior secured notes offering, providing us with the financial flexibility to fund the rollout of our new business endeavor into the functional energy drink category.
With that backdrop, let's now discuss results in our third quarter and the first nine months ended September 30, 2021. Net Revenue for the third quarter was $12 million and $40 million for the first nine months of 2021.
As Ryan mentioned, in the third quarter, we reformulated two of our top selling products Combat 100% Whey and Combat Protein Powder to deliver improved taste and mixability for our consumers. These new reformulated products will begin to ship to our customers in November.
Our gross margins in the quarter were 0.2% and 14.7% for the first nine months of 2021. The gross margin erosion was primarily due to increased protein costs as well as freight costs.
While the supply chain environment continues to be challenging, we have secured raw material for our top selling products to ensure availability and significant sequential improvement in fourth quarter sales and margins.
Operating expenses declined by 21% to $3.5 million and by 19% to $10.8 million for the third quarter and first nine months of 2021 respectively. This is due to our continued strong focus on cost control and restructuring the business for growth. The main drivers of the operating expense decline were reduced compensation expense due to restructure MusclePharm, reduced office expenses associated with the closure of our headquarters and warehouses, in addition to a reduction in professional fees.
Adjusted EBITDA was a loss of $2.8 million and a loss of $3.6 million for the third quarter and the first nine months of 2021 respectively. The loss was primarily due to significant increases in freight and protein costs that I mentioned earlier affecting the entire industry. We were able to stem our losses in the quarter due to the strength of our brand and improved efficiencies and cost containment measures, which we have implemented over the past years.
With the reformulated product increased sales and margins and continued focus on operating expenses. We expect to drive sequential adjusted EBITDA improvement in the fourth quarter of 2021. We stand by our conviction that the functional energy drink market is a massive opportunity for MusclePharm. And we believe we can capture enough market share to grow the business to $30 million in annual sales starting in 2023. This combined with our focus on growing the base business sets us up for a strong fourth quarter and full year 2022 growth.
I will now turn it over to the operator for questions.
A - Sabina Rizvi
Thank you. I will now turn the call back over to John Mills to read questions that have been submitted. Please go ahead.
Great, thank you. The first question comes from an institutional investor, how does supply change look for the next quarter?
Thanks, John. I'll take that question. Its Sabina. So as -- as I mentioned in my remarks, the supply chain environment continues to be challenging. However, we are excited to say that we've secured the raw materials necessary to meet our Q4 revenue numbers, drive sequential sales in the fourth quarter and including that we will see record sales on two of our top selling reformulated products in the fourth quarter of this year.
Great, thank you, Sabina. The next question comes directly from another institutional investor for Jason. Jason, the question is why did you come to MusclePharm and MP Energy?
Yeah, that's a good question. So, when I completed my tenure with sPepsiCo, you know, I had a lot of options to consider. My consideration of MusclePharm and its potential a functional beverage line goes back over three years now. I met Ryan Drexler, because I had contacted him to potentially license BMP marks specifically for energy products. Back when Rockstar was distributed by PepsiCo, as we knew that PepsiCo was looking to expand their portfolio. But that could only happen through their alignment with Rockstar. So we had an opportunity there. I got down the road with Ryan. I really enjoyed working with him. Ultimately, that initiative didn't pan out, our internal discussions with PepsiCo turn to outright, acquisition of the Rockstar brand, which ultimately happened.
That said, although MP Combat Energy was a product line that was strategized over three years ago, to me, the timing has never been better than it is right now. You've got MP, which is a trademark. That's a leader in sports nutrition. And the energy category has now evolved to a place where sports nutrition trademarks make a great deal of senses, functional beverage lines for both convenience and grocery retailers, which are the driver of energy business.
When you combine the potential for the MP Combat Energy line with the potential of the fitness energy line, in the emerging gender specific space, you've got a really strong portfolio with just a massive opportunity for exciting marketing and sales programs, which is what I'm all about. So overall, I see MP as a company that I respect and admire with a portfolio of functional beverages that I'm confident I can build out. Hope that answers your question.
Very good. Thank you. Thank you, Jason. The next question comes from a retail investor. Are you working with any additional distributors outside of the eight previously announced?
Yeah. I'll take that question. Yeah, we – when we focused on coming out with some of the products, we have these great demo kits that we actually produced, and it really showcases all the products really nicely. And once we had the products, we had to – we had a real opportunity to send it out to a lot more distributors. And we're talking to some of these people in final stages. And we'll have some announcements in the next three or four months, and some new distributors, and some new key retail partners that will be locked up.
Very good. Thank you, Ryan. The next question comes from another retail investor. What prompted you to reformulate Combat 100 Whey and Combat Protein Powder? And then you have – and do you have plans to do that with any other products as we go into next year.
We look at the products and we always look at the products -- we have some time to look at the product line to -- and look at some of the product reviews as a company. We focus on people's reviews and feedback. And we wanted to make the product even better than it was. So we looked at the product lines. And we came out with a new improved formula. I think what the consumers will see that it's going to be a new improved taste and mixability. Obviously, from where we were, we already had a great product where we're looking forward to the customer feedback. And we are planning to do that with most of the line moving forward for the tail part of this year and early part next year.
Very good. And we have one more question coming in from a retail investor. When do you plan to open up the fitness facility in Las Vegas?
Yes, thank you. We're very excited about that. We're planning to have a New Year's launch for that in January, and we're very excited about that. It's going to be different than our previous two facilities. It's going to be more of a private facility. We believe Las Vegas is a great spot. We have a lot of people coming in and out. It's going to be a premier facility where we're going to grab a lot of content can be a content driven facility. We are going through a lot of live videos. There's going to be much improvement. Definitely coming from the social media and again, this facility is going to be used for that and training people when they're in and out of town.
Very good. And Ryan, that concludes all the questions. I'll turn it back over to you for closing comments.
I want to thank everyone for joining us for the Q3. We're very, very excited for the future. Very thankful to our partners and the people on the phone to being a Jason very, very excited for the future of MusclePharm. Hopefully, everyone sees in the additional next couple of months Rockstar’s MP Energy, very excited for the fitness launch. And we're also very excited in the reformulation. Thank you for all your support and have a great day.
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.