NewAge Inc (fka NBEVQ) (NBEVQ)

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Brent Willis is the Chairman and Chief Executive Officer of ECIG. Prior to Victory, Mr. Willis operated as the Chairman and Chief Executive Officer of a portfolio of companies including Liberty Ammunition, a leading lead-free ammunition company, Throwdown Industries, a leading mixed martial arts company, and a start-up medical device company. Mr. Willis continues to own a significant equity stake in each of these firms.

https://www.crunchbase.com/person/brent-david-willis


Edward Vranic, CFA
Edward Vranic, CFA
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.
ECIG Has Become A Buyout Target For Big Tobacco After Its Failed IPO
Dec. 17, 2014 11:34 AM
Summary

ECIG has declined from a stock price of $5 to $0.11 in the matter of a few weeks over concerns of the company's convertible debt and cash position.
The company's IPO was terminated thanks to these poor market conditions, but it's valued so low that it has become a buyout target for big tobacco.
Revenue growth has been strong and the CEO's guidance suggests a very good Q4 with positive EBITDA and presumably lower cash burn.
Convertible debt holders have a very strong incentive to convert at these low prices then pursue a takeover bid that is lucrative to them and other new shareholders.
Electronic Cigarettes International Group, Ltd. (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:



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.


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.



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.

I strongly believe that ECIG's plight will end with it being bought out relatively cheaply unless the CEO can find a way to maneuver the company through this working capital deficit without significantly diluting existing shareholders, including himself and other insiders, and maintain control over the company. Then the company can refuse any low-ball bids and work to gain back the market cap it had before the IPO problems cratered the stock. But even with my fairly conservative scenario where shareholders are significantly diluted and the company gets bought out for $250 million which is less than 40% of the proposed valuation of the entire company after the IPO, I still see a scenario of $0.50. That is nearly 5x upside from the current stock price versus the unlikely downside scenario of bankruptcy with shareholders being wiped out. I like the risk-to-reward profile offered by ECIG while it sits through this turmoil and I will continue to hold my position until significant price appreciation takes place.

https://seekingalpha.com/amp/instablog/1107010-edward-vranic-cfa/3561345-ecig-has-become-a-buyout-target-for-big-tobacco-after-its-failed-ipo




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