Archive for January, 2016
As of the open on January 29, Groove participants now control just over 15% of CVSL’s public float. As mentioned in our last update, a very significant percentage of these shares have been acquired over the last two months as CVSL (NYSE Mkt: CVSL) shares have been hit very hard by selling that seemed to be at odds with we believed to be an increasingly positive outlook for the company’s operations. Yesterday’s midday press release from CVSL confirmed each part of our buy thesis –
1) CVSL’s operations are not faltering, they are hitting on all cylinders. Management confirmed that they expect to report revenue between $49-$50m for Q4, representing a 35% sequential increase over Q3 and a 50% gain over last year’s Q4 top line. We believe CVSL will report a stronger bottom line as well with significantly improved margins and numbers that will give a strong indication that the company is poised to achieve profitability in 2016.
Groove participants should understand that the most important aspect of yesterday’s report may just be that they actually released it and that is for two reasons –
1) We know that they are not deaf to shareholder concerns like so many companies are these days and
2) the information vacuum that existed since the end of Q3 had allowed short sellers and others who had an ax to grind spread many negative rumors about CVSL that seemed to catch a following as the stock continued it’s descent. During Q3 CVSL stock had traded in a range between $1.50 and $3 before closing at $1.67 on Sept. 30. Since that time the stock has fallen significantly and even yesterday was still trading in a range of $1 – $1.15. Such trading action is not uncommon for a micro cap stock that is falling on hard times but we now know that CVSL’s financial and operational performance and outlook improved significantly in Q4. SEQUENTIAL quarterly revenue gains of 35% prove that CVSL’s operations are doing quite well and while we do not expect the company to report a GAAP profit yet, we believe the bottom line will also show dramatic improvement in margins and give clear evidence of a company moving much closer to a bottom line profit.
2) The company’s plans to change its name, ticker and cusip number are more than encouraging. Not only does it take a Groove submitted suggestion for flushing out the naked short position, it goes a step or two further and represents a very serious company commitment to eradicating such illegal activity. The “prescription” that was mentioned in a previous post appears to be under way as of noon yesterday and we are confident that it represents only the opening salvo in what will be an ongoing series of actions taken by management to require trading in its shares to be executed within the allowable regulatory structure. Thus, yesterday’s announcement not only confirms that the company believes the naked short position still remains outstanding, it makes it unequivocally clear that they are moving forward with the “prescription” for curing such ills.
Groove participants who bought CVSL shares on our original recommendation in June of last year should consider doubling down as soon as possible. That buy rec came at a time when the company was about to report just over $50m in revenue for the first six months of the year and they have grown to produce that in a single quarter just six months later. The eye opening growth and the many significant questions facing this management team (and even the model itself) that have been answered since our original report make CVSL worth substantially more than it was, arguably even a multiple of the value it held then. We believe that the buyers who will emerge based solely on the increasingly remarkable value proposition that CVSL shares represent will cause the shares to move substantially higher over the coming weeks and months. And with Groove participants already owning over 15% of the public float, this move higher may be accelerated and exacerbated by a DTC inspired buyer of at least 2 million shares working against a hard deadline.
As of the open on January 21, Groove participants now control approximately 1.65 million shares or approximately 14% of the public float. A significant percentage of these shares were acquired over the last 30-40 days as CVSL shares have been hit very hard by selling that seems to be at odds with we believe to be an increasingly positive outlook for the company’s operations.
We note that CVSL’s stock has always been very volatile and this was particularly true around this time last year when it was also much more illiquid. At the time CVSL had serious cash flow issues, leadership issues at two of its largest divisions, declining sales at two of its largest divisions and was in the unfortunate position of needing to raise capital to close a transformative acquisition (Kleeneze). During that “perfect storm” CVSL stock traded mostly between $6 and $8 per share with peaks and valleys of $10 and $5.65. Now CVSL is trading at $1.04 and the following is true –
1) CVSL now has a strong balance sheet with enough cash to buy the entire public float at a 20%+ premium to yesterday’s closing price
2) We believe CVSL is on a revenue run rate that could be in the $190-$200m range for 2016 vs. what was an $80m run rate one year ago.
3) CVSL was able to close the Kleeneze acquisition and has since made a second acqusitions of a very similar (in size, geography and long standing tradition) company that should allow for tremendous synergy and expanded profitability for the combined companies.
3) the “leadership issues” of early 2015 have been resolved with new leadership in place at both companies that were experiencing such problems
4) we believe each of those divisions will show sequential improvements in revenue, ebitda and growth in sales reps, giving strong evidence that the new leadership is making a very positive difference and management’s turnaround plan is working.
5) We believe the company’s YIAH division will continue to show remarkable growth, making CVSL’s highest margin division not only its fastest growing but soon to be top 3 among revenue producing divisions at CVSL. The growth rate at YIAH make it among the fastest growing direct sales companies worldwide.
6) We believe that the company will outperform anaysts top line estimates that average just over $49 million in revenue for Q4. Thus, analysts are predicting almost 50% YOY revenue growth and 34% sequential growth, but we believe they will top even those numbers and show dramatic bottom line improvement that will make it obvious that the company is on track to reach profitability in 2016.
7) In addition to the significantly stronger financial and operational outlook for CVSL, the economic conditions are increasingly improving worldwide for direct sales businesses. As economies in Europe and the US start to slow down, there is always an increasing number of independent consultants for their direct sales businesses.
In summary, in the course of one year CVSL has gone from a $6-$8 stock with very serious financial and leadership issues to a $1 stock with extreme financial flexibility and each of the issues demonstrably resolved. Additionally, current economic conditions are increasingly conducive to growth for direct sales companies, as slowing economies in the US and Europe have historically resulted in significant growth in the number of people signing on as independent sales consultants and this fact plus anecdotal evidence leads us to believe that we will increasingly see this in CVSL’s numbers. We have noted previously the discovery of a very large naked short position in CVSL shares and we believe that remains outstanding. This is potentially a huge positive for CVSL investors at current levels, as buying to cover even a small percentage of that many shares would push CVSL much higher very quickly. And last but not least, one of the Groove community’s more active participants in the CVSL trade will be meeting with management in Dallas later today, someone who (like the rest of us) is heavily vested in the performance of CVSL’s stock and would like to see the company take several specific steps to enhance shareholder value.
The GrooveVC “Call to Action” for CVSL Management that was published earlier this week led to the opportunity to speak directly with CVSL Chairman John Rochon and Investor Relations head Tucker Gagen about our concerns. Mr. Rochon was very receptive and said that he understood our point about speculators spreading a number of negative narratives, including one that suggests that the company is on the verge of reporting a subpar Q4. He indicated that while he was obviously unable to speak of specific numbers, he was “very pleased with the company’s performance during Q4” and indicated that he was working with BDO to see if we can get the report released earlier than usual. He also addressed each point that we made and confirmed that the company has more than enough cash on hand to buy back the entire public float of CVSL at a significant premium to current prices. Mr. Rochon said that the stock is trading at a level that does not believe “…in any way represent what the company is worth” and that this is simply what can happen with a micro cap stock when a speculator is making a move he thinks the market can not counter to try to make an easy profit.
Additionally, Mr. Rochon indicated that the company is very aware of the 2 million share naked short position and he said that there is a “prescription” for dealing with an aggressive naked short position that includes some of the steps we suggested plus a few more and he made it very clear that he believes the prescription can cure the problem. In discussing what can happen when a naked position like this is uncovered, Mr. Rochon pointed out that these steps will cause a speculator to have to prove that there is a borrow and he alluded to a nearly identical situation that occurred when he was on the board of a very small coffee company. That company (YGYI) company had only $5 million in revenue and a $27 million market cap when the short position was discovered. In Mr. Rochon’s words “…we were in exactly this same situation and by the time the guy covered we had an $800 million market cap.” It is interesting to note that CVSL had the exact same market cap ($27 million) as that small coffee company just 48 hours ago when we posted our management “call to action”, even though CVSL has a revenue run rate of $150 million vs. YGYI’s $5 million in revenue when that short position was uncovered.
The bottom line here is that CVSL is keenly aware of the naked short position, they are very familiar with the “prescription” for dealing with naked shorts and there is a great example of what that looks like when it occurs. My overall takeaway from the conversation was that our “call to action” is being answered, that Mr. Rochon and the board knows exactly what action needs to be taken to cure the situation and that we might start to see that prescription get filled very soon.
We believe that CVSL’s stock price (currently trading at 80 cents) is a short term anomaly and that it is currently trading well below any valuation that could be rationally based on its assets, operational performance or growth trends. CVSL’s stock exhibits all the signs of a stock that is under heavy attack by short sellers. We believe it is time for action to address this situation and wanted to provide the community an update on where we stand with CVSL –
1) We have confirmed in a conversation with CVSL’s investor relations department that the original 2 million share short position remains largely intact, with only 50,000 shares covered as of the most recent measure (Dec. 29, 2015) provided by the company’s share surveillance firm Share Intel. Additionally, it appears that a second naked short position by a different entity may have been established for approximately 500,000 shares, which would bring the total naked short position as of December 29, 2015 to 2.45 million shares.
In the nine trading days since that report was issued by Share Intel (the surveillance firm hired by CVSL), CVSL’s share price has fallen an additional 20% leading us to believe that there has likely been no covering of that short position and more likely that additional shares have been sold short.
2) We believe that there are a number of false narratives being spread about CVSL and its owned companies and that this negativity in addition to the large and growing naked short position are pushing CVSL shares lower.
3) In an informal survey of Groove participants we compiled over the last few days, we learned that at least 11% of CVSL’s 11.8m share public float is now controlled by Groove participants and more than 25% of that stake has been acquired over the last 30 days. Thus, while the short sellers have been amassing a naked short position equal to 4 – 5 weeks average trading volume, Groove participants have been scooping up shares at these lower prices making the float situation that much tighter.
We believe there are several things investors should consider –
1) Record Revenue / Closing on EBITDA Positive – We believe that the company just finished a quarter that will be the largest revenue quarter in its history and that the company may be very close to achieving its first EBITDA positive quarter.
2) Large Cash Position – We believe that the company finished the year with over $14 million in cash, enough to buy back the entire public float at a very large premium.
3) 1 Million Shares Taken Back – In a conversation with CVSL Chairman John Rochon, we questioned the issuance of 1 million stock options a few months back that we believed would be too dilutive given how low the stock was trading (which was just over $1.50, about 90% higher than yesterday’s close). We are very pleased to note that our concerns were alleviated when those shares were taken back, as the issuance of those options were rescinded last week. (link to 8k). We want to commend management for hearing our concerns and taking affirmative action to protect shareholder value in this way. We believe that any management action that in any way suggests the value of a share of CVSL might be below $3 is wrong and there should be no shares sold below that level.
3) Conference Call – We are working to schedule a call with CVSL Chairman John Rochon this week to discuss additional steps that we would like to see the company take to protect shareholder value, including but not limited to –
A) Board authorization for stock buyback –
At current prices, CVSL’s balance sheet and cash flow would allow the board to buy back the entire public float (11.8 million shares) at a 50% premium ($1.20 / share) to the current share price of 80 cents. While there are restrictions that would make open market purchases of that many shares difficult to do without pushing the stock up to prices much higher than that, we would like to see the board take action to buy back as many of the 6.7 million shares we sold last year at $3 as possible, given what we feel is a dramatic increase the value of the company’s assets since those shares were issued and the likelihood of the company achieving profitability in 2016.
B) Aggressive Action to Halt Naked Short Selling –
We would like to see the board to take the most aggressive approach possible in dealing with the growing naked short interest that the company share surveillance firm has uncovered, including but not limited to seeking a formal investigation by FINRA, the SEC, etc.
C) No More Dilution –
Management affirmation that additional stock will not be issued below $3 unless it is currency for an accretive acquisition. At current levels, we see CVSL as the best investment in the space and we would like to see a quarter or two without M&A expense while the company invests in its own stock.
D) Address Rumors With Shareholders
We would like to see the early release of Q4 earnings and/or revenue figures to dispel one of the main negative rumors or if early release is not a viable option, we would like to see the company either issue press releases about happenings at CVSL or its wholly owned companies and / or schedule an open conference call to allow investors to ask questions and allow management to address current events in a bid to dispel the negative rumors.
We have made contact with the company over the last 24 hours to arrange a call to discuss these things with CVSL Chairman John Rochon and/or CVSL management and we will report what we learn back to the community after it occurs.
In summary, we believe CVSL is trading at levels that bear no relation to the publicly available information about the company’s assets, operations or prospects. From every source available we have seen only positive indicators of where CVSL and its businesses are performing and trending with some indicators suggesting things are extremely positive. We believe the stock will rally sharply when the company takes action to address the short selling situation and also when investors begin to understand that CVSL is actually performing quite well. We believe that CVSL trading below $1 is ludicrous and that the ability to buy shares at these levels is likely a fleeting opportunity.