Generation Next Franchise Brands (OTCQB: VEND) stock is flying around 4-year highs … even as the company sells stock for under half today’s going rate.
By the end of June, the company hopes to roll out vending machines containing small robots that serve frozen yogurt, a fad that has come and gone amid oversaturation in recent years.
But the bulletin board stock’s $100-plus million market value seriously overestimates the value of the business, in our view.
We believe the valuation is difficult to justify considering Generations’ business failure, promotional efforts, checkered past, financial condition and recent desperate discount stock sales.
The company stated it would soon respond formally to TheStreetSweeper’s questions regarding the market cap and other issues. So watch for later installments to this story.
Meanwhile, check out Generation’s website here, before we examine some issues threatening to melt this yogurt stock.
*Selling Stock At 63 Cents
Selling stock and booting its accountants kept Generation busy around the first of the year.
The stock traded at $2.06 at the closing bell on March 29. The next day, the company disclosed it sold a whopping 6.159 million shares for one-third the going price or just 63 cents apiece.
Earlier, on Jan. 2, 2018, with the stock fetching 88 cents per share, the company raised $6.4 million as it sold 12.8 million shares at 50 cents apiece.
About two weeks later in January, the company raised a red flag as it dismissed its accounting firm Anton & Chia – which replaced a firm that resigned in 2015 – which replaced a firm dismissed in 2013 after expressing doubt about the company’s ability to continue as a going concern. The most recent accountant group is a small, lower-tier, non-Better-Business-Bureau-accredited firm, Benjamin & Young.
Cheap stock will be hitting the market, while more dilutive offerings and financial hurdles likely wait around the bend as Generation dives into an expensive proposition …
*Replacing Failed Vending Business
Under the name of Fresh Healthy Vending International, the company tried to freshen up the vending machine franchise business a few years back by selling healthy snacks and drinks.
But net losses of over $-2 million yearly persisted in 2014 and 2015 amid franchisee issues. By June 2016, net losses had grown to $-5 million. Generation’s assets are now around $21.7 million. But liabilities are nearly twice that at $40.8 million.
The business just wasn’t cutting it.
So, last spring, the freshly minted Generation Next Franchise Brands Inc. discontinued new franchise sales and ceased all marketing of healthy snack vending franchises. “Furthermore,” the company disclosed, “we have sold our corporate route and no longer operate our own healthy vending machines.”
Yet the company promotes the old business on its website today, urging visitors to “Get Started!” in the healthy vending business that Generation has ditched:
(Source: Generation Next)
Regardless, now Generation states it is focused on vending machines containing small robots that serve up frozen yogurt in 60 seconds.
(Source: Generation Next)
But as of mid-February the company had not yet delivered a single one of these arguably gimmicky devices.
That’s right. Not one.
Nevertheless, Generation on April 2 announced “record bookings … aggregating 714 robots and approximately $29 million.”
We’re not buying it.
“We have a schedule to install up to 500 pre-sold robots end of April – June 2018. Locations for these have been secured,” company founder and chairman, Nick Yates, explained to TheStreetSweeper.
We find it almost impossible to believe the company can go from zero vending machines to 714 in under two months.
“Each of these first robot installs,” Mr. Yates said in an email, “allows us to represent about 40k of revenue. (Approx)”
He said they will be able to manufacture about 250 machines per month, but only approximately 1,000 to date have been sold, representing around $40 million in unrecognized revenue.
Sources in the vending machine business say a vending machine generating ~$800 revenue per week consistently is virtually unimaginable.
Yogurt has been an on again, off again fad for decades. Frozen yogurt was popular in the 1990s, when the Seinfeld TV show’s character Kramer invested in a non-fat frozen yogurt shop, leading to belly-bulging results for his buddies.
(Source: Fandom. Seinfeld characters gulp frozen yogurt in 1993.)
And now Generation appears to be entering the space as yogurt consumption is dropping.
Per capita consumption of yogurt in the United States from 2000 to 2016 (in pounds per person)
(Source: Statista, Consumer Goods & FMCG)
We’ll later dig into location, distribution and other issues surrounding Generation’s vending machines. But for now, let’s step back just a few years …
*Checkered Past: Company, Founder/Majority Stockholder
Allegations of fraud and deceptive practices in California, Washington and Australia dog Mr. Yates, the chairman who also owns the lion’s share of the company at around 16.6 million shares.
His company’s troubles began about two months after the incorporation papers were filed in California in 2010.
The state alleged “material misstatements or omissions” made by Mr. Yates and Mark Trotter, co-founder and former shareholder of Generation predecessor Fresh Health Vending (FHV). The company’s franchise registrations were revoked from 2010 through 2012.
The State of Washington issued a consent order in 2012 requiring principals Mr. Yates and Mr. Trotter of YoNaturals Inc., which changed its name to FHV Holdings Corp.(controlled by Yates, now dissolved), and was acquired by Generation Next, to cease and desist from selling franchises and violating anti-fraud statutes.
The defendants were also fined for investigative costs related to failing to provide their franchisees with disclosure documents. Investigators said the men also failed to register properly to sell those franchise deals.
Mr. Yates’ difficulties stretch back to his native Australia. He was among a group of five sued in Australian federal court in 2006 on allegations the company representatives “repeatedly engaged in misleading and deceptive conduct.”
Mr. Yates was found jointly liable for breaching trading practices and ordered to pay $3.5 million to victims.
The group operated a pre-paid phone card franchise and In-Touch Networks, a franchise that allegedly sold second-hand vending machines.
The Australian Competition and Consumer Commission described the operators’ aggressive advertisements claiming potential profits of up to $1.5 million per year.
But those who bought the machines complained they could make little or no money despite investing up to $260,000. They argued the vending machines and phone cards were faulty; and the franchisor didn’t provide suitable machine locations.
The Commission wrote: “Justice Gyles found that Nick Yates: “authorised the initial representations made by advertisements in each case and knew that there was then no proper or reasonable basis for those representations. He could not have believed them to be true.”
“Further he (Yates) very quickly became actually aware of all of the serious deficiencies that occurred in relation to the successful operation of each of the Vending Machines and …of all the difficulties and deficiencies complained of by the distributors…”
*Individual Franchisees Settle: “I’m Heartbroken”
The company also settled two separate individual franchisee claims in California and Oregon in 2013 for a total $172,850.
“I’m heartbroken every day,” said one former healthy vending machine franchisee who requested anonymity. Though Mr. Yates suggested to TheStreetSweeper that there is more to the story, the man told Franchisetimes.com he lost $60,000 of his $80,000 investment.
“That was all my retirement money and I feel like I was sold a bill of goods,” he said.
TheStreetSweeper is waiting for Mr. Yates’ response to this one…
Why is it going to be different this time?
Meanwhile, Generation has been hyped by professional promotional campaigns as far back as 2013. And promos continue today.
Current promotions seem to imply that a brokerage firm has produced “new research” and a “target price.” …
The same day, SeeThruEquity posted on Twitter:
But SeeThruEquity is not a broker or investment adviser.
Though it has not responded to our request for comment, the firm discloses companies must pay SeeThruEquity for the promotional material:
Generation’s press releases have also been frequently tweeted by Social Start Now since March 20.
According to Social Start Now’s vice president of sales, such promotions cost from $3,000 to $20,000 monthly.
We’re waiting to hear back from Generation about who is paying for promotions and how much.
Keep in mind that promoting stocks is legal as long as it is disclosed. But Wall Street frowns on promoted stocks.
*Third-Party Paid Promotions Kick Off This Story Stock
The promotions of this story stock go back to around late 2013 to early 2014.
In early 2014, a kind-hearted third party paid a promoter known as Stock Palooza a whopping $300,000 for a 1-day blitz on Generation, then called Fresh Healthy Vending. The disclosure indicates a stunning $900,000 total compensation for three days of promotions.
There’s always some grandma somewhere, as investingadvicewatchdog notes, who falls for these emailed “newsletters” designed to “create awareness” about little stocks.
So is it wise to follow heavily promoted, low-revenue, no-earnings companies that generate little more than good stories?
Legendary investor Peter Lynch ran Fidelity’s Magellan Fund from 1977 to 1990 and beat the S&P 500 nearly every year. Yet Mr. Lynch claimed he was 0-for-25 when he invested in companies with no revenue but a great story.
Watch for our updates to the ongoing Generation story. But right now, we just can’t find any value at all in a yogurt company on the verge of meltdown.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in VEND and stand to profit on any future declines in the stock price.
* Editor’s Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to firstname.lastname@example.org.