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Drinks Americas Holdings Is A Yet-to-Be Discovered Turnaround Story

Investment Thesis

Drinks Americas Holdings (OTCBB-DKAM-$0.60) is a company that has arisen Phoenix-like from the ashes of its past to become a lean, focused national importer and distributor of a line of unique premium alcoholic and non-alcoholic beverages including KAH Tequila, the market's fastest growing premium tequila.

The company has cleaned up its balance sheet; is reducing debt and payables and is starting to see a ramp up in sales. I think that at its $15 million run rate, Drinks America can earn more than $0.10 a share(untaxed) on its 21 million shares outstanding.

Strategic relationships; an experienced management team; unlimited access to production capital; a restructured balance sheet; four core brands: KAH Tequila, Old Whiskey River Bourbon, Rheingold Beer, Mexican Beer Portfolio; and a building sales momentum, places the company in a good position to achieve above-average growth and profitability.

The Company

Drinks Americas was founded in 2002 by an experienced team of beverage, entertainment, retail and consumer product industry professionals led by J. Patrick Kenny, a former executive at Joseph E. Seagram & Sons. Management's relationships with manufacturers, distillers, development/research companies, bottling concerns and certain customers provided the foundation tostart and build the business. Products are sold through established spirits, beer and wine distributors, virtually all of which are well known from prior business dealings with them. In certain markets the number of distributors has been increased. Mexcor (Mexcor International Wine and Spirits) distributes a limited number of products to a national network of wine, spirits and beverage distributors for Old Whiskey River Bourbon, Olifant Vodka and Damiana Liqueur.

The company utilizes contracts with independent manufacturers or contractors (called co-packers) to prepare, bottle, and package its line of beverages for sale primarily in the continental United States. Drinks Americas owns the trademarks for the majority of its products. It also has developed the formula for some of its distributed products. Certain products are owned jointly with brand owners, celebrities, or their affiliates.

Company brands have an association with iconic histories or iconic entertainers that provide efficient promotion and marketing opportunities. The Old Whiskey River Bourbon brand is promoted with Willie Nelson .Rheingold Beer's long history and brand identification with New York dates back to 1883.Management believes that the consumer awareness of these brands provides a marketing advantage that permits more efficient brand marketing across electronic, social and print media formats and to building brand awareness and create consumer excitement.

Management

The driving force at Drinks Americas is its founder, President and CEO Patrick Kenny, an experienced businessman and entrepreneur with over 25 years experience as a Senior Vice President of Joseph E. Seagram & Sons. In addition to six years of running a public company and five years of entrepreneurial activity, he has also acted as adviser to several Fortune 500 beverage marketing companies, and has participated in several beverage industry transactions. Prior to joining Seagram, Mr. Kenny was employed in a range of sales and sales management positions with Scott Paper Co. and Coca Cola.

Brian Kenny, Vice President of Marketing, has over ten years experience managing beverage marketing and marketing strategic alliances at senior corporate levels. In addition to working at Coca Cola, he has had marketing engagements for Sobieski Vodka; launched Trump Vodka; and produced several film and media projects.

Joe Belli, National Sales Manager, has sixteen years experience as a sales and marketing representative both with alcoholic and non-alcoholic beverage companies where he directed multiple national brand launches.

Jim Sokol, National Sales Manager, has twenty five years of sales experience with Pepsi Cola Company, Arizona Ice Tea and Snapple.

Major Brands

Olifant Vodka, which is manufactured at the Wenneker Distillery in Holland 1841, and rated by the New York Times as the second best Vodka in the world

Old Whiskey River Bourbon (NYSE:R), an award winning small batch 6 year old bourbon

Aguila Tequila, a 100% tequiliana weber blue agave reposado tequila

Damiana, a Mexican liqueur often given in Mexican culture as a wedding gift because of its perceived aphrodisiac characteristics

Rheingold Beer ,"New York's Beer" ( that had a 35% share of the state's beer market in the 1950's) was established in 1883 and has been sold by Drinks Americas since September 2010. Distribution of the product in bottles and cans has already been expanded to 13 states.

KAH Tequila is sold in an iconic skull-shaped bottle decorated as the famous God of the Dead and recently has won platinum and gold industry awards. The word KAH means "life" in the ancient Mayan language. Every bottle is an individual, hand-crafted work of art; no two bottles are the same.

Ed Hardy Silver Tequila fashioned in the famous and iconic designer Ed Hardy logoed bottle. Ed Hardy is a world class global trademark.

Mexicali Beer has been a feature in Mexico since 1928. The beer has the same lime but better taste than other Mexican brands.

Chili Beer, which features a unique hot chili pepper flavor (one chili actually in every bottle) now is sold in Trader Joe's and is expanding nationally.

Red Pig Ale, is the only craft ale from all of Mexico. Its dark craft beer taste is available in 12 ounce six packs.

The Milestone Transaction

After successfully commercializing and launching six core brands; building distribution; and generating repeat business the company ran into a working capital crisis in 2008-2010-at a time when banks cancelled small cap credit facilities. With no credit, no access to production, mounting payables and declining sales it appeared that the company was doomed. But that all changed in June 2011, when Drinks Americas sold a 49% interest to Worldwide Beverage Imports(WBI).This company is owned by one Federico Cabo, a wealthy Mexican businessman whose interests include ownership of the fifth largest distillery and the third largest brewery in Mexico. This new relationship provided the Drinks Americas with, among other things, a $1.5 million cash infusion; high profile products (KAH Tequila; Mexican Beers); access to production , to product, and to working capital.

The strategy going forward is to use the WBI partnership and the newly- licensed brands, together with existing distribution relationships, to keep overhead costs low; to support margins; and to create consumer awareness and demand for company brands. Near-term goals include: growing the top line; achieving 30+% gross margin; turning profitable; expanding domestically and internationally; and reducing debt. Drinks Americas just announced an agreement to expand distribution of its Tequila and Beer brands to the Asia Pacific markets.

Financials

For the six months ended Oct.31,2011, Drinks America reduced its loss by 59% to $730,000 on $1.4 million in sales (up from sales of $246,000 and a $1.7 million loss in the year-earlier period).The balance sheet shows $115,000 in cash; buildup in inventory and accounts receivable (for anticipated and reported sales);$1 million in current notes payable (which, under my assumptions, could be repaid over the next 12 months); no long term debt and a negative equity of $2.8 million. Because of the WBI relationship, there will be no need for additional debt or equity financing.

The company has a $44 million tax loss carry forward(over $2/sh). There are about 21 million shares outstanding, of which management owns some 35%.

Harris L. Berenholz, CFA

Disclosure: I own DKAMD shares

Disclosure: I am long OTCPK:DKAM.