New Age Beverages Corp (NBEV) is a distributor of ready-to-drink teas, coffees, coconut waters, and energy drinks. Brand names under their current umbrella include:
- Aspen Pure
I’ll forgive you if you haven’t heard of any of them. NBEV assembled this motley collection by acquiring other struggling beverage companies.
Why were they struggling?
Because it’s brutally difficult to compete with the likes of Pepsi and Coca-Cola – the heavy hitters that own this segment. It costs a fortune to build a brand and buy shelf-space, which is why NBEV has generated annual losses since its inception.
However, NBEV’s management is opportunistic enough to recognize the buzz around everything cannabis. So in September, 2018 NBEV announced it was getting into the CBD beverage space. They were launching three new products: CBD Tea, CBD Shot, and CBD WTR. Predictably, NBEV’s market cap went from $75MM up to $500MM because everything cannabis had been going gangbusters at the time.
If the chart above looks familiar, it should. Remember when Long Island Ice Tea Corp changed its name to Long Blockchain Corp during the most recent bout of bitcoin mania?
Same thing – they announced their name change, price shot up, reality set in. It’s now trading around 50 cents per share. I’m not sure what it is about struggling beverage distributors pivoting to the next big thing, but NBEV’s ability to turn a profit or generate positive cash flow remains a huge question mark.
Product Delays & More Pivots
Initially NBEV planned to release these new CBD beverages by the end of the third quarter in 2018 but they were delayed. Instead of moving forward with those product launches the company announced they were teaming up with Bob Marley to launch some co-branded CBD-infused beverages.
The only conclusion is that the initial CBD beverages were a failure either based on the pre-launch market reception or regulatory hurdles. Slapping Bob Marley’s name on the bottle won’t necessarily solve either of those problems.
What’s interesting is that the deal they struck with the Bob Marley brand has NBEV paying 50 percent of gross profits as a licensing fee. That’s insane. The standard licencing fee is 25 percent of pre-tax earnings.
In NBEV’s 10K for most recent year ending December 31, 2018, the company generated 17.8 percent gross margins with normalized operating expenses eating up 44 percent of net revenue. If you try to do the math to figure out how much revenue they have to generate to actually break even on an operating basis you quickly start finding yourself forced to make a bunch of unrealistic assumptions. And then when you tack on the 50 percent licensing fee for the products that are supposed to drive their growth, you end up trashing the model because it’s worthless.
And this completely ignores the fact that on page 42 of the 10K the company has the audacity to list “Non-GAAP Revenue”. I understand why a company would list “Adjusted EBITDA” in the footnotes – that’s pretty normal, especially for a company in the midst of a transformation. But “Non-GAAP Revenue” is a giant red flag for any investor.
Don’t invest – just trade
Luckily I’m not interested in being an investor. Quite the opposite. Eventually NBEV’s stock price will fully reflect the underlying reality of continuing losses. Unfortunately I’m not the only person thinking NBEV’s stock price is unsustainable even after it has dropped 50 percent from the September peak. While NBEV’s stock isn’t impossible to short, the annual borrow fee rate is hovering around 100 percent. So there is really only two ways to play this:
- The obvious way: wait for a short-term trade opportunity where the odds of a brief move downward are in your favor. These trades have to be quick enough and move far enough to overcome the 100 percent annual vig.
- The reckless way: set a market buy at a breakout level and wait for a vicious short squeeze. Sell 60 minutes after your buy order gets filled, hoping for a continued melt-up. You only need one piece of good news for this to happen, but I wouldn’t bet on a gain for the long-term.
It’s easy to blow up an account when you have so many people leaning bearish on one side plus so many people buying the hype on the other in a relatively small cap stock. So remember that a small position size is ultimately the best form of risk management when playing the odds on a company like NBEV.