Can CVSL Inc. Avoid Bankruptcy?
Jun. 9, 2015 12:01 AM ET | 1 comment | About: CVSL Inc. (CVSL)
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
•CVSL is having a bad year as the stock hits 52-week lows.
•Sales are collapsing at most of their brands.
•Directors are leaving and the company could see sales fall off a cliff this year.
•Investors should steer clear of this troubled company.
CVSL Inc (NYSEMKT:CVSL) is the parent company to several individual direct selling brands. The strategy for success of each brand is based on growing sales organically and also through the newly acquired network of distributors for the company's umbrella of other brands. The strategy makes sense on paper. New products and new distributors should cause sales to expand in each brand. That, however, is not the case. Sales at CVSL are bad and getting rapidly worse. At the current rate of deceleration, CVSL looks destined for a bankruptcy filing in the upcoming years.
Last month the company released Q1 results. The 10-Q showed that sales are falling quickly as the acquired brands continue to implode. As sales decline, management continues keep SG&A constant due to the complex nature of the business model. SG&A remained flat while revenues declined 28% year-over-year.
There are a few specific areas of serious concern that current and potential investors need to take note of.
Liquidity - In Q1, the company was forced to dilute shareholders with an equity offering to raise $17mm. As of March 31, the company has $15.3mm left in cash and short-term bonds. Much of the cash is restricted to operating expenses and debt covenants. With $1.4mm coming due in the next few months, the company was forced to borrow $425,000 from the advisory firm owned and operated by the CEO. Taking small short-term loans (which the company was forced to do last summer as well) is an incredibly alarming action. At this point, CVSL is essentially relying on cash from its directors to stay alive.
Loss of Key Directors - In the past month CVSL has been party to a public legal battle between former TLC CEO and director, Tami Longaberger. Ms. Longaberger, whose father founded the company, is suing the company alleging that she is owed money because the company was not paying her salary. TLC operating results were awful in Q1 and I suspect that they will fall off a cliff in the next few months as distributors, many of whom are loyal to the Longaberger family, leave the company.
Delisting - Late last year CVSL stock peaked at $23 per share. Today, the stock trades around $1.50. Per NYSE rules, the company must maintain a minimum bid of $1. Failure to do so could result in the common stock being delisted. Losing an NYSE listing is a relatively long process but is highly probable in the case of CVSL. In addition to the poor accessibility of the shares in the event of a delisting, there is significant reputational harm. A solid reputation is paramount in attracting and retaining distributors, something the company desperately needs at this point. It also is striking that CVSL would lose their listing just one year after being listed on the NYSE. It doesn't give the impression of a capable management team when they can not hold onto an NYSE listing for a full year and the stock loses 96% of its value in that timeframe.
Legal Headaches - As noted, CVSL is entangled in a legal case against former director Tami Longaberger. The company appears to have stopped paying her salary, despite being contractually obligated to do so and has caused Ms. Longaberger to receive personal invoices for the companies owed sales taxes. As noted in the 10-k, losing a key director could (and will) cause meaningful expenses as the two parties litigate for the remainder of the year.
Extremely Poor Governance - CVSL may possibly be one of the worst corporations in America from a corporate governance perspective. The CEO owns a management company which is paid to "advise" CVSL. His firm was paid $504,000 in the first quarter and receives around $2m annually. CEO John Rochon and his son, John Rochon Jr own, or their firms, own the majority of CVSL stock with allows them incredible sway in terms of these lucrative contracts for their personal companies. There is virtually no accountability at CVSL as everyone in control of the company seems to be a family member of the CEO. The VP and director is his son and the chief counsel is his daughter. Siblings and family friends make up the majority of executive positions. Those positions come with lucrative salaries despite the company's inability to produce a profit. VP John Rochon Jr even posts future earnings commentary on his personal Facebook page, despite that being a clear violation of reg FD.
Sales - It is rather common for direct selling firms to experience irreversible sales declines that can occur suddenly. TLC has been in decline for years, way before the CVSL acquisition. The strategy, however, was to turn TLC around. In practices, sales declines have gotten worse since CVSL came into the picture. TLC sales were down a staggering 38% in the first quarter compared to the previous year. If revenues maintain that rate of decline, Longaberger will post its worst sales figures in decades with an estimated $36mm for 2015. That represents a 97% drop from the 2000 peak.
Currency - A larger percentage of sales are coming from overseas as the company bought a UK-based direct seller. In 2014, 41.8% of sales were derived overseas. In the first quarter that figure increased to 49.3%. Investors need to continue watching the Euro vs Dollar to look at the impact on CVSL's bottom line given the acquisitions of YIAH (Australian) and Kleeneze (NASDAQ:UK). CVSL does not break down sales on a geographic basis, but Kleeneze and Agel generate the majority of their revenue in Europe.
There are a growing number of material issues at CVSL and any one of the outlined concerns could lead to substantial losses for the year. With a current deficit of $37mm, CVSL is becoming increasingly capital constrained. While the analysts covering the stock place buy ratings, it seems more likely that the company will issue new shares or take on additional debt. Neither of these scenarios will be good for shareholders. Nothing about CVSL is appealing from a long perspective. Yes, it trades at less than $2 and is at a 52-week low, but there is a reason for that. There are simply too many risks to get involved in CVSL for the foreseeable future.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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For Longaberger June sales will be bad, but July should do quite well.
10 Jun, 09:53 AMReply
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CVSL vs. ETF alternatives
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Today
3 Mths
1 Yr
YTD
XLV 0.1% 3.9% 27.4% 13.1%
CVSL 0% -51.8% -94.2% -88.2%
RWJ 0% -2.6% 5.5% 0.4%
PRFZ -0.2% -2.8% 5.3% 1.9%
EES -0.3% -3.4% 4.3% 0.4%
UWM -0.3% -1.6% 19.0% 7.9%
SLY -0.6% -0.2% 10.0% 4.2%
IRY -0.7% 1.6% 13.1% 17.4%
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2. American Capital Agency's Q2 2015 Income Statement Projection - Part 3 by Scott Kennedy
3. Periodic Table Of Dividend Champions - Which Champions Have The Best Combinations Of Yield And DGR? by David Van Knapp
4. Do Nothing Investing by Sure Dividend
ETFs & Portfolio Strategy
1. EWC: Consider Choosing Canada by TheBaron Investing
2. The Vanguard Short-Term Bond ETF Is A Great Replacement For Cash by ColoradoWealthManagementFund
3. Eureka! A Valuation-Based Asset Allocation Strategy That Might Work by Alpha Architect
4. Conservative Total Return Portfolio: Sells A Winner And Welcomes Back An 'Old Friend' by Anthony Ruben
Macro View
1. April Call To Wait And Buy Gold Below $1,000 Still In Effect by Doug Eberhardt
2. Gold: 3 Key Signs Needed For An Actionable Short-Term Bottom by James A. Kostohryz
3. No Growth, No Profit, No Problem by Wolf Richter
4. Deja Vu: The Return Of The 4 Horsemen Of Tech by Lance Roberts
Can CVSL Inc. Avoid Bankruptcy?
Jun. 9, 2015 12:01 AM ET | 1 comment | About: CVSL Inc. (CVSL)
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
•CVSL is having a bad year as the stock hits 52-week lows.
•Sales are collapsing at most of their brands.
•Directors are leaving and the company could see sales fall off a cliff this year.
•Investors should steer clear of this troubled company.
CVSL Inc (NYSEMKT:CVSL) is the parent company to several individual direct selling brands. The strategy for success of each brand is based on growing sales organically and also through the newly acquired network of distributors for the company's umbrella of other brands. The strategy makes sense on paper. New products and new distributors should cause sales to expand in each brand. That, however, is not the case. Sales at CVSL are bad and getting rapidly worse. At the current rate of deceleration, CVSL looks destined for a bankruptcy filing in the upcoming years.
Last month the company released Q1 results. The 10-Q showed that sales are falling quickly as the acquired brands continue to implode. As sales decline, management continues keep SG&A constant due to the complex nature of the business model. SG&A remained flat while revenues declined 28% year-over-year.
There are a few specific areas of serious concern that current and potential investors need to take note of.
Liquidity - In Q1, the company was forced to dilute shareholders with an equity offering to raise $17mm. As of March 31, the company has $15.3mm left in cash and short-term bonds. Much of the cash is restricted to operating expenses and debt covenants. With $1.4mm coming due in the next few months, the company was forced to borrow $425,000 from the advisory firm owned and operated by the CEO. Taking small short-term loans (which the company was forced to do last summer as well) is an incredibly alarming action. At this point, CVSL is essentially relying on cash from its directors to stay alive.
Loss of Key Directors - In the past month CVSL has been party to a public legal battle between former TLC CEO and director, Tami Longaberger. Ms. Longaberger, whose father founded the company, is suing the company alleging that she is owed money because the company was not paying her salary. TLC operating results were awful in Q1 and I suspect that they will fall off a cliff in the next few months as distributors, many of whom are loyal to the Longaberger family, leave the company.
Delisting - Late last year CVSL stock peaked at $23 per share. Today, the stock trades around $1.50. Per NYSE rules, the company must maintain a minimum bid of $1. Failure to do so could result in the common stock being delisted. Losing an NYSE listing is a relatively long process but is highly probable in the case of CVSL. In addition to the poor accessibility of the shares in the event of a delisting, there is significant reputational harm. A solid reputation is paramount in attracting and retaining distributors, something the company desperately needs at this point. It also is striking that CVSL would lose their listing just one year after being listed on the NYSE. It doesn't give the impression of a capable management team when they can not hold onto an NYSE listing for a full year and the stock loses 96% of its value in that timeframe.
Legal Headaches - As noted, CVSL is entangled in a legal case against former director Tami Longaberger. The company appears to have stopped paying her salary, despite being contractually obligated to do so and has caused Ms. Longaberger to receive personal invoices for the companies owed sales taxes. As noted in the 10-k, losing a key director could (and will) cause meaningful expenses as the two parties litigate for the remainder of the year.
Extremely Poor Governance - CVSL may possibly be one of the worst corporations in America from a corporate governance perspective. The CEO owns a management company which is paid to "advise" CVSL. His firm was paid $504,000 in the first quarter and receives around $2m annually. CEO John Rochon and his son, John Rochon Jr own, or their firms, own the majority of CVSL stock with allows them incredible sway in terms of these lucrative contracts for their personal companies. There is virtually no accountability at CVSL as everyone in control of the company seems to be a family member of the CEO. The VP and director is his son and the chief counsel is his daughter. Siblings and family friends make up the majority of executive positions. Those positions come with lucrative salaries despite the company's inability to produce a profit. VP John Rochon Jr even posts future earnings commentary on his personal Facebook page, despite that being a clear violation of reg FD.
Sales - It is rather common for direct selling firms to experience irreversible sales declines that can occur suddenly. TLC has been in decline for years, way before the CVSL acquisition. The strategy, however, was to turn TLC around. In practices, sales declines have gotten worse since CVSL came into the picture. TLC sales were down a staggering 38% in the first quarter compared to the previous year. If revenues maintain that rate of decline, Longaberger will post its worst sales figures in decades with an estimated $36mm for 2015. That represents a 97% drop from the 2000 peak.
Currency - A larger percentage of sales are coming from overseas as the company bought a UK-based direct seller. In 2014, 41.8% of sales were derived overseas. In the first quarter that figure increased to 49.3%. Investors need to continue watching the Euro vs Dollar to look at the impact on CVSL's bottom line given the acquisitions of YIAH (Australian) and Kleeneze (NASDAQ:UK). CVSL does not break down sales on a geographic basis, but Kleeneze and Agel generate the majority of their revenue in Europe.
There are a growing number of material issues at CVSL and any one of the outlined concerns could lead to substantial losses for the year. With a current deficit of $37mm, CVSL is becoming increasingly capital constrained. While the analysts covering the stock place buy ratings, it seems more likely that the company will issue new shares or take on additional debt. Neither of these scenarios will be good for shareholders. Nothing about CVSL is appealing from a long perspective. Yes, it trades at less than $2 and is at a 52-week low, but there is a reason for that. There are simply too many risks to get involved in CVSL for the foreseeable future.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
245 people get CVSL breaking news and analysis by email alert.
Get email alerts on CVSL »
Share this article with a colleague
0
in
Share
.
About this article Expand
More articles by Duane Bair »
Youngevity Is On The Edge Of Implosion
• PRO • Fri, Jul 17
Is Nu Skin The Next Avon?
Tue, Jul 14
Could Bridgepoint Be The Next For-Profit To Fold?
• PRO • Fri, May 22
Can LifeVantage Continue As A Going Concern?
• PRO • Tue, May 12
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• PRO • Wed, May 6
CVSL articles from SA PRO
CVSL Inc. Is In Trouble
• PRO • Thu, Apr 30
CVSL Is Embarking On An Ambitious Roll-Up Strategy
• PRO • Thu, Feb 20
Latest on CVSL
Will Undervalued CVSL Prove To Be A Multi-Bagger?
Today
Midday Gainers / Losers
Wed, Jul 8
Midday Gainers / Losers
Thu, Jun 25
CVSL misses by $0.10, beats on revenue
Tue, May 12
CVSL: The Bears Have Won A Few Battles But CVSL Will Win The War
Tue, May 5
CVSL Inc. Is In Trouble
Fri, May 1
CVSL: Roll-Up Strategy Offers Huge Value Creation Potential, Triple-Digit Returns Possible
Mon, Mar 30
Premarket Gainers / Losers as of 9:10 am
Fri, Feb 27
CVSL: The Rollup Will Accelerate
Fri, Jun 27
Comments (1)
Track new comments
78silverannvette
Comments (186)
| + Follow | Send Message
For Longaberger June sales will be bad, but July should do quite well.
10 Jun, 09:53 AMReply
! Report Abuse
Like
0
Username (*required)
Add Your Comment:
Publish
CVSL vs. ETF alternatives
ETFs
Today
3 Mths
1 Yr
YTD
XLV 0.1% 3.9% 27.4% 13.1%
CVSL 0% -51.8% -94.2% -88.2%
RWJ 0% -2.6% 5.5% 0.4%
PRFZ -0.2% -2.8% 5.3% 1.9%
EES -0.3% -3.4% 4.3% 0.4%
UWM -0.3% -1.6% 19.0% 7.9%
SLY -0.6% -0.2% 10.0% 4.2%
IRY -0.7% 1.6% 13.1% 17.4%
Dividends & Income
1. Durability Test: National Retail Properties by Brad Thomas
2. American Capital Agency's Q2 2015 Income Statement Projection - Part 3 by Scott Kennedy
3. Periodic Table Of Dividend Champions - Which Champions Have The Best Combinations Of Yield And DGR? by David Van Knapp
4. Do Nothing Investing by Sure Dividend
ETFs & Portfolio Strategy
1. EWC: Consider Choosing Canada by TheBaron Investing
2. The Vanguard Short-Term Bond ETF Is A Great Replacement For Cash by ColoradoWealthManagementFund
3. Eureka! A Valuation-Based Asset Allocation Strategy That Might Work by Alpha Architect
4. Conservative Total Return Portfolio: Sells A Winner And Welcomes Back An 'Old Friend' by Anthony Ruben
Macro View
1. April Call To Wait And Buy Gold Below $1,000 Still In Effect by Doug Eberhardt
2. Gold: 3 Key Signs Needed For An Actionable Short-Term Bottom by James A. Kostohryz
3. No Growth, No Profit, No Problem by Wolf Richter
4. Deja Vu: The Return Of The 4 Horsemen Of Tech by Lance Roberts
