A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that makes dietary supplements and non-alcoholic beverages.

Pat notes the company is looking to expand into the potentially lucrative CBD (cannabidiol) market, using the name of a famous Reggae musician associated with marijuana. The company has a wide variety of brands, which provide $300 million annually in sales and make it the world’s 40^th largest non-alcoholic beverage company.

However, Pat notes that the firm’s goodwill and intangible assets now represent a fairly high 31% of its market cap.

Q: Pat, have you heard of New Age Beverages? What’s your assessment, please?

New Age Beverages Corp., (symbol NBEV on Nasdaq; www.newagebev.com), makes dietary supplements and ready-to-drink beverages (mainly teas and juices) under a variety of brands.

These include Tahitian Noni Juice, TruAge, Xing Tea, Aspen Pure, Marley, Búcha Live Kombucha, PediaAde, Coco Libre, BioShield, and ‘NHANCED Recovery. Those products use natural and organic ingredients; they refrain from using high-fructose corn syrup and genetically modified organisms.

In addition, New Age makes skin creams and lip-care products.

The company sells its products through retailers in over 60 countries, as well as over the Internet. New Age took its current form in June 2016 when its predecessor firm, American Brewing Company, Inc., sold its beer brewing operations and acquired several non-alcoholic beverage brands, including Xing Tea and Búcha Live Kombucha.

In March 2017, the new company acquired the assets of Maverick Brands, including their brand Coco-Libre. In June 2017, New Age purchased the rights to the Bob Marley brands of ready-to-drink beverages. The famous Jamaican reggae singer died in 1981 and was a celebrated user of marijuana. Under a new deal with the Marley estate, New Age now plans to make drinks infused with CBD under the Marley brand.

CBD, short for cannabidiol, is a non-psychoactive compound extracted from both marijuana and other cannabis varieties. In 2018, the U.S. Congress passed a new farm bill that makes it legal for hemp growers to extract CBD. However, the Food and Drug Administration (FDA) has so far banned companies from adding CBD to foods that cross state lines, or selling it as a dietary supplement.

Inner Circle: Revenue is down but losses shrink following a merger

The company will only sell its CBD drinks in markets that have legalized marijuana.

New Age has also started selling a line of CBD oils, creams, and lotions under the ‘NHANCED brand. Initially, it will sell those products in North America through 30,000 direct-to-consumer product consultants, as well over the Internet. New Age will launch a separate line of CBD products for retail stores under the Health Sciences brand.

Revenue jumped 106.3%, from $25.30 million in 2016 to $52.19 million in 2017. In 2018, however, revenue fell 0.1%, to $52.16 million.

Overall losses shrank slightly from $3.63 million in 2016 to $3.54 million in 2017. However, due to more shares outstanding, losses per share worsened from $0.10 to $0.12. Losses then ballooned to $0.26 a share (or $12.14 million) in 2018 due to extra costs and interest expenses stemming from the company’s acquisitions.

In late 2018, New Age merged with Utah-based Morinda Holdings, Inc., which makes and sells health-oriented beverages in over 60 countries. That firm gets over 70% of its revenue from markets in Asia. Under the terms of the deal, New Age paid $75 million in cash plus $10 million in shares. In 2020, it will have to pay an additional $15 million (in either cash or stock) if the combined company meets certain financial targets.

Following the Morinda deal, New Age is now the 40th-largest non-alcoholic beverage company in the world with total annual revenue of $300 million. It ended 2018 with cash of $42.5 million, and its long-term debt was just $4.7 million. However, goodwill and intangible assets now total $99.3 million. That’s a somewhat high 31% of its market cap.

The company’s earnings should rise from $0.09 a share in 2019 to $0.19 in 2020 as it realizes more savings from the Morinda merger. The stock, which has jumped 111% in the past year, trades at a high 22.2 times that 2020 estimate. However, you could call it moderately priced compared to most other cannabis-linked stocks.

Recommendation in Pat’s Inner Circle: New Age Beverages Corp is a hold.