BeBevCo: Plenty of Room to Grow

company valuation

It is not often that a company on the micro caps actually have earnings but when they do, they are often valued well below listed companies, all things being equal...

Being that I am so close to BeBevCo (OTC Markets: BBDA) in that we conduct investor relations, investor communications, website design and maintenance, I have been looking at other beverage industry companies lately. Working within BeBevCo, I have learned a considerable amount regarding the beverage business over the last 10 months or so.

Looking at the beverage business as a whole, I am particularly interested in specialty drinks. I like energy drinks. BeBevCo’s Potencia is a great alternative to the rocket fuel offered by Coca Cola’s (NYSE: KO) Full Throttle or Monster Beverage Corporation’s (NASDAQGS: MNST) Monster Energy Drink.

Of much more use to me is a relaxation drink. Being in business with a million things to keep track of and a thousand problems and issues to work through daily, it is hard for me to shut my brain down. I started consuming Koma Unwind relaxation drinks which I pick up from BeBevCo every couple of weeks. And, in the last couple of months, I have been grabbing the new Relax 5 shots. Both of these products work great and have enabled me to get a good night’s sleep!

A couple of days ago, an article regarding Monster Beverage came out on Bloomberg’s website regarding the growth and valuation of the Company. I like numbers so, I began to do some simple math.

But first let’s look at what Bloomberg’s article said:

After MNST more than doubled in the last year, Monster Beverage was valued last week at 20 times earnings before interest, taxes, depreciation and amortization, the priciest of any North American soft-drink maker greater than $500 million, according to data compiled by Bloomberg that includes net debt. The $10.4 billion company, which got its start selling juices in the 1930s, has the highest operating margins in the industry and is projected to boost earnings 70 percent in the next three years, analysts’ estimates compiled by Bloomberg show.

OK, so if I do my math right (using MNST as a benchmark), with BeBevCo earnings at $229K for 2011, that puts the stock valuation at .00458. The stock is trading at .0008. So, all things being equal, MNST’s valuation is 5.725 times BeBevCo’s. BeBevCo is trading at less than 3 times earnings.

MNST stock is currently trading at 39 times earnings. If BeBevCo’s stock was trading at 39 times earnings it would be trading at just over penny.

At 20 times earnings, BeBevCo’s valuation is $4,584,540. However, BeBevCo’s current valuation is only $676,800 (20 X .0008 / 846M shares outstanding). In summary, fair valuation for BeBevCo is .0046. That number is a long way from the .0008 they stand at today. So, there is plenty of room for growth with regard to marketplace valuation.

BeBevCo is a client company; please see our disclosure pageForward Looking Statements apply to all client news and information posts.

Charts, diagrams and money

The Reality Going Public and Raising Money in the Capital Markets

How one Company has beaten the odds…

Given my experience in the micro and small cap marketplace, one of the biggest misconceptions that investors have is how money is raised in the marketplace by publicly traded companies.

Why and how does a company go public in the first place?

When a company goes public especially at the small and micro cap level, it is usually done through a reverse merger. A reverse merger is a transaction whereby the private company shareholders may gain control of a public company by merging it in with their private company. This way is also the quickest route of going public; the other way being finding initial investors and filing a mountain of paperwork with the SEC. It takes usually well more than a year to go public in this way.

Via the reverse merger route, far more often than not, the publicly trading company that the private company merges with has a myriad of problems including debt, legal proceedings and disgruntled shareholders who are angry with the previous management team and now transfer anger and blame to the new company’s management. It is paramount that the private company does extensive due diligence on the publicly trading company’s trading vehicle because, if not, it can come back and bite the new company once the stock is trading again. I have heard hundreds of horror stories over the years regarding the problems that surfaced only after the reverse merger was complete.

It then becomes the responsibility of the new management team to fix the problems they inherited from the merger. In most cases these problems turn out to be too difficult to solve and the company ends up essentially going out of business just like the previous company. The problems with the trading vehicle and actions (or lack thereof) of the old company turn out to be too big of a liability to overcome.

relaxation drinksWhen Brian Weber, CEO of Bebida Beverage Company (BeBevCo) (OTC Markets: BBDA) purchased the company in 2009, he discovered just how difficult the process of going public at the micro cap level was.

“When I bought this company, it was to have a vehicle to raise investment capital to introduce and grow our brands of drinks. The only asset in the company was 400 bottles of water. The water wasn’t even any good; it was bottled tap water,” Weber said.

Weber continued, “Once the merger was complete, we found not only did we have a $400k debt judgment against the old company which we were now responsible for but the stated number of shares outstanding was 1.3 Billion shares at closing of the deal. Subsequently, we found out it was more like 7.8 BILLION shares outstanding. In other words, this vehicle had a whole lot of miles on it.”

“We ultimately went up to 12 billion shares outstanding by raising money between the .0002 and .0005 level. We certainly did not hit the lottery, it was only enough to keep the lights on and pay for legal work,” Weber said.

Having worked with many micro cap companies, I can tell you that Brian Weber’s story is not unique. Many reverse mergers have turned out to be a nightmare for the new company merging into the old company shell. The difference between Weber and many others is that he never gives up or quits at anything and has managed to turn his situation around. Most of the debt is paid off and revenues for BeBevCo are increasing steadily.

“Not in a million years would I go through this again,” Weber said regarding the last 3 years of struggling through cleaning up the trading vehicle and paying off debt.

“I really did not have any experience with public companies and the process of going public; I got a lesson and learned it all the hard way,” Weber said.

BeBevCo has grown substantially in a short period of time in spite of all of the problems and interference from people associated with the old company and the bashers on the message boards.

The entire purpose of a company going public is having the ability to raise money from investors to grow their business. This in itself causes a problem because many investors, especially at the micro cap level believe that it is the job of the company to increase the value of their investment; growing the business is a “secondary” objective in their eyes.

With regard to raising money to fund operations, many investors believe that the company themselves sell the stock directly into the marketplace. Well, it doesn’t work like that; not legally anyhow

“One of the biggest and most misunderstood issues in the capital markets and especially at the micro cap level is all the layers of what amounts to middlemen we have to work through to get things done,” Weber said.

Stock must be sold directly to institutional investors in a cash for stock transaction. Most of the institutional investors willing to put money into micro cap stocks want a 50% discount, and in some cases, more than a 50% discount off of the face value at the bid price of the stock in the marketplace (depending on the stock’s liquidity). The stock purchased by institutional investors is usually in the $10,000 range or more. The stock issued to these institutions is debt in the company which has been aged and converted to equity.

In some cases institutional investors buy and hold to help the company stock value. They will hold the stock in expectations that when capitalization is complete their investment value will rise. However, other institutions will buy a stock at a discount and sell out at any profit. They will also short against their position and accumulate more money to buy more debt in the company. The debt buyers (as they are called) have no interest in the company they are “investing in” ever getting out of debt. If possible (which is the case most of the time), they want the company to continue to increase their debt load and convert more debt to equity. They are just like credit card companies in that respect. They can use the debt to continue to make money on their position. So, clearing the debt leaves them to move on to another company to toy with and make money on.

Another method of capitalization is the 504 Registration. The 504 allows a company to raise up to $1 million via the 504. The 504 is considered illegal by the DTCC and frowned upon by the SEC. The 504 is widely used in Delaware, Wyoming, and Texas as a means to raise capital; 504s are legal in these states. There is an ongoing State vs Fed issue regarding 504s and this battle has been going on for years.

The SEC and other large entities have been waging a war against small publicly traded companies for years now. While it is true that many micro cap companies have been used by a criminal element to bilk money from investors as well as money laundering activities, not all small companies fit into this category. The SEC is clearly winning because they have more resources. The DTCC is a tool wielded by the SEC to systematically destroy micro cap companies. If a company files a 504, which is technically legal the DTCC will chill the stock of that company. Most of these companies do not have the resources to get their DTC eligibility back and will be starved to death.

So, if the micro cap space is viewed as a garden, while there are weeds that need to be pulled and pests eradicated, the SEC and other entities have decided to burn the whole thing to the ground. Or… rather than digging through a basket of apples and separating the good ones from the bad and throwing the rotten ones out, they have decided it’s cheaper and easier to throw all the apples away basket and all.

Too much debt is the biggest reason companies end up out of business and their stock becoming worthless. In many cases the management team members scatter to the winds and run off leaving the mess for someone else to clean up.

“We end up with about 38% of the face value of the stock we sell to investors; between the discount they expect and the fees to free up and transfer the stock, we end up with a relatively small amount of the total,” Weber said.  “The public company absorbs all of the expenses of these transactions. And, it is getting harder and harder and more expensive to transfer stock to investors all the time. It’s unconscionable to companies and their shareholders,” Weber went on to say.

Another misconception investors at the micro cap level have is that in filings with the SEC the amount of stock owned by the CEO and the management team is for stock for sale into the market by the management team. That is absolutely not true although I am sure it has been done on many occasions at the micro cap level.

In another company I am very familiar with, the CEO owns 100M shares of the company. Every time the stock trades briskly and doesn’t move up sharply in price, he is accused by many shareholders on the message boards of selling his stock into the marketplace. Many of these investors live in fear of the CEO dumping his stock into the market and rendering their own positions worthless.

The reason the CEO and other management team members hold so much stock is for control purposes. CEOs need to always maintain the “control block” of stock. If the CEO starts selling this stock off, anyone with real money can come in and buy enough of the stock to effectively take control of the company and throw the CEO and management team out onto the street.

Companies go public to have access to capital to develop and grow a business. Now, there is no doubt that the SEC litigation pages are full of miscreants that went public to line their own pockets as well as the pockets of those involved in putting the deal together. They almost always get caught though.

In small business today, access to capital through banks has all but been cut off. Small businesses are considered “great risks” with regard to loans unless the company has a history of revenue and profits as well as assets to cover the value of the loan.

But, how does a business go from being an idea or goal to actually being in business and generating revenues? One thing all start ups need is capital. The public marketplace is one way for developmental businesses to go into operation and grow and ultimately become the next multi-million dollar (or in some cases, multi-BILLION) business.

In most cases, it takes years of raising capital for a company to become profitable and debt free. In the micro caps, well more than 90% of the companies that go public fail and end up out of business.

Weber commented, “BeBevCo is a great investment for those with an 18 to 36 month horizon. If you are looking at a quick gain, BBDA is not the choice. Many micro cap investors want to buy and cash out weekly or even daily. They think micro cap companies are slot machines in Las Vegas. We are running our Company in the way it was intended to be in the capital markets; raise money through investors, increase revenues and profitability. We are operating like a Big Board Company in a small board environment.”

Weber predicts a capitalization crest in 2012 and a lull period afterward where capitalization ends but a buyback is not yet in effect. This period could last 4-8 months depending on several major distribution and retail partnerships that are pending and in the discussion phase.

He continued, “We are going to continue to raise capital to grow our brands as long as we need to until our capitalization needs are met. We expect that to occur by later this year. At that point, we will have enough revenues and enough profit to shut off sales of stock to investors. Once we have reached critical mass and are able to run on our own revenues and profits as well as be able to continue our growth, we will begin a systematic buyback of the stock.”

In my 15 years of experience, I have seen very few companies get out of debt and actually buy back stock. Those that were able to clean up their stock via their own profitability did so by going public with a clean vehicle. I cannot think of one that dug themselves out of the mess that BeBevCo inherited and went on to grow and become profitable.

If Brian Weber pulls this off, and I think he will, he should be invited to the White House. It would be an extraordinary American success story like few others.

BeBevCo has come one hell of a long way since the 400 bottles of tap water and a mess of a trading vehicle.

“All any investor has to do is call us and set up and appointment. We will make the time to show them around, let them sample products and ask all the questions they want,” Weber said emphatically.

“So far, we have had few takers; most, it seems would rather believe what is written in the bashersphere of the message boards. Time will prove what we are doing here is real. It will be reflected in our distribution, our relationships with distributors and most of all, our bottom line,” Weber said.

Weber’s disgust with regard to the micro cap markets is thinly veiled (and, sometimes not very thinly). At the same time, relationships with long term investors that support the Company and its goals are important to Weber.

“I am extremely confident that the day will come whereby our investors will be rewarded and rewarded significantly for their patience and support. We will attain much higher revenues with great margins in 2012 and beyond. As our brands continue to grow, awareness of our Company grows as well,” Weber said.

“I know that some of our investors are worried about the specter of BeBevCo going private. However, as disgusted as I am at times with the micro cap marketplace, they deserve to cash in on the success of our Company. One way or the other we will eventually achieve a fair valuation for BeBevCo in the capital markets. We will see to that,” Weber concluded.

I have often characterized the micro caps as a “swamp”. As you move through this swamp, any number of denizens can rear up at any point and pull you under into the muck and be consumed. Only a great deal of persistence and a “never give up” attitude can carry a company management team through the swamp.

I frequently visit BeBevCo’s headquarters and the changes and improvements are remarkable since my first visit last summer. The very first time I went to BeBevCo’s building I was somewhat surprised. The building was in need of repair and a lot of work. It was very quiet because Brian Weber was the only one there at the time.

His “office” was in the reception area of the building just inside the front door. His furniture consisted of two chairs; one to sit in and the other being used as a makeshift desk. The building was essentially a construction zone and most of the small team was working from home. It was a sort of “organized confusion” before the great transformation took place.

Today, BeBevCo’s headquarters has a “corporate” feel about it but with individual touches. The entire administrative section in the front part of the building has been made over. All of the work has been done by Brian Weber himself along with family members. Brian is very proud of the appearance of the building and how he saved tens of thousands and even hundreds of thousands of dollars redoing the entire building with family help instead of hiring contractors.

Brian has his own spacious office now. Daisy Ramirez, the COO has her own office and all support personnel including sales and orders have their own offices. There is far more activity going on every time I stop in. More drinks are being moved to and from the middle part of the building as well as the small orders room.

During my last visit Brian was thinking out loud about what to do with the back part of the building which is several thousand more square feet. He said they could rent it out 3 months at a time but more than likely and before too long, this space would be needed to support the growing company’s needs.

At first, a 23,000 square foot building looked ridiculous for such a small company. Now it is not looking ridiculous at all. They will need every bit of it before too long. Brian has already enquired about space in surrounding buildings.

This is the reality of raising money in the public marketplace. This is the way it was intended to be. Micro cap companies are not exclusively for scalpers, day traders, short term swing traders, promoters and other sorts of short term and immediate gratification people.

Building a Company is what Brian Weber and his team envisioned at the very beginning. It was not going to be easy and in fact, it turned out to be a very difficult road to travel. But, perseverance and attaining goals one step at a time has led to a success story on the micro caps, a place where success stories seldom last for more than a few days.

David Brinkley said: A successful man is one who can lay a firm foundation with the bricks others have thrown at him.

I think that quote spells out exactly what BeBevCo has done.

See our case study on Koma Unwind, BeBevCo’s flagship product.

BeBevCo is a client company; please see our disclosure pageForward Looking Statements apply to all client news and information posts.