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Electronic Cigarettes International Group, Ltd. (OTCQB:ECIG)
has seen its stock price and enterprise value sharply decline since October when it set terms for its NASDAQ listing. The company planned to raise $150 million at $4.50 per share, valuing it at a $678 million market cap but poor market conditions forced the company to officially withdraw its plan on December 15. Investor concerns over its debt load and dilutive conversion provisions of its convertible notes has caused ECIG to crater from the $5 range in October to $0.11 as of market close on December 16, valuing the company at a mere $9 million in market cap and $57 million in enterprise value. While the bearish argument had merit when the company was trading in the billion dollar range, at these low prices ECIG becomes a very strong buyout target. I believe the convertible debt holders are aware of this and will take advantage of the very favorable conversion terms to participate in and influence the direction of a takeover.
Excitement over the electronic cigarette market is quite warranted. E-cigarettes work by vaporizing nicotine liquid, do not contain tobacco and there is no combustion, smoke nor odor. They have become popular as the vaping process can closely mimic the act of traditional smoking but also allows consumers to have control and choice over the product as they can mix and match component devices to save money and have a variety of flavors to choose from to make the experience more pleasant. Investor and industry craze over e-cigarettes have tempered a bit as governments worry that the process will lead to increased youth smoking and even if the trend is limited strictly to e-cigarettes, they still contain the addictive nicotine drug. E-cigarettes, in theory, are meant as an intermediary step towards smokers kicking their habit or an alternative that allows them to smoke in places where it is disallowed or shunned. Increased taxation and government restrictions on advertising and places for vaping may hurt future industry growth however the estimated sales for the U.S. vapor market alone is already $2.5 billion for 2014 with global sales expected to surpass $10 billion annually by 2017.
ECIG has been aggressive in its pursuit of this market. Through various acquisitions and organic growth of its flagship Victory brand it has managed to quickly grow from $1 million in revenue in 2013 to an estimate of more than $80 million in revenue in 2014 according to a message from the company's CEO Brent Willis to a shareholder on December 15:
(click to enlarge)
This message provides important data for investors who are trying to determine if ECIG is a good speculative bet at these very low levels. The company's Q3 report showed $16 million in revenue for Q3 2014 and $31 million in revenue year-to-date. Assuming the CEO's guidance is accurate that would mean revenue for Q4 is expected to be more than $50 million. If $50 million per quarter is the starting point going into 2015, investors can speculate that the company will have revenues in excess of $200 million next year.
(click to enlarge)
The company had an operating gain of $19 million in Q3 and an operating loss of $65 million year-to-date but these figures have been greatly impacted by the change in value to the warrants as the stock price fluctuates and the goodwill impairment. Excluding those two line items the operating loss is $19 million for Q3 and $42 million year-to-date. There was a one-time charge in Q3 of $5.6 million due to the aging of inventory leading to a normalized loss of $14 million for the quarter. The CEO claims an EBITDA margin in excess of 50% and an EBITDA greater than $3.2 million although the time period for those numbers is not specified. When looking at gross margin less marketing and SG&A costs, year-to-date numbers do not suggest a positive EBITDA so investors will have to carefully review Q4 numbers to see if positive EBITDA is achieved. If so, this is a very good development as the company has grown just enough to reduce its cash burn at a time when it is running low on cash.
The bearish argument on ECIG has been a strong one in 2014. Traders with a short selling focus could have pointed to the company's high cash burn rate, the fact that a major portion of its assets are goodwill and intangibles, the high short-term debt load relative to assets and to revenue and the conversion provisions on that debt that could lead to very high dilution after a tank in the stock price as valid reasons to ride a short down from $19 to less than $1. However, I believe at 11 cents the stock price has overreacted to these issues and the CEO's email points to extremely improved operating performance.
It is imperative that investors interested in ECIG understand the terms and level of its debt and the implications on the stock price. All of the debt is short-term and must be converted or refinanced within the next 12 months. The company funded its acquisitions through short term debt expecting that the IPO will allow for it to pay off its obligations as well as fund a further acquisition that has since been cancelled. The company has $48 million in debt and another $21 million in payables against only $29 million in current assets for a working capital deficit of $20 million. Page 20 of the company's Q3 filing outlines the amount, type and features associated with each security.
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Conversion provisions for some of the notes are very favorable for the holder of these securities as the conversion rate can decline when the stock price declines or other dilutive activities take place. For instance, the 4% notes have the following conversion clause:
"The conversion price of the notes will be adjusted if the closing bid price for the Company's common stock on November 26, 2014 is below the conversion price, in which case the original conversion price will automatically adjust to 70% of the lowest VWAP in the 15 trading days prior to such date".
Since November 26 the stock has gone from $1 to $0.11 with an increase in volume, suggesting that some notes have been converted to shares and are being flooded into the market. Based on the definition above, we can assume that the conversion rate is at least $0.70 as the stock was trading in the $1 to $2 range in late November. In the event of a default, the holders of the 4% notes are able to convert at a price that's equal to 60% of the lowest VWAP during the 30 trading day-period immediately prior to the default event.
For the notes without explicit conversion instructions, I predict that they will be converted using a similar method based on market prices at the time they come due if a suitable refinancing option isn't successful. Dilution could be well in excess of 100%. The company's market cap of $9 million does not mean a lot at this moment, but the company's enterprise value - which includes the value of the company's debt - is still only $57 million so upside exists even with heavy dilution. I can foresee a resolution to the debt that involves it being converted into shares at 10 cents, or about 480 million shares. For the sake of simplicity and the fact that some debt may not be converted and some may have been converted at higher prices, my analysis will assume that ECIG will end up with a total float of 500 million shares with a cleaned up balance sheet that has little to no debt.
Big tobacco companies have been aggressive in the pursuit of the e-cigarette market although capturing market share has been difficult as consumers tend to go for the independent vaporizers in vape shops over the cigarette look-alikes made by the big companies that are more expensive and less diverse. Lorillard Inc. (NYSE:LO) acquired BluCigs for $135 million in 2012, which at the time had only $30 million in annual revenue so LO paid more than 4x its revenue for Blu.
ECIG has already surpassed $30 million in revenue for this year, should surpass $80 million in revenue for 2014 according to the CEO and $200 million in revenue in 2015 based on the pace set in Q4. A $135 million price tag would be just the starting point for ECIG and even at a share count of 500 million that would be $0.27 per share. A $250 million offer would be paying just 1.25x of ECIG's annual revenue and that would lead to a $0.50 per share offer. A $800 million offer would lead to a price of 4x of revenue or $1.60 per share.
The alternative to ECIG converting its debt at these bargain basement stock prices is a formal restructuring process or bankruptcy. The stock is certainly priced for that as it is only 11 cents away from zero. I believe this scenario isn't likely especially if the debt holders are given a deal that gives them cheap shares and control over the company. Wasting time in the formal bankruptcy process for a growing company in an industry that is desirable by large cigarette companies in order to maintain market share and reinvent themselves is not the best way to efficiently maximize investment profits.
Received a new email from the CEO Brent...
He is meeting with his BOD and Attorneys today
about the PPS and manipulation that may be going
on.
He said to read the latest filings, especially last
Q's numbers, as they obviously don't reflect where
the PPS should be. He said he cant control the
fluctuations of the Market, but they are very frustrated
at this drop. No insiders have sold one share.
They are growing leaps and bounds, and 2015 will have
record sales. He again said read last Q. It speaks
for itself how well they are doing, and growing.
A Shareholders Letter will be coming after they find
what is happening, and share their findings with everyone.
It will also detail 2014 success, and 2015 expectations.
Just to address this issue would be good to hear.
Hope this helps...
VLF
Buys pounding the Ask, then 1K sells at Bid...
Patience folks. Let it churn folks out. 1030 - 1100 she will move...
Let folks trade in and out. It will run in an hour...
Thanks Pete! I Appreciate that!
MJ Season upon us also. Timing on this is awesome!
Fundamentally, $ECIG still has $156MM in shareholder equity which comes out to about $1.50 per share with O/S at ~100MM. Some will argue that a big portion of $ECIG's assets are goodwill and that the company has considerable debt, but that is not how shareholder equity is to be assessed. Shareholder equity a relative measure of the company's overall capitalization which in this case is the value of equity issued + additional paid in capital - accumulated deficit. To this, you divide O/S.
I've noted that the company booked ~$9MM in impairment charges to goodwill as of last quarter. As long as the company continues to grow revenues and generate positive cash flow, impairment charges should remain minimal or a non-issue. The Company did not necessarily over pay for the acquisitions, they offset goodwill against issuance of common stock at a considerably higher price than where the stock is currently trading.
Another very interesting aspect of $ECIG's financials is the amount of warrants that are out there. All the warrants have been recognized as liabilities in the balance sheet. For 3 month ended September 30, 2014, the company recorded an income of $33 million in warrant and derivative fair value adjustment and another $38.3 million in income on advisory agreement warrants. Due to these adjustments, $ECIG actually recorded $37 million in book income or $0,51 per share for the quarter ended. What we can say about these warrants and derivatives for the 4th quarter is that $ECIG will book an enormous book income on all warrants out there, even bigger than what had been recorded during 3rd quarter due to the decline in the share price of its common stock!
It would not surprise me one bit if $ECIG finished the year with profits at this point.
In the meantime, the company must restructure its debt as a top priority and focus on generating revenues. The rest will take care of itself. As an additional consideration, they might want to buyback stock at this point and return them to treasury.
C/O Sooah
VLF
Thank you! Great day today my friend!
Thank you very much! All the same to you and yours as well.
Big Hugs...
VLF
Thanks! Back atcha! A Happy Birthday for me today!
I had a 400K Bid to help hold .11 Great day folks! C'yall tomorrow!
2M coming into close...
We're buying heavy into close now. Get in or get out...
Nice Bud. Hope you did well. GLTY!
Going see some Big Bids, and BIG buying coming at EOD...
Got a nice EOD coming. Watch...Have a little surprise for the shorts EOD.
There ya Go! V Move back to Dollars coming...
Then, watch for the run up at EOD...
You'd be crazy not to be in this tomorrow AM!
VLF
LOL I know, but you're so right. But, very important message in that post, and once they get it, and the light bulb goes off, they will be thinking Dollars also.
BIG V coming, and its not me!
VLF
The amount of FV adjustment made to warrants and derivatives will be determined by what the fair value of the common stock at 12/31/2014 will be. My guess is $1.50 to $1.85 range which should completely offset the enormous expense booked for advisory agreement entered with Fields to the tune of $50,164,350. The company opted to expense this during the first quarter of 2014 and a big portion of the losses for this year is coming from this particular item which, as the FV of common stock continues to decrease, correspondingly decreases alongside all warrants and derivative features embedded in the notes issued. The warrant liabilities themselves will adjust accordingly so $ECIG's debt level is not what people think they are.
If $ECIG plans to record $80MM in revenues for 2014, hence adding $50MM in revenues to the 4th quarter and we take the FV adjustment mentioned above, there stands a very high chance that the Company will finish the year GREEN. No doubt.
Let's say as an example that this dilution we're seeing increases the O/S by 50MM shares and the final O/S count at 12/31/2014 were 150MM shares. Second, we're going to use $1,50-$1.85 as the FV of ECIG's common stock for the 4th quarter which should adjust the FV of warrants/derivatives to flip the net operating result to positive for the year. This adjusts the shareholder equity to around $1.33 per share.
Extinguishing the May 2014 convertible note by diluting commons by 50 million shares is really not a bad idea because the net impact to SH equity is minimal while the overall impact to the balance sheet and P/L is very, very positive.
DD by Sooah
VLF
Absolutely!
No problem! Thanks for the info. Either way something is coming soon : ) GLTY!
Thanks Doog! Good to see you here my friend! Kudos to Z-Deville for sharing the email. I just reposted it.
Could be, If so...when its confirmed. But, News can come anytime...
Very possible we'll see a Shareholder Letter, News, and/or Form 4 Buying from the Company tomorrow into Monday.
CEO said he will respond about the great 2014 year, and going into 2015 after the S-1 is closed, which it now is, and cant wait to see what they have to say.
VLF
You will always have evil in folks, as there is no 100% positive world out there. Many just have no moral conscience
in them. Its the nature of the Beast. Literally.
Excellent Post of the day! Please everyone Read!
DD by Sooah!
The amount of FV adjustment made to warrants and derivatives will be determined by what the fair value of the common stock at 12/31/2014 will be. My guess is $1.50 to $1.85 range which should completely offset the enormous expense booked for advisory agreement entered with Fields to the tune of $50,164,350. The company opted to expense this during the first quarter of 2014 and a big portion of the losses for this year is coming from this particular item which, as the FV of common stock continues to decrease, correspondingly decreases alongside all warrants and derivative features embedded in the notes issued. The warrant liabilities themselves will adjust accordingly so $ECIG's debt level is not what people think they are.
If $ECIG plans to record $80MM in revenues for 2014, hence adding $50MM in revenues to the 4th quarter and we take the FV adjustment mentioned above, there stands a very high chance that the Company will finish the year GREEN. No doubt.
Let's say as an example that this dilution we're seeing increases the O/S by 50MM shares and the final O/S count at 12/31/2014 were 150MM shares. Second, we're going to use $1,50-$1.85 as the FV of ECIG's common stock for the 4th quarter which should adjust the FV of warrants/derivatives to flip the net operating result to positive for the year. This adjusts the shareholder equity to around $1.33 per share.
Extinguishing the May 2014 convertible note by diluting commons by 50 million shares is really not a bad idea because the net impact to SH equity is minimal while the overall impact to the balance sheet and P/L is very, very positive.
I hope all invested in $ECIG or looking to invest will review the company's financials and understand how the numbers have been compiled.
I am definitely a buyer of $ECIG this/next week because there is definitely value in this stock and company.
GL all,
BB
That's awesome! Glad to have all of you here!
Shorts working hard not to break .10...
Resistance is Futile.
Once hit, she's gone....
15M Volume First 3 Hours...
I smell Form 4's coming.........
Email From CEO Brent Willis - Thank you for your message. I can tell you that I know of no one in the company or even semi-insider that we know of has sold a single share.
Performance-wise, the company continues to deliver – better than any other company in the sector that we can compare to or know of – with sequential revenue growth in the previous quarter of >40%, and underlying EBITDA margin of >50%, with EBITDA of >$3.2MM. I can’t manage the speculators or the buyers or sellers. All we can do internally is drive the performance of the firm …which we have done going from essentially $1MM in revenue in 2013 to >$80MM in 2014.
I am pulling our S-1 today, so any actions to uplist onto Nasdaq right now (like a reverse) is not on the table – my simple plan is drive the business, deliver revenue & profit, and live to fight another day.
Brent David Willis
Chairman & Chief Executive Officer
Electronic Cigarettes International Group
14200 Ironwood Lane NW
Grand Rapids, Michigan 49534
CREDIT TO Z DEVILLE
10M Volume First Hour...
LOL Raising it my friend? ; ) Close enough. Good call.
6.5M Volume first HALF HOUR...
Yes, remove my original Sticky as there are two CEO emails up now and replace it. Thanks!
Excellent Post of the day! Please everyone Read! Sticky!
The amount of FV adjustment made to warrants and derivatives will be determined by what the fair value of the common stock at 12/31/2014 will be. My guess is $1.50 to $1.85 range which should completely offset the enormous expense booked for advisory agreement entered with Fields to the tune of $50,164,350. The company opted to expense this during the first quarter of 2014 and a big portion of the losses for this year is coming from this particular item which, as the FV of common stock continues to decrease, correspondingly decreases alongside all warrants and derivative features embedded in the notes issued. The warrant liabilities themselves will adjust accordingly so $ECIG's debt level is not what people think they are.
If $ECIG plans to record $80MM in revenues for 2014, hence adding $50MM in revenues to the 4th quarter and we take the FV adjustment mentioned above, there stands a very high chance that the Company will finish the year GREEN. No doubt.
Let's say as an example that this dilution we're seeing increases the O/S by 50MM shares and the final O/S count at 12/31/2014 were 150MM shares. Second, we're going to use $1,50-$1.85 as the FV of ECIG's common stock for the 4th quarter which should adjust the FV of warrants/derivatives to flip the net operating result to positive for the year. This adjusts the shareholder equity to around $1,33 per share.
Extinguishing the May 2014 convertible note by diluting commons by 50 million shares is really not a bad idea because the net impact to SH equity is minimal while the overall impact to the balance sheet and P/L is very, very positive.
I hope all invested in $ECIG or looking to invest will review the company's financials and understand how the numbers have been compiled.
I am definitely a buyer of $ECIG this/next week because there is definitely value in this stock and company.
GL all,
BB
Did some digging, looks likes they are...
working on a National Television AD Campaign, Will
be the very first of its kind to air on U.S. T.V.
They also were the very first to televise in the U.K
National Television exposure would be huge.
Wonder how they will present it, and what will be
different than how/what they are doing now?
; )
VLF
Nice CJ! Me too! Mid .05's...GLTU!!!