MusclePharm, (OTCQB:MSLP) undertaken a number of strategic initiatives over the last 6 months that are likely to have a significant impact on future revenue growth and profitability. It is currently difficult to properly assess the value of the stock as there are too many moving pieces and not enough concrete data points to build a valuation model. The shares have traded down significantly after reaching a 52 week high of $13.10 in August, most recently trading around $ 9 per share.
Below is a summary of the recent key developments that will take center stage at the Q3 earnings announcement this coming Friday, November 15, 2013.
Arnold Product Line:
Arnold Schwarzenegger announced on August 1, 2013 that he is teaming up with MusclePharm to develop and market a new product line under his name called the "Arnold Series". The agreement is set for an initial 3 year term. Arnold's compensation consists of a mix of royalty payments and stock compensation. As part of the transaction he effectively acquired a 7.7% stake in MusclePharm and became the largest common shareholder. There is no lock-up provision in the agreement but rather a clause providing that he will not sell more than 50% of the stock compensation he received for a period of 6 months since the date of the agreement.
MusclePharm signed up Europa Sports Products as the exclusive North American distributor on September 4, 2013 and announced the launch to take place during the Mr. Olympia event September 26-29, 2013.
The new product line launch appears to have been well received by customers based on the positive reviews and ranking on bodybuilding.com. Approximately 1 month into the launch, the Arnold Series broke into the top 10 rank and most recently ranks 12 in overall popularity on bodybuilding.com. Several products appeared to be stocked out at the website's online store shortly after the launch. Management will have to explain whether that was due to overwhelming demand or due to manufacturing or distribution issues. Overall, given the magnitude of this transaction (Arnold's share were valued at approximately $10 million at the time of the announced of the transaction) an update on the launch status will be critical. Assuming no material cannabilization among the MusclePharm and Arnold Series brands, I expect an upward revision of the current 2013 topline guidance.
Costco Distribution Agreement
MusclePharm signed an agreement with Costco on August 7, 2013 to carry Combat Protein Powder nationwide in all 430 stores beginning late October 2013. On October 15, 2013 MusclePharm updated that it began shipping product to all 430 Costco locations where it will be available in the coming weeks. Again, 3Q13 financials will not reflect any sales impact from this agreement but management will hopefully break it out as part of their updated FY2013 guidance.
Strategic Investment in Biozone
On September 3, 2013 MusclePharm announced a $2 million strategic investment in BioZone Pharmaceuticals, Inc. (BZNE). MusclePharm's $2 million investment in BioZone was made in the form of a 10% secured convertible note due one year from the date of issuance. The note is convertible into shares of BioZone common stock at $.20 per share. MusclePharm also received a 10-year warrant to purchase 10,000,000 shares of BioZone's common stock at an exercise price of 0.40 per share.
BioZone is a contract manufacturer for over-the-counter products ranging from cosmetics to drugs and nutritional supplements. BioZone also owns novel drug delivery platforms, including its QuSome® technology which may hold potential for a new generation of transdermal supplements. This transaction appears to have provided MusclePharm with critical manufacturing and distribution capabilities. On November 13, 2013, MusclePharm announced that it signed a definitive asset purchase agreement with BioZone to acquire substantially all of the assets of BioZone and its subsidiaries for approximately $12 million in an all stock transaction.
The transaction will significantly transform MusclePharm's current business operations. MusclePharm's management believes that the acquisition would provide MusclePharm with additional benefits:
"A substantial opportunity to bring science, innovation and sophistication to the sport nutrition market
An opportunity to realize meaningful cost savings by utilizing the existing BioZone facilities in Northern California to establish a new west coast distribution center for MusclePharm products;
An opportunity to realize meaningful cost savings by internalizing and consolidating MusclePharm's product quality control programs which are currently being outsourced; and
An opportunity, over time, to internalize various components of manufacturing of MusclePharm Products."
As stated in the 8k, the transaction is expected to close prior to year end December 31, 2013. Based on that 4Q2013 and FY2013 results will provide pro-forma financials reflecting the impact of the transaction. Notably, Phil Frost is a shareholder in both Musclepharm and Biozone. Given the all-stock nature of this transaction, the ongoing SEC investigation into MusclePharm does not appear to be an obstacle in the timely closing of this transaction.
FitMiss Walgreens deal
Starting in January 2014 the FitMiss Delight product will be available nationwide in all 7,000 Walgreens stores. Additional products of the FitMiss line will be added in June 2014. This deal is in line with what management outlined during the 2Q13 earnings call and represents a significant revenue opportunity. Additional guidance from management on the expected size of the opportunity should positively impact FY2014E revenue expectations.
Strategic Investment in Fuse Science
MusclePharm announced on November 8, 2013 a strategic investment in Fuse Science, Inc. (OTCPK:DROP). MusclePharm's financial interest is part of on-going discussions that may lead to a more meaningful strategic relationship between MusclePharm and Fuse Science. I expect the product collaboration to be quite advanced as a financial investment usually represents a significant strategic commitment. Fuse issued and sold 10% senior secured convertible notes in the total amount of $700,000 and warrants to purchase 23,332,00 shares in this financing.
The uplisting of the company's shares to NASDAQ was originally estimated to occur late 3Q2013 or early 4Q2013. I suspect the uplisting will require a prior resolution of the ongoing SEC investigation. From an investor perspective, I would assume that Arnold had done some level of diligence prior to receiving his entire compensation award in stock (780k shares). Lack of clarity on the timing of the uplisting is a major overhang on the stock.
Disclosure: I am long OTCQB:MSLP.