MusclePharm Reports Strong 2016 Third Quarter financial results:
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.