June 12, 2014: It would be an understatement to say that DNA Brands (DNAX) has had its ups and downs this week. On Monday, it soared 525 percent on the strength of a press release announcing a distribution agreement with Trenton Coca-Cola Bottling Company LLC of Trenton, Missouri. It was, of course, the magic word "Coca-Cola" that did the trick. Unfortunately, that "agreement" was a complete fabrication.
|DNAX chart, 10 March to 11 June|
The message boards buzzed. Some posters were shocked; others bravely tried to convince themselves and others that it was just a mistake that had been fixed, and would not inflict lasting damage on the company's stock price. They were wrong. The stock crashed and burned at the open. The Wednesday intraday looks rather like a graph for a formerly-suspended issue on its first day on the Grey Market.
|DNAX June 10 -11, 2014|
The 8-K was accompanied by yet another press release. In an apparent attempt to emphasize the positive, it was titled "DNA Brands, Inc. Names New Interim President and CEO." The "new" officer is Melvin Leiner, one of DNA's founders. Leiner has served as the company's executive vice president, secretary, and director since its inception.
Fowler's hasty departure made it clear that what had happened went beyond a mere innocent misunderstanding.
The story begins with Eric Fowler. In his mid-fifties, he's worked in the beverage industry for most of his career. He spent six years at BooKoo Energy Brands, and then moved to PBEV LLC, where he was employed as national sales director from 2008 to the end of 2012. That's how he picked up experience in the energy drink business: BooKoo markets a few canned specialties; PBEV makes "Killer Buzz"--also known as "KLR BZ"--beverages.
|Eric Fowler, at right|
As of today, Fowler's Linked In page omits his recent tenure at DNA; perhaps he removed all reference to it once he realized his time there was over.
What really happened?
In the initial upbeat PR about the supposed deal with Trenton, Fowler effused that he was "elated to have such a premier distributor as Trenton Coca-Cola, now carrying our line of products." In reality, Trenton is a small but successful local company with an interesting history. It was founded in 1894 as Trenton Bottling Works, and in 1899 applied to become a Coca-Cola franchise. The conditions specified that the applicant must purchase 10 shares of stock in Coke, and must sell 200 gallons of Coca-Cola syrup each year for three consecutive years. Trenton made the cut, and became a franchisee in 1904. It remains one to this day. It's a family owned and operated business run by Peter Trembley.
The now-notorious DNAX announcement also contained a purported quote from one Chuck Jones, who was misidentified as Trenton's president. Jones was allegedly "excited" about his new opportunity to launch DNA's "exciting" products.
In reality, Jones never said any such thing, nor did he sign or even indicate interest in a distribution agreement with DNA.
Jones is Trenton's sales manager. We spoke with him at length on Wednesday afternoon. He's a nice guy who's found this incident as surprising as DNAX shareholders did. The story began on Monday, when Fowler called Trenton. Evidently he'd kept contact information for companies he'd dealt with in his old jobs; one of his former employers did work with Trenton in the past. He got through to Jones and began a hard-sell pitch of DNA's products. He insisted on emailing Jones a presentation extolling the virtues of the DNA energy drinks. Jones thought no more about it; he had no idea that Fowler had announced a deal with Trenton until the next morning.
Bright and early on Tuesday, Coca-Cola's legal department, which evidently doesn't miss a trick, was on the phone to Trenton and to Jones. He says he was stunned when he realized what Fowler had done, and assured the attorneys he had no culpability in the matter. The lawyers evidently also had a talk with Melvin Leiner of DNAX. He, too, called Jones to confirm Trenton's account of what had transpired--or, more accurately, had not transpired--the day before. Tuesday evening, DNA, no doubt fully aware of Coke's legal firepower, retracted the announcement of the distribution deal that never happened.
It may be wondered why Leiner hadn't questioned the announcement when it was made. Agreements of any kind entail paperwork in the form of contracts that are typically drawn up, or at least reviewed, by attorneys for both parties. While Leiner may not have known Fowler made his first and last call to Jones on Monday, as DNAX's only other officer he ought to have been interested in the terms of the deal Fowler claimed to have struck. As company secretary, he ought also to have asked for a copy of the (nonexistent) contract.
We called DNAX hoping for answers to these questions and others, but those calls went to voicemail. Messages left got no response.
What was Fowler thinking? Was he so convinced of his salesman's charm that he believed he could eventually persuade Jones to go along with his plan? That wasn't on the cards: Jones told us that because Coke makes its own energy drinks, he could never promote a rival's products.
On 19 May, DNAX announced a distribution agreement with Jack Hilliard Distributing, a Texas company. The events of the past few days naturally raise questions about that. A call to Hilliard late Wednesday was too late to catch any executives still in the office, but we'll try again tomorrow.
In the Hilliard press release, Fowler said:
Now that the warmer weather is upon us, Jack Hilliard is the first of many distributors that we anticipate will be coming on board in the very near term. This past severe winter was extremely challenging for us as a company. We found the unseasonably cold and disruptive weather negatively impacted out sales efforts and definitely hampered our ability to gain distribution…He was right, but not only about the past nasty winter. DNAX's sales have been faltering for some time, as the company's financial reports show. At its website and in its press releases, DNA emphasizes what is evidently its only big win, the title of "World's Best Tasting Energy Drink" in 2010 and 2012.
DNA's 10-K for fiscal 2013 shows that the company lost less money in that year than in 2012; $3.1 million compared to $4.4 million. But its accumulated deficit is now $28.9 million. In the same period, net sales declined sharply, from $249,416 to $156,803. Leiner and Marks have forgiven $944,000 in accrued salaries, and have also returned and cancelled the Series D preferred they owned. It was replaced by Series E preferred. The Series E stock has supervoting rights, but is not convertible into common.
Despite the preferred stock cancellations, the company has been diluting at a good clip. As of 19 November 2013, the shares outstanding were 105 million. As of 9 April 2014, there were 196 million shares out; as of 18 May, 240 million. More recently, on 10 June, DNA filed a preliminary proxy statement declaring its intention to raise the number of its authorized shares from 400 million to 1 billion. According to the filing, by 29 May the outstanding had ballooned to 318 million. The reason given for the increase in the authorized was that the company anticipates the need to raise money. No surprise there.
It has obviously felt that need for some time. In its financial statements, DNA discloses that it's sold various convertible instruments to several parties, but does not identify those parties. One of them, however, is Asher Enterprises, which filed a Schedule 13G on 24 March 2014, disclosing ownership of 10.5 million shares, or 9.99 percent of the company. Probably Asher is forbidden by the terms of its agreement with DNAX to own more than 10 percent, and so is converting and selling stock, and then offering more financing, on a revolving door basis. That would account for the rapidly increasing number of shares outstanding.
Why did Fowler do it?
Maybe he just lost it, feeling pressure to perform. After all, he'd promised the addition of more distributors in the near future. When he was given his promotion, Darren Marks commented that "his [Fowler's] efforts over the past 12 months have put us in a position for some serious growth and will help ensure that DNA will be able to reach its goals of increasing distribution." Finding new distributors, then, was the key to Fowler's future success. But fabricating an agreement with a Coke franchisee was an exhibition of extremely poor judgment, to say the very least. Even a rookie knows that in the modern world, without contracts and signatures, there's no agreement.
Fowler's employment contract was not filed as along with the 8-K announcing his recent appointment as CEO and president, so it isn't known whether he received stock, stock options, or warrants as part of the package. It is known that he's not a greater-than-five-percent owner of DNA; if he were, that would have been made clear in the proxy statement from 10 June. As an officer, any stock he may own was restricted, and will remain restricted for 90 days after his resignation. He isn't permitted to sell more than 1 percent of the outstanding every quarter until those three months have ended. He could have purchased stock on the open market and sold into Monday's Coke-fueled run, but if so, that's is something for the SEC and FINRA to determine.
In the 8-K introducing Fowler as DNA's new CEO, it's specified that "he will hold such position until the next annual meeting of our Board of Directors, his resignation, removal or death." It goes without saying that resignation is better than at least one of the alternatives offered, but right now he may not think so.
As for the future of DNA Brands, these words from a different Chuck Jones--the one famous for his Looney Tunes productions--may tell the tale: