Deal To Watch: Food For Your Brain

Key Stats:

Summary

The TruBrain team has been selected as a “Deal to Watch” by KingsCrowd. This distinction is reserved for deals selected into the top 10%-20% of our due diligence funnel. If you have questions regarding our deal diligence and selection methodology, please reach out to hello@kingscrowd.com. 

A healthy body and a healthy mind are paramount to a healthy life.  Without these, you have nothing. While some people neglect one or both a segment of the population turns to supplements and other solutions to get what they need, and that’s where the management team behind TruBrain comes into play.  The company has generated significant sales with its nootropics and ketone offerings, but now, with the widespread acceptance of CBD (cannabinoids) becoming a reality, the firm is seeking to expand by unrolling a line of products with it as a key selling point.  

Problem

Keeping a healthy body and mind can be a monumental challenge today.  The temptations of unhealthy food and the mental nudge telling us we can exercise tomorrow are further complicated by confusion over what options exist for keeping our body and mind operating optimally.  

Solution

The founders of TruBrain, working alongside UCLA-trained neuroscientists, have created two leading product categories: a line of nootropics and a line of ketones.  Boasting all-natural recipes aimed at their respective targets (nootropics for promoting a healthy, strong, functioning mind, and ketones for boosting ketosis for the purpose of weight loss and other dietary endeavors).  Total sales generated by the firm since inception were $11.8 million, all of which have come through DTC (direct-to-consumer) channels. The next step, management asserts, is to hit the $100 million sales mark, which it believes it can achieve if it can get its products placed into a top 10 US retailer.

Typically , for a company like this, you want to see continued year-over-year sales growth, but this was not the case in 2018.  Last year, sales generated by the firm totaled $2.75 million, down from the $2.96 million a year earlier.  Despite this drop in sales, though, the company’s net loss narrowed from $401,072 in 2017 to $280,792 last year, due in large part to its gross profit margin expanding from 39.8% to 49.5%.  Management has not provided any figures for the current fiscal year, but they did indicate that 2019 has seen positive earnings. 

Sales for TruBrain , according to management, have been a global phenomenon.  In its lifetime, the company has sold over 5 million drinks, shipping them to all 50 US states, 80 different countries and 27 military bases across the globe.  TruBrain has successfully marketed its product in a DTC subscription format. The average order value from its site is $61, with the average consumer making 4.2 purchases per year and a full 98% of its clients are set up on a subscription. 

Management has succeeded in creating a robust, vertically-integrated company.  According to the firm, it handles all of its own key operations, ranging from research and development, to manufacturing, marketing, web development, fulfillment, and shipping.  For a startup, this is a challenge because of the costs involved, but if successful, having this kind of vertically-integrated setup can help reduce costs long-term. The company has gone through some significant capital raises, bringing in nearly $1.6 million from VC firms like Sherpa Ventures as well as 500 Startups.  This does bring us to one major downside for the firm though: debt. As of the end of its 2018 fiscal year, TruBrain had $1.46 million in the form of convertible notes, plus an additional $431,330 in the form of accrued but unpaid interest. While the company did highlight a couple of triggering events for the notes, specifics appear to be lacking and this could lead not only to dilution, but potentially to the company scrambling for cash if it’s elected for those notes to be redeemed in cash instead of stock.  Considering the firm’s cash and cash equivalents are only $185,964, there could be an issue if a redemption in the form of cash can be enforced.

Over the life of the company, it has focused its efforts (with regards to its  first two product lines) on three key focal points : 1) to improve the brain’s ability to make new connections, 2) to overcome mental blocks, and 3) to conquer procrastination.  The company maintains that its products increase “verbal fluency”, help consumers avoid distractions, and boost their daily output. With a strong history of sales under its belt, the firm believes that the next logical move is into a CBD-centered product with the goal of helping consumers  reduce stress and anxiety without suffering from the side effects typically associated with anything in the cannabis space.  

Three Sizable, Growing Markets

At its core, TruBrain isn’t focused on one market, it’s focused on three: nootropics, ketones, and now CBD.  The most controversial of these three areas, surprisingly, is the category known as nootropics. Products focused in this space claim to boost the mental output/capacity  of its consumers. The science is still inconclusive regarding their efficacy. One source lays it out nicely.  According to Barry Gordon, MD, PhD, the Director of the Cognitive Neurology/Neuropsychology division at Johns Hopkins Medicine, there is “no strong evidence” that nootropics work.  He opined that reports from users might be due to the placebo effect, which is the phenomenon that shows something having an impact because the user believes it will have an impact.  

Chris D’Adamo, PhD, and Director of Research and Education at the University of Maryland’s Center for Integrative Medicine, however, is not as negative in his assessment.  He believes that some products in this space may benefit some users, but then goes on to say that consumers would probably see the same results by getting adequate sleep, eating nutritionally-rich diets, and finding ways to better manage their stress.  Once these factors are addressed, nootropics may provide a little boost.  

The science here is far from settled, but for investors, whether nootropics work or not may  be irrelevant. This is because the industry is sizable and growing. According to one source, the nootropics market is forecast to be about $5.9 billion in size by 2024.  This represents an annualized growth rate of 15.7% from the $1.3 billion estimated market size in 2017. Consumers are poised to push this space higher over the next several years, due to a lack of government regulation, and regardless of its true benefits. 

The ketone market is considerably larger than the nootropics space TruBrain is playing in.  It’s estimated that this market will grow to $12.3 billion by 2024.  If this comes to fruition, it will have realized an annualized growth rate of about 5.3%.  The reason the ketones space is so large is that it’s so broad. TruBrain’s products allegedly help boost ketosis, but the broader market covering the ketogenic diet covers everything relevant to the space.  Because of this, it’s hard to know how much upside boosters themselves might have, or how large that space is, but the bottom line is that it’s probably significant.  

Ketone products are less controversial.  The ketogenic diet is used both  by individuals seeking healthier eating options, and it has been actively recommended by physicians the world over.  That said, Harvard Health has outlined some risks associated with it, such as the possibility of the practitioner becoming  nutrient deficient, or people with existing liver conditions seeing their health issues  worsen. It can also result in kidney problems and can be particularly dangerous for individuals with diabetes.  

The final focus is on CBD, which is their newest category and has perhaps the greatest potential.  CBD products are typically devoid of THC found in cannabis and are often referred to as industrial hemp.  Due to a change in federal legislation, CBD products (subject to certain restrictions) are legal nationwide, plus they are becoming legal in Canada and in other nations as well.  According to BDS Analytics, this space should grow nicely, hitting $20 billion per annum by 2024, up from $1.9 billion in 2018.  This represents a CAGR of 49% and only focuses on the US. Nielsen believes that by 2025 the market for CBD products in the US alone will be $6 billion.  The global outlook, is expected to rise to $16.3 billion by 2026, up 27.7% CAGR from the $1 billion last year.  BDS Analytics’ estimate, though, covers the globe instead of the US, but it’s important to keep in mind that with the exception of the US, the only large market where cannabis is legal right now is Canada. 

This does not mean that the realistic addressable market for TruBrain’s CBD products is $20 billion, even if the BDS Analytics estimate is accurate.  This market is significant in its scope, covering the use of CBD in cosmetics, health products, food and beverages, pet products, skincare , and pharmaceuticals.  The $16.3 billion market forecast, for instance, said that the largest piece of the CBD pie will be the $9.3 billion associated with therapeutics.  

Terms of the Deal

The transaction TruBrain is attempting  to complete is as simple as they get.  In exchange for an investment investors will receive common stock in the firm, with each unit valued at $0.36.  The minimum investment required per investor is $351. In addition to receiving a slice of ownership in the firm, investors will get a $299 product bundle as part of the deal, plus investors who allocate above certain thresholds receive discounts, including a 50% lifetime discount for those allocating $25,000 or more.  The minimum amount management is trying to raise is $10,000, but they are targeting a raise of $1.07 million, with a pre-money valuation of $18.97 million. As of the time of this writing, investors have pledged $80,261 toward the deal. 

An Eye on Management

The core team members at TruBrain consist of the firm’s founder and CEO, Chris Thompson, and his operating partner, Justin Greely.  Thompson received his MBA from Duke before going to work at consumer products giant Unilever where he had management experience overseeing food, beverage, and personal care operations through the company’s Hellmann’s and Suave divisions.  Before that, he served in a consulting capacity where he worked with firms like Coca-Cola, Wrigley’s, and Kimberly-Clark. His partner, Greely, received his JD from UC Irvine, after which he went on to work at three early-stage startups, two of which saw successful exits.  He was also the founder and COO of a sports-oriented startup where he raised $2.5 million during his tenure . The company also has two additional team players from UCLA who are trained in neuroscience / cognitive neuroscience, one of whom has an undergraduate degree in the field, while the other has his PhD.

The Rating: Deal To Watch

KingsCrowd has  rated TruBrain a “Deal To Watch”.  The company’s strong sales are encouraging and the CEO has the kind of experience you want to see from a startup seeking rapid expansion.  Though details were not disclosed, the idea that the company is generating a profit this year is encouraging, as is the fact that the company has received significant capital already from VCs.  Add to all of this that the company is operating in two large market segments with attractive growth prospects and is looking to move into a third, even larger, market, and it’s hard to deny that this is an interesting concept worthy of consideration.  

Having said all of this, the firm is not without its risks.  The significant amount of convertible net, continued net losses up to 2018, and the fact that sales declined from 2017 to 2018 are note-worthy.  The nootropics business is highly controversial while the CBD market it is expanding into is very politically sensitive in the states and abroad. One strong catalyst to help offset these concerns would be if management  successfully lands its product in one of the top 10 largest retailers, but investing on that premise alone is speculative at best. Even so, the prospect here is undeniably interesting and while the firm does have its risks, the upside, could be material.