Small Cap Profits Exclusive CEO Interview's

22th April 2010

YTB International (OTC:YTBLA)

Participants

• Dominick Bianco

• Robert Van Patten

Dominick Bianco: This is Dominick Bianco, Senior Financial Analyst with www.smallcapprofits.com.  I’m here today with the CEO, Robert Van Patten of YTB International Incorporated.  Bob, I really appreciate you taking the time to discuss your company with us.  Why don’t we get started with you telling us a little bit about YTB International and a little bit about your background?

Robert Van Patten:  First, my background is I have been in the fertiliser business for 25 years as a Senior Executive; the last 10 ten years as President of the company and it’s a totally unrelated business to what YTB represents, but in the process I had been part of a public company.  We took the company private, we operated the business privately for six years and then we took the company public.  A lot of my background is similar to issues that YTB faced being a start-up company. Founded by three individuals, Lloyd Tomer, Kim Sorenson and Scott Tomer. They operated and built the business as a private company and then took the company public.  With that they faced the challenges of the economy as a lot of businesses have over the last couple of years, so because I had been in both the private and public company arena, I was brought on last year to help address some of the business issues that a young company like YTB was involved with. 

Basically the business of YTB, started almost exclusively as an in-home travel agent business where they sold the opportunity for individuals to become in-home travel agents by having access to an array of travel products, both air, car, hotel, cruises, packaged vacations through vendors like COED, Apple and so on.  What it allowed an individual to do, was to be able to market travel to friends, family, neighbours, etcetera and earn a commission on the basis of these sales.  Independent of the site owners, there was a marketing group that sold the business opportunity to people that wanted to recruit site owners and then they in turn received an override commission, the number of sites that were in there are what we call our down line.  It was a two-phased operation, a marketing group and a host travel agent opportunity for people to operate an in-home business.

Dominick Bianco: Before we start digging into a little bit of that business, can you tell us a little bit about the capital structure of YTB International?  I notice you have Class A and you have some Class B shares.

Robert Van Patten:  The shares are basically Class A which are common shares owned by shareholders and traded on over-the-counter market.  The Class B shares were a group of shares; they’re voting shares that were held by the founders and they don’t pay a dividend, but it does give the founder some semblance of control over the business and if they wanted to sell the B shares they convert to A and then they’re marketable shares.

Dominick Bianco:  They convert on a one-to-one basis?

Robert Van Patten: Yes, they convert on a one-to-one basis.

Dominick Bianco:  How many shares are outstanding currently on the Class A and the Class B?

Robert Van Patten:  Combined there are roughly 106 million shares outstanding.

Dominick Bianco:  How many of them are Class B?

Robert Van Patten: They’re 50/50.

Dominick Bianco:  The founders still own 50% of the company?

Robert Van Patten: They own a little less than that.  It’s probably closer to 40%.

Dominick Bianco:  I looked at your last quarter filings where you had the drop in revenues.  Is the drop in revenues a direct result of the decrease in the marketing group or from the actual sale of travel?

Robert Van Patten: It was primarily the fall off in travel.  In 2008 we booked over $425 million in gross revenue in travel. In 2009, (our fiscal year ends on 31st December), that travel number fell to 250 million, so because of the drop in travel we also had a drop in site owners, because it was less profitable for them to maintain the site on a monthly basis as travel fell off.  That’s just basically the implication of where the economy has been.  A lot of people have discontinued discretionary travel and as a result we felt the decline, like the airline industry has had as well as the hotel industry and so on.

Dominick Bianco:  Do you still have the multi-level marketing business model?

Robert Van Patten: We still have that model, but the change in the business model as of the start of this fiscal year was we’ve expanded our product offerings to include a shopping opportunity and we’ve done that in two ways.  We have an affiliated store network of over 700 retailers, companies like Wal-Mart, Target, Home Depot, Best Buy and so on.  They’re all part of an affiliated network that if our site owners or their customers of the site owners go through our business model to any one of those stores, the shopper can buy online and receive cash back from the vendor anywhere from 2.5% on lower margin merchandise such as clothing in stores like Wal-Mart because they’re on the lower end of the discount and then up to 12% cash back on higher margin product lines like you would find at Best Buy. 

Dominick Bianco:  Do you own that shop network or do you sublease the network?

Robert Van Patten: No, we are just subleasing it, so, we have access to that through a contractual arrangement and the reason Wal-Mart encourages that and offers the cash back to our site owners versus if you just went to the Wal-Mart website on your own is they’re obviously trying to promote online merchandising.  Last year the industry reported 3% of total retail revenue was done through the internet.  Five years ago that was 1%, so the numbers are growing and obviously all retailers are feeling that online shopping will become a much greater business activity in the future, so they incentivise a business like ours to encourage online shopping by offering the cash back. 

Then in addition to the affiliated stores, we have a proprietary arrangement with selected vendors in that we offer an organic health and beauty and cosmetic line through a single vendor.  We have a neutraceuticals line through a single vendor and we have a jewellery line, a ladies’ handbag line and a ladies’ undergarment line.  These are exclusive arrangements we have with vendors where our site owners can host home parties and focus on just selling a specific product line to a group of potential customers and for this, again, they’re paid margin, but higher margin opportunities than they would through the affiliated stores or through travel. 

As you know, in the travel space, airlines have virtually stopped paying commissions to anybody for selling tickets, so in the travel industry the margins are generated through hotels, cars, cruises, packaged vacations; they’re not made by the airline fees.  What we’re trying to do is broaden our product offering to our business opportunity owners to where they can still focus and sell travel, but in addition, they have the featured stores that they can do individual home parties with or they can offer all their customers access to the affiliated stores to where their customers can do online shopping at any of these 700 stores and they receive direct cash back from the vendor. 

Our big focus has been to diversify and not rely solely on travel for our business opportunities to be successful.

Dominick Bianco:  Based upon your quarter end in 2009, what percentage of revenues…basically what’s the breakdown of revenues between travel, charging the sales agents the monthly fees and this new business development of leasing out discount networks or rebate programs?

Robert Van Patten: We just did a beta launch of the shopping last August, so our revenues were probably less than 5% as a result of the shopping and what we sold, the majority of our revenues, are either coming from 30% travel commissions or 70% from web hosting fees that we charge the business opportunity owners. 

What we see going forward is a shift in our shopping model that as it expands  the arrangements we’ve had with the featured stores continue to grow.  We launched this new series of featured stores at a show on the 15th of January and each month since the launch we see our revenues increasing from the sale of these products and the commissions generated into our business opportunities increasing at the same time.  In the future we’re going to probably change our financial reporting to include the earnings generated from these featured stores in addition to travel.  Right now we basically report travel and we report the sale of the business sites and we’re going to change that to include the sale of the business sites along with the monthly hosting fees as one segment and then the earnings generated from both travel and our featured stores will be a second business sector.

Dominick Bianco:  On the hosting business, you’ve received some bad press, to say the least, over the last two years regarding that business model.  Since you’ve become the CEO in October 2009 what have you done to clean that up?

Robert Van Patten: In 2008 there was an action filed by the California Attorney General challenging the business model and the issue came down to the fact that because the fees we charged, we didn’t fall within the franchise law and we didn’t fall within their business opportunity law.  We were in no man’s land as far as their legal structure was concerned to operate in the state of California, so they challenged our business model primarily to determine which should we fall under, their business opportunity regulations or under the franchise regulations.  We settled with the state by agreeing to operate under the franchise model and the only difference between what we were doing versus what we do now is that when a business opportunity owner wants to buy in, there’s a 14-day wait from when they initially expressed the desire to buy versus when we actually enroll them and collect the money, so they have a 14-day cooling off period, so to speak, before they become a business site owner.  That’s what we operate and have operated since July of last year with the state of California, but because that action was prolonged, it took about eight months of negotiation before all of the issues were addressed and that model was changed in California.  It did have a negative impact on the business, because the perception was that we were doing something illegal, which in fact we were not. 

            The whole business model with this company was originally set up with legal Counsel and every docket that we produced, everything we disseminated was with legal Counsel review so we obviously felt that we were doing everything within the law of the various things that we do business in, but in California we just did not fit their model and they challenged us on it.  The day we settled with California and that was announced, Illinois filed the same action against us, that action was filed in July of 2009 and quite frankly has sat there with no response or activity by the state against us.  They felt that they should file because we were an Illinois based company, but they have not pursued any action against us and nor have we tried to force any action on the state to settle the issue because we were proven not doing anything illegal in California and we did not feel like we were doing anything here in violation of any existing laws, so we have not pursued the issue; but unfortunately there always has been a cloud over our head and we then had to deal with that in the public’s perception of doing business with us.

Dominick Bianco:  Now you said earlier…I just want to make sure I heard correctly, that 70% of your revenues came from web hosting fees and 30% from travel commissions.

Robert Van Patten: Yes.

Dominick Bianco:  Now do you pay your agents commissions for bringing in other sales agents and is that that an unlimited down artefact?

Robert Van Patten: There is a commission paid, yes to the sales rep that signs up the business opportunity owner and that down line gets a minimal piece of that commission as well.

Dominick Bianco:  Now do they receive any additional fees on the actual sale products or just for the recruiting?

Robert Van Patten: No they get for both recruiting and as an encouragement to make sure that the sales person continues to support that business opportunity owner and mentors the business opportunity owner, make sure they are aware of any new product offerings or new presentation materials that are available, any training that is available for them, monitoring the activity of their site owners that they have sold, they also receive a partial provision on either the product sold or the travel commissions generated.  They are compensated to mentor and monitor their business opportunities that they have sold.

Dominick Bianco:  Just roughly how many sales agents do you think you have right now?

Robert Van Patten: That would be considered sales agents I think there is maybe about 8,000 sales reps that have sole business opportunities and we have close to 40,000 business opportunity ownership on a month to month basis.

Dominick Bianco:  Since you have become CEO besides the litigation challenges I saw there is also a class action lawsuit by some of these agents, has that matter been resolved yet?

Robert Van Patten: The class action lawsuit was dismissed last August and then they re-filed and the judge dismissed it a second time and now they came back and re-filed in December the third time, each time modifying the charges…the first two times they were thrown out because they did not qualify as class action and the third time it was submitted the judge kind of gave them a guideline as to what they needed to file under in order for it to be reviewed by the courts.  They filed again it in January 2010, we filed a motion to dismiss in February because the grounds were basically the same as the previous two filings and it is in front of the judge now to decide whether he is going allow the suit to move forward.  If it is dismissed this time it will be dismissed with prejudice meaning that they will not be allowed to return to the court with this case.   

Dominick Bianco:  Are you glad to say that you are starting to clean up some of this litigation that has been hanging over the company and are your 40,000 sales agents or home based agents happy to hear that also.  Now, the home based agents are they located primarily in the United States in Canada or throughout the world?

Robert Van Patten: No, our heaviest concentration is the US, we have maybe 3,500 in Canada and we have a few in areas like Bermuda and Puerto Rico, but we are not an international based company as of yet.  When the litigation in California hit, the company made the decision to retreat and not pursue any other further expansion until we got all our issues resolved and behind us. 

Dominick Bianco:  We have also noticed that since you have become the CEO the general overhead and expenses have been reduced by $1.5 million, would you care to comment on that?

Robert Van Patten: Basically last year when the business declined as I mentioned from the revenue and the travel from $425 million to $250 million we adjusted overhead last year to the tune of about $6 million by reducing central office staff; then the beginning of this year we have take another million and a half dollars out of the poor expense package here at the home office and we have done that by - there were several key executives that left the company that we did not replace.  We did have one significant staff reduction at the end of January and I think we have got the overhead now structured to adequately serve our core business, opportunity owners and we can grow from this base going forward without adding incrementally a lot of overhead to support it.  We have done a lot of downsizing or right sizing as some people like to call it and we feel comfortable now that we have gotten our overheads in line with our revenue stream.

Dominick Bianco:  Okay that is very good, now would you care to comment on the recent resignation of CFO John Clagg and the corporate secretary?

Robert Van Patten: Yes those were the two key executives that I have mentioned and part of their reason in departure was when I was brought on,  the structure was that there was the three founders in key positions. We had John as the CFO and Andy Cauthen was President of the marketing group and when I came in it made six highly compensated top executives and clearly the company was over managed from a key executive standpoint and a lot of initiatives that I undertook in terms of the  rightsizing of the expenses and making some Board changes and so on, was redundant to what John and Andy’s role had been in the past.  Their decision, it was voluntary on their part to leave the company, to pursue other opportunities and I took that as an advantage to reduce the number of key executives that the company had to be more in line with what our revenue stream.  The way we are basically organized now is one of our founders Lloyd Tomer resigned as Chairman and moved to exclusively a marketing position. He is 76 years old and he likes to be in the field working with the sales organization, he did not like the administrative side of his job so he gave up the Chairman job to be exclusively in marketing and that left the company now with three key executives.  We have Kim Sorensen focusing on the travel business.  Scott Tomer focusing on the marketing side of the business and I'm focusing on the administrative side of the business. 

            We’re much better organized to take advantage of the expertise of the individuals and each is focused on their area of responsibility and as a result, I think the company is functioning a lot more efficiently as a result.

Dominick Bianco:  Now, how much debt does the company have, both long term and short term debt?

Robert Van Patten: The only debt the company has, is a mortgage on our office building of 1.6 million and a short term note for $650,000 dollars that was financed against the sale of a building that we owned and have sold, but the party buying the building had trouble finding a financial lender to close with it, so we did some interim financing against that building, but they have now since gotten approval for a mortgage. We will close on the sale of our building and not this building, but a surplus building we had and that interim note will be paid off.  Our total debt is 2.2 million from a company standpoint.

Dominick Bianco:  Of which the 1.6 is the mortgage and this other 61,000 is…I guess the short term related to the sale of the property?

Robert Van Patten: Right, exactly.

Dominick Bianco:  Perfect.  Well, is there anything else that you think our subscribers should be aware of?

Robert Van Patten: Well I think the key message that I would relay is, we have come through some challenging times and I think we’ve identified what the issues were. We’ve addressed the issues and I think we’ve restructured the business, both from an overhead standpoint, a management standpoint, but most significantly from a product offering standpoint.  But, it’s going to allow the company to move forward in a positive way and to continue to be successful in the future.

Dominick Bianco: Right.  Well, I really appreciate your time and I appreciate you sharing your experiences with us and our subscribers.

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