MusclePharm continues to post sales increases, but stumbles with cash flow, governance issues

07-Mar-2016 - Last updated on 22-Mar-2016 at 14:00 GMT

MusclePharm Corporation, a sports nutrition firm noted for its aggressive marketing via athlete endorsements, continues its meteoric growth curve even as the company required additional funding earlier this year and the stock price continues to fall.

MusclePharm has been recognized in the past for its exceptionally strong sales growth. Much of that was driven by the company’s focused marketing that included tie ins with athletes such as former San Francisco 49ers quarterback Colin Kaepernick and professional golfer Tiger Woods. The company also launched last year a line of cobranded sports nutrition products under Arnold Schwarzenegger’s name. Those endorsements don’t come cheap, and MusclePharm CEO Brad Pyatt said during a NutraIngredients-USA sports nutrition forum aired last fall that the company, which was founded in 2008, would start phasing those high profile endorsements out now that a certain amount of brand awareness has been built.

Earnings highlights

In a recent release of preliminary year end financial results for the year ended Dec. 31, 2015, the company reported the following highlights:

• Net revenue of approximately $41 million, an increase of approximately $7 million compared to $34 million for the third quarter 2015, or 21% increase sequentially quarter-over-quarter, and an increase of approximately $8 million compared to $32.7 million for the fourth quarter 2014, or 26% increase year-over-year.

• Gross margin increased to approximately 35% an increase of approximately 4 percentage points compared to 31% for the third quarter 2015, and an increase of approximately 12 percentage points compared to 23% for the fourth quarter 2014.

• Supply chain improvement: fill rates increased to approximately 85% compared to 55%, sequentially quarter-over-quarter.

But despite those bits of good news, the company has been under cash flow pressure for some time. The preliminary earnings release did not include a loss statement, and MusclePharm’s issue over the years has been the fact that costs and losses have moved in lockstep with the meteoric sales numbers. The company recorded a net loss for fiscal 2014 of $16.2 million. The company got a much-needed infusion of $10 million in January from Prestige Capital Corporation.

Questions of corporate governance

The company has been the target of criticism from activist investors such as Wynnefield Capital Management principal Nelson Obus. Questions were raised about the company’s corporate governance and in September 2015 MusclePharm agreed to pay more than $900,000 in fines from the company and its executives to the Securities and Exchange Commission over undisclosed compensation paid to CEO Brad Pyatt and other officers. The company was also alleged to have violated accounting practices when among other things it offered stock to compensate vendors for a $1.1 million shortfall last year. The SEC viewed this transaction as an unregistered stock offering.

Late last year the company agreed to separate the roles of CEO and chairman, with Ryan Drexler being named to the latter position. All recent statements from the company have been attributed to him.

“I am pleased to see improved stability in the business, as we continue to build a sustainable and profitable business. We are building strong relationships with our key partners, in both the supply chain as well as our retailers, that we believe are making the business stronger and healthier. We remain committed to acting in the best interest of our shareholders and maximizing shareholder value,” Drexler said.

The restructuring plan has yet to bear fruit in terms of the company’s share price. From a high of more than $14 a share in 2014 the company’s shares have steadily declined to about $2.30 today.