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Email from Eric:

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adkmoves   Tuesday, 03/10/09 01:35:32 PM
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Email from Eric:

Mr. Lehner,

I have been a shareholder of Winning Brands for over a year now. I understand the risks associated with a startup company, yet see the gradual steps you are taking to grow this company (very impressive). When studying business in college I read a book by Jim Collins titled "Good to Great." It is a breakdown of major companies that either grew too fast and eventually failed or those who took a gradual approach and are now thriving. I do not know why I am telling you this, as I bet you have already read that book, and if not, I would recommend it. It will seem as though you are looking at yourself in the mirror.

All that being said, I have a few questions to pose. First, is it possible to release a year-over-year sales growth percentage (either same store sales or overall)? This would extremely help new and existing investors see where the dilution is taking us yet maintain the advantages of being a non-reporting company as you have stated in the past with regards to releasing financial statements. Secondly, once fully established globally with multiple products, what is your estimate for a conservative gross margin on your sales? Third, is it fair to assume that we can expect an updated o/s number this month? And finally, at today's pps, would you consider us grossly undervalued, undervalued, fair, overvalued, or grossly overvalued? Treat the last question as if you were going to buy shares on the open market.


Response:

Hello Mr. XXXXXX,

You pose several questions and they will be more fully addressed in a revised FAQ section in due course.

In general terms for now however, I can say this. A key challenge in my role is to manage expectations responsibly. There are two countervailing forces at work. On the one hand, shareholders (of any company) want to have good news and watch their company grow and succeed. On the other hand, ethical conduct of the relationship between the CEO and those shareholders is to not let their aspirations take perceptions beyond reality. Thus ironically, the responsible CEO should actually be quick to quell inflated expectations and in my view spend more time doing that than trying to promote the company’s perception amongst its shareholders. This counter intuitive situation arises from the fact that there is natural goodwill, enthusiasm and perception of opportunity amongst the individuals who make up the shareholder family. They view the situation through the prism of what can be, whereas management sees things through the additional corrective lens of practicalities that stand in the way of achieving the goals.

I have been consistent from the beginning by making it clear, in many ways and on many occasions – that we are still a start up. I deliberately did not forecast an elaborate calendar correlation to all the phases that a firm of our type is likely to go through. I have refrained from attaching a proposed year to each of the phases, although it was my target that we could move up a category in connection with the implementation of a U.S. national account about this time. In an exceptional example of honesty in this regard, the firm has been consistently described in the FAQ of having sales of less than $1 Million. I have always stated that the value of this firm to investors rests not in its current numbers, but in its potential to achieve a very desirable combination of high sales and profitability if certain circumstances come together. There are several good and relevant examples of firms whose primary brand has acquired the stature of household name and in the process acquired a sales volume even higher than estimated in the highest phase envisioned for Winning Brands.

Therefore, and this is the key point to bear in mind, the valuation of the firm depends entirely upon whether the valuation is based on what its current intellectual property (formulations R&D, trademarks, emerging listings) can yield eventually or instead whether the valuation is based on the conventional financial statement book value. The bottom line is that this firm has never been promoted as a suitable investment for persons wishing to participate on the basis of Winning Brands’ current position on financial benchmarks. Instead, Winning Brands is suitable for persons capable of sensing the extreme potential of its business model and can hold on for the implementation of same to materialize. I realize that this is an elite group within the world of investors because it takes tremendous personal judgement and self confidence. I have always believed, and acted on the principle, that unsuitable investors should be filtered out prior to ever joining this group through such frank characterizations.

The company is a Non-Reporting Issuer at this stage. This is a perfectly legitimate mechanism for early stage emerging enterprises like ourselves to exist as we work our way to a real lift off. Our business model is extraordinarily simple. Therein lies its appeal. With a relatively small number of operational staff, and subcontract production, we can manage a growing portfolio of distributors and retail accounts for eventual massive throughput of volume in a highly disciplined cost structure. Furthermore, it should be remembered what even one million dollars represents in actual consumer behaviour – and why the firm’s progress from a much lower starting point upward through the first phase is by itself noteworthy. In a very basic approximation, one of our products is now being purchased by a consumer somewhere approximately every 2 minutes during the extended business day, throughout the year. The U.S. market is still in its very early stage of development – thus this figure is only going to accelerate. These consumers are real people, many of whom are purchasing for the first time, and thus represent the start of new consumer relationships.

Our cost of goods sold is in the normal range for well managed manufacturing operations of approximately 50%, of the wholesale price, bearing in mind that our raw materials are of a higher calibre than the typical cleaners. Our formulations are highly concentrated and deliver terrific value to the consumer.

Therefore, to answer your question about valuation I will give you my opinion, not as an accountant but as an entrepreneur. The “upside” of Winning Brands is enormous. The “downside” is not significant because we have already demonstrated an ability to perform the 3 primary tasks: create and manufacture a terrific product(s) – develop a (growing) portfolio of retail partners – manage advertising/marketing programs that pull it all together to build brand awareness for heightened trademark value. On this basis, it is my estimation that we have much more likelihood of being successful than of failing. With the passage of time our chances for success improve because all our arrangements normalize. Suppliers learn to extend credit, staff learn their responsibilities, the bank learns about our prudence, customers learn about our level of interest in serving them; all these things are getting stronger continuously.

It therefore all boils down to the question of what a firm with all this potential is worth? Is it worth $7 million? There is not the slightest doubt in my mind that this is very low. The manufacturing/distributor/retailer relationships that are being put into place constitute a pipeline to the consuming public. This pipeline has a throughput capacity of more than the $100 Million+ characterized as the most advanced phase presented in the FAQ. The difference between Winning Brands and some other companies with this potential is that private companies are not accessible to investors who desire liquidity and public companies are generally either more advanced or merely shells. Thus, we are in that special zone of being “ripe” for something really good to happen that takes us up several orders of magnitude. The shareholders who will be the owners of the company at that time will own a very attractive money machine because it has been built from the outset to be resilient and sensible. As previously mentioned, that is the time for the firm to begin buying back shares from the market with the result that the diminishing number of remaining shareholders will own an increasing percentage of a highly profitable company. When a well designed profitable company with a good business model has money coming in systematically, there is no limit to the ways in which shareholders can be made to benefit. It has already been demonstrated through the behaviour of this firm that its management, and I in particular, are both driven to achieve this endpoint for the benefit of shareholders.

Ultimately, I refuse to “sell” this firm as an investment while it is still at this early stage. This is completely at odds to the conventional routine of CEO being cheerleader on a “dog and pony show” as it is referred to in the investment industry or hiring stock promoters to engineer massive buying campaigns. As a result, Winning Brands is rare amongst its junior public company peers by not being over promoted. There is a vast array of potential investors and share purchasers who will in due course join the company when its success is more apparent and when such investor awareness building programs can be implemented. Because of our prudence now, we will have enormous leverage then.

It is exactly this timing gap that creates the opportunity for the rest of us at this stage to still acquire an interest in the firm at the current low valuation.

Sincerely,
Eric Lehner, CEO
WinningBrands.ca


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