JRJR Networks filed an NT 10Q after the market closed yesterday, giving the required statutory notice of its intent to delay filing its financial statements for the first quarter of 2016. The filing indicated that the company did not expect to file in the next five days. Additionally, there was a filing yesterday that indicated JRJR director Senator Kay Bailey Hutchinson had rescinded the JRJR stock grant from February. In the context of the company’s continued delays in filing its 10k for 2015 and its failure to provide shareholders any explanation for this director filing for the stock grant to be rescinded, it is difficult to see either of these occurrences in a positive light
We have previously lamented JRJR’s failure to communicate with shareholders. May 16, 2016 was a very important day given it was the deadline for filing first quarter financials, it was the deadline for filing the company’s compliance plan that will allow them to retain an NYSE Mkt listing, it was a day where a long tenured director filed to rescind a 94,000 share stock grant given less than 3 months ago and it was a day where the company would have to issue an additional 50,000 shares to lender Dominion Capital for going another 10 days past the 10k filing deadline. Any one of these four occurrences would usually result in some explanation being offered and the four of them together would usually result in a company taking steps to explain to shareholders why things appear to be in such disarray. As of one hour after the market opened this morning that has not occurred.
“Egregious” is the word that comes to mind to describe JRJR’s shareholder communication practices. It is an understatement to say that they must improve if they hope to achieve the company’s long term goals and it is difficult to imagine any significant shareholder value being created here until there is demonstrable change. While many Groove participants have understandably reduced their JRJR holdings significantly or completely liquidated, we know there are some who continue to hold shares and we hope that the company will take steps to keep its NYSE Mkt listing and adopt better shareholder communication practices in the near future.
A community update following the release of Inuvo’s (NYSE Mkt: INUV) Q1 results and in anticipation of quarterly results coming soon for Remark Media (Nasdaq: MARK) and Rave Restaurant Group (Nasdaq: RAVE) –
Inuvo reported Non GAAP earnings last night that beat estimates by a penny, but weakness in its core business during March caused the company to came up short on the revenue side. Despite its 8th consecutive quarter of GAAP profitability, investors were less than enthused due to comments on the call that indicated that March weakness had carried over into April and management is now expecting a weaker second quarter to result. The positive comments on the call were largely focused on the Searchlinks roll-out and the potential for big game hunting type account wins, but it appears that investors are more focused on the reported partner revenue results that came up short. While management pointed out that most of the shortfall could be attributed to the company’s acquisition of several of the better performing partner sites and this essentially moved that revenue from the Partner Network to the Owned and Operated Network side, we believe that that investors were disappointed due to an expectation that Searchlinks revenue would have grown to make up for a much larger portion of that revenue shift by now. We suggest investors remain cautious on Inuvo with a wait and see approach as we expect that future Owned and Operated revenue growth will slow and continue to be mostly offset by the additional advertising spend required to produce it, Additionally, we have viewed Searchlinks as the key catalyst for growth and from a revenue production standpoint, it does not appear that Searchlinks has gained significant traction yet. Management comments on the call suggest that they do not expect this to occur in Q2 either which means investors may have to look all the way out to Q3 to see evidence that Searchlinks is the catalyst that will take the company to the next level.
Remark shares seem to have settled into a trading range between $4.50-$5 and the trading in the stock has fallen off precipitously. The company’s acquisition of the Vegas.com assets has transformed Remark into a completely different company that is heavily impacted by online travel bookings in a concentrated geographical area. While the company continues to develop its Kan Kan and Bikini.com initiatives and it gets meaningful revenue contribution from its tax and financial domain businesses in Q2 each year, it appears that there is currently very little if any synergy between these businesses. While the monetization of the Sharecare asset could provide an opportunity for upside, we believe that investors are largely taking a “wait and see” approach with Remark as many find the long term growth story with these disparate businesses to be increasingly difficult to understand.
Rave Restaurant Group
Rave Restaurant Group’s shares seem to have found support in the $5 range and settled into a trading range between $5 and $5.50. The departure of senior VP Chris Smith following the closing of several underperforming Pie Five locations seems to have dampened investor’s enthusiasm for the Pie Five growth story. Given these closings and the upcoming Q3 earnings report where additional closings and challenging same store sales figures will undoubtedly be part of the narrative, we do not expect to see significant upside in the very near term, though we remain cautiously optimistic on the long term picture.
We are increasingly concerned by JRJR Network’s lack of communication with shareholders.
In the absence of evidence to the contrary, we are required to read the tea leaves and infer what is going on from the bits of information that are available. BDO has been serving as JRJR’s accounting/auditing firm for about a year now. There was no prior indication that the company might have any accounting issues that would require a late filing. At literally the 11th hour, the company hired a new CFO and filed for an extension, on which they indicated that they expected to file within the 15 day extension period. That day came and went with no additional new releases or filings until the SEC deadline for disclosing the deficiency letter from the NYSE Mkt due to their failure to file within the 15 day extention period. It is difficult to see this as just an extreme disregard for shareholder communication, as it also gives the impression that there may be some surprises when the 10k is ultimately filed. In our experiences, surprises that cause delays of this kind (delays that are kept under wraps until the last possible minute) are not good surprises.
While our general bull thesis could remain intact, it is difficult to know if the turnarounds (Longaberger, Agel, etc.) are progressing, if the newly acquired UK companies are delivering improved margins and if the growth trajectory of YIAH has continued to impress. These things are not knowable because there have been no financials filed that would give official numbers for going on 8 months now. Worse yet, there have been no press releases giving any indication of anything (positive or negative) with these companies with the exception of the pro forma revenue figure released a few months back. The bottom line here is that the lack of shareholder communication raises the risk profile for JRJR Networks significantly. While the current price could turn out to be a tremendous bargain (and we hope it does), we do not currently have the information that would allow us to be certain of that.
Lots of interesting things happening at JRJR, but no press release yet about earnings call date or time, leading us to wonder if the company is going to file late given that the deadline is today. Given that this is the first K filed with a new auditor, it is not that surprising that the company would be filing at the last minute or even filing late, but it is disappointing that nothing has been communicated to shareholders about a time and date for the earnings conference call by March 30. The hiring of an experienced CFO is a very positive development and will hopefully lead to improvements in many processes that will ensure that reporting is more timely going forward. We hope that communication with shareholders will be improved as well.
Trying to read the tea leaves remains difficult, as we would typically see such a delay as negative, but on the other hand we note the 8k filing this morning that announced the significant stock option awards that were priced this week. If the company was about to report a very poor quarter or if they had material issues that might drag the full year audit out for an extended period, you would think that they would wait until later to price those options on the expectation that the stock price would fall and the options grant could be at a lower price.
Last week’s release of the reported short interest indicated a decline of nearly 45% and differing interpretations of the most recent naked short interest report (the first after the registrar, cusip, name change) have lead some to see the position as substantially covered and others to see noise in the figures indicating it could still be outstanding. While we were not privy to the details of that report, we would think that the recent price decline despite positive developments at JRJR would lead most shorts to cover their remaining exposure while they have the opportunity to do so at an attractive price. We note that some of the trading this morning appears to reflect short covering. Though it is not in great volume yet, the pattern used to walk the price down has been used in several trades to buy this morning, we have not seen that occur in many months and this is a very interesting development that bears watching. Regardless, JRJR shares are very cheap again and this presents a great opportunity for investors.
Interesting trading action this week with JRJR Networks, as the stock has fallen significantly without any substantive company specific news or sector weakness and only a mildly negative broader market environment. While the price movement in JRJR Network’s shares generally over the last 30 days lends credence to our belief that some part of the naked short position may have been covered, we still believe that a substantial short interest continues to be part of the JRJR Networks story and we will be very interested to see where the REPORTED short interest count comes in after the close today.
We remain very bullish on JRJR Networks stock and believe that the Q4 report that should be filed within the next four trading days will put an end to what has been nearly six months of negative rumors about the company’s operations that have negatively impacted the stock as short sellers and those with an axe to grind took advantage of the vacuum of information by injecting rumors of all sorts of operational hazards and corporate misdeeds into that void. We believe that JRJR Network’s management has consistently chosen to take the long view, ignore the naysayers and keep their nose grindstone for the purpose of delivering results that will silence the critics. We are excited to see what that laser like focus on producing results will bring with the Q4 report, as we expect to see a company with improving margins and a vastly improved bottom line to go with the tremendous top line growth the company pre-announced. We believe the loss reported in Q3 (11 cents) will be more than halved, with significant margin improvements at Agel and Longaberger driving the company to reduce that loss to the 4-5 cent range. Anything better than that we will view as a pleasant surprise with very positive implications for the company’s momentum going forward. We note that Q1 will be essentially in the books by the time we have the Q4 conference call and we think management comments on the company’s progress could provide a catalyst for the shares to trade higher.
A question was posed by a Groove community participant and we wanted to address it here. The investors who have revealed their holdings for our calculation of the percentage of the public float that is owned by Groove readers have no agreement of any kind regarding those shares and all have made it very clear that they are acting independently, each in his own respective capacity with regard to acquiring, holding, voting or disposing of those shares. As of the most recent count, there was more than one shareholder approaching the 5% ownership threshold that would require a filing under Section 13d of the Exchange Act and all involved want to make it abundantly clear that each is acting independently and there will not be any filings or action taken as a group. Additionally, a significant number of those participating have indicated that they will not be providing updates on their holdings going forward.
JRJR Networks at yesterday’s closing price of $1.21 represents a very low valuation ($43m market cap) for a company that is clearly gaining operating momentum and will likely produce $200m or more in revenue in the current calendar year. We see many potential catalysts for upside beyond the operational results reported next week and again six weeks later and hope to get a clearer picture of what they stand on the Q4 call.
As of the open on March 14, Groove investors control over 26% of the public float of JRJR Networks shares. Discussions among several Groove participants who closely monitor the daily trading of JRJR’s stock lead to the unanimous conclusion that the trading since last Monday’s cusip change could not have put much of a dent in the outstanding short position, naked or otherwise. The NYSE Market updated the REPORTED short interest after the close of Trading on Thursday, showing a near 20% increase in the short interest to 345,277, very close to the all time high for CVSL / JRJR. Thus, the number of shares sold short appears to be increasing and the shares available in the public float that are not owned by Groove participants is rapidly decreasing.
A member of the Groove community got the opportunity to speak with JRJR chairman and CEO John Rochon last week about the YIAH spinoff proposal. While he was not willing to commit to such a move at this juncture, he was very open minded to investigating the possibility of such an offering and his comments reflected a keen awareness of the fact that the extraordinary value that has been created in YIAH is still not reflected in JRJR’s stock price. Given the revenue multiples and valuations of the most recent VC rounds of other players in the space, YIAH alone would be worth more than double the entire enterprise value of JRJR at Friday’s closing price of $1.54 per share, meaning an investor at these prices gets a piece of YIAH for 50% off of the venture capital valuation plus Agel, Longaberger, Kleeneze and Betterware for free. For those who are counting, those last four companies are fairly well established (average operational life span of over 50 years old) and have an annual revenue run rate in the $150 million range.
Thank you Mr. Rochon for taking decisive action to counter what appears to be the illegal efforts of those who would try to push down the price of our stock to make a quick profit. When we became aware of the likely reason behind what seemed to be an inexplicable (even for a micro cap stock) sell off in the shares just as the company’s operations began to be demonstrably improved, members of our community asked you to consider taking several steps to help with that situation –
1) Release Q4 numbers that would address rumors circulating that the company’s businesses had a down quarter – four weeks ago CVSL (now “JRJR”) issued a press release indicated a revenue range for the quarter of $49-$50m. The record quarterly revenue that was a 37% SEQUENTIAL increase over the prior quarter made it very clear that JRJR is not dying, it is THRIVING.
2) Change the stock symbol and cusip number to force a DTC accounting process that would require all short positions to prove a borrow. With the pre-release of Q4 numbers it was also announced that the company would be changing its ticker to JRJR to reflect the new JR Networks corporate name and that they would also change the cusip number. This will likely cause any short positions that are naked to either prove a borrow or cover. Regardless of which route they take, we believe this will make it more difficult for naked short sellers to attack our stock and we appreciate that management is willing to go the extra mile to protect shareholder value when it is necessary.
Bravo Mr. Rochon and thank you for leading a management team that hears shareholder concerns and is proactive in taking steps to protect shareholder value.
In light of the fact that JRJR Networks is still trading at a very large discount to its intrinsic value, we would also like for the board to consider undertaking a strategic review of the operations of our Gourmet Foods division, giving due consideration to the possibility of spinning off a minority stake in a Reg A+ IPO to unlock the shareholder value that has been created there and allow Your Inspiration at Home (hereinafter “YIAH”) to be valued based on its growth and prospects as a standalone. We believe that such an offering would be well received by investors generally, given the valuations accorded to similar companies that have achieved growth at the rates YIAH has delivered the last two years and also in light of the fact that it would be the first pure play in the gourmet food kit space.
Company 2013 2014 2015 2 Yr Growth Rate
Hello Fresh $19.2 $77.0 $290.0 1 1510%
YIAH $1.5 $8.4 $22.5 1520%
Though relatively new, we believe the Reg A+ crowdfunded offering process is ideally suited for a company like YIAH for the following reasons:
1) YIAH/MSK has a built in base of potential YIAH shareholders who would likely buy a very significant percentage of the shares offered and hold the shares long term based on their personal connection to the company’s products and services. This highlights one of the best reasons for a Reg A+ approach vs. selling those shares through a brokerage firm whose prime customers will just flip it soon after the offering is that we let the people who believe in the company and use its products get the benefit of the “IPO Pop” or increase in price that will likely occur when the stock begins trading. This rewards those early adopters for the role they will play in the company’s growth, builds greater affinity for the brand and has the potential to create many new “brand evangelists”.
2) New Sales Rep Incentive – while we are raising capital for a US roll-out, the ability to offer shares in an upcoming IPO would be unprecedented in the space and given the enthusiasm of consumers and venture capitalists for Blue Apron, Plated, Fresh Express and other companies in the space, the ability to own a piece of the first pure play stock in the gourmet food kit business might be enough of an incentive to bring in many new sales reps for YIAH.
3) New Customer Incentive – while we are raising capital for a US rollout, the ability to offer shares in a hot IPO to all customers who sign up as of x date would be a very unique incentive. Blue Apron, Hello Fresh , Plated, et al are all really cool services, but you can’t own stock in them. Why not join one that lets you own a stake in the company when you use their service?
To be crystal clear, we believe a significant percentage of the initial shares offered should be first made available to YIAH reps and customers, followed by the 70,000 JRJR Networks reps from other owned companies and then existing JRJR shareholders. We also think that shares allotted for sales reps and customers that are not taken by them should then be offered to JRJR shareholders before allowing those shares to be made available to investors generally.
We have been watching with great interest as one of the first companies (ELIO Motors – OTC: ELIO) to make use of the Reg A+ rules for an IPO began trading for the first time over the last few weeks. After raising $17m by offering their customers, employees and small investors (6600 people bought shares in the IPO) the opportunity to buy shares at $12, the shares began trading February 19 in the teens and in the days that followed saw its shares soar to levels that value the company at well over $1 billion. The stock has since settled in to a trading range that is slightly lower, but still values those shares at more than double the IPO price the initial investors paid for their shares. We note that an offering of YIAH at a 2-3x revenue IPO valuation represents a significant discount to what the venture capitalists have been paying to take down stakes in Blue Apron, Fresh Express and Plated where the most recent valuations have ranged from 5-10x revenue.
We believe the Reg A+ process is uniquely well suited for a direct sales company and in particular one that has such a significant social component to it in a very hot space. The demand for shares in the first gourmet meal kit pure play would likely boost the revenue of the underlying business as the exposure in the financial and mainstream media would also do much to drive customer and sales rep additions. The potential for post offering upside in the share price will give even more incentive to the sales reps and potentially attract more customers to YIAH. The Reg A+ process appears to be the most efficient way to raise capital, with much lower fees than a traditional offering and it taps into an existing source of capital that is eager to invest and use their own resources to help the company succeed vs. very high fees and a new base of owners who might be quick to dump the stock or in some cases even make bets against the company. Additionally, the “Testing The Waters process” allows us to gauge the demand for an offering by soliciting indications of interest before committing to proceed with the offering.
In summary, we believe a Reg A+ IPO for a 25-33% stake in YIAH to raise $15m or more to fund the launch of YIAH in the US and for JRJR to acquire other incubation opportunities should be given due consideration. And while it might make sense for JRJR to retain the full stake in YIAH that is not sold, we think the company should also give due consideration to distributing up to 33% of the new YIAH shares to existing shareholders. Either way, we believe a Reg A+ IPO for YIAH could galvanize the customer base, generate significant new exposure that could drive customer additions and do much to unlock the existing shareholder value there and scale it to new heights.