Electronic cigarette and vapor pen company, Electronic Cigarettes International Group, Ltd. (OTCQB: ECIG) jumped as much as 31.50% in the early hours of trading on Friday, July 1, 2016. The vapor company normally sees average daily volumes of around 216,733 shares over the past three months. However, nearly 614,500 shares or around $124,300 in dollar volume has already exchanged hands during the early hours of trading.
To be sure, Electronic Cigarettes International Group, Ltd. (OTCQB: ECIG) has had a very tough start to 2016, where the company reported very poor first quarter earnings that were well below expectations and lack of working capital is giving investors headaches. However, Electronic Cigarettes International Group, Ltd. (OTCQB: ECIG) could be subject to a takeover by Big Tobacco.
Earlier this year, British American Tobacco purchased vaping company Ten Motives, for $75 million. The good news for Electronic Cigarettes International Group, Ltd. (OTCQB: ECIG) is that they are generating millions of more dollars in sales than Ten Motives was able to produce. Here is an article detailing of the possible takeover rumors:
The bottom fell out from under Electronic Cigarettes International Group Ltd (OTCMKTS:ECIG) in May after disappointing earnings. Shares then made fresh 52 week lows in early June and have been attempting a comeback ever since. Now it looks like the dip buyers have returned and shorts are starting to cover on the basis that the company is in the midst of a turnaround.
Electronic Cigarettes International Group is dedicated to providing a compelling alternative to traditional cigarettes for the more than 1 billion current smokers around the world. ECIG offers consumers a full product portfolio that incorporates product quality and the latest technology. The Worldwide Vape Products Market is expected to reach approximately $32.11 billion by 2021.
One of the problems with e-cigarettes is that there’s a debate over their benefits since the effects of vaping on the human body are not yet fully known. However, they are considered less toxic than traditional tobacco cigarettes because they produce vapor instead of smoke. They are considered as an effective method that helps smokers quit smoking, though there is no scientifically grounded evidence for this.
First quarter 2016 net sales increased 1% versus 2015 to $11.7 million, despite unfavorable foreign exchange movements of $0.3 million and a forecasted decrease of unprofitable Vapestick sales. Gross profit was $6.6 million versus $6.4 million in the first quarter of 2015, an increase of 5%. Gross profit margin increased 2% quarter-over-quarter, despite the impact of the new royalty payment, which began in Q1 2016. Adjusted EBITDA was negative $1.5 million in the first quarter of 2016 versus a negative $4.2 million in the first quarter of 2015. CEO Dan O’Neill said:
“The first quarter revenue growth was disappointing, reflecting the company’s lack of working capital to fund certain growth initiatives and also due to falling behind schedule to expand internationally from the UK. Management changes have been made to narrow individual responsibilities and increase operational focus. Changes to the current capital structure are being explored with the objective of reducing interest payments and therefore increasing cash available to fund ECIG’s profitable growth opportunities.”
It’s the company’s lack of working capital that has investors worried. ECIG will have to do another capital raise or covert some of its debt to stock and dilute existing shareholders. The lack of working capital has also had an impact on the things the company needs to do. CEO Dan O’Neill said:
“The first is lack in available cash to fund growth. The exceedingly high interest rates of 12% and 8% on our debt is extremely challenging, there is no question about it. It restricts are build even brand building activity, in not only the UK where it’s critical but also in the U.S. The investments should in the form of showed up and where we could see lack of ability to invest came in new product activities, staffing to support kiosk growth or staffing to drive international expansion.”
In spite of these weaknesses, we believe ECIG is a great acquisition target for Big Tobacco. In the UK, Ten Motives was purchased this year by British American Tobacco for $75 million. The key here is that ECIG is doing a millions of dollars more a year in sales. We could easily see a Big Tobacco player acquiring the equity in ECIG and then using their fortress like balance sheets to restructure ECIG’s debt and pay a fraction of the interest ECIG is currently paying. ECIG is currently burning $2.5 million a quarter on interest payments alone.
Currently trading with a market cap of $12 million, ECIG is an exciting story among OTC stocks. The e-cigarette market has tremendous growth potential. They remain a small part of the overall tobacco market and Well Fargo is expecting the sector to grow to $10 billion by 2018 and to $32 billion worldwide by 2021. The key for ECIG is getting some breathing room on its balance sheet and reducing its interest payments. Then we will see the turnaround really take shape. We will be updating Insider Financial as soon as we know more. For continuing coverage on ECIG, sign up for our free newsletter today and get a free ebook as an added bonus!
Disclosure: We have no position in ECIG and have not been compensated for this article.