Electronic Cigarettes International Group Ltd (OTCMKTS:ECIG) was once the darling of the small caps as investors got excited about the electronic cigarette market. This is because the electronic cigarette industry is one of the fastest growing consumer goods categories worldwide. After all, the world smoking market is enormous and e-cigarettes offer basically all the good stuff about regular cigarettes but none of the bad.The problem is that lately electronic cigarettes have gotten a bad rap. A government sponsored study by scientists from Harvard University found a link between chemicals used to give candy flavoring to e-cigarettes and a dangerous health condition called "Popcorn Lung." A high percentage of the flavored liquids used in e-cigs contained the dangerous chemical diacetyl.As a result of this negative press, E-cigarette sales growth is down in recent months, while sales declines for traditional cigarettes have moderated to better-than-anticipated levels, according to industry data. Wells Fargo analysts Bonnie Herzog thinks some consumers have become "disenchanted" with e-cigs and returned to cigarettes. Cigalikes sales have also slumped over the last month. Further pressuring prices, manufacturers are reporting a backlog of e-cigarette inventory.However, we think the tide is turning for the industry and that ECIG will be the prime beneficiary. The thing to keep in mind is that ECIG is a turnaround story. The old management made a series of strategic blunders that new CEO Dan O'Neill has had to fix. Most importantly, he had to repair the balance sheet. The most recent deal is a $9.0 million term loan financing with one of the Company’s long-term existing investors. The principal use of the proceeds will be to fund the recently announced settlement agreement with Fontem Ventures and to satisfy prior debt obligations. The Company issued 45.2 million warrants as a component of the financing, with an exercise price of $0.25 per share. CEO Dan O'Neill said:
"This latest round of financing once again reflects strong investor support for ECIG and further right sizes the Company’s financial position. The new capital enhances the Company’s flexibility to pursue various growth opportunities both domestically and internationally, including the expansion of essential marketing and distribution capabilities. With a stronger balance sheet, the Company continues to make progress against the six strategic pillars and is now better positioned to achieve long term profitable growth.”
Resolving the issues with Fontem Ventures was important for ECIG. Management can now focus on growing the business. Under the terms of the settlement, Fontem Ventures granted Electronic Cigarettes International Group, Ltd., a non-exclusive royalty-bearing global license under the patents asserted in the litigation and certain other e-vapor technology related patents.
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Growing the business is key. The good news is that management has been making progress. In the third quarter, net sales increased 28% sequentially from $12.0 million to $15.4 million reflecting the impact of the company’s turnaround program. Gross profit increased 49% sequentially from $6.2 million to $9.3 million, reflecting an increase in gross margin of 8%. Net income for the third quarter of 2015 was $9.2 million, or $0.09 per diluted share. As CEO Dan O'Neill said:
“The results of the overall business continue to improve, driven by the relentless focus and commitment of the new management team to enhance the base fundamentals of the company. At this time I do not foresee any reason that this improvement should not continue in the near future. Additionally, following the previously announced strategic review, the company has identified numerous opportunities and remains well-positioned to grow profitability.”
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Currently trading at a $17 million market cap, ECIG is an exciting story on the OTC markets. ECIG offers consumers a full product portfolio that incorporates product quality and the latest technology. The company is targeting the world's 1 billion smokers and is offering them an alternative. That's what gets investors so excited about ECIG. The market potential is enormous and the upside limitless. ECIG has been working hard to expand its points of distribution in the hope of capturing more and more smokers. We will be updating Insider Financial with latest on ECIG as the story develops. Be sure to sign up to get the latest alerts.
Disclosure: We have no position in ECIG either long or short. We have not been compensated for this article.
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