Flying Purple Portfolio Eater? (PPBV)

by Travis Johnson, Stock Gumshoe | April 10, 2008 5:33 am

I usually don’t comment about “naked” promotional stock spam, the kind of stuff sent out by DoublingStocks or the breathless emails screaming about a particular penny stock that’s about to go off to the races. But so many people have commented on Purple Beverage that I thought I might share a few thoughts.

Purple Beverage is a company that makes an antioxidant drink, essentially, and it is being marketed pretty heavily — I’ve had many, many readers call it to my attention, and there have been several folks discussing it on the Stock Gumshoe Forum.

Here’s what I know:

They at least do have a product, which is being marketed in bars and vitamin stores in a few big cities so far. It’s a drink that’s made with acai and a bunch of other high-antioxidant berries and fruits. Haven’t actually seen it or tasted it. I think it costs $3 or $4 a bottle. The product apparently launched at the end of last summer in New York City.

They are being touted on email by several different “advisors” who all seem to be the same person/company. I’ve seen the email from “Scott S. Fraser’s Elite Stock-Market Advisory” and from “The Fagan Report,” both of which appear to be affiliated with or projects of the Contrarian Press.

But these are certainly not investment newsletters, trading services, or advisory services — they are stock marketers. This is clearly disclosed in their disclaimers, which of course most people never read. Here’s an excerpt from one of the disclaimers (other than the names of the companies, the other ones I’ve seen all have the same disclaimer):

“IMPORTANT NOTICE AND DISCLAIMER: This stock profile should be viewed as a paid advertisement. In order to enhance public awareness of Purple Beverage Company and its securities through the distribution of this report, Investment News Ltd. paid the publisher, Contrarian Press the sum of $105,000. Contrarian Press applied these funds towards costs associated with creating, printing, and distributing this report and will retain any excess funds as profit. Contrarian Press may receive additional revenue, the amount of which cannot be determined to any degree of certainty, from sales of the Ultimate Stock-Profit Compass in connection with the accompanying offer. No additional sums, however, will be paid by Investment News Ltd. This publication is not, and should not be construed to be, an offer to sell or a solicitation of an offer to buy any security. This publication, its publisher, and its editor do not purport to provide a complete analysis of any company’s financial position.”

So clearly, this is an advertisement. I think probably most people never read these disclaimers because it seems like they’re all the same, but in almost every case like this you’ll see a fairly clear disclosure not unlike the one above — it’s that disclaimer that probably saves them from the attentions of the SEC, since many, many unsavory things are legal as long as you disclose them.

It’s possible that Scott Fraser and his “contrarian press” stuff does also include investment advisory or real research from time to time, but this is the first I’ve heard of him. His “compass” on the website also includes some sells, so I don’t know if those are real recommendations or just some balance artificially added to make his touted stocks seem better. Given the existence of this ad, I certainly wouldn’t bother ever looking at his stuff again — life is too short.

So the fact that this is a paid ad means, at least in my book, that this is a never ever ever buy stock. If I owned a stock that hired a stock market spam touter like this, I would sell it — in my opinion, it’s an awful indictment of a company’s prospects if they pay firms to tout their stocks, and, even worse (as in this case, apparently), if they pay them in stock to tout the stock — that adds even more motivation for them to lie, cheat, or do whatever else it takes to drive the stock price up.

But just for fun, let’s have a look-see at Purple Beverage, since we’ve gotten this far.

Here’s a little excerpt from their filings:

“The cost of sales during the three months ended December 31, 2007, amounted to $254,493. Our cost of sales includes the manufacturing costs of our proprietary brand and warehouse and distribution costs. The cost of sales as a percentage of sales was approximately 98% for such time period. We anticipate that our cost of sales will decrease and related gross profit margins will increase for the remainder of our current fiscal year due to the refinement of our production process in strategically located production facilities and from expected economies of scale in the purchasing of raw materials.”

So they have some hope that they’ll make a profit, but their gross profit margin is 2%.

Net profit is, of course, nonexistent to the nth degree — partly because this is a company that spends a lot more for marketing and brand-building than it does making it’s product.

“advertising and marketing expenses represent our brand development and promotional expenses for our proprietary brand. These expenses include promotional spending at point of sale. In November 2007, we issued 650,712 shares of common stock for advertising and promotional services valued at $325,356. We anticipate that our advertising and marketing expenses, in both cash and equity components, will continue to increase for the remainder of our current fiscal year, subject to our ability to generate operating capital.”

I’m assuming that a fair portion of that marketing expense was to pay Scott Fraser and his folks in PPBV shares, though they also seem to pay for most of their other marketing and consulting costs in shares. Though they also have a fair number of celebrities, who I’d guess are probably also being paid in stock (that’s just a guess) — unfortunately, as impressive as Chaka Khan, Mariano Rivera and Tori Hunter are in their professional lives, as product pitchers I imagine they’re quite a ways down the list from, say, Michael Jordan and Michael Jackson. If only they could bribe Oprah to put Purple on her “favorite things” list …

And, just to be clear how much money they’re losing so far:

“We reported a loss from operations of $1,614,791 for the three months ended December 31, 2007.”

And just recently, they’ve been offering a big discount to warrant holders to try to get them to exercise, which sounds like a cry for cash, and they’re also continually diluting to sell shares to foreign buyers (they’re not actually registered to sell shares in the US yet, as far as I can tell, though they are obviously traded here on the unregulated markets). They have an accumulated deficit of close to $3 million, so I guess they at least won’t be paying corporate taxes for a while.

Now, many startup companies with new products start off in a big hole — that’s not unusual and not a reason to criticize. But most startup companies also fail, particularly startup consumer product companies — and you can see from their “risk sharing” arrangements where they pay a lot of their vendors and consultants in stock that they know the risks are pretty high. It is extraordinarily hard to build a brand, get shelf space, market yourself, and sell a compelling product at compelling price, all while floating in the tiny part of the market that’s not dominated by the massive consumer products conglomerates.

Purple Beverage has a pretty slick website, and is clearly pretty good at putting together marketing materials. But as far as I can tell, that’s as far as we’ve gotten.

The website lists dozens of mentions in popular, consumer and business publications in order to try to build the idea that there is a buzz behind the product. A few of these are genuine (if underwhelming), mostly the little snippets from consumer publications that essentially announce the product and have two or three lines of text … but the vast majority (of the links that work) are simply press releases from the company or one of it’s customers, rehashed all over the web. Don’t be fooled by the SmartMoney, CNBC, YahooFinance, Marketwatch or similar links into thinking that these outlets have covered the company editorially, they just ran press releases that we all see throughout those websites, generated by PR/Newswire and others on behalf of their clients. The whole of the news and coverage appears much smaller than the sum of the corporate logos on that page.

PPBV so far has one significant customer in GNC (significant to PPBV, probably not significant to GNC) — how many nationwide beverage crazes started out in GNC? It doesn’t mean it can’t happen, but it means some caution might be warranted. These guys are spending a lot of money relative to their size — maybe their marketing will be on target and it will allow them to break in to the distribution channels or get some shelf space outside the health and vitamin stores, but that is, at the very least, a very difficult challenge with a host of competitors of all sizes.

Is this the next Hansen? Or even the next Pepsi? Maybe someday, possibly perhaps maybe … but it’s a huge leap from here to even picture them as the next Pom Wonderful (which apparently has paid for lots of scholarship burnishing the power of pomegranate oantioxidants) or the next RC Cola or Vernor’s Ginger Ale, niche soda products that remain massively larger than PPBV, even decades after losing their markets to big competitors.

Remember that for every Hansen Natural there are dozens of other pretenders to the energy drink throne, and for any trend or consumer niche there will always be at least dozens of companies trying to win the market. The broader niche for Purple Beverage, the healthy antioxidant drink market, may well be enduring … but it’s also very crowded. Any visit to a Whole Foods, a Safeway … even a 7-11, depending on where you live, will probably expose you to several antioxidant drinks. And that’s not counting boring old antioxidants like grape juice or orange juice, both of which have much more marketing power than acai. I’m betting that none of them will be from Purple Beverage just yet, but you never know.

I don’t want to say that this company has no chance — I guess they’ve go the same fighting chance as any tiny company trying to break into the beverage market. And I don’t blame them for trying, I just don’t want them to do it with my money. Remember, for every story like Honest Tea or Glaceau or Hansen (those first two were very profitably bought out by Coke), we need to remember that there are probably hundreds of failed companies with perfectly decent products addressing those same markets. Are you confident that you can pick the winners from the losers?

Just by point of comparison: Glaceau at the time of it’s sale to Coca Cola was for Glaceau in 2006 apparently (according to a NY Times article) sold 77 million cases, and had $355 million in sales. Coke bought them for $4.2 billion. So clearly if you’ve got a very promising brand that can be quickly ramped up to a mass market through existing distribution channels, someone might pay a lot for it. That price is about 12X sales, though Glaceau probably also doubled sales from 2006 to 2007.

By way of comparison, Purple Beverage had $258 thousand in sales. Thousand, not million. Their market cap, which I assume doesn’t count some of those warrants[1] that haven’t been exercised yet, and might not include options[2], either, is $167 million, according to Yahoo Finance numbers. If I’m doing my math right, the current price is about 650X sales.

If I were dedicated to figuring out which of these companies was going to win (and I don’t know why I’d waste my time — there are lots of investments out there that would take far less work), I’d figure it out using something other than the “analysis” of a paid shill.

And here’s my disclaimer: Purple beverage might possibly (though it’s unlikely) end up advertising on this site if they happen to do so through one of the networks I participate in, but they have unfortunately not paid me $200,000 in stock to write about their company. Don’t worry, in the very unlikely event that they did offer that and I accepted, I would have told you — and up front, not in the fine print.

I’ll leave you with this excerpt from the “ongoing concern” section of their last quarterly filing:

“The ability of the Company to continue as a going concern is dependent upon increasing sales and obtaining additional capital and financing. During the fiscal year ended September 30, 2007, the Company borrowed $750,000 for working capital purposes and sold common shares for net proceeds of $350,000. During the three months ended December 31, 2007, the Company sold common shares for net proceeds of $3,375,550. Management intends to attempt to raise additional funds by way of a public or private offering. While the Company believes in the viability of its strategy to increase sales volume and in its ability to raise additional funds, there can be no assurances to that effect. The Company’s limited financial resources have prevented the Company from aggressively advertising its products and services to achieve consumer recognition.”

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