Flying Purple Portfolio Eater? (PPBV)

By Travis Johnson, Stock Gumshoe, April 10, 2008

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‚Äôs 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