If you are an investor with a long-term focus, we have a company that we believe that you should consider buying for the speculative portion of your investment portfolio.
The company is called Glucose Health, Inc. (OTCPK:GLUC) and we are long the shares.
As Fidelity Magellan portfolio manager Peter Lynch used to say… Finding unique investment opportunities require turning over a lot of rocks.
Source: AZ Quotes
We’ve been doing that for over ten years now since retiring in 2010 from a successful Wall Street career. We have always had a passion for the research process, are always looking for the next ten-bagger by focusing on small caps, undiscovered companies, and special situations.
In short, we turn over a lot of rocks.
Our research and investment philosophy is based upon the tenets laid out in the two books that were written by Peter Lynch; One Up On Wall Street (1989) and Beating The Street (1993).
Mr. Lynch believed that the individual investor had a distinct advantage over many of Wall Street’s large Institutional Investors. That advantage laid in the fact that the average investor could take positions in companies that were far too small for these large pension funds, endowments, and managed accounts to invest in.
We continually scour the investment landscape to find “diamonds in the rough”. These little gems are often overlooked by the large Institutional Investors, and as such typically remain undiscovered until their market capitalization reaches a substantial level to allow the big boys to get involved.
Such was the case with Celsius Holdings, Inc. (CELH). We first came across this micro-cap company back in 2007-2008; only a few years after the company went public.
We purchased our first shares at a price below fifty-cents and managed to accumulate a very substantial position in the shares over time.
We have written 36 articles on CELH since 2014 and you can see for yourself the chronological progression of each article that we wrote.
It was a labor of love for us to write about Celsius Holdings, Inc. over a six-year period. It defined a unique place for us, and we are glad that we were able to help investors to profit from our insights.
But, the question for us is… What do we do now?
In short, we wondered if there would be “life after Celsius” for us.
Source: Stock Scores
Suffice to say that Celsius Holdings, Inc. turned out to be an amazing investment for us. Unfortunately, we doubted whether we would ever be able to find another micro-cap with the same kind of return potential as CELH.
Source: Seeking Alpha
Then, in early 2017, we turned our attention to a company trading below ten cents a share, which had a rather unique product that, as chance would have it, fell into the same category of being a functional beverage company, and was similar in many ways to Celsius in its early years.
After some initial due diligence, we began to build a position in the company’s shares at prices between 5 and 15 cents.
The Functional Beverage category has experienced tremendous growth over the past 10 years. It seems that today’s discerning consumer not only wants a beverage that tastes good, but they also crave one that has functionality.
In response to this changing consumer preference, companies that once dominated the beverage industry with sugar-laden, high-fructose corn syrup offerings are now pivoting towards offering healthier beverage choices to maintain their dwindling consumer base.
Categories such as Sports Drinks, Nootropics, Enhanced Hydration, Probiotics, Weight Management, Healthy Energy, Mood Improvement, Brain & Memory Support, Immunity Drinks, Muscle Recovery, Anti-inflammatory, Hangover Cure & Prevention, BCAA (Branched Chain Amino Acids) and CBD-Infused are just some of the categories that have sprouted up in the marketplace recently.
Many of these categories not only have multiple brands within their respective group, which are being aggressively marketed by many of the different rivals in the beverage industry, but the race to differentiate a brand from among the plethora of choices facing consumers is getting much more competitive.
Generally speaking, in the CPG (Consumer Packaged Goods) space, the first to market typically holds a major advantage over the competition, by virtue of having a unique product that becomes quickly embraced by early-adopters.
This diffusion of innovations theory has five different categories of adopters – Innovators, Early Adopters, Early Majority, Late Majority, and Laggards. These categories of adopters can be seen using Roger’s Bell Curve.
According to Wikipedia, when the first edition of Diffusion of Innovations was published in 1962, Rogers was an assistant professor of rural sociology at Ohio State University. He was only 31 years old but was becoming a renowned academic figure.
In the mid-2000s, The Diffusion of Innovations became the second most-cited book in the social sciences. (Arvind Singhal: Introducing Professor Everett M. Rogers, 47th Annual Research Lecturer, University of New Mexico).
The fifth edition (2003, with Nancy Singer Olaguera) addresses the spread of the Internet, and how it has transformed the way human beings communicate and adopt new ideas.
As a result of the importance of being first to market with a new innovative product, larger, more mature and well-established companies oftentimes will take the position that it is “better to buy it than it is to build it” thereby choosing to let a much smaller company develop the product, colonize the market, build a following among consumers and, in turn, to ultimately dominate this newly-formed category as the traditional adoption curve unfolds in the marketplace.
The advantage to the small innovator company is that this fairly common large company mentality of waiting for a product to emerge, mature, and subsequently become established as the leading brand in a new category, typically means that there will likely be little or no competitive threats in the first few years of its product lifecycle.
This also gives the small innovator company time to adjust and make changes and improvements to the product based on feedback from customers. These product enhancements show a ready willingness, on the part of the company to listen to its consumers, serves to validate the importance of consumer opinions about the product, and helps to foster a symbiotic relationship between the consumer and the company, which will hopefully lead to the all-important goal of creating brand loyalty among a large base of users.
A few of the things that we like about Glucose Health, Inc. are its capital structure and the fact that it has a very small public float; currently at 5.68 million shares. This is something for investors to keep in mind since that low number of shares available for trading means that liquidity could suffer, at times, in the market.
There was some convertible debt, but it had a fixed conversion price and was not the traditional PIPE financing arrangement, where the convertible debt was floorless and extremely toxic to equity holders.
We also liked that the CEO, Murray Fleming, was not taking a salary from the company. In fact, he wasn’t even accruing it on the company’s financial statements.
Instead, he owns very substantial position in the company by virtue of debt instruments which are convertible into common stock. He also owns all of the Preferred “A” shares which gives him sole voting power by virtue of having an additional 10,000 votes on any corporate matter.
Obviously, the convertible debt that Mr. Fleming holds is what we would classify as “friendly debt”, meaning that the CEO would not typically do anything with that debt to jeopardize shareholder’s interest, and subsequently, in that process compromise his own position in the company.
Glucose Health, Inc. has done a couple of financing deals in the past few years in an effort to clean up the balance sheet, by extinguishing all of the outside convertible debt not held by the CEO, pay off an existing line of credit (LOC) provide working capital, and improve the overall fundamentals of the company.
In order to accomplish these strategic goals, the company raised $460,000 in a private offering to a select handful of investors in May of 2019. This strategic move helped to extinguish all of the fixed-price convertible debt that was held by one entity, thus allowing the company to drastically improve the balance sheet and, at the same time, provide much-needed working capital.
The terms of the $460,000 financing deal included the issuance of an additional four million shares of restricted, Rule 144, common stock and the creation of a new Class “B” preferred stock which pays a 10% annual dividend to shareholders, and is convertible into GLUC common stock on a 1-for-1 exchange basis.
Earlier, in March of this year, the company raised another $65,000 to eliminate the line of credit that was outstanding, by issuing a newly-created Class “C” preferred stock. These preferred shares pay a 10% annual dividend to its shareholders, and the preferred shares carry a conversion feature, whereby the holder of the preferred shares may exercise his, or her, right to exchange the preferred shares for GLUC common shares, also, at a 1-for-1 ratio.
Finally, in May of 2020, the company raised another $300,000 in a private offering of Class “D” preferred shares. These designated “D” preferred shares pay a 10% annual dividend and are convertible into common shares at a 1-for-1 exchange rate.
After all of these transactions, here is the capital structure of GLUC, as of the filing of the financial report for the second quarter ending June 30, 2020.
Source: OTC Markets – GLUC Filing
We would note that Glucose Health, Inc. uses the OTC Markets Alternative Reporting Method. As such, its financial statements are unaudited.
All of the above transactions can be viewed on the OTC Markets website, under the Filings and Disclosure tab.
Moving on, there certainly has been no shortage of news recently on the progress that Glucose Health, Inc. has been making.
First, in April, Glucose Health, Inc. reported its first quarter financial results comparing 2019 and 2020. The key takeaway, for investors, from that report was the impressive increase of 224% YOY in Amazon sales.
In late May, the company announced that it had formally signed a nationwide distribution agreement with CVS Health, Inc. (CVS), for the summer roll-out of all four flavors of Glucodown tea-mix. It was indicated in the press release that CVS Health, Inc. was in the process of focusing its efforts on a number of key areas, as they remodel their pharmacies across the country. One of those areas of focus for CVS pharmacies is diabetic care products.
Mid-June saw the company report that monthly Amazon sales in May of 2020 increased 1,048% over the same period in 2019.
That was later followed by a report in July that showed sales for the month of June at Amazon surged ahead 1,284%. The company also indicated that the Glucodown products were sold out at Amazon, as a result of strong consumer demand.
The strong sales results experienced by Amazon helped contribute to a 186% increase in revenues for the second quarter of 2020 versus 2019.
The company attributed much of the revenue increase to the implementation of a marketing campaign on Dish and Direct TV; advertising on a number of popular television networks which included FOX Business News, CNBC, and Bloomberg Television during Q2.
Needless to say, GLUC shares have acted very positively to the recent news.
Source: Stock Scores
Other noteworthy news includes the appointment of three Celsius Holdings, Inc. Alumni; Gerry David, Hal Kravitz, and John Fieldly to the Glucose Health, Inc. Board of Directors.
It seems that CEO Murray Fleming is assembling a powerhouse of former and current beverage industry executives to provide him with decades of hands-on experience and knowledge in building the Glucodown brand.
There are certainly plenty of positive things happening at GLUC, but we always like to balance our articles with some potential negative things that investors should also consider.
First, while Murray Fleming is a very capable and hard-working CEO, he is also without much help, in the way of employees, to manage all the different aspects of running a publicly-traded company.
Sure, the GLUC Board of Directors are there to offer guidance, but without having boots-on-the-ground employees to assist him with the various responsibilities and tasks that he must deal with on a daily basis, Mr. Fleming faces potential executive burn-out, or worse yet stress-induced health problems.
Second, stock-outs of Glucodown tea-mix, at any retailer, are unacceptable, and need to be addressed promptly and, more importantly, remedied just as quickly.
Whether it is supply-chain issues, inventory issues, transportation issues, lack of working capital, or anything else, this needs Mr. Fleming’s entire focus and full attention.
Third, the company uses the OTC Markets Alternative Reporting Standards. While we prefer audited financials, the company is at least reporting on a quarterly basis and has indicated that the primary reason for choosing the ARS method was the cost savings over being a fully-reporting SEC company.
In addition to these business risks, there are also substantial investment risks to consider.
An investment in Glucose Health, Inc. carries a number of inherent risks not present in other types of securities. Chief among them is a shares price of less than $5 a share, thereby subjecting the shares to the penny stock rules.
Other significant risks include a small number of shares in the public float, which could lead to low liquidity resulting from a lack of trading volume.
Due to this low liquidity, a thinly-traded public float, and the limited number of firms making a market in the company’s shares, the stock could be subject to experiencing wild price swings and high volatility.
While there are only 5.68 million shares of common stock that are currently outstanding, there is a substantial number of shares than may be created as a result of conversion privileges associated with various classes of existing preferred shares, the exercise of warrants, and convertible notes.
The impact to shareholders, if all of these additional common shares were to be issued and outstanding by the conversion process, it would result in an additional 22,460,231 shares of common stock in the public float.
Shares of Glucose Health, Inc. should be considered “highly-speculative”, and as such, an investor should be prepared for the possibility of losing one’s entire investment in the company.
As always, we suggest that each individual perform their own due diligence before making an investment in any publicly-traded company. We highly recommend that investors take the time to read through any financial reports and press releases issued by the company, as they may contain material information.
Lastly, and most importantly, there is always the competition.
Abbott Labs Glucerna and Nestle Health Science’s Boost are both established brands that are already addressing the growing issue of a global epidemic of obesity and diabetes.
Both are established brands with name recognition. The most important distinction for investors looking to capitalize on this growing functional beverage trend is that sales of these products for Abbott Labs and Nestle represent an infinitesimal amount of both company’s total revenues, whereas Glucodown represents 100% of Glucose Health’s revenue base.
The other big difference between these two products and Glucodown rests in the type of beverages they are.
Source: Glucerna & Boost websites
Both Glucerna and Boost are primarily meal-replacement drinks. Like other similar shakes in the market including Ensure, SlimFast, Atkins, Weight-Watchers, Premier Protein, Nutri-System, etc. they are thick and dairy-like in texture.
Glucodown tea-mix is a more mainstream thirst-quenching beverage with functional benefits.
The functional benefits of Glucodown come primarily from its unique process of agglomerating the FDA-recognized dietary fiber called Fibersol into the proprietary Glucodown formula.
Fibersol is the fiber-based innovation of global food processing giant Archer-Daniels-Midland (NYSE:ADM).
In a June 2018 Nutritional Outlook article which discusses the FDA decision, we find the following commentary:
Greg Dodson, vice president, fiber, for ADM/Matsutani LLC (Chicago; the joint venture between ADM, Matsutani Chemical Industry Company, Ltd., and Matsutani America Inc.), said of the company’s soluble dietary fiber Fibersol digestion-resistant maltodextrin: “ADM supports the FDA’s efforts to provide consumers with nutritional labeling information that is honest, clear and relevant. We remained confident in the totality of scientific evidence that shows Fibersol’s physiological benefit to human health and its classification as a dietary fiber. With the FDA’s decision, food and drink companies can be reassured that their products using Fibersol can continue to be labeled as containing dietary fiber and will meet the compliance date for the nutrition facts labeling final rule.”
Fibersol has also been studied for over 20 years and has had nearly 100 clinical trials conducted during that period.
In an article appearing in the June 2018 issue of Food Business News:
Fibersol has a large body of clinical science behind it,” said Yutaka Miyamoto, executive vice-president for Matsutani America. “The citizen petition for Fibersol presented a multitude of scientific studies conducted on Fibersol, including post-prandial blood glucose response, post-prandial blood triglycerides response, and non-English language journals for the F.D.A.’s review and determination of Fibersol as a dietary fiber.”
One clinical study that was conducted at Iowa State University, demonstrated that Fibersol has been shown to increase satiety. This is important because the development of diabetes has been linked to obesity, which may be caused by overeating.
Results of clinical studies conducted by Dr. Suzanne Hendrich at Iowa State University confirm that Fibersol®-2 digestion resistant maltodextrin, a soluble corn fiber, may impact satiety by decreasing hunger, prolonging satiation or increasing satiety signals from the gut. Fibersol-2 has been studied for health benefits including affects on regularity, glucose control and serum lipids. Various studies have shown that adding fiber sources to the diet decreases energy intake and increases production of multiple satiety hormones.
By curbing one’s appetite and reducing hunger, the likelihood of overeating and thereby developing symptoms of obesity are diminished.
With fat loss being a predominant goal of many of today’s consumers, three of the key ingredients in Glucodown appear on the list of Fat Loss Supplements according to the Supplements in Review website – Banaba Leaf, Chromium Picolinate, and Vitamin B12.
The goal of any functional beverage should be to provide a simple, easy, and enjoyable way for consumers to improve their physical and mental state by the ingestion of something that not only tastes good but does good.
There are not many functional beverages that are addressing the global macro issue of diabetes. The trend is alarming and likely to get worse before it gets better. Just take a look at the chart below to see how rampant obesity (a leading cause of Type-2 diabetes) is in the United States.
Source: Centers for Disease Control
The Glucodown tea-mix is the first product of its kind to help address these health issues, and consumers have embraced it.
Amazon purchasers give it an average rating of 4.3 out of 5 on Amazon’s rating system for three flavors (peach, super berry and raspberry) and 4.2 out of 5 for the lemon flavor.
Glucose Health, Inc. is blazing a new path for diabetic and pre-diabetic consumers with its Glucodown product; offering an alternative and innovative way for this group to make healthier beverage choices where the options currently seem to be somewhat limited.
If the current pathway of Glucodown continues to attract the all-important early adopters, and subsequently results in the mainstream acceptance of these four great tasting tea-mixes by the diabetic and pre-diabetic communities, this newly-created innovative category may be on its way to carving out a very profitable niche in today’s highly-competitive functional beverage marketplace.
Disclosure: I am/we are long GLUC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: We are not responsible for updating this article, or our opinion on any of the stock(s) that are mentioned in our articles. We are not in the business of giving investment advice and ask that readers refrain from asking us for it. Please do your own due diligence before investing. We are not responsible for any actions that you take based on the opinions that we express on Seeking Alpha.
Please remember that this article is a reflection of our current opinion on GLUC. It is based on information that is publicly available at the time we wrote the article. Additional public information may be available but was not brought to our attention at the time we authored the article. We provide sources and links to factual information that we include in our articles but take no responsibility for the accuracy of their content. An investor should consider that new information may become available regarding the company’s business activities, financial condition or corporate governance. It is the responsibility of each investor to make sure that they stay abreast of any new developments which may arise, that could have an impact (negative or positive) on their investment.
We currently hold a beneficial interest of greater than 5% of the outstanding common shares of GLUC. We also own shares of preferred stock Series B, C, & D issued by the company as a part of the normal course of financing activities by the company. An investor should carefully take this information into consideration when assessing the value of our opinions. We make every attempt to be objective in our articles, but there is always the potential for a conflict of interest to exist by virtue of our substantial equity ownership in the company.