How MusclePharm went from swole to twig - Bloomberg article
For years, Brad Pyatt’s supplement company bulked up on celebrity endorsements and penny stock trades. Then the SEC started kicking sand in its face.
Brad Pyatt was golfing at the Phoenician, a resort in Scottsdale, Ariz., when he decided to go after Arnold Schwarzenegger. It was the spring of 2013. Pyatt had picked the Phoenician—set against the southeastern slope of Camelback Mountain, a jagged pile of granite and sandstone sprinkled with saguaro cactus—to host an executive retreat for MusclePharm, the sports-nutrition company he’d founded five years earlier. Palm trees frame the greens of the golf course where Pyatt was playing alongside Cory Gregory, MusclePharm’s co-founder, and Jeremy DeLuca, its chief marketing executive. Between swings, they tossed out the names of athletes whose endorsements they might want. When Schwarzenegger came up, DeLuca recalls, they agreed he’d be “sick”—the “best athlete you could ever have.”
About a month later, the trio flew to California to pitch Schwarzenegger at his office in Santa Monica. Meeting the bodybuilder-turned-movie-star-turned-governor-turned-wise-elder-of-musclemen was a pinch-yourself moment for all three. Pyatt is a former NFL kick returner and wide receiver; Gregory, a gym owner and professional bodybuilder; DeLuca, a co-founder of the online supplements marketplace Bodybuilding.com. “I get the goose bumps talking about it,” Pyatt says. He carried a box he describes as “tricked out, just Arnold logos all over,” filled with empty bottles covered in more Arnold branding—mock-ups to show Schwarzenegger how his line of supplements would look on a shelf.
Ten minutes into Pyatt’s spiel, Schwarzenegger stopped him, turned to Gregory, and, in his famous Austrian rumble, demanded, “Stand up. Let me see your arms.” He asked Gregory to pretend he was curling barbells. As Schwarzenegger launched into a critique of Gregory’s physique, Pyatt knew he had a deal. (A spokesman for Schwarzenegger declined to comment.)
Schwarzenegger signed with MusclePharm that July, in exchange for $8.5 million in stock, plus royalties. The company passed $100 million in sales that year, including tens of millions from Arnold’s Iron powders, making it the sixth-largest brand in sports nutrition, according to Euromonitor International, a research company that tracks the $7 billion U.S. market. Pyatt was a jock unicorn, earning more money and renown as an entrepreneur than he had as a player.
Brad Pyatt (right) with Arnold Schwarzenegger.
He tells the Schwarzenegger story in an office at Arvada West High School in a suburb of Denver, where he now coaches football. At 36, he looks like he could still run 40 yards in under 4.5 seconds. An inch short of 6 feet, he has tattoos covering his left arm, a small cut on the bridge of his nose, and a dark, trim beard. He leans back in his chair as he speaks, running his hands through his mussed-up hair, the picture of a chill bro in a chill situation. “My strength is building brands and seeing things before they happen,” he says. “Your normal CEO visionary guy that just sees shit differently.”
When Pyatt began coaching at Arvada West in early 2014, it was a side job. He sandwiched practices and games between his duties running MusclePharm. The high school is his only office now. He resigned from MusclePharm this March, his plans for turning the company into the first truly mainstream supplement brand undone by revelations that he and other executives had spent hundreds of thousands of dollars of company money on cars, clothes, private jets, retreats, and golf, without informing investors. “I have no shame,” he says. “I failed a shitload, but I didn’t stop fighting. You know what I mean? I’m still fighting.”
Pyatt has been fast since he could walk. When he was 9, older kids in his Denver neighborhood would challenge him to races. “Brad would go out, beat them, and we would never see them again,” his mother told the Indianapolis Star. As a student at Arvada West, he played wide receiver and won a state championship. He landed a football scholarship at the University of Kentucky, where, he says, he rarely went to class. In the spring of his freshman year he was arrested for kicking a police car outside a house party. Later he was suspended for four games by the NCAA for academic fraud. His transgression, he says, was letting coaches help him with homework.
In 2002 he transferred to the University of Northern Colorado, playing for a season before being suspended again, this time because he tested positive for a banned stimulant. He says he’d taken a metabolism booster he bought at a GNC store. “I didn’t know what I was taking,” he recalls. “I just figured: It’s in GNC. It’s safe. It says you can lose body fat and be ripped.”
Instead of finishing school, Pyatt began training full time in hopes of making the NFL. His suspension made him ineligible for the 2003 draft, but he was allowed to sign afterward as a free agent. In a workout for the Indianapolis Colts, he ran a 40-yard dash in 4.3 seconds, as fast as anybody coming out of college. The team signed him as a kick returner and backup wide receiver.
Pyatt as a football player with the NFL’s Indianapolis Colts
The highlight of his NFL career came that October, on a Monday night in Tampa. With five minutes to go in the fourth quarter and the Colts trailing the Buccaneers by 21 points, he returned a kickoff 90 yards, sparking one of the most dramatic comebacks in league history. A month later, he was clobbered by a Miami Dolphins linebacker during a punt return. He lay on the field for 10 minutes before being removed on a stretcher. Doctors diagnosed him with a fractured vertebra, telling him the injury reminded them of ones they’d seen from car accidents. Pyatt didn’t return that season and played only sparingly the following year; after yet another injury sidelined him in 2005, the Colts released him. The next year, he was picked up and cut by the St. Louis Rams and then the Dolphins, without playing in any regular-season games.
Around that time, Pyatt met a serial entrepreneur named Richard Pearce. “He came to me for some mentoring,” says Pearce, who currently markets an exercise contraption called the Frog. His past ventures include CashGraf, a suite of financial software endorsed by Rush Limbaugh; ThermaWalk, a heat-conducting rubber floor mat endorsed by John Elway; and the sportswear brand Refuze2Luze. When he and Pyatt met, he was running DC Brands, which sold a canned drink called Dickens Energy Cider. (The gimmick was that bar patrons would leave out the word “energy” when ordering.)
DC was a penny stock, one of thousands of tiny companies, whose business plans are frequently speculative-to-fictional, that raise money from amateur investors and don’t meet the disclosure requirements of the big exchanges. Pearce sold shares in DC at a discount to people he knew, and in 2006, Pyatt began investing, making money at first. He’d put in a few thousand dollars, he says, sell six months later at a profit, then reinvest. SEC filings show that Pyatt sold at least $240,000 worth of DC stock in 2007.
Pyatt calculates that he poured more than a million dollars into the company. “That was my nest egg,” he says. His plan was to fold Hard Nutrition into DC, then join the management team when he was done playing football. But he lost his investment, as he tells it, because Pearce issued so many shares in DC that the stock became almost worthless. “I learned really quickly how penny sheets work from the wrong side,” Pyatt says.
Pearce tells a different story. “That’s a little self-guilt coming out right there,” he says. According to Pearce, Pyatt always sold his DC shares as soon as he could and never complained about losses. Pyatt’s real problem, Pearce says, was that Hard Nutrition didn’t make money, which left him with little choice but to sell it. DC Brands bought Hard Nutrition in August 2007 (for $37,000, according to Pearce) and began selling energy drinks under the name. “There wasn’t much there,” Pearce says. “Just some pill-making machines and some vitamins and herbs that weren’t properly stored.”
Pyatt still hoped to return to the NFL, but he’d already begun to work toward life after football. In 2005 he’d started a company in Denver, called Health Advantage Research & Development, or Hard Nutrition, after meeting Robert Nikkel, a local health guru. Nikkel had persuaded Pyatt to cut back on the grab bag of supplements he was taking and adopt a more deliberate regimen, an approach Pyatt hoped to translate into a “clean brand” of herbal supplements for athletes. Nikkel (who died in 2013) was brought on as “master herbologist.” Hard Nutrition bottled its pills in a warehouse next to the gym where Pyatt worked out and sold its first shipments through Bodybuilding.com, the marketplace DeLuca ran with his brother.
MusclePharm’s Arnold Iron Mass.
The same month, Pyatt married his girlfriend of five years and gave up on his NFL dreams. He’d just finished playing a season with the local indoor team, for $50,000, and he didn’t feel up to proving himself again to some fickle coach. By the end of 2007, he was broke and unemployed, his wife was pregnant, and they were living in the basement of the house he’d bought for his parents. The next February, Pyatt filed for bankruptcy. He had more than $1 million in debt and only $112,000 in assets, mostly from his NFL retirement account. “I was starting to apply for jobs at Home Depot,” he says.
Still, Pyatt believed he’d been onto something with Hard Nutrition. Not long after declaring bankruptcy, he called Gregory, the bodybuilder who’d been a spokesman for the company, and asked him to join a new venture. Gregory agreed, and together they raised about $300,000 from friends and family. (Gregory, who now sells workout plans online, declined to comment. “I will write a detailed book one day,” he wrote in an e-mail, “and it’s a best-seller, I’ll tell you that much.”)
Six months later, MusclePharm shipped its first order to Bodybuilding.com. There were four powder blends, called Assault, Bullet Proof, Combat Powder, and Re-Con, and two types of capsules, Battle Fuel and Shred Matrix—all sold in bottles wrapped with a neon green MP logo. The supplements promised to “maximize testosterone output,” help users lift more, improve sleep cycles, enhance libido, accelerate fat loss, and “destroy sugar cravings.” Of Re-Con, a post-workout powder, the company wrote: “Every facet of reconstruction nutrition is accounted for in this brazen, innovative formulation.”
Pyatt’s timing was good. From 2008 to last year, according to Euromonitor, the U.S. sports-nutrition market more than doubled, from $3.2 billion to $6.7 billion, drawing overscheduled office workers and worn-out parents into a burgeoning netherworld of pills, bars, and powders originally created for bodybuilders. These products aren’t vetted by the U.S. Food and Drug Administration, as medicines are; the FDA requires only that supplements be safe to consume and that their ingredients be properly labeled. It also, along with the Federal Trade Commission, demands that companies be able to substantiate marketing claims, but these standards are enforced only after the fact.
Like most supplement brands, MusclePharm used contract manufacturers to turn its proprietary formulas into pills and powders. Pyatt quickly demonstrated a knack for making his company’s tubs of protein stand out in a crowded market. The name MusclePharm, evoking both barnyard and laboratory, had been his idea. (The company later tried to stop a competitor from selling a product under the label Turbo Shred, because it infringed on the Shred Matrix trademark.) More important, he signed deals with dozens of mixed martial arts fighters, paying them to wear the MusclePharm logo during bouts for Ultimate Fighting Championship, the sport’s marquee circuit. Pyatt signed Mike Bisping to wear the company logo on his butt during a UFC event, for $17,500. Clay Guida got $6,500 per fight for crotch placement, and Alan Belcher made $18,000 for a crotch, butt, and shirt combination. After every fight, Pyatt says, vendors would text him that sales had gone up.
In 2009, MusclePharm passed $1 million in revenue, but it was losing money, and the company’s bank accounts were overdrawn. Nevertheless, as the new year began, Pyatt committed $800,000 to a sponsorship deal with World Extreme Cagefighting, a since-shuttered UFC subsidiary that featured flyweights and featherweights in smaller cages. His thought process, he says, went something like this: “How am I going to come up with this? F--- it, we’ll figure it out.”
The arithmetic proved challenging. Banks were reluctant to lend to MusclePharm, and, in the aftermath of the 2008 financial crisis, private investors were scarce. “Nobody wanted to give [money to] a company with a former bankrupt CEO and another musclehead,” Pyatt says. His experience with DC Brands, however, had taught him a third way—he could turn MusclePharm into a penny stock, issuing shares to raise cash.
Rather than go through the onerous IPO process, MusclePharm paid $25,000 for a dormant public company, “isometric training technique” marketer Tone in Twenty, and changed its ticker symbol to MSLP. Once public, MusclePharm began making deals with outfits that buy stock from companies at a huge discount then flip it to individuals. “Brad needed to raise a sensational amount of money,” says William Bossung, who was part of the investor group that helped MusclePharm get listed. One financier paid off $375,000 of the World Extreme Cagefighting debt in exchange for 7.8 million shares. Another, who’d turned to penny stocks after being barred from the hedge fund business, acquired about 200 million shares for as little as three-tenths of a penny each. “We took any money we could,” Pyatt says. In his mind, it was either that or miss payments and fail to fill orders. “Anyone in that penny stock world that’s toxic, we dealt with.”
In 2011, anonymously authored promotional e-mails started arriving in the in-boxes of penny stock investors. “We have noticed that MSLP is already becoming a major player in the nutritional market,” said one such e-mail, from someone identified as the Stock Brainiac. “You can clearly recognize that this is not some small generic company.” That year, MusclePharm issued 487 million shares.
Sales were also growing, reaching $17 million in 2011, and Pyatt kept spending. He moved the company headquarters to a 30,000-square-foot warehouse with an in-house gym that included a UFC octagon, a basketball court, and top-end weight equipment. In the fall, a month after UFC signed a major broadcast TV deal with Fox, MusclePharm became its official supplement supplier, at a cost of about $4 million over two years. Around the same time, MusclePharm inked NFL quarterback Michael Vick to a $1.5 million endorsement contract, his first since being released from prison for running a dogfighting ring.
Pyatt with Woods, who was paid millions to put MusclePharm’s logo on his golf bag.
The next summer, with the company seemingly ascendant, Pyatt booked a private jet for a corporate retreat in Cabo San Lucas, Mexico. His wife was on board, as were Gregory and DeLuca, their partners, and four other couples, according to Pyatt’s then-executive assistant, Mindy White, who was also on the jet with her husband, himself a MusclePharm employee. They stayed at the Esperanza, a five-star resort with thatch-roofed cabanas overlooking a private beach. MusclePharm paid for all of it: $20,000 for the flight, Pyatt estimates, and an additional $10,000 for everything else. He, White, and DeLuca all describe it as a work trip. They held meetings during the day, then golfed or rode dune buggies in the evening. Pyatt told me he closed a million-dollar order while sitting in a swimming pool. “Did we drink? Of course we did,” he says. “But I still worked.”
He would come to regret the trip. The following summer, just as Pyatt was closing the deal with Schwarzenegger, MusclePharm learned that it was under investigation by the U.S. Securities and Exchange Commission for potential violations of securities law. Among other things, investigators were looking at the company’s executive perks. Investors hadn’t been informed of the all-expenses-paid retreat to Cabo.
Michael Kreshel, a 32-year-old who works behind the counter at a Chipotle in Plano, Texas, was one of those investors. He’d started buying the stock after Schwarzenegger was signed, initially paying about $7.50 a share. “I was like, Holy shit. Arnold is a legend,” he recalls. “How the hell did MusclePharm get this guy?” Kreshel, an avid weight lifter who swears by the company’s Assault powder—a preworkout blend of amino acids, caffeine, taurine, and vitamins—says he eventually bought about $8,000 worth of stock.
While the SEC investigated, MusclePharm kept living large. By 2013 the company was selling in more than 10,000 U.S. retail outlets. Revenue for the year was $111 million. Pyatt made a bid for vertical integration, buying supplements maker BioZone Pharmaceuticals with about $11 million worth of MusclePharm stock in hopes of bringing production in-house.
In June 2014 he signed Tiger Woods, paying him $5 million in stock and a cash retainer to put the company logo on his golf bag. “My long-term goal is to become the first mainstream supplement company to take the scariness out of supplements,” Pyatt told the New York Times for a story about the signing. Woods was five years removed from the sex scandal that had led Gillette, Gatorade, AT&T, and other sponsors to drop him, and had just had back surgery. Pyatt saw it as an opportunity. “If Tiger wins one of the majors with a MusclePharm bag, it would have been a great story of how he came back using supplements,” he says. That summer, MusclePharm also signed Johnny Manziel, a hard-partying rookie quarterback for the Cleveland Browns, again seeing value where most brands saw risk.
A MusclePharm-branded sports car.
A couple of months later, spurred by the SEC investigation, MusclePharm filed a revision to four years of regulatory filings, in which it disclosed more than $400,000 worth of previously unreported perks paid to Pyatt, DeLuca, Gregory, and other executives. The tab for the Cabo retreat was listed as $22,005. Another executive retreat in California came in at $17,092, including travel and lodging for Pyatt, his wife, their kids, and a nanny. Pyatt had personally racked up more than $200,000 in expenses over two years. In 2012 he spent $54,595 on golf club dues and fees, including $12,550 in tabs for meals and entertainment, and withdrew $15,525 in cash that MusclePharm couldn’t prove was for business purposes. There were also company cars, phone bills, and tens of thousands of dollars in payments for clothes, luggage, and jewelry. The perks were on top of pay packages rivaling those of much larger companies. In 2014, when MusclePharm’s revenue topped $177 million, Pyatt’s total compensation was $7.1 million (though almost all of it was in the form of restricted stock).
The revised filings weren’t enough to make the SEC go away. Along with the previously unreported perks, regulators accused MusclePharm of failing to disclose almost $7 million in commitments to sponsors and a $100,000 aircraft lease, and of issuing stock to third parties without registering the transactions. They also said Pyatt had failed to disclose his 2008 bankruptcy. The two sides settled in September 2015. MusclePharm agreed to pay a $700,000 penalty and neither admitted nor denied wrongdoing.
Pyatt, who was hit with a personal penalty of $150,000, insists the unreported perks were honest mistakes that could happen at any fast-growing company. “If we didn’t report certain things,” he says, “it’s because we just didn’t know.” He adds that the spending may look extravagant, but that it was necessary for a job where deals happened on the golf course and over dinner, and small compared with MusclePharm’s bottom line. Of the private jet to Cabo, he says, “Should we have done it? Maybe not. … But when you got guys like us that are just hustlers and guys that are just self-motivated, you have to have that type of recharge.” And they needed to convince themselves that they belonged in the world of Tiger Woods and Arnold Schwarzenegger: “Private jets when we probably shouldn’t be flying, it just makes you believe you’re bigger than you are.”
The SEC didn’t especially care about these rationales. Public markets had made it possible for Pyatt’s company to raise tens of millions from retail investors, and with that came a duty to account for every dollar. The settlement shifted attention away from MusclePharm’s rapid growth and big-name endorsers, and toward its inexperienced management and shaky finances. The company had never turned a profit, losing more than $90 million from 2010 to 2014. After cresting at $14 per share in October 2014, its stock price sat below $5 at the time the settlement was announced. It now trades at about $2.
Kreshel, the Chipotle worker, says he started selling his shares after seeing that Pyatt and other executives had been lining their pockets and deceiving investors. He lost most of the $8,000 he put in. “It was ridiculous how much they took from shareholders,” he says.
The MusclePharm building lies in a cluster of warehouses on the east side of Denver, between a uniform supplier and a circuit-breaker shop. On a weekday afternoon in July, the new interim CEO, Ryan Drexler, joins me for a tour. We see the artificial putting green, the 96-seat movie theater, the underwater treadmill, the rows of weight racks and machines, and the in-house research lab, which looks like a sci-fi movie set. It features a hyperbaric chamber and a long bed, called a dual-energy X-ray absorptiometry scanner, that the company uses for measuring body fat.
Drexler, tall and tan with a salt-and-pepper beard and his hair in a bun, stays quiet as we move from room to room. In May 2015, after Pyatt approached him through a mutual friend, he paid about $6 a share for a 7 percent stake in the company. “We are either going to crash and burn, or we can fix this,” Pyatt recalls telling him. Drexler took Pyatt’s seat as chairman of the board the following month and became CEO when Pyatt left in March. A surfer and a jiujitsu competitor, Drexler has a lineage in the industry: His parents co-founded Country Life, a vitamin company sold in 2006 to the Japanese food brand Kikkoman for an undisclosed price.
Drexler has trimmed the company’s spending, opting not to renew the UFC sponsorship and paying Woods $2.2 million to end his deal early. Schwarzenegger has also left, citing “the significant issues MusclePharm faces.” The company, through a spokesman, says it terminated the deal because Schwarzenegger “failed to promote the product line.” Overall, MusclePharm has cut its sponsorship commitments from $59 million to $8 million. Through June, sales were down 17 percent from the same period last year, but operating losses were down, too. Drexler is confident the new, lean MusclePharm can still compete and grow. “We market,” he says, “at the grass roots.”
Pyatt’s voice carries easily across the football field at Arvada West during an early-morning practice in July. He roams the field in sunglasses, a baseball cap, a purple T-shirt, and sweatpants, throwing tight spirals to receivers, demonstrating proper footwork, and huddling with his assistants. “You’ve got to run, man!” he calls to one player. “You’ve got a bad habit of half-assin’ it.”
He professes to be happy looking after 100 high school boys instead of 200 employees. The pay isn’t as good—he draws a token $98 salary, leaving most of the school’s coaching budget to his assistants—but he can turn off his phone at night and doesn’t have to answer to shareholders or the SEC. Most afternoons, he plays golf. He left MusclePharm with a $1.1 million cash severance, plus his stock, now worth about $1.5 million.
It doesn’t bother him, he says, that Drexler is tearing down much of what he built. “We always did things bigger and bigger and bigger, to where now this brand is so big and well-known that Ryan doesn’t have to spend,” he says. He expresses confidence that the turnaround plan will work and that investors will once again recognize the value of the brand he built. When they do, he’ll have tens of millions of dollars and a reputation for something other than running up a tab.
In the meantime, he’s nurturing plans to start another company when his noncompete clause expires in March. It won’t be as ambitious this time, he says—just three or four products, a handful of employees, and $30 million or $40 million in revenue. “I told my wife this morning,” he says, “if you made the NFL, you don’t suck at football. And if you built a brand that did $170 million in sales, you don’t suck at business.”