zackster - i disagree with your assertion about the company making too many mistakes in the beginning. the following is long and involved but i will walk through why i disagree and how i viewed, and now view the company in terms of an investment and the risk/reward. generally speaking - i think they made one, big mistake when looking at all things considered. the rest i think are perpetually debatable when applying context and attractive alternatives for different decisions/actions. again -it is long but for anyone trying to better understand the company/investment, or, try to reason their own investment (whether to buy more, hold, or sell), hopefully this gives you perspective to start your own objective approach to determine fair value for the stock and whether it still fits your risk profile.
with very limited capital or distribution presence - this small group of guys put this product in a new category in the largest c-store chain in the world and put it on shelves across the US and Canada. that is very impressive and i dont think many long time investors appreciate how difficult that is.
as far as the rest of the "mistakes" - which of those arent directly attributable to the manufacturing issue? i am not sure if anyone here has ever been involved in running their own company or dealing with a start up but cash is king and even if you micromanage every detail, at some point when it comes to manufacturing - you have to rely on your partners unless you are making every part yourself.
i have posted before concerning this but it bears repeating. the company had (and still does) very limited capital and relied on 3rd party mfg to produce the product. if you have ever run a start up and dealt with managing capital tightly - you realize you constantly are putting faith in the product moving and the ensuing revenues to fund the rest of the growth/operation. cash coming in pays for new inventory, operating costs, interest on debt, paying suppliers, and employee overhead (which in this company there was very little starting out).
when you have a major interruption in cash flow, you immediately start robbing peter to pay paul. there was no line of credit - they were a public company and operating in one of the tightest (and still very tight) credit markets since the 70s. from what i have gathered in reading the court filings and speaking to those in the company - they assumed the production interruption was a limited issue. i would say their biggest mistake was putting too much trust in the mfg after the first mistake and not putting their feet to the fire after the botched shipments. however, only knowing limited details - they probably had little leverage.
since they had limited credit and more than likely the majority of their capital was tied up in unsaleable product - their best bet at the time was probably to play nice and work with the mfg to "make it right." they cant threaten to take the business elsewhere because they had no money for preproduction/start up let alone to pay for the production run. this isnt like putting an order in for 10 widgets. when producing food/beverage third party - you pay for the entire production run up front. the mfg has no use for product that isnt picked up, not being paid for, or if a company goes BK prior to taking the order.
in this scenario (and i am making some assumptions based on conversations, filings, speaking with distributors/wholesales, etc), what other option did they have other than trying to get the mfg to honor the commitment? i notified the company early on about an issue with trying to get the shrink wrap off the lid of the bottle. there were no/very limited micro perforations. i didnt realize it at the time but the company couldnt tell me why. they had to limit the conversation to "production issues" but thanked me for bringing it to their attention. obviously - they new about it but what can they do at that point...? they had to move product. i inform companies regularly about failed/off spec product. being in the production environment and now sales - i appreciate people (distributors or end users) bringing the matter to our attention productively so that we can investigate, do due diligence, and correct the issue so that it doesnt happen again. i just had a conversation with Con Agra on a lid issue on my kids' pudding cups. being an engineer that has spent a lot of time in food grade mfg environments - i recognized the sealing issue and sent a polite email with pics showing them the issue. with the issue at HJOE - it made more sense since i was also an investor.
i have read several comments on here about they should have been at the facility inspecting every shipment/run. that just isnt feasible. they had 3-5 guys. they were responsible for everything including and most importantly, building relationships with distributors and retailers to accept and try the brand. further, as it is now known - they were already speaking with other mfg to replace the one that was failing. how does one expect someone from the company to babysit production? that is what contracts, QA/QC commitments, and trust in suppliers is for. when that trust is breached, you give them the opportunity to correct and if that doesnt work - you move forward. again, in this case, due to the very tight capital, they were highly leveraged and needed to play nice trying to appeal to the better sense of commitment from the supplier. obviously now that didnt work.
from there - everything snowballed with the capital tied up in unsaleable inventory. suppliers want to be paid for advertising, for rent, for tradeshow space, etc. TCA wanted the interest on the loan. major customers are demanding volume/supply based on contracts. how does a company with very limited resources manage the demand and allocate remaining capital appropriately? we know they had to honor the larger contracts (like 7/11). we also know that TCA owned/controlled a large part of inventory based on filings. it isnt surprising (looking back) that revenues dried up even though limited product was being shipped and some orders filled.
now - it is easy to blame this all on "excuses." however, i was noticing a supply crunch early on in 2013 when i started investing. several retailers and distributors i spoke with said "it sells very well when i get it but the company (or distributor if it was a retailer) has a hard time keeping up with orders." now - at the time i considered that as growing pains. since i had spoken to several across the country where it was heavily marketed (Vegas and New Orleans) and in areas where there was limited or no marketing (my area in the midwest) i was getting a consistent response. the larger/key areas were first in line for obvious reasons and they were crunched later.
in speaking to the company about supply and comments from the field, again, the company was vague. they had to be for two reasons. one - they dont want customers, distributors, and investors to know they had a major supply issue and two, they had to deal with disclosure rules as a public company. i knew at the time the guy was holding back and wanted to say more (and as an investor - i prodded where i could), but he kept going back to disclosure and pointing me back to filings (past or future). i had posted comments about 3Q13 being critical based on the revenue slump. however, by the time those numbers were to be due (11/15/13) - the supply issues were already a known entity. from there - knowing what i knew and starting to put the pieces of the puzzle together - the dried up revenues made sense. i also knew they were in a very dire position and i limited any further investment.
i was excited and encouraged about the Japan announcement but i did not invest further. i wanted confirmation that it was happening. i realized it would be chasing at the time but i had a considerable investment already and was ok with my position. i think this was and remains their biggest mistake. not so much the announcement, but the lack of disclosure/follow up once the regulatory issue holding up teh deal became a known entity. when the energy shot was announced with LTCG - that changed things dramatically for me. i looked at where they had been, the cash issues, the supply issues, etc and thought - why would a major name/brand be investing heavily in a venture that was going to fail? now - cynics will argue zackster - i disagree about making too many mistakes in the beginning.
with very limited capital or distribution presence - this small group of guys put this product in a new category in the largest c-store chain in the world and put it on shelves across the US and Canada. that is very impressive and i dont think many long time investors appreciate how difficult that is.
as far as the rest of the "mistakes" - which of those arent directly attributable to the manufacturing issue? i am not sure if anyone here has ever been involved in running their own company or dealing with a start up but cash is king and even if you micromanage every detail, at some point when it comes to manufacturing - you have to rely on your partners unless you are making every part yourself.
i have posted before concerning this but it bears repeating. the company had (and still does) very limited capital and relied on 3rd party mfg to produce the product. if you have ever run a start up and dealt with managing capital tightly - you realize you constantly are putting faith in the product moving and the ensuing revenues to fund the rest of the growth/operation. cash coming in pays for new inventory, operating costs, interest on debt, paying suppliers, and employee overhead (which in this company there was very little starting out).
when you have a major interruption in cash flow, you immediately start robbing peter to pay paul. there was no line of credit - they were a public company and operating in one of the tightest (and still very tight) credit markets since the 70s. from what i have gathered in reading the court filings and speaking to those in the company - they assumed the production interruption was a limited issue. i would say their biggest mistake was putting too much trust in the mfg after the first mistake and not putting their feet to the fire after the botched shipments. however, only knowing limited details - they probably had little leverage.
since they had limited credit and more than likely the majority of their capital was tied up in unsaleable product - their best bet at the time was probably to play nice and work with the mfg to "make it right." they cant threaten to take the business elsewhere because they had no money for preproduction/start up let alone to pay for the production run. this isnt like putting an order in for 10 widgets. when producing food/beverage third party - you pay for the entire production run up front. the mfg has no use for product that isnt picked up, not being paid for, or if a company goes BK prior to taking the order.
in this scenario (and i am making some assumptions based on conversations, filings, speaking with distributors/wholesales, etc), what other option did they have other than trying to get the mfg to honor the commitment? i notified the company early on about an issue with trying to get the shrink wrap off the lid of the bottle. there were no/very limited micro perforations. i didnt realize it at the time but the company couldnt tell me why. they had to limit the conversation to "production issues" but thanked me for bringing it to their attention. obviously - they new about it but what can they do at that point...? they had to move product. i inform companies regularly about failed/off spec product. being in the production environment and now sales - i appreciate people (distributors or end users) bringing the matter to our attention productively so that we can investigate, do due diligence, and correct the issue so that it doesnt happen again. i just had a conversation with Con Agra on a lid issue on my kids' pudding cups. being an engineer that has spent a lot of time in food grade mfg environments - i recognized the sealing issue and sent a polite email with pics showing them the issue. with the issue at HJOE - it made more sense since i was also an investor.
i have read several comments on here about they should have been at the facility inspecting every shipment/run. that just isnt feasible. they had 3-5 guys. they were responsible for everything including and most importantly, building relationships with distributors and retailers to accept and try the brand. further, as it is now known - they were already speaking with other mfg to replace the one that was failing. how does one expect someone from the company to babysit production? that is what contracts, QA/QC commitments, and trust in suppliers is for. when that trust is breached, you give them the opportunity to correct and if that doesnt work - you move forward. again, in this case, due to the very tight capital, they were highly leveraged and needed to play nice trying to appeal to the better sense of commitment from the supplier. obviously now that didnt work.
from there - everything snowballed with the capital tied up in unsaleable inventory. suppliers want to be paid for advertising, for rent, for tradeshow space, etc. TCA wanted the interest on the loan. major customers are demanding volume/supply based on contracts. how does a company with very limited resources manage the demand and allocate remaining capital appropriately? we know they had to honor the larger contracts (like 7/11). we also know that TCA owned/controlled a large part of inventory based on filings. it isnt surprising (looking back) that revenues dried up even though limited product was being shipped and some orders filled.
now - it is easy to blame this all on "excuses." however, i was noticing a supply crunch early on in 2013 when i started investing. several retailers and distributors i spoke with said "it sells very well when i get it but the company (or distributor if it was a retailer) has a hard time keeping up with orders." now - at the time i considered that as growing pains. since i had spoken to several across the country where it was heavily marketed (Vegas and New Orleans) and in areas where there was limited or no marketing (my area in the midwest) i was getting a consistent response. the larger/key areas were first in line for obvious reasons and they were crunched later.
in speaking to the company about supply and comments from the field, again, the company was vague. they had to be for two reasons. one - they dont want customers, distributors, and investors to know they had a major supply issue and two, they had to deal with disclosure rules as a public company. i knew at the time the guy was holding back and wanted to say more (and as an investor - i prodded where i could), but he kept going back to disclosure and pointing me back to filings (past or future). i had posted comments about 3Q13 being critical based on the revenue slump. however, by the time those numbers were to be due (11/15/13) - the supply issues were already a known entity. from there - knowing what i knew and starting to put the pieces of the puzzle together - the dried up revenues made sense. i also knew they were in a very dire position and i limited any further investment.
i was excited and encouraged about the Japan announcement but i did not invest further. i wanted confirmation that it was happening. i realized it would be chasing at the time but i had a considerable investment already and was ok with my position. when the energy shot was announced with LTCG - that changed things dramatically for me. i looked at where they had been, the cash issues, the supply issues, etc and thought - why would a major name/brand be investing heavily in a venture that was going to fail? now - cynics will argue that the name/brand doesnt care about the long term prospects of the company as long as they get their licensing fees up front. and i am sure there are many celebrities that dont care - i dont see this with LTCG. if you look at his foundation and read through his interests - this guy gives a disproportionate amount of income to his charities and he balances his time between his comedy and doing charity events. he is also on the top of his earning curve with major endorsement deals (Prilosec) and not looking to thrown his name anywhere just to keep the lights on.
when i looked at the whole picture with the energy shot - it became more compelling. who is the target demo for energy shots? working folks, blue collar folks, etc. who does LTCG appeal to? is there a better slogan/catch phrase for getting a boost of energy than Git-R-Done...? you dont need a shot of energy to sit on your arse.
i started investing heavily again on this announcement and have continued to do so. i think the mgmt team is committed to making this a success, they brought on the outside talent (Veal) when it was obvious they had limitations with running a public company (two founders). they are still taking in very limited compensation and much of that has been defered at no interest (how many penny companies can you say that about?) the brand resonates with people i have discussed it with. and everything else considered, the product WORKS for me without the caffeine or sugar. i have never taken other energy drinks/shots until i started investing with this company. i took others to compare taste/effects. while my vested interest in recovery/energy shots can not rule out placebo effect - it has a muted effect when it comes to taste or the feeling like i wanted to gnaw off someone's face after taking 5HR. i fully admit that i drink/consumer very to no little caffeine and the only time i had prior to this shot when i was driving late at night and needed the occasional Dr. Pepper to keep me alert/awake or when ruining a perfectly good bourbon with some coke. since the energy shot came out - i take that when driving late at night or if i hit a lag in the afternoon while driving long stretches (i cover 5 states so i do a lot of driving). for me - it usually takes about 15-20 minutes and then my mind/focus is right back to where it normally is and i didnt even think about the "transition." that is where i think the shot has HUGE potential over the competition. on the recovery shot - when i have meetings or late nights with customers that might involve said bourbon - taking the HJOE shot right after getting up has left me with no energy drain/malaise through morning meetings/appts and i usually dont start dragging until around 2 (which usually happens around 3 anyways).
i wasnt happy about the short term convertible debt when it was announced in early 2014. i questioned the validity of needing it vs other viable streams. i also questioned the early September debt just announced. however, i think about others that i personally know looking for terms/credit in various businesses and without a solid, very solid revenue/earnings streams - the capital market is still puckered up. as an example - i have a family owned distributor that has been in business 60 years that has a very cyclical business nature (specifically cash cycle due to seasonal customers and traditional payment terms). he was put in a crunch by some past bad deeds and has been fighting banks for the last 6 years trying to increase capital lines to grow. they tell him that they want him to prove he can grow before they lend him the money. let that sink in. THAT is the mentality of the credit markets right now. he has doubled the company in the 10 years he has run in and looking for further growth and now, even with a $20-25MM/year business where most of the years have been profitable - they still have put the screws down because mfg was hit hard after 2008 andthey are suspect of his industry (despite the fact that he only had one negative year since the crash (2009) and has been increasing bottom line positively since).
i firmly believe they will use the data (as announced) from the soft launch to prove viability and then get access to real/more favorable capital. if the soft launch is/was successful (in my DD in the field - it has been), the capital will come, exponential growth will follow, and there will be more people lokoing to buy the stock then sell. that will mean the share price will go up. it is hard to tell how many shares will end up with this dilutive phase but it could be limited to 180-200MM shares. while that sucks from an investment standpoint - it is still better than having nothing. further, the shares coming on the market now will still look ridiculously cheap if the company's launch is successful.
right now the company has around a $400-600K market cap. they did $2MM in 2012. if they do $2MM in 2015 (which i think is very, very doable) there shares should trade at around $0.05-$0.20 depending on the multiple one wants to apply and assuming the OSis at or under 200MM. for example - at $0.10/share and 200MM shares OS - that provides a $20MM market cap. if they do $5MM in revenues in 2015 - that is only a 4X multiple. at $600K market cap - they are trading WELL BELOW fair value in ANY model/multiple situation. the market has this priced at BK levels. while the balance sheet is certainly ugly - does the prospects/launch/field data suggest this company is going under...?
this is a long look at why i invested in, remained invested in, and aggressively increased my position. i am fortunate that i have a high risk tolerance, risk capital that is allocated for this class of security, and have a longer term time horizon (i am primarily an investor and dont day trade although i occasionally swing trade on large irrational movements up or down on stocks i own/follow closely). based on the valuation above (and i have posted more detailed valuation based on actual sales based on early assumptions on initial production runs based on average revenue per bottle and absorbed cost per bottle), i think this remains a very strong risk/reward proposition.
finally, going back to the "mistakes," i think the Japan deal either should have been worded differently, or more importantly, should have been addressed sooner and specifically as soon as they realized there was a regulatory issue. that shouldnt have taken that long. the rest of the mistakes need to be put in context of the situation at the time and judged against viable alternatives that might have existed. when i use that metric, using information i have from filings and individual research, and then applying objective assumptions based on my own mfg experience - i cant assign specific blame/fault for most of these decisions. many detractors said they wouldnt make it through 2013. they said the energy shot would never hit the shelves. the dilution would kill the stock. etc. but - the company appears to be poised to capitalize on a major launch with seemingly good data and they did this by limiting the dilution during a dire time from somewhere between 35-50%.
so - for you and anyone else trying to justify the investment, buy more, sell, hold, etc - i would challenge you to critically examine the steps taken and then contact the company and speak with the IR folks and ask the questions. if you dont like the answers, feel like you are being sold a line, or just dont get a good feeling, take teh loss and move on. if their answers seem rational and justified and you are able to apply context - then you will feel much better about the decisions you made and the decisions you will need to make.
AI
