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Capstone files $65 million breach of contract suit against MusclePharm

Capstone files $65 million breach of contract suit against MusclePharm

Capstone Nutrition has sued MusclePharm for breach of contract, stating in its complaint that “MusclePharm has essentially turned Capstone into its bank.”

The complaint, filed in District Court for the District of Colorado, seeks more than $65 million in damages resulting from breach of the parties’ manufacturing contract. Capstone said it filed the complaint following numerous attempts to resolve the matter with MusclePharm. Capstone, based in Ogden, UT, said it is seeking damages for multiple contractual breaches by MusclePharm, including non-payment of more than $22.5 million for product that MusclePharm ordered and accepted delivery of without payment and more than $40 million for MusclePharm’s failure to meet its minimum volume 
requirements.

Endorsement strategy
MusclePharm, based in Denver, was founded in 2008 by former NFL player Brad Pyatt. The company has had a meteoric growth history.  Until recently the company recorded strong year-over-year revenue gains in most quarters, and at one time was recognized by GNC as one of its best performing vendors.Those sales gains came at a price.  

Pyatt, who was ousted as CEO earlier this year, entered into a wide array of high-ticket endorsement and product development deals with athletes and celebrities such as Tiger Woods, NFL players Johnny Manziel and Colin Kaepernick and bodybuilding legend (and former California governor) Arnold Schwarzeneggar. Unwinding those deals has cost the company significant amounts of capital.

Pyatt was replaced as CEO and chairman on an interim basis by Ryan Drexler, who owns a significant share of the company's stock and holds $6 million of the company’s debt. Drexler is a former executive at Country Life Vitamins, founded by his father, Halbert Drexler. 

Losses mount
While the company grew strongly, losses were also consistently high. The company released a final earnings report for fiscal year 2015 in mid March, recording a loss of $51.9 million on $166 million in net revenue.  

The company attributed more than $21 million of that loss to the costs of a restructuring plan it started last fall that included buying out the endorsement contracts entered into during Pyatt’s time at the helm. 

The plan also included significant inventory costs to dump underperforming SKUs. The company’s stock price continues to slide, trading at about $2.85 a share, down from a high of $14 a share in October of 2014.

History of noncompliance
Capstone’s suit alleges those losses would be even higher if MusclePharm had been making good on its production contracts. Capstone claims it invested more than $10 million in a production plant in Tennessee specifically to meet MusclePharm’s projected capacity needs. But the company did not meet those commitments, the suit alleges.“MusclePharm fell well-short of meeting its contractual obligations. In the third and fourth quarters of 2015 alone, MusclePharm missed its minimum volume requirements by over $12 million,” the suit alleges.MusclePharm signed its contract with Capstone in late November of 2013. Relations between the parties were tense from the beginning, the suit alleges.

“MusclePharm has been in arrears for virtually the entirety of the parties’ business relationship,” the suit maintains. According to the suit, MusclePharm did briefly come into compliance with the contract terms in March of 2015, at which time the parties entered into a contract extension. 

MusclePharm then fell back into its previous mode of behavior of stalling on payment for delivered products and refusing to accept delivery of others, the suit alleges. Capstone said as a result it has become more indebted to its own suppliers, with its account of payables that are more than 30 days past due rising from approximately $2.26 million to $13.1 million.  

Capstone also currently holds a significant amount of product that MusclePharm ordered but did not accept delivery of.  Capstone said it would liquidate the inventory and seek the difference in price from MusclePharm.

Attempts to contact MusclePharm for comment on the suit were unsuccessful.