Jason Williams is pitching his Future Giants newsletter ($1,999 for the first year, 90-day refund period), this time with a “next Nestlé” stock story. Today the investment teased is a genuine penny stock, with a teensy-weensy market cap of well under $100 million, so we should tread carefully… but still, I’m curious. Let’s see what he’s talking about.

Here’s the spiel about the newsletter:

“Future Giants is my brand-new exclusive weekly investment advisory service focused entirely on small, microcap companies.

“They will span across multiple sectors and industries, but they’ll all have one thing in common…

“The potential to be industry-defining titans with explosive profits and screaming growth.

“Just like this Vancouver-based company that’s set to be the next billion-dollar behemoth like Nestlé.”

This is a fairly new publication, I think it was launched earlier this year and we’ve only covered it once — that was when Williams was teasing the “Newton Battery” for energy storage back in May (that’s still part of this new ad, too, it’s one of the extra “special reports” he throws in). In case you’re curious, that “Newton Battery” stock, Energy Vault, has lost about 60% of its value since we covered the ad, about six months ago (the S&P is down about 2% in that same time period, though small-cap stocks in general, measured by indices like Russell Microcap, have been about flat).

So what’s the stock being touted by Williams this time? It’s some kind of tiny conglomerate that owns several different companies… including a little food company making something like a vegan version of Cheetos, and an agricultural processor and distributor that can provide pea protein to all the artificial meat companies (Beyond Meat, Impossible Foods, etc., everyone’s making fake meat now, and most of them use some kind of legume).

Here are the clues from the order form:

“I think the company behind the “Manhattan Project for Food” could become bigger than anything else I’ve covered over the course of my career.

“Because it has all the elements for market domination in place:

“Control over the entire value chain: This firm holds stakes in industry-leading companies that cover the entire value chain, from farm gate to grocery shelf. Their massive network consisting of 3,000 farmers does NOT suffer from supply chain issues…

“Powerful brands: One of this company’s brands saw a 533% revenue increase in less than one year. The launch of more explosive in-house branded products is just around the corner…

“Patented technology: Not only does this firm own the tech required for the massive switch to plant-based protein, but it also has a legendary industry veteran under contract. He developed one of America’s most popular snacks. This product raked in $200 million in retail sales in its first year alone.

“As you can see, this firm is spearheading what Yahoo Finance calls a “red-hot market.”

“If you’re going to put money in one speculative play this decade — this stock is it.”

And he tosses in a few other clues in the loooong ad, including that this “very small firm” is priced under a dollar and is valued at “just $34 million”, which is why I say it’s a genuine penny stock. That’s often a signal that a stock is extremely speculative, at least as likely to be bankrupt in a year as to become a viable company, though the tiny gems do surface from time to time.

Thinkolator answer? This one is a company called Eat Well Investment Group (EWG on the alternative CSE market in Canada, EWGFF OTC in the US).

Eat Well used to be called Rockshield Capital, and it went through a pretty strong “hype cycle” about five years ago because it was focusing, at that time, on cannabis and blockchain investments. They consider themselves a “venture investing” company, with dozens of investments made over the years, but most of those investments themselves were extremely small — rarely over a million dollars. A Canadian blogger compiled them back in 2018, in case you want a little back story.

If you go back a bit further, Rockshield was briefly named CuOro Resources, and before that it was a junior blank check company called Blue Cove (if you look at the stock charts, its previous surge was during the junior gold stock boom in 2011-2012). I think the only person still in common is Nick Demare, who was on the board a decade ago and remains the CFO — his connection is through Chase Management, which has advised lots of junior miners (his name comes up in connection with lots of other early stage Vancouver story stocks that I’ve written about in the past, like Tinka Resources, East West Petroleum, Mirasol Resources and Tasman Metals). Regardless, the history of the stock doesn’t mean much at this point — over the past year or so, they’ve been using a very small amount of capital they’ve raised, and a lot of debt, to buy some “plant-based protein” companies.

The “story shift” didn’t scare off the cannabis folks — Danny Brody, who at the time was one of the big pitchmen for the National Institute for Cannabis Investors (Money Morning’s subsidiary that focused on pot stocks, now defunct), wrote favorably about Eat Well about a year ago, when they were in the process of changing their name and formally shifting their focus to plant-based protein. At the time, he was “working with them” and was sure that you “haven’t missed the boat” even though the stock had ridden that story excitement to about 77 cents (US$), so if that’s true, well, I guess you still haven’t missed it — the stock has fallen dramatically and now trades at about 15 cents. Brody managed to pitch it almost exactly at the top (at least for now). He also promoted the stock again last November, after it had fallen a bit.

According to the last update from the company, a certain “Daniel Brody” has 1.8 million options (at 56 cents) and 1.7 million restricted shares in Eat Well, is listed as a founder of the company, and has been, according to press releases, buying more shares as recently as June. So he still believes, for whatever that’s worth.

What’s the story today, now that we’re about a year into this new plant-based focus for Eat Well?

They say some rosy things about the financial performance in their presentations and other commentary, indicating that their three investee companies had $58 million in revenue in 2021 and expect to have about $100 million in 2022, and that those companies “generated $1.477mm in net earnings in 2021.”

That profit is all from Belle Pulses, which has been reasonably profitable over the years, but is not fast-growing or glitzy. They’ve been around as a processor of split peas in Saskatchewan for 46 years, and seem to be a pretty established business, though I guess they are trying to expand to bet on the growth in demand for vegetable protein. It may be that the demand for pea protein from the fake meat market is going to make their business move valuable, we’ll see, though so far it’s the war in Ukraine that appears to have the biggest impact — their revenues are not really growing quickly at the moment, but they did say they saw a jump in profits this year.

The other two investments are both aspirational consumer packaged goods companies…

They have now acquired 100% of Sapientia, which is run by a food scientist who worked on Frito-Lay’s Twisted Cheetos and has some patents on puff-style healthier vegan snacks (for a while this business was called The Healthy Table Superfoods, but that name seems to have fallen off). Sapientia has introduced its first product, which is a white label snack being sold in Western Canada, though I haven’t seen any real detail about what the numbers look like. That initial product has been successful enough to get approval to double it’s distribution footprint, from about 400 stores to 800, and they say they’re also working on pet treats and more snack products.

And Amara Organic Foods, which is primarily a maker of powdered vegan baby food, is expanding through club distribution (I don’t know what that means, maybe warehouse clubs like Costco?) and building an e-commerce business. They describe it as “one of the fastest-growing baby food brands,” but do not report any other financial details. Some stories about the initial acquisition of these firms, with the deals sourced from Novel Agri-Tech, indicated that Sapientia had a million dollars or so of revenue, but at the time the deal was to buy a “superfood” company called Boku as the third asset, not Amara. Not sure what happened in the interim. They currently own 51% of Amara, partly paid for by a promissory note (that’s about $10 million of their liabilities), and have the right to buy up to 80% ownership for another $29 million.

So the more speculative new food brands they’re trying to build are obviously not yet really proven (and their last update noted that progress wasn’t as rapid as they had hoped), but it’s also too early to judge them as failures. Introducing consumer products takes a long time, particularly if you don’t have the backing and distribution heft of one of the giant multinational food companies.

On that front, then, we have the somewhat appealing structure of a steady and growing business in Belle Pulse to help steady the fund while the two much more speculative ‘startup’ food brands they’ve acquired take a lot of time to develop.

The bigger concern for me is debt, though. Eat Well borrowed the entire $30 million purchase price to buy Belle Pulse, and a little more to satisfy the cash portion of the other acquisitions, and that debt, now totalling $34 million, is now due October 31st, 2022. As far as I can see, they haven’t yet figured out how to deal with that maturity — they say that discussions are ongoing for additional funding to replace the debt facility, but so far all they’ve done is push the due date from July 31 to October 31.

They don’t really have detailed financial statements for the three companies they’ve invested in, so we don’t see a lot of info about how those companies are doing, though they do report their asset value and the debt of those subsidiaries, and provide some operational updates.

As such, it’s sort of a balance sheet and net asset story, and on that front the debt stands out as being the most important factor — they carry the three investee companies at cost, a total of $54.76 million worth, and they owe Amara another $10 million or so in a promissory note as part of that acquisition, and have borrowed now a total of about $34 million from that $40 million credit line that comes due on Halloween. That means, if we think of this as an investment holding company, the asset value attributable to Eat Well shareholders, after accounting for the debt, is in the neighborhood of $10-15 million, which fits in reasonably with the assertion that their shareholders’ equity as of May 31 was C$11 million.

Those companies may or may not be worth what Eat Well paid for them, Eat Well obviously hopes that they’ll be worth a lot more than they paid… but they’re recent acquisitions, so with a current market cap of about C$30 million, you’re essentially paying a 200% premium to Eat Well’s purchase price to buy into this company.

Which makes it a bet on whatever they do to refinance the large chunk of debt — if they can refinance that debt on good terms, and for a longer period of time, then you get the potential for a strongly levered ride on however Belle Pulses and their other investments perform over the next few years. If, however, they can’t refinance or raise money on good terms over the next two months, then the odds are pretty good that a lot of the rewards for being invested in those companies (assuming there are any rewards) will go to someone other than you — the new partners or shareholders who invest at a lower price in their next equity financing, or the debt owners who would have more influence and probably ownership of the company.

That’s not necessarily an unusual thing, private equity and lots of other investors often use heavy amounts of debt to lever up their investments… but it strikes me as a bit unusual and highly risky for what is really a venture capital fund. It’s awfully stressful for early-stage consumer products companies to rely this heavily on extremely short-term debt.

So yes, there is a big inflection point here. Plant-based proteins and vegan processed foods are certainly becoming more popular, so that’s somewhat of an inflection point for the sector, and it might increase the demand for split peas and yellow lentils and other pulses as ingredients in those processed foods, that seems pretty clear.

But for me the bigger inflection point is not the rise of plant-based meats… it’s the management of this balance sheet over the next couple months. Personally, if I loved this story I’d wait until they figure out their debt… you don’t want to be the last buyer in before a microcap penny stock is forced to try to double its market cap or give away a lot to borrowers to extend their loans. Maybe that risk is already in the shares, that’s a matter for interpretation, but I don’t see an emerging powerhouse of a product that’s going to change their profitability in the next year or so… which means I’d rather wait until the balance sheet is sturdy enough that we can have a little more confidence that they will still exist in a year.

Novel Agri-Tech acted as a business broker, they sourced the investments and it sounds like the people at Novel planned to come work at Eat Well and find more investments. So the Novel folks are now a huge shareholder of Eat well, they earned 11.5 million shares as part of those acquisitions of Sapientia and Belle Pulses, and have a net profits interest agreement that will give them an additional 65 million shares if their “performance measures” are hit (I don’t know what the measures are). The share count has been bumping up pretty quickly as they’ve made these acquisitions, so it’s around 155 million now, but, depending on how those profit sharing payouts work with Novel Agri-Tech, could be up in the 220 million range pretty soon even if they don’t do another equity financing.

There are also warrants trading for Eat Well, though it would take another big surge in excitement over the next couple years to put them “in the money” — the CSE page indicates that they have about five million warrants with a December 23, 2024 expiration date and a 75-cent strike price, a remnant of the fundraising they did in 2021. Those warrants trade “by appointment,” as we used to say about illiquid investments — the last trade in those warrants was in July, and it was for $20. Yes, twenty bucks, no missing commas or decimals.

So we’ve got a highly levered holding company that has bought a pretty solid processor of split peas, which will probably be profitable most years but would likely need capital investment to grow much faster than 5-10% a year, and two small packaged food companies that are trying to build their own product lines and distribution deals. The whole package is worrisome to me, but mostly just because of the huge debt coming due on October 31 and the uncertainty that brings — I think the idea of investing in pea-based protein production as a core business and dabbling in some experimental new healthier snacks is a reasonable way to set up a “new foods” holding company, it’s just that the use of tons of debt puts more pressure on those split peas than I’d like. I’m afraid that Belle Pulses would have to be a lot stronger than it initially appears to handle both a fully leveraged buyout (which is essentially what happened here, Eat Well borrowed the whole purchase price), and generate enough cash flow to also cover the debt and startup costs incurred by the consumer product companies that Eat Well is trying to shepherd into growth.

It’s always easier to invest in a company that doesn’t need your money, of course, so I might just be a little too conservative to get excited about this kind of startup. I’m OK with venture investing, if you know the risks, you bet on a bunch of startups and hope that one works out… and I’m OK with private equity investing, since the companies they usually buy are supposed to be steady enough to handle the big debt loads they pour on to engineer their profits… I just can’t get excited about doing both of those things at once in one microcap holding company. Maybe you can, or maybe you see more potential here than I do, but until that balance sheet looks a lot safer I’ll stay away.

That’s just my thinking, of course… what’s yours? Let us know with a comment below. Thanks for reading!