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MusclePharm Reports Strong 2016 Third Quarter Financial Results

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Net Loss Reduced and Cash Increased as Company's Strategic Restructuring Turns Corner

DENVER, Nov. 9, 2016 /PRNewswire/ -- MusclePharm Corporation (OTCQB: MSLP) ("MusclePharm" or the "Company"), a scientifically-driven, performance lifestyle sports nutrition company, today announced financial results for the quarter ended September 30, 2016.

Muscle Pharm

Operating and Financial Highlights for Third Quarter 2016 (as compared to Third Quarter 2015):

  • Reduced net loss to $1.4 million from $27.6 million;
  • Produced adjusted EBITDA of $1.3 million;
  • Decreased total product net revenue by $3.3 million to $30.7 million;
  • MusclePharm and FitMiss product net revenue increased by $5.6 million or 22% to $30.7 million (excluding the impact of the discontinued Arnold Schwarzenegger product line and BioZone revenue);
  • Inventory reduced by 58%;
  • Cash increased by $2.4 million to $5.9 million;
  • Total operating expenses reduced by 69% to $11.5 million;
  • Selling, general and administrative expenses decreased 15% to $3.9 million;
  • Salaries and benefits decreased 60% to $2.3 million;
  • Settled Capstone litigation (subsequent to the third quarter 2016).

Ryan Drexler, MusclePharm's Interim Chief Executive Officer, President and Chairman of the Board of Directors, said: "We believe that the strong results of the third quarter validate the immense strides we have made in the implementation of our strategic restructuring program. We have turned a corner on our plan to return the Company to profitability and value creation, and anticipate continued improvement in our operating margins and expense structure going forward."

Mr. Drexler said he was most pleased that the Company's brand has come out of the restructuring stronger than ever, and that MusclePharm continues to build upon its status as a leading nutritional supplement innovator focusing on the needs of all athletes. "While we still have work to do, the Company is on a much stronger financial foundation than when we began the restructuring," said Mr. Drexler. "We are making significant progress in stabilizing the Company and positioning MusclePharm for future growth."

The Company also announced that it executed a settlement agreement related to litigation involving Capstone Nutrition. Under terms of the settlement agreement, the Company has agreed to pay to INI Buyer Inc. (a company related to Capstone Nutrition) $11.0 million within five business days following the execution of the settlement agreement.  In addition, the Company has issued to INI Buyer Inc. a warrant to purchase 1,289,378 shares of the Company's common stock. The exercise price of the warrant is $1.83 per share, subject to adjustment under certain circumstances provided for therein.  The warrant has a term of four years. The Company has estimated that the aggregate grant date fair market value of the warrant is approximately $1.9 million.

The Company had previously recorded approximately $21.9 million in accounts payable and accrued liabilities associated with the Capstone liability as of September 30, 2016. Based upon the settlement, the Company anticipates recording a gain of approximately $8.9 million during the fourth quarter of 2016.

In conjunction with the settlement and as further proof of Mr. Drexler's confidence in MusclePharm, the Company entered into a convertible secured promissory note agreement with Mr. Drexler pursuant to which he has agreed to loan the Company $11.0 million (the "2016 Convertible Note"). Proceeds from the 2016 Convertible Note will be used to fund the settlement payment. The 2016 Convertible Note is secured by all assets and properties of the Company and its subsidiaries, whether tangible or intangible. The 2016 Convertible Note carries interest at a rate of 10% per annum, or 12% if there is an event of default. Both the principal and the interest under the 2016 Convertible Note are due on November 8, 2017, unless converted earlier. Mr. Drexler may convert the outstanding principal and accrued interest into shares of Company common stock for $1.83 per share at any time.

The Company concluded its restructuring plan announced in August 2015. In the third quarter of 2016, the Company closed its finance and administration office in Denver, CO, and a distribution center in Pittsburg, CA. The Company's previous restructuring efforts include the sale of its subsidiary, BioZone Laboratories Inc. ("BioZone"), for $8.3 million (excluding the earn-out potential), a reduction in headcount from 310 employees to fewer than 90 employees, and the closure of seven facilities. The Company has also optimized product SKUs, eliminated unprofitable licensing agreements, migrated to new product suppliers and the Arnold Schwarzenegger product-line licensing agreement has been terminated. As the Company continues to execute its growth strategy and searches for additional cost savings opportunities, it anticipates continued improvement in its operating margins and expense structure.

Financial Results for Third Quarter 2016

Net revenue decreased $2.2 million, or 7%, sequentially to $30.7 million for the three months ended September 30, 2016, compared to $32.9 million for the three months ended June 30, 2016. Net revenue decreased primarily due to higher sales-related discounts for the Company's major customers, the elimination of unprofitable licensing agreement sales, and the loss of BioZone sales in the third quarter. However, the MusclePharm and FitMiss product net revenue for the three months ended September 30, 2016 increased by $5.6 million or 22% to $30.7 million as compared to $25.1 million for the three months ended September 30, 2015, excluding the impact of the discontinued Arnold Schwarzenegger product line series and BioZone sales.

Gross profit for the third quarter 2016 was $10.2 million, or 33% of revenue, compared to $10.7 million, which was 33% of revenue in the second quarter 2016.

Operating expenses for the third quarter 2016 decreased to $11.5 million, compared to $12.2 million for the second quarter 2016 as we finalized the restructuring plan and continued to focus on optimizing our cost structure. Excluding restructuring and impairment charges, operating expenses for the third quarter 2016 decreased by $3.0 million to $9.7 million, compared to $12.7 million for the second quarter 2016.

Net loss for the third quarter 2016 was $1.4 million, compared to $4.2 million in the second quarter 2016.

Adjusted EBITDA, a financial measure outside of U.S Generally Accepted Accounting Principles ("GAAP"), was income of $1.3 million for the third quarter 2016 compared to a loss of $43,000 for the second quarter 2016. Adjusted EBITDA excludes depreciation, amortization, interest, taxes, stock-based compensation, restructuring charges and other expenses. See "Non-GAAP Financial Measures" below.

Conference Call Information

As a result of management's focus on executing the Capstone litigation settlement and improving liquidity, there will be no third quarter conference call to discuss results.

Non-GAAP Financial Measures

In addition to disclosing financial results calculated in accordance with GAAP, this earnings release discloses Adjusted EBITDA, which is loss from operations adjusted for income taxes, depreciation and amortization of property and equipment, amortization of intangible assets, provision for doubtful accounts, amortization of prepaid stock compensation, amortization of prepaid sponsorship fees, stock-based compensation, issuance of common stock warrants, other expense, net, loss on sale of subsidiary, restructuring and asset impairment charges. Management believes that these non-GAAP measures provide investors with important additional perspectives into our ongoing business performance.

The GAAP measure most directly comparable to Adjusted EBITDA is income (loss) from operations. The non–GAAP financial measure of Adjusted EBITDA should not be considered as an alternative to net income (loss). Adjusted EBITDA is not a presentation made in accordance with GAAP and has important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because Adjusted EBITDA excludes some, but not all, items that affect net earnings and is defined differently by different companies, our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

About MusclePharm Corporation

MusclePharm® is a scientifically-driven, performance lifestyle company that develops, manufactures, markets and distributes branded nutritional supplements. The Company offers a range of powders, capsules, tablets and gels. Its portfolio of recognized brands includes MusclePharm® Sport Series, Black Label and Core Series, and FitMiss™, which are available in more than 120 countries and over 50,000 retail outlets worldwide. The clinically-proven supplements are developed through a six-stage research process utilizing the expertise of leading nutritional scientists, doctors and universities. MusclePharm is the innovator of the sports nutrition industry. For more information, visit http://www.musclepharm.com. To sign up to receive MusclePharm news via email, please visit http://ir.musclepharmcorp.com/email-alerts.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. Statements that are not a description of historical facts constitute forward-looking statements and may often, but not always, be identified by the use of such words as "expects", "anticipates", "intends", "estimates", "plans", "potential", "possible", "probable", "believes", "seeks", "may", "will", "should", "could" or the negative of such terms or other similar expressions. Actual results may differ materially from those set forth in this release due to the risks and uncertainties inherent in the Company's business. More detailed information about the Company and the risk factors that may affect the realization of forward-looking statements is set forth in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, the Company's Quarter Reports on Form 10-Q and other filings submitted by the Company to the Securities and Exchange Commission, copies of which may be obtained from the SEC's website at www.sec.gov. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. All forward-looking statements are qualified in their entirety by this cautionary statement and the Company undertakes no obligation to revise or update this release to reflect events or circumstances after the date hereof.

 

MusclePharm Corporation

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)










September 30,

2016



December 31,

2015




(Unaudited)



(Audited)


ASSETS









Current assets:









Cash


$

5,894



$

7,081


Accounts receivable, net of allowance for doubtful accounts of $329 and $347 as of September 30, 2016 and December 31, 2015



15,872




22,003


Inventory



8,047




12,549


Prepaid giveaways



65




307


Prepaid stock compensation






1,641


Prepaid expenses and other current assets



3,021




3,698


Total current assets



32,899




47,279


Property and equipment, net



3,298




6,693


Investments, long-term






977


Intangible assets, net



1,718




8,652


Other assets



420




180


TOTAL ASSETS


$

38,335



$

63,781


LIABILITIES AND STOCKHOLDERS' DEFICIT









Current liabilities:









Accounts payable


$

36,093



$

39,652


Accrued liabilities



10,065




12,526


Accrued restructuring charges, current



1,728




9,140


Obligation under secured borrowing arrangement







Convertible note with a related party, net of discount



5,988





Line of credit






3,000


Term loan






2,949


Other debt obligations



11




21


Total current liabilities



53,885




67,288


Convertible note with a related party, net of discount






5,952


Accrued restructuring charges, long-term



787




279


Other long-term liabilities



103




330


Total liabilities



54,775




73,849


Commitments and contingencies









TOTAL STOCKHOLDERS' DEFICIT



(16,440)




(10,068)


TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT


$

38,335



$

63,781


 

MusclePharm Corporation

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)











Three Months Ended

September 30,


Three Months

Ended June 30,



Nine Months Ended
September 30,



2016



2015



2016



2016



2015


Revenue, net                        


$

30,694



$

33,982



$

32,867




$

106,473



$

125,780


Cost of revenue (1)



20,497




23,512




22,181





70,377




83,428


Gross profit



10,197




10,470




10,686





36,096




42,352


Operating expenses:






















    Advertising and promotion



1,905




7,093




2,686





8,878




22,603


    Salaries and benefits               



2,291




5,681




3,292





15,203




20,505


    Selling, general and administrative



3,937




4,647




4,424





12,604




14,730


    Research and development



270




1,437




531





1,664




3,323


    Professional fees



1,315




1,980




1,742





4,445




5,499


    Restructuring and other charges



1,667




16,650




(4,820)





(2,579)




16,650


    Impairment of assets               



137







4,313





4,450





   Total operating expenses



11,522




37,488




12,168





44,665




83,310


Loss from operations



(1,325)




(27,018)




(1,482)





(8,569)




(40,958)


Loss on sale of subsidiary









(2,115)





(2,115)





Other expense, net



(122)




(559)




(592)





(1,426)




(1,090)


Loss before provision for income taxes



(1,447)




(27,577)




(4,189)





(12,110)




(42,048)


Provision for income taxes






71




7





138




104


Net loss


$

(1,447)



$

(27,648)




(4,196)




$

(12,248)



$

(42,152)
























Net loss per share, basic and diluted


$

(0.10)



$

(2.01)




(0.30)




$

(0.88)



$

(3.12)
























Shares used to compute net loss per share, basic and diluted



13,978,833




13,723,213




13,874,209





13,886,496




13,504,455




(1) 

Cost of revenue for the three and nine months ended September 30, 2016 included restructuring charges of $0.1 million and $2.3 million, respectively, related to write-down of inventory for discontinued products. Cost of revenue for the three and nine months ended September 30, 2015 included restructuring charges of $1.3 million, respectively, related to write-down of inventory for discontinued products. Cost of revenue for the three months ended June 30, 2016 included restructuring charges of $0.5 million related to write-down of inventory for discontinued products.

                                                                               

MusclePharm Corporation

Reconciliation to Non-GAAP Income (Loss) to GAAP Net Loss

(In thousands)

 (unaudited)

















Nine Months Ended



Three Months Ended







Three Months Ended




Sept. 30, 2016



Sept. 30, 2015



Sept. 30, 2016



June 30, 2016



Mar. 31, 2016



Year

Ended

Dec. 31,

2015



Dec. 31, 2015



Sept. 30, 2015



June 30, 2015



Mar. 31, 2015


Net loss  


$

(12,248)



$

(42,152)



$

(1,447)



$

(4,196)



$

(6,605)



$

(51,858)



$

(9,706)



$

(27,648)



$

(7,025)



$

(7,479)


Non-GAAP adjustments:









































Stock-based compensation



4,981




8,690




(116)




427




4,670




12,705




4,015




2,154




4,013




2,523


Restructuring and asset impairment charges



4,100




17,912




1,864







2,236




21,235




3,323




17,912








Loss on sale of subsidiary



2,115










2,115




















Amortization of prepaid sponsorship fees



1,055




5,363




211




146




698




6,255




892




2,111




1,821




1,431


Other expense, net



1,426




1,090




122




592




712




1,806




716




559




348




183


Amortization of prepaid stock compensation



938




3,198







235




703




3,901




703




962




1,127




1,109


Depreciation and amortization of property and equipment



1,162




1,330




346




389




427




1,760




430




492




456




382


Amortization of intangible assets



496




776




80




196




220




1,055




279




278




273




225


Stock-based compensation related to issuance of common stock to a related party for guaranty of debt


















80




80











(Recovery) provision for doubtful accounts



234




168




225




43




(34)




219




51




70




68




30


Issuance of common stock warrants to third parties for services



6




62







3




3




65




3




12




17




33


Provision for income taxes



138




104







7




131




105




1




71




21




12


Adjusted EBITDA          


$

4,403



$

(3,459)



$

1,285



$

(43)



$

3,161



$

(2,672)



$

787



$

(3,027)



$

1,119



$

(1,551)


 

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SOURCE MusclePharm Corporation


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