MusclePharm Seeks NASDAQ Listing, Eliminates Debt, Grows Q3 Revenues by $14M YoY

Submitted by Sarah Harris as part of our contributors program.

It looks like long-term investors in MusclePharm (OTC: MSLP) (MSLPD) are finally going to be rewarded. With revenues likely to exceed $70 million this year, dwindling debt, and a recent 850-for-1 reverse split, the stock now meets some major listing standards for the NASDAQ. Revenues in the third quarter grew $14M versus last year and its CEO has publicly stated that he will “seek a listing of our common stock on a more established trading market.”

MusclePharm has had a record-breaking year as evidenced in its rapid sales growth and capital restructuring. The company eliminated dilutive equity agreements, reduced derivative liabilities to nearly zero from $7.1 million at the beginning of the year, and settled all but 4,990 million warrants (down from 333,339 million in January, split-adjusted).

A Company Trading at Less Than 1/6th Its Annual Revenues (For Now)

MusclePharm will likely exceed $100M in 2013 revenues, yet its market capitalization is just $15M. This curious reality is easy to explain: the company’s debt levels and profit margins have struggled in the past, due to the company’s young age and low sales volume. Now that equity overhangs have been eliminated and profit margins will likely turn positive, MusclePharm’s market capitalization of $14 million should quickly become a thing of the past.. Higher sales volumes will certainly lead to lower cost of goods sold due to lower manufacturing and other costs.

* 2009 revenues: $1 million
* 2010 revenues: $4.1 million
* 2011 revenues: $17 million
* 2012 revenues: $51 million (as of the third quarter)

These numbers speak for themselves. Long-term shareholders have not benefited from this incredible growth, however, due to capital structure issues like dilutive equity offerings and toxic debt deals. In 2013, however, it looks like MusclePharm will finally emerge from its past with a recapitalized, high-growth business with healthy profit margins and eyes clearly set on a NASDAQ listing. Currently, among other requirements, NASDAQ asks for a minimum initial listing bid price of $4.00 per share and an ongoing minimum bid of at least $1.00. Moreover, with MusclePharm’s shares trading in the $5s and a tiny float of less than four million shares, investors now can benefit from the momentum and higher interest from the institutional trading communities, as well.

Operationally, MusclePharm should be able to reduce its cost of goods sold and selling, general, and administrative expenses as sales volumes are consistently at $20M per quarter or more. For example, MusclePharm’s cost of goods sold and selling, general, and administrative expenses were 78% and 54%, respectively, of net sales for the quarter ending September 30, 2012. Another company, Lifeway (LWAY), which sells kefir (yogurt) had net sales of $20.6 million last quarter. Lifeway’s cost of goods sold and selling, general, and administrative expenses were 63% and 26%, respectively. Lifeway, which has almost identical sales to MusclePharm, has a market capitalization of $150M compared to $15 million for MusclePharm mostly because Lifeway’s costs are slightly lower. With MusclePharm’s higher sales volume, it should be able to renegotiate many of these costs and reduce its above mentioned 78% and 54% numbers significantly.

Recall that 2012 is the first year MusclePharm has exceeded $20 million in revenue, so 2013 would be its first year to legitimately negotiate from a position of strength. Now that its capital structure is cleaned up, MusclePharm will undoubtedly focus on maintaining its exponential sales rate while reducing costs. The company can easily renegotiate its manufacturing and shipping contracts now that volumes have grown by such a large amount. In addition, MusclePharm can trim endorsement deals and other miscellaneous expenses.

Will MusclePharm Be Profitable in 2013?

Crossing into profitability during 2013 would be unsurprising. Top-tier retailers sell MusclePharm’s products, including GNC (NYSE: GNC), Vitamin Shoppe (NASDAQ: VSI), Vitamin World (NYSE: NBTY), Dick’s Sporting Goods (NYSE: DKS), Amazon (NASDAQ: AMZN), and BodyBuilding.com. MusclePharm is able to market its products with minimal advertising expenses, and most customers hear about its products by word of mouth. In addition, the leading retailers of sports supplements online, BodyBuilding.com, recently nominated MusclePharm in 18 product categories for its 2011 awards. The company won three awards: breakout brand of the year, packaging of the year and new supplement of the year (for its Assault product). MusclePharm’s Assault also secured a nod of approval from the U.S. Sports Academy for safety and effectiveness following an extensive clinical trial.

MusclePharm is the official nutrition company of the Ultimate Fighting Championship (UFC). Its products are endorsed by popular athletes like Michael Vik and by national teams including the Cincinnati Reds. (An independent study by Consumer Reports found that Michael Vick is one of the few celebrities with verified daily use of their endorsed nutritional supplement.) MusclePharm prides itself as a NSF International and Informed-Choice certified company. In addition, all of its products meet the National Nutrition Food Association’s good manufacturing practices and are manufactured in laboratories registered with the FDA. Finally, MusclePharm has a world-class Sports Science Center located in Colorado where athletes and scientist collaborate to produce supplements that are both effective and meet the stringent standards of governing sports organizations.

Conclusion

Next year will be pivotal for MusclePharm. The company is nearing the $100 million threshold of annual sales, its brand has broad acceptance in the sports community, and it has a large distribution network of major domestic and international stores. Now that the company has cleaned its balance sheet by eliminating toxic financing, shareholders will expect market capitalization to better reflect sales numbers. A possible NASDAQ listing, a recent reverse stock split that brought the company’s stock price to over $4 per share, and profitability potential are all factors that will contribute to MusclePharm’s pivotal 2013.