Electronic Cigarettes International Group (ECIG), the U.S. company behind brands such as FIN, Vapestick, Victory and VIP, increased its sales nearly 15-fold during 2014 but still recorded a loss approaching $400m.
Total revenue before adjustments for the year ending 31st December was $43.5m, compared with $3.1m in 2013. But ECIG’s net loss was $381.6m, including $144.4m in goodwill impairment charges largely relating to the FIN and Vapestick businesses, two of several which it acquired or merged with during 2014.
Nearly all of the loss came in the fourth quarter, ending a year during which ECIG shelved its plans for an IPO on the U.S. NASDAQ stock exchange.
However, gross profit – the difference between income from sales and the actual cost of producing a product – was $12m, up from $1.8m the previous year, giving a gross profit margin of 27.6%.
The difference between this positive profit figure and the large loss on the eventual bottom line will be partly down to costs such as payroll and overheads, which are ignored in calculating gross profit. For example, distribution, marketing and advertising expenditure was up from $1.4m to $10.4m, with marketing activity focused on point of sale and online.
But the firm now hopes to turn the corner rapidly.
Said executive chairman Dan O’Neill: “Every stone of the company has been reviewed, discussed and challenged. The restructuring of the balance sheet, the ability to secure both short-term and long-term financing, the changes to the board and the cleaned-up old inventory are mostly behind us.
“More importantly, we [have] obtained an internal agreement for a new global strategy setting ourselves up for 2015. Cash and profits will be the drivers, with new targets set for inventory turns, SKU priorities, in-country production, receivables and payment terms.”
Less is more
ECIG – known as Victory Electronic Cigarettes until its merger with FIN around a year ago – also recently completed a one-for-15 reverse split of its stock, which is traded on the OTC Bulletin Board market under the ticker symbol ECIG. That market is generally considered much less prestigious than the NASDAQ, and easier for a company to obtain a listing on.
As a result of the split, investors received one new share for every 15 old ones they had held, and the value of the stock increased roughly in proportion to this.
While reverse splits do not affect the total value of a company, they can be used to make its stock appear more desirable by removing the stigma attached to extremely low-priced shares.
For example, ECIG stock was worth just 13 cents per share when the markets closed on 23rd March, and then leaped to $1.84 per share when they reopened the next day after the reverse split.
What This Means: ECIG’s goodwill impairment charges are substantial enough to raise some questions about how successful its acquisitions have been.
The amount paid for a corporate acquisition over and above the value of actual assets (such as equipment) – in other words, the value of intangibles like the acquired business’s market position and its brands – is treated on a balance sheet as goodwill, and then reduced by an impairment charge if it is later considered to have been excessive.
The impairment charges for ECIG therefore imply that it paid more last year to merge with FIN and acquire Vapestick than the two firms have turned out to be worth.
And that is not the whole story of ECIG’s losses, either. Even ignoring the impairment charges, the firm still lost almost $200m on sales of around $40m.
– Barnaby Page ECigIntelligence staff