Yet Another Value Podcast - Edwin Dorsey from Bear Cave on Short Selling, FOIA requests, and Celsius $CELH

Episode Date: October 6, 2020

Edwin Dorsey, the founder of the Bear Cave, comes on to talk about short selling, his new newsletter, and his recent report highlighting the red flags at Celsius. Fun fact: Edwin estimates he represents ~1% of the FOIA requests in the U.S.Edwin's twitter: https://twitter.com/StockJabberBear Cave newsletter: https://thebearcave.substack.com/

Hello and welcome to yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have the founder of the Bear Cave, Edwin Dorsey. So Edwin, how's it going? It's going great, Andrew. Thanks so much for having me on. I'm excited to be here. Hey, well, I'm excited to have you. You know, you're unique for this podcast because first, I think you're the first guest younger than me that we're going to have. So you're starting to make me kind of feel my age. But second, you know, most of the guests have been long focused. And you're, I would say, more of short, more short focus. So I think it should be a really interesting conversation. And let me just pivot that into the way I start every podcast. And that's by

pitching you. You know, you've been doing the Bear Cave newsletter for what I would say about six months now. Has it been longer than that? Yeah, maybe six or seven months. Yeah. Yeah. And, you know, it's great. Again, it's unique. There isn't a lot out there that's short focused. And I've just loved it because every time a big short report comes out, it can be tough to grab it. You always grab it. You always have an interesting angle on it. And you've just recently pivoted. to you're doing kind of your own unique alpha identifying opportunities. So the first one was great. I'm really excited for that. I've really enjoyed the product and really enjoyed your writing over the past couple months. So that out the way, give us a little background on yourself and how you

came to start the Bear Cave. Okay, Andrew, 22. I've always been really passionate about stocks from a really young age. Like in second grade, I was talking about stocks. Freshman year in college, I got hooked into the short side because by coincidence, I made two great short. short sellers, Mark Cahodes, who's kind of on Twitter, and Jim Carruthers, who runs a short only hedge fund. And I worked for him on and all for three years, and that's kind of how I learned the ropes of the short side. I also interned for the SEC enforcement division, so I got to see the other side of how companies are regulated and the shenanigans they do. So I've always been really passionate about the short research and finding fraud. So about six months ago, like you mentioned,

I started this free newsletter where I would talk about recent activist short campaigns. And more recently, I rolled out a paid version where twice a month I highlight companies with unnoticed problems. I don't think are being picked up by the market. Yeah. And let me dive in there because I think people are going to hear your 22. And I know a lot of people will be like, oh, turn it off. This guy doesn't know what he's doing.

But, you know, I think you published the first one. It's free. It's on Celsius holdings. And, you know, whether you like the idea or don't like the idea, like, the idea, like I think there are a lot of unique angles. And, you know, I think back to, um, Mike from Namgap when I have him on and he reads a proxy statement and he pulls out things and angles that no one, no one sees or expects or things of stuff.

And like when you pull out this Celsius report, you're going to see stuff that like, you know, it's equivalent to the stuff you'd expect to see in Muddy Waters is probably the most famous activist shorts are out there. Like there's those angles where you're pulling out, hey, this person four years ago worked at this fraudulent firm and now they're on this board. Like, isn't that a red flag and all this sort of stuff? So I just wanted to, you know, just highlight that for you. But please, go ahead.

To talk about Celsius? Let's talk about Celsius later. Let's dive into Bear Cave a little further, actually. Okay. So Bear Cave, you know, first of the disclaimer, nothing here's investment advice. You know, especially shorting can be extremely risky. But that out the way, let's discuss short selling. Just give us a basic overview of what short selling is.

So short selling is a way to bet against a company. The mechanics are pretty simple. You find somebody who owns a stock that you want to bet against. You're going to bet that it goes lower. So you borrow a share of stock from somebody at its current price. You pay them a small fee for the inconvenience. You sell it and you say, I'm going to return to this share to you at a later date. So the person basically has a fake synthetic share.

You take the real share, sell it on the market, and then you buy it back at a later date. And if you sell it at 100 and buy it back at 80 to return it to the original. in person, you make a profit. Now, if the stock goes up and you sell it 100 and you need to buy it back at 200, you can have a big loss. In fact, the losses can go to infinity. But that's basically the mechanics of short selling. It tends to be really tough to make money on the short side. So if you look at like Jim Chano's, his short only book, I think, you know, since inception 40 years ago, is maybe annualized one or two percent positive returns. So it's really tough to do a portfolio of shorts well. But the one nice thing about it is it can allow you to get more long. So if you

have a short book that's breaking even, then you can go more long the stocks you love. And that's how you really generate greater terms. Yeah. Yeah. So I think you answered my next question, you know, why would someone want to short sell? Because over time, stocks go up and you're kind of betting against the trend. And your hope is like, hey, your hope is everything you short goes to zero and you sold it for 100. It goes to zero. And you never have to pay them back anything. but your real thought here is, and correct me if I'm wrong, hey, because I'm going short some companies that I think will go up less than the overall market, I can be going more long the overall market because I've almost got this hedge in place.

That's precisely it. So what Jim Chanos does and he's probably close to the best out there, if not the best, is he is like 190% long stocks and the 90% short. So it's just like, you know, net 100% long, but if he can break even on the shorts, then he's going to get twice the market return on the long side. And I think he's annualized something like, I'm guessing here, but 18 or 20% a year over 30 years, which is insane. But I guess the next question would be, you know,

if you're a talented short seller, right, you can go out there and you can actively identify stocks that will go up less than the market. The question is, hey, why can't you use that skill set to identify stocks that will go up more than the market? And shouldn't you spend more time focusing on that? Because, you know, over time, because returns compound, if you're getting long stocks that go up more than the market,

like that's going to make a lot more money than stocks that go up less than the market. That's a great question, Andrew. And Andrew, I think it's really two different skill sets. It's like saying if you're really great at soccer, why not play basketball, these basketball players earn more? It's like, it's very, to me, it's very different ball games. Like, for short selling, for me, it's a lot about digging. So looking into management history, looking at old documents,

filing a lot of FOIA requests, trying to figure out if there's something, something fraudulent or scamming going on and the customer value proposition and like, you know, reading all these comment letters and lawsuits and trying to like make, like figure out if the dirt there is actually a big problem or a small problem. On the long side, you know, I think it's really different. It's, um, I, you're gauging customer satisfaction. You're trying to predict new product rollouts. There's similar stuff, but, but for me, shorts and longs are just two different ball games. Okay. No, that's great. So it sounds like you're more focused on short selling. Are you solely focused on that? Or do you look for longs as well? You know, I would say 90% of my time is shorts.

With longs, I do a little bit of stuff on the microcap side. You know, usually if I make a long investment, it's more shoot from the hip than actually well researched. But 90% of my time researching stocks is on shorts. And I can spend hundreds of hours researching a single idea on the short side. On the long side, I'll never spend. more than five or ten. Okay. No, you know, I'm just going back to what you said, where the skill set for shorts and longs is so different. Like, you know, since long, I've been running my fund for, I guess, about five years now. And that's exactly what I found. Like, when I'm looking for something that's long and looking for something that's short, you know, like long, I'm looking for something that's undervalued where I like the management. With a short, my initial thought

was, oh, you just find something overvalued where you don't like the management. And actually, that doesn't really work. Like, I think valuation shorts tend to be the worst shorts where you say, I think this is worth 20 times. I'm going to short it because it's at 25 and it's got a worse. Like you really want something that's got a lot of hair and a lot of red flags with some combustible risk. And I just find the skill sets for long and shorts just really aren't compatible, to be honest with you. So I kind of think you hit the nail on the head there. Let's go into your process a little bit.

Your focus, 90% of your time, focused on short selling, you know, I wouldn't be surprised. You said you're 22, but I wouldn't be surprised if that's going to leave you with some gray hairs in the new feature. How do you generate new short ideas? Okay, so one way is just by talking to people. You can talk to other people in the industry. I'm also always talking to just young people I meet, and people I meet, like, have you heard of any companies that are scamming or bad? That's my favorite way, but that's tough.

One thing I do is I read every single as a comment letter, the SEC sends companies. So people that don't know, comment letters are letters at the SEC. since publicly traded companies, kind of scrutinizing their financials. They get public after a month delay, and you can find them just on Edgar or on the full-text search tool that they recently released. And there might be like 10 or 15 new ones posted every day. A lot of them aren't serious, but if you read through a hundred of them every like week

or so, you'll find like one or two where the SEC is just like flaming the company. Like, you know, do 10 different bullet points on things they're getting wrong in their filings. And the cool thing is you get to see the company's responses. Usually a company has about a month to respond. And sometimes the companies will have a really good response that makes the SEC just look wrong or, you know, it'll have a substantive response. Other times the companies will respond being like, you're wrong about this, we're sorry, we're changing our policy, we're changing these six things. And it's like, what's going on? And the nice thing about comment letters is I really don't think enough people are looking at them.

So I think it's one thing that kind of gets underpriced or mispriced, especially because there's a month delay. So it's like not the type of short term like trade right now thing, Wall Street gloves. So I look a ton at comment letters. I do run like screens sometimes, not in the typical way. Like I got a list in Excel of all 6,000 publicly traded companies and their auditors. And I kind of looked for huge companies that weren't using a big four auditor because there's a probably a reason why. Or, you know, Grant Thornton and BDO are kind of number five and six still have credibility, but what are the one or two billion dollar companies that aren't using, like, a

credible auditor at all? You know, so that's another way I find ideas. I think Twitter is also really underutilized resource. I think Twitter's a great way to find ideas, too. Let me, I want to talk about comment letters in a second, but let's start from the end and go backwards. So Twitter, I agree, though, well, we can talk about Twitter later, but let's talk about the looking at companies with different auditors, right? Kind of, let's say outside of the big six. So one thing I've struggled with is sometimes I'll look at a company and it's a $5 billion market company and, you know, they'll have Dorsey Walker is their auditor firm and we'll be

a $5 billion company. There are auditors and they don't audit anyone else over 50 million, right? And I'll look at that, that's a red flag, right? Yeah. well a lot of times you talk to the management team and they say oh we'll upgrade at some point but you know we've had explosive growth recently right uh we grew from a 75 million dollar company three years ago to five billion and we just haven't changed and i never know like is that a reasonable thing you know because switching an auditor takes some time it takes some headache it's going to spend a lot a little bit

of money is that a reasonable thing or do you think like the moment you can kind of afford it you you should just go with big four big six or whatever how do you think about that so i i would say you can see when they got the auditor. Did they get it six years ago when they were actually a smaller company and they've actually exploded since then? Or at the time they chose their auditor, were they also kind of misplaced in choosing an auditor that was much smaller than they should have gotten six years ago? The PCAOB database lets you see the specific audit partner at a firm that's auditing a company. Most people don't know that. So you can actually see which audit partner is. And I have a you can see like audit partners who are bad tend to like audit other fraudulent or bad

companies so the audit partner has a history of like auditing companies that get fined or go bankrupt and that's not a good sign um so i think there could be especially in the smaller cap space some credibility to that argument that we've outgrown it but i i think more more often than not they're just saying that to kind of mess with you you can also you know look at executive of turnover. So if you've had three CFOs in the last five years, that's probably a sign like there's actually gamesmanship going on. But if you've had the same CFO, you had an audit firm that was appropriate for where you were two years ago and you just happened to grow a lot, you know, I might give you a little bit of credibility there. And let's go, the first thing you

mentioned was SEC comment letters, right? And A, I think this is such great tool because, look, I follow every firm that I follow or invest in anything. I've got alert set up all across the board, right? And as I think about, I think a lot of the alerts that, a lot of the alerts that I've set up don't even pay attention to or pick up on SEC comment letters. So, A, I think that's such a good one where I do agree with you. I think it's very under notice and underfollowed. Like, I can't think of a single person who I've been talking to been like, oh, did you see this SEC comment letter on the revenue recognition? But B, just to dive more specifically in it, what's something in particular in the comment letter that you're looking for where you see it in an outsider might say,

oh, you know, that's a normal revenue recognition thing. But to you say, oh, my God, the SEC is really, really piling on this company here. So one really bad sign is if the SEC sends multiple, like, so you send, the SEC will send a letter. Yep. Sometimes it can be as simple as one question. Other times you can see it be 12 bullet points,

like the longer, the worse it is. The company gets an opportunity to respond. In 90% of cases, I'm estimating here, that ends the process and it's done. and 10% of cases, the SEC will send follow-up questions or two more follow-up letters, like, explain this part, explain. So, you know, if the first answer isn't satisfactory, that's a pretty good sign. Something's, like, the SEC is definitely scrutinizing for a reason. That's a sign that something can be wrong.

I'll also try to understand in plain English, like, what they're saying. I think it was Muddy Waters talked about, I forget the company, but the company got a revenue recognition comment letter from the SEC, and the response was literally 2,000 words. And it's like, come on, I can't understand this. And you're doing it intentionally, so no one can understand it. So generally, the length of the comment letter, what's being asked about? Sometimes it's somewhat small things like we notice on your website you have a distributor based in Syria and the company's like, oh, that was an error.

It's less than $10,000 of sales and our web team just forgot to update it. So that's not a huge issue. but if it's like this revenue thing this revenue thing this revenue thing your disclosure is wrong inconsistent filings please resolve this inconsistency and the company just admits to being wrong on all that you know that's not a good sign and you mentioned uh you just mentioned they might say hey you mentioned on your website you're you have a distributor in syria right how much of the my my thought was the SEC enforcement division when they were looking at these they were only reading the 10k and kind kind of going with letter of the law accounting stuff right like

hey you mentioned your revenue recognition policy is 45 days why isn't it 30 days or 25 or something but are they actually going out and doing some type of like due diligence whether it's just looking at the company's website or other things when they're performing these uh sending out these letters my basic understanding um and this is my basic understanding from the outside no special knowledge um is about 90% of the SEC stuff comes externally so it can be through the tips complaints and referrals inbox that like were anyone who can submit a complaint it can be through whistleblower reports which get taken very seriously

it can be through referrals from the regulators or FINRA and I think they definitely do do like projects in-house too to find companies that are wrong but I think a lot comes through external referrals and then a lot is the tone at the top so if the chairman wants and the commissioners want to like you know, go after cryptocurrency was a big thing. And those companies will receive a lot of extra scrutiny. Yep.

But I do think it's a little more than just reading the files. So as a short, obviously you're, you know, you're just getting the short newsletters started up. But are you submitting complaints to the SEC and are you seeing like, hey, this company's revenue recognition policy I don't think is right. And four months later, you see it, sometimes you'll see a comment from that. So maybe not a comic letter, but I have seen things where I or someone I know people in the short community will send something to the SEC, and then maybe like six months

later, the company will put out an AK changing investor metric or updating their investor slide. Maybe a comment letter would be a little extreme, but I have seen responsiveness from companies, either coincidentally or not, after complaints from short-sellers. And it's becoming, I think, more and more common. And in this China stuff, I think the SEC sent out a letter to a Chinese company, like, the week after Muddy Waters or Wolfpack research without a report. And it's like, I think they genuinely value short sellers and are responsive to it. And then, you know, I think a big piece of new, of short ideas is, again, it's not the valuation. It's the people behind it.

It's the management teams. How much of your ideas is tracking, hey, you know, last year I followed this company that was a fraud. and their management team, and now their CFO is over here. Like, how much is tracking management teams from one company to the other? And how do you process, how do you kind of structure and process that? So some people are outstanding at that. So John Hempton, I think, like, has a database of 20,000 people. He's apparently the gold standard of, like, anyone who's ever committed fraud,

he's got you in a database the moment you pop up, boom, he's got you. So Hempton's the king at that. I actually kind of don't do that. I usually start by finding a company that I think is interesting, and then I'll look into the management team. And people also would say look into, if you read the management bios, sometimes those will be misleading or leave out important things. So then you can Google them and maybe look at old articles. One of my favorite things to do, and for me the easiest, is just take a CEO or CFO's name, put it in quotes, and then the SEC has this new tool. they actually recently rolled out called full text search where you can search every SEC filing

ever in the last 20 years for a specific phrase or name and see every time it's appeared. And then that's how I'll go. So find a shady company, then look at the management, put their name in quotes, put it in the full text search tool, and see every time their name has appeared. So it's not just like where they've been an official board member, but like anytime they've appeared as an investor, anytime their name was mentioned in a competing filing. and then you're going to get a bunch of these filings and you can just look through them and see, okay, this is every time this person's name has been mentioned in an SEC filing

for the last 20 years, you do that for the board and executive team, and then you kind of, I think that picks up on about everything. And let's talk a little bit more about short selling. So one thing I worry about with short selling, right? Like when I think of this year or just like everything, outside of investing, I worry that we're increasingly in a post-truth world. You know, like I think of something like Hertz filing for bankruptcy. earlier the summer and them saying our equity is worthless they don't even get an equity committee

an equity committee appointed in the bankruptcy and day traders take the the stop from you know 60 cents to five dollars in a month and just this frenzy of retail uh stock trading and hertz was actually going to use their stocks to fund the bankruptcy before the SEC shut it down but you know i think of something like that or i think of Tesla i think short sellers have lost more money on Tesla than any company in history, right? And when I look at all the claims that Elon made, you know, you mentioned turnover in the C-suite that Tesla had so much turnover in the C-suite. I think Elon said 100,000 robotaxies on the road by the end of 2020. I guess he's still got two months to deliver on that, but you know, we're not getting 100,000 fully autonomous

vehicles. And I just like, that's the type of promise. It used to be like if you clearly made a promise that ridiculous, like your stock would get hammered, but that stock is up, you know, five X over the past year. And I just see Tesla, Hertz, things like this. And I wonder, like, are we past the point of short selling? Because you can kind of just type a company to the point where your stock will go up. And short sellers will blow up. You know, you short a company at 1% position, you think it's going to zero because it's worthless like Hertz. It goes up 6x. It doesn't take too many of those to just blow a short book up completely. Yeah. So I have two general rule of thumbs now. One, don't short these like small cap things.

like below 500 million or even below a billion. He's like there's so many of these companies like a workhorse. I think an electric truck company up from like one to 20, something like that. There's so many of these small cap things. I think especially with these Robin Hood and chat rooms and options just and all this stuff that like these names can explode on nothing and be completely worthless and still get out of this world. So you just don't want to be sure that because you don't want to like be blown up 10x on anything.

And then like Tesla is a great example of a big. company that really went against you. So my second rule is I really try to avoid names that are crowded on the short side. Like people say high short interest is a good thing. You know, high short interest companies tend to underperform. I would much rather prefer to find a great potential short that has a low short interest than a high short interest. I think just like on the long side, how there can be a lot of crowding of ideas, there can definitely be the same on the short side and it's worse on the short side because then you can have squeezes you could have more expensive borrowers so like i i've spent like close to no time ever thinking about Tesla and my view is

you know you can much easier we find a much better short in the one to two billion dollar market cap area that's going to perform much better or you can be the hundredth person talking about Tesla and it's like if you if you care about the returns and like playing the game and like doing the research and don't research Tesla. It's like, no, look, I, I completely agree with you that I guess, you know, my worry has always been, even if you're in the once, two billion dollar market cap company, like it's very easy for a one billion company. We see it all the time now. All of a sudden, they're worth 20 billion or something. And then, but, you know, with the Tesla, it was a $50 million company. You thought, oh, they're kind of the most expensive car company in the world. And then all of a sudden,

it's $300 billion. So you can have your face ripped off either way. I agree with you. Like, my favorite shorts recently have been like something like AT&T where I don't think it's as good anymore but you looked and you were like hey this company like every strategic decision they can make they they do it poorly uh if there's something for sale that's about to be a dying business they're going to go out and overpay for it you know they bought they bought uh direct tv for way too much money the capital allocation was awful just everything they were going to do was awful and i thought the business was overvalued at the time so it's like this type of sleepy like they're going to do everything poorly. It's probably overvalued. And nobody else cares or looks at it because it's not

going to go to zero. That's kind of been my favorite. One more question on short selling, and then we'll move on to Celsius. I think one of the things about, especially the scammer companies when you short them, their first response is always not to defend the business, is attack the short saw. Right? Somebody came out with the short report. We're going to hit them with a lawsuit. We're going to attack their character. You're starting up a newsletter, right? So I'm sure you're going to run into this. Like, you're doing me. public short selling, how are you thinking about legal risk here? So I would say a few things. I think sometimes companies get upset if somebody's like targeting

them over a long period of time. Like I'm just doing a new company every two weeks. I think I'm going to be going a lot less deep than the typical activist shortsellers. Like my first report was pretty good. I think my next one will be pretty good. I don't think all of them will be like super deep or market moving. I think they'll be interesting. I think they'll provide a new perspective. I think some people will use it to, you know, eventually do research and initiate a short position. I don't think, I don't think any companies are going to be suing me. You can also kind of tell based on the companies you go after, typically like the much smaller ones,

penny stock pump and dumps are more likely to take legal action. The bigger companies are more likely to, you know, maybe contact you behind the seat. But, you know, very, I don't think most semi-legitimate $10 billion companies are going to sue a 22-year-old. They would just be bad press. Like, care.com, the one company I wrote about that got me in a little trouble. They contacted my college to complain about me, but they never sued me. So I'm not too worried about it for now. And care.com, I think a lot of your points were eventually proven correct, if I remember.

I mean, that was like a 2018 story, right? but I think eventually a lot of heads rolled over there. Yeah, the CEO, CFO, General Counsel, and half the board got replaced. The company was sold. Yeah, and that was the one company. So they sent a letter to my parents' house. They called Stanford to try to get me in trouble.

And they even sent a private investigator to my house at one point. But never sued. So that's crazy. No, it's funny, like, care.com, just crazy story. IAC bought them for 500 million. I'm actually, I know a lot of the history, but I'm actually quite bullish on them today.

I don't know if you're still following them or not. On care.com or IAC? Cure.com. You know, I've been a little, follow them loosely. You know, now that they aren't their own publicly traded company,

I'm not following them as closely. It's weird. Like, even though my big report came out two years ago, I still get, like, journalists reaching out, like, do you know about these safety issues

or, like, lawyers saying, like, we're suingcare.com. Do you have anything you want to, like, help us with? I think it could be a really valuable business, especially during coronavirus, as long as they get the safety stuff right, or they make it clear that they like, this is like a Craigslist for babysitters and not, you know, a well-veted platform. You either need to disclose the safety risks or eliminate the safety risk. You can't have this middle ground where you make it seem safe, but it's not. I 100% agree with all your points there.

I just, I think exactly like you said, like, I think they've got a good business. I think they've got a really nice brand name even after all that stuff. And I think like going forward post-coronavirus, companies are going to be very interested in, hey, how do we provide our, how do we provide our employees with some type of home care and stuff for their children? And care.com is pretty much the only natural platform for that. And I just think there's a lot of optionally. But neither here nor there. Let's turn over to your first report. It's on Celsius. The ticker is C-E-L-H. I'm going to turn to you right after I mentioned one more time that

nothing on this podcast is investing advice. That said, why don't you just give us an overview of Celsius and then maybe an overview of your short thesis there? Okay. So to reiterate, nothing on this podcast is investment advice. And I'm not even short it. So if you're shorting it based on this, you're really not doing your work. So Celsius Holdings is a one and a half billion dollar company that allegedly makes healthy energy drinks. So think Red Bull, but it's like healthy for you. I think a few years ago, they were claiming it had a negative amount of calories. I don't know how that's possible. So they make these healthy energy drinks. The stock's up like a thousand percent or so over the last five years. And the business model is they sell to

distributors who then sell to end customers, generally speaking. And on one hand, they're growing really fast. They're growing like 80% a year. And there's some like legitimacy to their growth. I think their Instagram has over 100,000 followers. They're popular in the U.S. On the other hand, they've got a ton, a ton, a ton of these weird red flags. So the SEC has sent the multiple really scathing comment letters, in my opinion. They use an auditor that no other NYC or NASDAQ company uses. One of their board members was Tim Leisner, who was at the heart of this Malaysian sovereign wealth fund scandal and their head of Asia sales was Roger NG who was also part of this scandal and is now invited. So there's a lot of odd stuff going on too,

which is kind of the crux of why I think, you know, everything might not be what it seems to be. No, look, and I message you this. One of the reasons I want to talk about this company is Celsius is a very sore point for me because last year, I remember specifically the CBS across the street from me got Celsius in it and I love energy drinks. It's a sore point for my wife and I I will be banned from them for a while

and then every now and then I can sneak one in but I saw the Celsius and I was like oh this is a product that I have a lot of experience with I saw they were publicly traded I looked at them I thought they were cheap a lot of growth opportunity but I picked up on some of the red flags

that you picked on certainly not all of them but the stock was at $4 then versus 20 today so it's a very sure point but walking me through I think the biggest red flag to me were the auditor and the European acquisition. And I do think there's some stuff with their Asian operations as well that are pretty big. But those were the two main ones for me.

So let's start with the actually we already talked about in the first part, why having an auditor that no one else would have is bad. Is there anything else specifically on this auditor that you found a red flag? Or is that just kind of the stuff we covered in the first part? So some of the longs I said, kind of said what you said earlier, you know, they just outgrew their auditor. You know, it was small, but now they're bigger. That's just not true.

So they switched to this auditor, Assurance Dimensions, which only audits other OTC companies with the average market cap of about $5 million, and then Celsius is $1.5 billion company. They switched to assurance dimensions like three years ago, I believe. And at the time, three years ago, they were uplisting to a major exchange and they had a $200 million market cap, give or take. So they were going to be the biggest client by like a factor of 10 as far as I can tell. So at the time they chose this auditor, they were choosing an unqualified audit. They were choosing an auditor that wasn't, like, in my opinion, suited to their needs. And now that they've grown up 10x, it's even more flagrant.

But, yeah, so I think, you know, you can't just say they outgrew the auditor. And then the other big red flag for me, particularly when I was looking at them, was they did a stock offering. I think it was earlier this year, late last year, because their European distributor went bankrupt, unless I'm mistaken. and they bought them and they did a stock offering and that's when I was looking at them and that was the red flag for me that kind of killed it. Can you dive into what happened

with the European distributor and why this is such a big red flag? We'll talk about Europe and we'll talk about Asia because they're very closely related. So Europe, Celsius is selling to a distributor called Funk Foods in Europe. It's a very fast-growing portion of their sales.

This is in like the 2017-2018 timeframe. They actually didn't disclose the distributor by name for a while. do this like company A, company B things. And then I think about at like October 2019, you can look at Funk Foods like website and filings. They were having a lot of solvency issues. They were like, you know, they were doing bond restructurings. They weren't well capitalized. The Celsius distributor in Europe was having a lot of these financial issues, even though Celsius was the main product they're distributing and Celsius is supposedly really hot.

And then Celsius goes and acquires them. And even though this distributor was about 14, percent of Celsius's revenue at the time of the acquisition. It was like 30 percent plus of the accounts receivable. And then they go. It was a big portion of the accounts receivable. They go. They acquire this company. They immediately take a big inventory right down on this acquisition and then European sales start exploding. So what it looks like happened is, you know, and this is just my opinion based on the company's filings, you're selling this no-name distributor, a lot of inventory. They're accumulating this inventory and promising to pay you it at a later date. They don't pay you it because they're insolvent and can't.

So then you go and acquire them and be like, oh, we recognize this revenue and it's good, but we're just going to mark this inventory down and call it a day. And, oh, by the way, this distributor that we now control that's captive is buying a ton of our product. and European sales are up like 600% in the last year. And it's like, hold on, like, this doesn't make sense for a lot of reasons. If you've got a hot product, why is your main distributor doing so badly? Why are you choosing a bad distributor? Why are you acquiring this?

It doesn't make sense. But this has happened repeatedly. So the same thing in Asia, I didn't talk about this fully in my article. They got this random Asian distributor that I'd never heard of that I can't tell, like, barely has a website. And the Asian distributor goes, starts buying a lot of the product. doesn't pay in cash, builds up this huge multi-million dollar accounts receivable balance, can't pay. So then they do this complex restructuring where I believe they inject cash into the Asian business

and then have this weird structured royalty deal. Yeah. We're getting paid on like some weird term that's defined as net revenue. There was a hedge fund involved in this process that's now suing, that's an arbitration with Celsius over how they're recognizing revenue from this Asian subsidiary. So in the filings, like now the Asian subsidiary is like, you know, the minimis, like around $1 million, I'm guessing, in revenue. But there's a lot of questions about how it's being recognized and what's going on there.

And it was previously much bigger. And they now have this like $10 million roughly defaulted or interrears accounts receivable from the Asian subsidiary. And then for their U.S. distributor, I didn't mention this in the article, but their U.S. distributor, I think this is in the 20. 2017, 2018 timeframe, had a dispute with Celsius, legal dispute, and Celsius needed to pay them over a million dollars in cash in stock for some disagreement with their U.S. distributor, who I think now they use a different one.

But it's like, how is it that you have got such a hot product and you're growing so fast and then all your distributors are ending up terribly and the person like overseeing the Asia operation is an indicted criminal? it's like none of this is making any sense and you're using a really wacky auditor and then another point some people have made on Twitter

is they got a new management team well they switched CFO they got a new CEO in 2017 but the new CEO was the old CFO so the CFO who is there from 2012 to 2017 who's overseeing all these issues is now CEO

that doesn't qualify as a new management team um so there there's other issues on top of that and you can interject if you want or i can keep going but um but but they also you know received multiple comment letters from the SEC and you i so i'm going to read to you just a small portion of one go you know said the the the the the cc comments said you know we note you report a two hundred seventy three thousand dollar net loss for the six months end of June 2015 in the statement of operations. However, you report net income rather than net loss in the same period in the statement of cash flows. Please resolve this inconsistency. And the company just said this inconsistency noted by staff was an inadvertent error,

which has been corrected. And that's like all their responses to all 10 things. It's like, you're having like a million inadvertent errors in your filings. I would just find reading the filings. There would be typos and dates. They would like, they would not be updated. info from the last year and like when you see just all these typos again and again and again it's like you just lose a lot of credibility yeah fast in the business um you know they also changed the revenue recognition policy so in 2017 they said revenue is recognized when persuasive evidence of an agreement exists the products are delivered sales price is fixed or determinable and the collectibility is reasonably assured that's a pretty normal disclosure

And then in 2018, they changed it to revenues as measured as the amount of consideration the company expects to receive an exchange for transferring goods. It's like, what? So all these issues combined when you put them together, to me, suggest something really wacky is going on and the market wasn't fully picking up on it. So that's why I put this report together and it seems to have gotten an audience. yeah no no look those uh these are great red flags i i guess one of the others and this is a much softer red flag but last month they did a deal where they the company sold about 15 million or 20 million dollars worth of shares to a growth private equity firm which is very typical right like this is a company that's growing almost 100% per year uh selling energy drinks is not the same as

selling software right like you actually need to go produce the energy drinks ship it all that but as part of that deal, I think like every director also sold, in total, sold about $20 million worth of shares to the growth equity firm. And like, there's nothing, that's not fraudulent, right? Like, there's nothing wrong with insiders in the company selling. But I just can't remember any time where I've seen a company where the company and all of the insiders together sold like equal amounts of their holdings. And that worked out well. Like to me, that's just the ultimate sign like insiders are trying to get money into the company and get their money out of the company as quickly as possible if that makes sense. Yeah. And it. And,

if you look at some of the specific board members like Kevin Harrington who's on the board who's also a shark and shark tank on season one I believe he sold like 80% of his stock so this isn't like just take a little money off the table this is like sell the majority of um your position so there's a lot of insider sales going on there I was going to say something but I just um oh and then the other thing that makes no sense to me is these are any energy drinks this is a very high margin business. This should be so profitable to be selling these energy drinks. It should be out of this world profitable. But if you just look at the cash from operations segment of their filing, over the last five years, they've generated about negative $20 million in cash from

operations. And they've kind of offset that with $40 million of stock issuances. So it's like people will talk about all these different financial terms and whatever, but it's like your business isn't generating cash over the last five years like quarter to quarter it will muck around a lot because they'll be playing with the accounts receivables and stuff but over the last five years you haven't generated cash and you've needed to issue stock to generate cash even though you're selling this high margin energy drink it doesn't make sense um so that it just too much is just a muck there yeah now i had a lot of you know i i know a lot of microcup investors who've been invested in this again like it's energy drinks it's something you can see touch feel i i know a lot of

my craft investors who've been very successfully invested in this and a lot of them reached out over your report so obviously it struck something of a nerve and i think i'll dive into some of the bull bullpatch pushbacks i got but i think the most frequent one i got was yes he's pointing out of a lot of smoke right all of us saw a lot of all of us could see a lot of the smoke but he can't point to any specific fire. What would you say if I said, what would you say if I told you, hey, I get it. You're pointing smoke. You're pointing smoke. You're pointing smoke. But like, these are real products, right? Like I can go to the CBS across the street and buy it. I tweeted out today. If I look up energy drink on Amazon, the number two, behind all the promotion stuff, the number two thing that pulls up is a Celsius

energy drink. So what would you say to the bulls you're saying, you're pointing out smokes, but there's no fire and you're kind of missing the forest for the trees. Well, I would say there is a little bit of a fire, this funk food sink was an absolute fire. You can't be selling a ton of inventory to a distributor, you know, getting this a huge account's receivable balance, acquiring the distributor, then immediately marking the inventory down. You're recognizing revenue on product you didn't sell. Now, what the bull said, or one person said in a Twitter threat is, oh, that's a $2 million thing. You know, that's not a huge fire. This is a $100 million a year company. You're just finding a $2 million fire.

But, but, you know, if that's what I can find just by, like, looking at the filings on a weekend, then I'm sure there's more there that you're not getting. There's never one cockroach in the kitchen. Now, it's true that you can go buy the product. The product's good, you know, and it's probably growing in the U.S. And they've definitely done a good job with the Instagram marketing and this coronavirus stuff. You know, I would say, like, I'm sympathetic to the idea that, yeah, this company, had a ton of issues pre-2017 you know when around 2018 they got new investors the some of this stuff

started to improve maybe a little not a lot and now the u.s sales might be fully legitimate and they're growing really fast and next year u.s sales might be like a hundred million dollars and they should be trading at 20x u.s sales because they're going to get bought out at a huge multiple like all these other hot energy drinks. Like, I get that. But, but even if you believe, like, none of these issues matter and the U.S. sales are fully real, I don't think it's that cheap. Like, you know, I think if they grow like 80% next year, they're going to be at $100 million run rate. Maybe at the end of this year, I might have the number slightly wrong, a $100 million run rate in the U.S. And they're a $1.6 billion company. So that's 16x revenues. And, like, you know,

the sleepy energy dream companies that aren't growing get bought out at 8x revenues, 7x revenues. So it's like, it's not like this thing is super cheap anymore. It's also possible it's a fad. Like sometimes these things get really popular and then they don't get popular. I think everybody's assuming this thing's going to be around for the long run. But part of the reason I don't think it's like an out of this world short is because I can't prove that, you know, they're faking 30% of U.S. sales. You know, there is no fire, and that's the reason the stock's trading this elevated multiple.

But, but, but so, yeah, like, I, I can't prove that the U.S. sales are fake. You know, I'm not sure if I even believe the U.S. sales are faith, but sometimes if there's so many of these issues, you can just be like, I'm staying away from this one. So, so I get it, but. Yeah, I guess the other things I would say is like, you know, in the energy drink market, and the most frequent bull pushback was, there's no fire he's pointing to. And then a lot of the Bulls would say, hey, this is growing really fast in the U.S. Why doesn't Coke or Pepsi buy them for 10, 15 times sales? They'll cut out all the, all the SG&A. Like, he'll be hugely profitable, plug them into the distribution.

And I get that, but you know, like the energy drink, yes, it's a growing market, but there are a lot of brands out there. Like, Coke and Pepsi both have their own energy brands. Monsters out there, rain energies out there. Like, there are a lot of brands. And as you said, I don't know why Celsius is like, I don't get why Celsius has any type of defendable brand moat here and what's becoming a very crowded segment yeah the thing that scares me is i always look for shorts where i could get run over like i think the best performing stock over the last

20 years it's monster energy yeah so it's like that's another thing that that kind of concerns me is let let's say they have been playing fast and loose with the rules but they have got a real product and they somehow were able to make the biggest hit energy drink and everybody just loves celsius it's like, wow, you can really, what if this becomes the next monster? I don't know, it's food for thought. I mean, like, I'm not, I'm personally not short. And my report was titled, Problems at Celsius Holdings. I was just highlighting problems.

I wasn't saying that I never claimed that U.S. revenue was fake. I was just highlighting the facts that people admit. So, yeah, I get what the Bulls are saying. I don't think it makes much chance to me. Another thing that I do that I didn't include in the report is, you know, this is going to sound a little odd. You can see what websites a company owns or something called a reverse who is search. So if you is search shows you who owns a website or a reverse who is search shows you all the websites owned by a company or an individual. So I did that for Celsius.

And like as far as I can tell, they haven't registered a single new web domain in the last three years. and for me this has always been like a really interesting sign like growing companies register new websites it's just what you do when you grow you for whatever reason and celsius isn't doing that it's another small thing that just doesn't add up um so and you know i can't think of any right now off the top of my head but so many names with real products and real growth get blown up by playing accounting like under armor under armor was really popular There was a hot stock. I don't know how much it's down from its peak, but it's sold off a ton, not because it's

much less popular, but because it had a lot of these accounting issues and was channel stuffing, and I'm sure that if Celsius has issues, they're probably much bigger than whatever Under Armour was doing. No, that's a great point. You know, I think Crocs, which, you know, Crocs is more on the fad than Under Armour side, but Crocs ran into issues with channel stuffing, if I remember correctly. And then, you know, like, some of the points you point out, like, Monster was the best performing stock of the past 20 years, I believe. And if it wasn't, it was close enough that you

would have been very happy to have invested in. But you know, like, Monster, again, it was coming into the energy drink category where it was them in Red Bull, right? There was a lot of white space. Today, Celsius is coming in and there's Monster, there's rain, there's Rockstar, there's Red Bull, there's five-hour energy. Like, there's a, it's increasingly a, it's an increasingly mature category, even if it's growing. There's a lot of competition there. And they're going to be fighting a lot for market share, right? So I think that's one thing. And the other thing, you spoke earlier, cash flow from operations was negative. And I've looked at Monster before.

And I was thinking, oh, what were they doing? I was just kind of flipping through some 10Ks as we chatted. And they were actually, I believe they were always cash flow from operations positive, even when they were growing at really insane amounts. So I do think that does speak to another potential issue with Celsius. Like, go ask your friends who own the stock, why this company that sells a high margin energy drink has lost cumulative. $20 million over the last five years. Like, I just want, if somebody can explain that to me in English, I would, I would be more

impressed. Well, you know, I don't know if that's 100% fair because I, if you're, if you're growing really quickly, like, it might make sense because marketing expenses or expense through the income statement, right? So you could lose money because you're making these huge marketing investments and you're creating this fantastic brand, fantastic moat, like you're growing quickly. And, you know, this is why every SaaS company looks like they're losing money. because upfront they're spending, they're hiring salesmen, they're growing really quickly,

and they're getting people who have like, you know, 4X the lifetime value of what they're spending on marketing. The thing is, for Celsius, I don't think that's quite the case because there's a lot of other companies spending similar amounts of marketing dollars, but I could kind of see that argument. Fair enough, fair enough. Yeah, let's see. Anything else you want to talk about at Celsius here? There's other things I want to talk about.

I don't know if I have a, let me just see on Celsius. no there's not not much else on Celsius like you know the one thing I think if people really want to like understand the company just read the comment letters like go to the web SEC Edgar look up the SEC correspondence on Celsius read that and if you still love the company great but it's like it'll take 15 minutes and it'll give you a much newer perspective perfect perfect well this is great So Bear Cave, going to do two ideas, two ideas a month is the target? Yeah, so the Bear Cave for right now, free subscribers. They get my weekly recaps on new activist shorts.

Paid subscribers will get two ideas every month. They'll come out on the first and third Thursday every month. The first one has been Celsius. I got another $1 billion company that I think has got a lot of red flags. It's being missed that's coming out a week from Thursday. One thing that I didn't mention is I do a lot with FOIA requests. I estimate I'm about 1% of all like FOIA requests to the state attorney generals in the U.S. So that's incredible.

You're probably going to see a lot of FOIA related stuff in the future reports. I think that's really underutilized. That's really interesting. No, I agree. You know, we used to do several and we don't do as much FOIA requests anymore. But I agree, like you can do these FOIA requests and sometimes you can get information that is a lot different or it's a lot different view than kind of what you can find publicly on the SEC website or, you know, on the company's investor relation website where they're never going to disclose

some of that stuff to you. Yeah. Look, again, Edwin, thanks so much for coming on. I love the Bear Cave, excited for your next report. And, you know, next time you've got an interesting one, we'll just have to have you back on and everybody can pull up, have a Celsius, and listen to the next one. So thanks again for coming on and we'll chat soon. Thanks so much, Andrew.

Thank you.