Tuesday, October 13, 2009

Vertical Branding: A Predictable Failure

In a post last March ("Applying the Altman Z"-Score Model to a Non-Manufacturing Company"), I mentioned a company called Vertical Branding (at the time it was on the OTC BB; now it's on the Pink Sheets: VBDG.PK). I noted at the time that the Altman Z"-Score model predicted bankruptcy for the firm and that when I had shared this information with the folks on the Investor Hub message board for the stock, I had gotten the Enemy of the People treatment.

A few days after that March post I was indefinitely banned from Investor Hub's VBDG message board, by a moderator who was indicted for securities fraud a few months later. After the close today, Vertical Branding released a "corporate update". Excerpt:

The company's restructuring efforts have failed to achieve expectations or intended results and the company lacks sufficient cash flow to maintain normal operations and meet its current financial obligations. The company's Board is presently reviewing the company's options for reorganization, recapitalization or other methods of deriving value from the company's assets to satisfy the company's liabilities. Because of its working capital shortage, the company has substantially reduced operating expenses by laying off all but three employees and by suspending various operations.

In this case, my getting banned for posting fact-based, bearish comments about Vertical Branding didn't do much good for those who continued to hold the stock. Investors need a site where they can post and read a full range of comments about stocks, including bearish or skeptical comments. Soon they will have one.

Update: The site I alluded to is live now: shortscreen.com. Use of the message boards on that site is free; you just need an e-mail address to sign up here.


Ted said...

As a person who lost money in VBDG, I tip my cap to your foresight:-) Nice job!

Ben said...

wow I have been posting my consipracy theories for months but it fell on deaf ears. I was the only one who has been predicting this for the last few months but held onto my shares cause I couldn't find anyone else to validate my thoughts.

EVERYONE was so bullish it swayed me to doubt my own theory and hold on.

If you were not banned - just one other person agreeing with me - would have saved me. I would have sold and saved $$$$.

DaveinHackensack said...

Sorry for your losses, guys.

That's exactly why investors need a site that minimizes the bull and highlights intelligent commentary. My company is about to launch one that does just that. Check back here soon for an announcement about that.

gilead23 said...

These were my comments on VBDG 5/12/09

I have been calling bankruptcy for some time as well

Why bankruptcy is still in the cards

Looks pretty simple really. They do get a 1 time guaranteed payment of 2.8 million over the course of the first year. After that there are no guarantees at all other than what would happen in year 4 if they decide to renew. Any revenue in years 2 to 3 is not clearly defined.

They did this in exchange for basically their entire brick and mortar business. Looks like the company is going to be strictly infomercial going forward for a one year lump sum payment plus unspecified royalties. For vbdg unspecified = poor.

One would think if it was meaningful the company would trumpet the numbers but instead they reference vague formulas. Its very possible year 2-3 revenue is trivial.

Of the 3.6 million they get in year one they are obligated to spend 900k in advertising for P2F. That brings the total down to 2.7 million. Of whats left almost all of the money is required to pay the GSM note.

Add on top of that losses in the march quarter that probably hit about 3 million dollars. Its likely book value hit a negative 10 million in the March quarter. Its safe to expect it was at least another million or so to date so figure a total hole of 11 million. 2.8 million doesn't even begin to make a dent in that.

The company will continue to have no cash and with their brick and mortar business handed away for basically peanuts its hard to see where they are going to get any money for new products or even to pay off their existing debts. This token payment bought them a little time but not much else.

When a company can't even pay their auditors the red flags resemble a Chinese parade. One might ask themselves where the audited filings are if this really fixes the companies financial problems. Audit expenses relative to millions are trivial.

The answer is they sold off the only thing that was worth anything for a few million dollars to avoid immediate bankruptcy. The idea that anyone thinks this is good news is extremely surprising.

DaveinHackensack said...

Good points, Gilead. Rawnoc is still pumping this on I-Hub, saying there's still a chance shareholders will end up with something when the dust settles. How the caboose of the capital structure won't get wiped out when the company lost 11 cents per share last quarter I have no idea.

Anonymous said...

As of 10am Eastern time on Wednesday morning, it's selling for 1.5 cents per share. Instead of getting a Diet Pepsi from the soda machine down the corridor maybe I'll buy a thousand shares.


DaveinHackensack said...

Don't forget your commission, Peter. Your commission would cost you more than the shares themselves. And the empty soda can might have a higher residual value.