Just got off of the phone with VBDG.
I talked with Chris Lipp (VP-Corporate Counsel) for about 40-45 minutes. I was looking to speak with Nancy, but he did an excellent job answering my questions.
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Adsouth acquisition - Purchased Adsouth for 5.5 million shares (at $1 each) and $681k in a promissory note. With the acquisiton, they got a portfolio of products that Adsouth owned or held exclusive licenses to (Dermafresh, Hercules Hook, etc.). The real kicked of the deal was that VBDG got Adsouth's retail distribution network which opened up the company to the major retailers.
Transactional vs Retail - The company uses transactional sales as a self-funding advertising vehicle for the retail business. Transactional generates consumer demand in the products. It also validates that there is in fact consumer demand out there for the product and then the company proceeds to take it to retail distributors. Now that the products are on retail shelves, they can stay there for many years, while the company plans to only carry 2-4 products in the transactional area. As products roll off of transactional sales and into retail they gain more leverage and better margins (because they are selling more in the higher-margin retail channel). Most transactional products start out being profitable, but as demand from that form of advertising wanes, profitability fades, but retail starts to kick in and the profitability really ramps up.
Does the continuity model work? - New shipments (through continuity model) are a value proposition to the consumer. They now get (Ex.) 10 Hercules Hooks for $6 instead of $15, but the company also generates better revenues from continuity as well. While Zorbeez and Hercules Hooks do have continuity sales, they are not the ideal products to be selling through this model because they are not really consumables. On the other hand, the company did well with the continuity model with Botopical, an anti-wrinkle cosmetic product. Hot Legs (a new product that VBDG has introduced) is also the type of product that would benefit from the continuity model because it is a consumable.
Licensing agreements - most agreements have minimal sales levels that must be achieved for VBDG to remain the exclusive provider. If these aren't met, VBDG no longer has exclusivity (obviously). But if they aren't meeting their sales goals, VBDG probably doesn't want to continue selling the product anyway!
Manufacturing is all done through third parties. "Hard products" like Zorbeez, Hercules Hook, etc. are outsourced from China, while cosmetics and beauty products are produced in the US.
Earnings leverage - Leverage is expected to come from fast growing sales on a relatively fixed G&A cost base. Office leases, SEC costs, payroll, etc. should move at a much slower rate than sales.
Call center - The call center will greatly reduce costs (he didn't have exact cost differences, but I know other people on the board have mentioned them). Not only will it lower costs by bringing it in house, but it will also improve revenues. An in-house call center has greater incentive to sell their own company's products than a 3rd party that could really care less if they help someone change their mind about cancelling a product order or with a customer service issue. The guy that is in charge of the call center worked with Ronco's bringin their call center in house and it became a real profit generator for that company.
Real Estate - Real estate is a legacy business that the company inherited when they merged. They are actively looking to sell their Conneticuit property and (I believe) that this is more likely to happen when the NOLs associated with property expire next month (November).
Why is a consumer products company seasonal? - While it doesn't make sense that a retailer would buy more beauty products or Zorbeez, etc. because there logically shouldn't be any more demand than the rest of the year, retailers actually have larger purchasing budgets in the 4th quarter. Generally, people spend more money in the 4th quarter anyway (I guess because they're just in the spending mood).
New products account for about 80% of revenues, but this will likely drop as they focus more on retail which has much longer shelf lives.
All of the company's cash is immediately invested back into inventory. While the company will continue to grow becoming cash flow positive will be difficult with such rapid growth.
The company is planning to restructure its balance sheet in the near term. Ideally, they'd like to have the BFI financing along with a subordinated debt and that would be it. (I explained that it would greatly simplify the VBDG story if they simplified the balance sheet...he really agreed that it was difficult.)
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Overall, I was very impressed talking with Chris, he really knew about his company and gave very logical answers to my questions. If he is a good representative of the rest of management, then VBDG's definitely passes my management test. I believe we'll see a double from here easily.
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