Electronic Cigarettes International's (ECIG) CEO Dan O'Neill on Q4 2015 Results - Earnings Call Transcript

| About: Electronic Cigarettes (ECIG)

Electronic Cigarettes International Group, Ltd. (OTCQB:ECIG) Q4 2015 Earnings Conference Call March 28, 2016 5:00 PM ET

Executives

Matt Steinberg - IR, The Piacente Group

Dan O’Neill - CEO

Phil Anderson - CFO

Analysts

Jeff Porter - Porter Capital

Operator

Greetings and welcome to Electronic Cigarettes International Group’s Fourth Quarter and Full Year 2015 Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Matt Steinberg. Please go ahead.

Matt Steinberg

Thank you, operator and good afternoon, everyone. Welcome to the Electronic Cigarettes International Group’s fourth quarter and full year 2015 earnings conference call. The earnings release was distributed over the wire after the close of the financial market today, which is also available on the company’s website at www.ecig.co.

Our call today will include Dan O’Neill, Chief Executive Officer and Phil Anderson, Chief Financial Officer. Following management’s prepared remarks, there will be a question-and-answer session.

Today’s conference call will contain forward-looking statements about our expected financial and operational performance. This includes results of operations, economic performance, financial condition and achievements of ECIG including statements regarding ECIG’s expectations to seek continued growth. These statements involve a number of risks and uncertainties that could cause the actual results to differ materially from our projections and include a variety of factors some of which are beyond our control. Potential risk factors that could cause these differences are described in our SEC filings include our Form 10-K for the fiscal year ended December 31, 2015; our current reports on Form 8-K and our press releases posted on the ECIG website. These documents may be obtained from the SEC or by visiting the Investor Relations section of our website.

All information provided on this call is as of today, March 28, 2016. Today’s discussion will also include certain non-GAAP financial measures, including adjusted EBITDA, reconciliations of our non-GAAP measures to the most closely related GAAP measures can also be found in our press release. As a reminder this conference call is being recorded.

At this time, I would like to turn the call over to ECIG's CEO, Dan O'Neill.

Dan O’Neill

Thank you, Matt. Welcome everyone to the 2015 year end call. Interesting to note that it’s my 12th Anniversary with -- my 12 month Anniversary with the company as of this week. So I am happy everyone is still involved in the organization. I think the success and the focus of our meeting today will demonstrate the success we’ve had in the last 12 months, 14 months. There is a number of improvements over the period. More importantly and we’re going to be talking about those specifically, but more importantly than talking about the past it is how these changes will impact our future.

First a quick look at the financial improvements that you’ve seen summarized and we’ll go into more detail both Phil and I on the press release. The revenue increased 21% versus 2014 to $54.2 million, up 9.5 million. The actual forecast we had going into December was somewhat higher than this but there were large number of returns in late December. We had actually thought we’d cleaned up most of these returns during the year, but that kind of gave us a surprise a negative impact on our numbers.

We have reiterated in the past couple of months our return policies to all customers, made sure that they’ve understood these policies and cleaned up a large amount of the inventory as I said in the trade. So we don’t expect any of these surprises in 2016. We feel quite comfortable we have them all cleaned up but we continue to get emails, or comments of accounts that we haven’t sold due in two years and we just clearly reiterate our policy.

Gross profit, we’re proud of this number more than doubled year-over-year versus the $13.2 million in 2014, and increased up to -- when moved up to $30.5 million, an increase of 17.3% a percentage increase of over 131%, not 31% but a 131% increase. Gross margin grew 26 points year-over-year and we plan to have obviously continued focus in 2016. There will be an impact with the Fontem negotiations that we completed however we are much more confident in our gross profit numbers in that we have a much better and thorough understanding of what make up those costs across all the product lines and we will manage the mix accordingly over the year.

A number of factors that I think are interesting to share delivered to the improvement in gross profit. Number one, the elimination of approximately 2 dozen unprofitable customers had a big impact there as we said at the beginning probably back in May that we were focusing and reducing the number of customers that was a very positive result. Effectively we executed our return policy as I mentioned and reduced the cost of our hardware and our liquids from our suppliers.

We had a lot of negotiations started back in May, we met with a large number of suppliers, we consolidated them down into 3 to 4 and based on their willingness to give us discounts and reduce fees on what we were paying. It had a huge impact on our global e-commerce business when we identified that from the same supplier, there was a significant double-digit difference in what they were paying versus what we are paying.

The other area that I think is an area where we made great progress, but one that I think there is still a lot to be made is in our operating expenses. Our operating expenses decreased from $235 million believe it or not in 2014 to $75 million over the last 12 month period. There is still plenty of room for improvement specifically in one we will be addressing in the next 30 to 60 days is our professional fees and despite being down almost $7 million year-over-year they remain disproportionally high at $15.4 million, driven primarily by our audit fees and legal fees.

Action as I said is underway; the target is to reduce these expenses significantly in 2016, I would like see them drop another $7 million maybe half of that $15.4 million if we can really get our activities in place. But that is a goal to help improve our overall net income. And we will communicate achievements as they happen.

Inventory levels were and will be an area of focus especially the amount of slow moving inventory. We had a large amount of inventory over the last - well we inherited it actually. And as identified in our global meeting in May of which I communicated, we’ve reduced our inventory levels from 6.7 million to 5.1 million 22% despite- and you [indiscernible] weigh this off against the 21% increase in revenue. So you look at the achievement, it’s very solid. I do think though we still have more to do with respect to our inventory. We still have slow moving items out there; we carry a long line of items especially in our kiosk because that’s the point of difference. So the kiosk you’re allowed to -- you offer a wide line, but it’s extended over in our e-commerce businesses and we have a group working on trying to implement a plan and matter of fact two week ago to help reduce that. So that should be a continued area of improved use of our cash.

Adjusted EBITDA it improved $29.9 million or 80% in 2015, but was still a negative at $7.3 million compared though to $37.2 million last year. In Q4, the adjusted EBITDA loss improved by $8.5 million or 84% to a negative $1.6 million compared to a negative $10 million. So we’re improving and as I said we're improving everywhere across the business and we’ll talk more about it, but from a continuation of these improvements I’m going to turn it over to Phil to review a couple of more of critical aspects of the P&L and the balance sheet. So Phil?

Phil Anderson

Thanks, Dan. So as many of you maybe know who are following our company, improving ECIG’s working capital is one of our six strategies to achieve our mission of becoming the world’s most valuable ECIG Company.

Day sales outstanding or DSO is a measure of the number of days it takes for a company to collect cash after sale has been made. The contribution of the Denver based finance and accounting department that ECIG hired in 2015, we’ve reduced DSOs from 28 days on September 30 to 20 days on December 31. DSOs was still a further three days to 17 days as of February 29 this year. Interesting anecdote as we work to turn around the company related to decline in DSO is that our accounting department recently discovered over $400,000 of sales from 2014 which had never been invoiced. The company subsequently billed and collected that cash.

During Q4, 2015 the company became current on accounts payable with all of its vendors for the first time since Dan and I joined the company and we remain current today.

Thank you for attention and I will turn the call back to Dan.

Dan O’Neill

Thanks, Phil. And prior to moving forward to discuss performance relative to the strategic guidelines, which I am making a habit of reviewing and sharing the progress I’m just going to quickly touch on some operational achievements that clearly impacted. We obviously as you all know and it seems like a long time ago to me we moved the headquarters to Golden, Colorado, which allowed us to upgrade the entire corporate finance and accounting departments. And as Phil said this group has made a huge impact on our business. We negotiated and settled 15 inherited legal disputes, lawsuits across the USA. That was also very, very time consuming.

We resolved the overhang of the Fontem patent infringement case which really came to a head in October so October-November and up until January 4th we were in those discussions; we finally have that behind us and we settled over 20 outstanding disputes with aged or non-profitable customers.

So those and there is a lot a longer list on that, but if you consider A, that we were bankrupt basically in January we took over and we’re looking at all these activities, the critical point that these represented over the last 12 months a huge time commitment. Taking our concentration our efforts away from our strategic work, new product work that could have really moved the business forward.

Importantly management now understands at a much greater depth the profitable levers or profitability levers of the company and each of the varying profitable lines. The distribution networks where the supply chain can be adapted so we’ve spent a lot of time and I think you’ll see that when I talk at the end of the discussion today where we will spend our time and what we want to do.

Moving on to the strategies, which is designed to deliver the business plan you know the vision, I iterated to become most sought after independent e-vapor e-cigarette company in the world as viewed by co-consumers, investors, major tobacco companies, as measured by our annual stock performance.

So the first of the six strategies was VIP and establish VIP as a number one premium global brand in the segment and we’ve done a lot with VIP over the last eight to ten months we expanded the VIP brand into an additional 58 kiosk, or in some of those are more of a vape shop throughout the UK as well as we explore the opportunity to enter into five new countries with the VIP brand that work is ongoing and I’ll talk further about that at the end, but those the VIP brand the number one so we want to continue focusing on that plan.

The plan for expansion in the U.S. market was develop and as you’re aware the first kiosk was launched in January 2016 just north of Denver. Consisting with the category leadership role of VIP we increased the focus on new product entries. So not only do we lead in terms of the kiosk and keep expanding the business through opening new kiosk in new areas and new space we also had to keep the breadth of the product line and we had fallen behind as I mentioned previously in October we had fallen behind in some new product activity and we’re spending the first five months of this fiscal year getting caught up in those gaps and as you can imagine we have a very low cost of entry when we have 175 kiosk it’s just a matter of putting in there we’re not paying listing fees, we’re not having discussions about what items go in, they automatically go in. So huge competitive advantage relative to any of our competition.

We also took major steps to have the brands VIP and Vapestick compliant with all upcoming pending legislation well before the May 23rd 26 legislation comes into effect. We’re there, we’re ahead, we’re completed, we’re ready to go and we’ve been ready since January 1st there was a couple of tweaks in a couple of items, but overall we’re well ahead of that legislation. So we don’t see any problems coming up where numerous competitors especially the small competitors in the marketplace will be struggling to meet the legislation.

The number two strategy is utilizing the FIN and the Vapestick’s brands as traditional retail brand. We’re pretty much spot on this strategy the Vapestick brand in the UK was fully integrated in the must have facilities with their inventory, purchasing, order fulfillment and management are all under one roof. The annual savings are estimated of approximately $2 million plus, we may approach $2.5 million depending on where we go, but super positive with that whole integration. It’s been successful and there is a few little bumps along the road but otherwise as we entered into the year we feel pretty confident with that integration.

Retail sales for Vapestick in the UK continue in a very select, with very select major retailers that was our plan, with priority is given to restocking our current customers, keeping very strong customer service with those people rather than trying to fight for shelf space. So when you look at the UK and how Vapestick is doing, it’s doing great, it’s doing. But we’re not going to go out and spend millions of euros trying to get a new or pounds trying to get new listings it’s not worth it. And we -- and I’ll talk later on our focus towards e-commerce and maintaining our customer base.

In the U.S., the Vapestick’s 200 store test in the Northeast has been successfully completed, thus allowing us to expand. We went to another 50 stores back in the January I guess it was December period. We will be adding another 250 in the next month or so. The plan is to try to approach 700 to 750 by the end of the year. So it’s overall success they’re very small stores, but we continue to see the brand awareness is building, which is very positive.

FIN, another one -- the number one retail brand in the U.S., we relaunched with new packaging during the year. We had a large number of new SKUs into a major account, which was the new line was launched in approximately 8,000 stores across the US. So it’s continuing to plug along and still our major brand in the U.S. and there is more news about that in the non-traditional channels.

So the non and moving to the non-traditional channels, expanding our profitability into these channels and new markets through distribution partnerships. The e-commerce business has been a major focus for management team over the last 12 months probably the last from August on in the fiscal year. Global e-commerce important to company it was purchased in 2014 in June, launched the new vaping line in the U.S. marketplace in July of 2015 and launched the pro-vapor product line in Europe in the November and December period.

So those two adjustments into that particular segment into their group of consumers have been very positive you will see -- starting to see the effects of that in January. The must have management team fully prepared both VIP and Vapestick product lines for pending legislations in the UK as I mentioned is adapting and adopting the new and that into their e-commerce businesses and we’ll be relaunching both new sites in the March-April period. So that’s solid.

And as I mentioned FIN we rebuilt and redesign the e-commerce business back and the strategies associated with that back in end of August beginning of September. It has become very successful. We also use it for the reduction of slow moving items at an excellent discount to our consumers or rewards type program for and with specials every week and we’ve really used it as an outlet for our slower moving items and turning inventory into cash.

Vapestick initiative work on an e-commerce platform for sales in the U.S. So this whole area and that work has been done at the end of 2015 again another project that we will be looking at and relaunching or end launching excuse me here in the U.S. using a lot of the strengths of the UK e-commerce business for Vapestick. And this work as I mentioned is in process.

On the fourth item organizational talent. 2015 witnessed a significant increase in the talent of the company. We don’t plan on stopping there. We have targeted three new positions for 2016. In fact we have achieved a very experienced Chief Marketing Officer who will begin work in the next seven days. He is in the office tomorrow with doesn’t start officially till the first Monday in April.

Low cost providers, several meetings and I mentioned the ability that we’ve had to reducing to driving our gross profit margin. So we’ve had several meetings with the major suppliers in China and the U.S. The improved financial position the company along with the volume growth is well within improved terms. New product opportunities getting a better selection to be the first person out with new products and lower prices as I mentioned helping our gross profit margin.

Working capital Phil has already talked about it and mentioned the several of the improvements we have made. So that kind of goes over the six strategic driver I did it pretty quickly, but prior to opening the call for questions, I’d like to summarize the plan, which is entitled the plan to profitable growth that I presented at the ROTH Conference Recently.

What it has and what it focuses on is it four of the six strategic pillars that I just referred to, but the first area was continue to expand VIP where in the presentation outlined and committed to adding 25 new kiosk in countries in existing countries, add 10 plus new kiosk throughout the new countries in Europe. Test the kiosk expansion throughout the U.S. and we are putting plans to role that out as we learn from our current kiosk and expand the product line to fill competitive gaps, which is a big area as I mentioned we fell behind.

So from the VIP business, those would be the four priorities. Improve our major retailer focus I talked, Vapestick regional rollout adding 200 to 400-500 stores in the next 12 months. Add one new major customer and expand into non-retail channels, that’s for those two retail focus brands.

Non-traditional channels, I spoke briefly on some of these capitalized on the opportunities in e-commerce that was very evident in my earlier points. VIP will be new focus in the UK, launch a website in the US. FIN revitalize the website launched in September, Vapestick U.S. website to be launched hopefully in the later part of March or April. Two new channel opportunities are being reviewed. And the organizational talent as I mentioned evaluate the addition of three new positions over the next three months. While holding our payroll flat and decrease as a percentage of sales.

In conclusion, I think it’s very important to say and position we’ve just looked at all the achievement but there is no doubt we made progress significant improvements actually. However, I don’t want anyone to think that I’m one of these people that looks back and say I’m happy with the improvements. I’m here for one reason, I realize I’m here for one reason and that’s to improve shareholder value. I’ve not done that and that’s going to be a priority for this year. And we have numerous plans to do that.

So yes, we’ve made progress with [indiscernible] we’re here to create value for our shareholders and that’s how I feel whether we’ve improved or not and to this point, I think we have made vast improvements in terms of the structure, vast improvements for our future outlook, vast improvements with the ability to spend time on the business and vast improvements in the talent pool. Now we have to demonstrate that with the stock and the communication of that.

Okay so prior to opening the call for questions, I’m going to answer -- I would like to answer one question and it’s been hounding me every day and numerous shareholders sent me emails and I think it’s important. Have we done anything, and have we approached and looked into the comments on the ECIG’s stock manipulation.

So based on the concerns of a handful of shareholders we ECIG launched an investigation to determine if there is illegal stock manipulation. I have learned a ton of this, about this topic over the last three months. I’ve listened to the people, I’ve listen to experts. And at this point in time, I cannot currently comment on any of the specifics of the investigation is going on. I have been asked by the legal people who are undertaking several of these investigations that it’s best that I don’t comment, okay.

But I think at the heart of this whole thing there is one thing if we are to step back and think about. And is personally what I believe. And I’d like to say that there was one real solution to this situation. Performance clearly is what if we continue to perform, continue to outperform, accompanying with a solid investment base of investors we will reach the point that these people go away if there is such activity going on in the marketplace.

And I refer to illegal stock manipulation not if people we can move the stock around for their own benefit as well as it’s not illegal. So my view on this is this is in my hands I have to improve the company number one, number two, get out and communicate those improvements and that will a goal where the amount of time and that’s why I focused on so much of this call and how much time w freed up.

And with that I will end my conversation and open it up for questions. Okay thank you very much.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Jeff Porter of Porter Capital. Please go ahead.

Jeff Porter

Hi, guys. First off I’d like to say really appreciate all of your hard work and though there has been a lot of heavy lifting and hopefully things are clearing up and future looks bright. We’re almost all the way through the first quarter right now is it appropriate this time to provide some guidance for revenues and margins for the first quarter and perhaps going forward for the rest of the year?

Dan O’Neill

Jeff, it’s Dan O’Neill, obviously, but I think it’s inappropriate at this time to be able to do that, I mean it’s another I think 40 days before we have the Q done. So I just -- I don’t think we can give any guidance on that at this time.

Jeff Porter

Okay. To follow up-what about just some idea of the number of kiosks you’d like to add this year throughout Europe and the new territories in the UK?

Dan O’Neill

I summarized that you were actually at the meeting, and I summarized it as we were trying to - we have 170, there is always a culling of the bad one so when I say – you said 177 last at the close of the year in the October call we might lose two to 175 and so we plan to come out of the year at 200 for this fiscal in the UK. The situation is such so we added 58 during the year last year. We’re seeing that there is a little slow -- I mean so you have got 12 new ones that will enter into 2016, which could automatically say this is X amount of revenue.

The situation though is a little different in that they’re getting closer together or because they are part of a bigger competition now, consumer maybe going to a store down the street from the mall and we have to transition their habits and it takes a little longer than having a new one and then market was new. So we look at 20-25 new ones in the UK, 10 new ones in around Europe, and so there is an additional 35 in the U.S. We’re still evaluating how this current one is going.

Jeff Porter

Okay.

Dan O’Neill

Did that answer your question?

Jeff Porter

Yeah in the U.S. are you planning on taking a go slow attitude until the regulatory environment gains a little clarity?

Dan O’Neill

I think that’s the exactly spot on in the overall strategy. I used the word simmer I don’t mean that negatively, we’re going to aggressively go after some segments, e-commerce for example, but if you look at going to a major customer and adapting to their needs and paying the possible listing fees and with the uncertainty in the marketplace of what the legal ramifications will be given the FDNA it makes it a very risky venture. If you look at the UK legislations already happened. We were - had two members on the committee that set the rules, we’re in a very strong position relative to competition because we’re already adhering to all the rules and the people there Dave Ryder especially has done a great job in sort of keeping us abreast, he was on the committee.

So you look at it and go should you do a risky thing here in the U.S. and start paying some listing fees and bringing a bunch of inventory when you don’t know what the rules are going to be the uncertainty or you say, hey look we know it’s going on in the UK we’re already good in those positions let’s commit some extra funding on a proportional basis to the UK or Europe because it’s all the same regs that are controlling the marketplace, ruling the marketplace I guess.

Phil Anderson

Hey Jeff, it’s Phil the 10-K was submitted to EDGAR and Dan’s comments regarding the kiosk expansion are front and center on page number of two of the K. I’m not sure they have shown up yet, but it will show up momentarily. Okay.

Jeff Porter

Okay, thank you very much.

Dan O’Neill

Okay, thank you.

Operator

Thank you. The next question is from Jeff [indiscernible] a Private Investor. Please go ahead.

Unidentified Analyst

Hi, Dan, thank you for taking my call. I’ve got a couple of questions, so if you’ll please come back to me for the second one. I’m curious about your advertising strategies and particularly if we could focus on FIN since that’s the local brand here and then comments on your other products as well.

Dan O’Neill

Okay. FIN advertising, well let’s - I would say advertising spending in the purest of sense of the word advertising is zero. But if you look at as a marketing spend it is I won’t tell you the exact amount, but it exists and the marketing spend being differentiated from the advertising spend in that we spend the money directly with our customers and the money is spent on -- which I mean we couldn’t do when we were -- when I came in we were selling to 711, gross margins were low. And how can you get to 8,500 stores across the United States to check the shelf appearance, were the products even on the shelf, was it in the back room of the 711, is it - where is it positioned in the shelf.

With a couple of other customers, we have full-time teams going around and executing the agreements we have with the trade on where that product is going to be, how many facings it has on the shelf, where it’s located on the shelf, the price points that we’ve agreed to. So we can manage those stores effectively and really get a bang for your buck. And that’s where we’re spending the money right now.

Could we out-spend some of the big companies, big tobacco companies and the brands they’re doing? Not really. But our relationships with two or three major accounts in the U.S. allow us to execute flawlessly and do as good job at point of sale as our competitors are doing and having a very strong relationship with our buyers in those accounts. So that’s where our focus is.

Unidentified Analyst

Okay. I was just kind a basically wondering how people hear about the FIN brand? Particularly a Walgreens account which – that’s number one right?

Dan O’Neill

Yeah, that’s number one. And what we’re doing and it’s a great question because you sit there and you go should I spend the X millions to communicate to a broad audience which maybe 2% of the people that you’re spending against are going to hear the message. So we’ve gone back and forth and my belief is we can take that money and make it much more specific at point of sale to drive our business with trial offers, reduced money on starter kits, those types of things and the stores are very supportive of that.

Now in the UK, because it’s the number one brand, VIP is the number one brand in the marketplace, we are advertising, we do spend behind the brand, we spend a great introductory campaign which got all sorts of awards. We did a program in December first week in January, might have been only the - just prior to December or prior to January, excuse me, which focused on the New Year’s resolutions. And it focused on the public health campaign, public health campaign they came out Public Health England came out with a report that said e-cigarettes are 95% better for you than regular cigarettes and it also said if we could afford giving a free e-cig to everyone in the country we would. So we gave 10,000 we went online and said if we went on TV said you have an opportunity to win one of 10,000 free units. And we’ve got an excessive large number of calls and email addresses obviously for the product and that helped build the business and we did give away 10,000 for free.

Unidentified Analyst

Do you think that’s a pretty successful campaign, the giveaway?

Dan O’Neill

It was a successful campaign, but again our May 16th the advertising and the TV advertising is prohibited in the UK. So we wanted to make sure we got some good I mean obviously it take hit in gross margins when you are giving away stuff free. But we felt there was a valuable communication. Now the other thing that’s important when you look at advertising and promotion. We put the marketing spend for our kiosk.

All the work we do there the cost of our kiosk okay, the rental space for our kiosk that to me is the marketing at the point of contact with the consumer and much more, I mean I had 30 years doing TV advertising and so it’s almost bless me but if you could offer at these direct to the consumer discussions one-on-one with well-trained sales people the much better deal and you’re getting foot traffic of a million people a month or a week depending on the size of the facility and the time of the year. It’s much, much effective. And you have one-on-one conversations on average in the UK they last 25 minutes believe it or not.

Unidentified Analyst

Okay, thanks for that answer. Let me ask you one more thing Dan. I’m not sure I heard it correctly it was at the ROTH Conference. I thought I heard you make some comment regarding an exit strategy and I was wondering if you could elaborate on that a little if I heard that right.

Dan O’Neill

You did, you heard sort of partly right. What I was referencing was our positioning and our vision which I stated earlier at the beginning of the call becoming the most sought after independent e-vapor, e-cig company in the world, okay. And when we talk of that point of view, we want to obviously be well known to the consumer with a very good brand and that focus globally is VIP. We want the investors to see while these guys are executing as they have a plan and they’re executing it and with the execution of that plan the numbers are coming in, the numbers are committing to. We can see whatever that number is a 20% growth annually. But I’m not stating that as a comment with respect to here is a forecast for the future.

But we start demonstrating overtime that these people know what they’re doing and I also said that we want to be sought after by the major tobacco companies. And be noticed and going hey there is a very valuable company. Not that it’s an exit strategy that more importantly they’re looking at us and there is value being created in our brand, in our company actually.

Unidentified Analyst

Alright well thank you.

Dan O’Neill

That’s kind of a roundabout answer to your question.

Unidentified Analyst

Yes I appreciate your thought on that Dan.

Dan O’Neill

You can take what you want out of that, but I’m trying to use objectives of thoughts.

Unidentified Analyst

Alright. And thank you for all of your efforts. It’s really nice that you take calls from Private investors too and thanks for doing that and for all the enthusiasm. I hope you’ll keep it up and it’s a win-win for all of us.

Dan O’Neill

I hope so thank you very much.

Unidentified Analyst

Thank you, Dan. Bye-bye now.

Operator

Thank you. The next question is from Jay Brosnan [ph] of Pinnacle. Please go ahead.

Unidentified Analyst

Hi, good afternoon. I just wanted to ask about additional growth and expansion opportunities internationally outside of the UK and I’ll hang up and listen. Thanks.

Dan O’Neill

Okay, thank you. The revenue and where we see it coming from and where we think it’s now. Obviously as you mentioned, revenue is being driven primarily by our success in the UK. And we referred to it internally as a land gram and land gram expression comes in the point of view of expansion of the kiosk within the UK a year ago, not a year ago, June of 2015 I sat with a group we did a bunch of grids where we could expand what the total area is.

So yes UK is still a focus but more importantly beyond and throughout Europe and I think that’s more to the question when we look at it, we see the growth throughout Europe now that the regs have been put into place and they’re well defined people are seeing VIP outside of the UK as the leading brand, the leading imagery and meeting all the regulations. And we push ourselves and make that very clear in the UK that we are very clearly legally correct well we’ve camping of the work we have accomplished all of the goals in meeting the regulations.

So from that purpose we see and are getting a lot of calls from varying countries across Europe and I think in the next four to five months we’ll be seeing expansion in specific countries. And varying a lot of countries we’ve done a lot of work where we’ve seen there’s one major competitor it’s maybe not an international brand, it’s a local brand, we’ve spoken to a lot of governments, so we’re moving in that direction.

The one thing that will probably come up before the end at a different question, I mean before I move on to that last part in additionally on both continents we have e-commerce as a special area of attention as I mentioned. So you look at it as we have internal growth coming from the kiosk in the UK and brand breadth, expanding our product line to make sure we address all the requirements so there is two areas of growth in the UK.

We have brand growth outside the UK on the continent okay and then we have both continents e-commerce is an area of attention so those I would say are the primary areas of growth and not just focused on VIP. Is there another next question I guess that person hung up so… I hope that answer your question Jay.

Operator

Thank you. [Operator Instructions] And our next question is from Michael Caplovitz [ph] a private investor. Please go ahead.

Unidentified Analyst

Hi, gentlemen and I appreciate the thoroughness of your call. One question I have is what is your comfort level to resolve the $19.5 million in 15% notes due in July and August if the price is or is not between the $0.45 to $0.75 range certainly for both scenarios?

Dan O’Neill

Phil do you want to do that I can give my opinion, but do you want to I think you have that one.

Phil Anderson

Yeah so approximately $5 million of that comes up in July 7th the balance August 28th. The large majority of those note holders use the expression of friends of the company and whether the stock price gets to a level they would convert, we had a number of discussions about there are several possibilities of extending the notes, remodifying the notes or having other parties come in and buy the notes. And based upon the discussions we’ve had again with the large majority of the principal value of the notes, which have all been very constructive we’re not particularly concerned about dealing with that upcoming maturity. Dan?

Dan O’Neill

That’s good.

Unidentified Analyst

So if they were to have exercise those the warrants do you have enough shares authorized to be able to do that?

Phil Anderson

Yeah that’s correct in fact the shares underlying the notes total 29.5 million. There are 75.1 million shares already issued against an authorization of 300 million so you can see we have plenty of room to issue shares from the authorized.

Unidentified Analyst

Okay.

Dan O’Neill

The other point we’re obviously not going to leave this till July if they are [indiscernible]. We are having conversations as Phil said with -- there are friendly investors if you will and initial investors. And so we’re already having conversations with them on what they will do and what they think they will do. So we will be prepared when that time comes.

Unidentified Analyst

Sure so and do you think you’re going to need to raise any more capital that will be dilutive or are you self-funding from this point going forward?

Phil Anderson

No, I talked to our lawyers about this earlier last week and again today. And if you were to answer that question it could be consider as a form of guidance so company is not providing at this point. So I realize that we may not be a great answer, but that’s the legal answer.

Unidentified Analyst

Got it, fair enough. And then one last question, do you see anything coming out of the Middle East with the Mansoor Group?

Dan O’Neill

Hey great question I was going to answer that question on the end of my previous question on growth. The Mansoor situation and I will direct it more -- I direct it away from the families more towards the country itself. The country has experienced a lot of turmoil in its government if you read or follow it, there has been a new health minister, a new finance minister, another new health minister and another new finance minister over the last 14, 15, 16 months. So you make progress with one and then you kind of lose and you have to start over again. And it’s been a series of start and stops.

Now that’s why we’ve started to as other countries have approached us we’ve started to address other countries to try to make up for that and continue our growth plan. So the country itself is in turmoil as you are more than aware and that’s been inhibiting that program. It’s still there and we’re in constant conversation with the Mansoor, but it’s more of a country related instability actually.

Unidentified Analyst

Okay alright. Thank you very much.

Dan O’Neill

Thank you.

Operator

Thank you. The next question is from [indiscernible], a private investor. Please go ahead.

Unidentified Analyst

Yeah. Dan in the last conference call, you had a guidance or hopeful of guidance on your sales on quarter-to-quarter of about 20% to 25% that was realized year-over-year in this time around. Somehow it was attributed as you see in the returns. What was your return policy before, what is it now and do you still have the hope of the same guidance?

Dan O’Neill

Hey [indiscernible], how are you by the way. I think the return policy was always the same okay. We just didn’t have the courage or the strength or the will to enforce it. And people were taking huge advantages of that giving us product that was sold in 2013 prior to we really been having the brand names anymore and we were taking them back and giving credit. We received great legal guidance on the policy. We wrote all of our customers and communicated that we would now enforce the policy. And that’s what we’re doing, okay.

So that’s the plan and do we feel we’ll be successful, yes. Because they see us now as not sort of bending over and taking what people offer and say here you owe us this no we don’t owe you that we’re not paying is now a comment that we’re very willing and the people inside the company are willing to communicate. Because they have my backing, they have legal backing outside of the organization so we feel comfortable. That’s answer number one. Now the guidance the 20% growth we did that growth I think it’s not something that we would say, this is the exact number, but as a guideline for ourselves internally and given the market where it is that would be a global sort of guideline I guess as oppose to guidance. But that’s what we’re trying to work internally. More importantly…

Phil Anderson

On page 2 of the 10-K you will see there is a target net income margins statements.

Unidentified Analyst

Okay, alright thank you. The other question as well is regarding IR and PR. Are we doing anything to address that?

Dan O’Neill

Yes we are. On an IR point of view I’m going to be much more active. Number two, on a PR type we have taken steps, we will start working on an annual plan, we will start communicating on my trips to the UK for example where the brand is very well known we will start doing communication there IR meetings as we will do more here in the U.S. But we’re putting together an annual plan that will be done by the next 45 days; 50 days and agreed to and then started to be executed.

Unidentified Analyst

Okay, thank you gentlemen.

Dan O’Neill

Thanks [indiscernible].

Operator

Thank you. The next question is from Donald Duvignon of Clean Slate [ph]. Please go ahead.

Unidentified Analyst

Hello, gentlemen. Two questions, one is around your M&A strategy any changes there? And number two, do you see any strategic opportunities now you’ve been in Colorado for some time and Cannabis?

Dan O’Neill

Okay. Second one took me little bit surprise I was like not that we’re going to start doing it the results are better and maybe a year ago we might had to smoke a little bit, but anyway, M&A strategies we don’t have anything currently inline or lined up in our sites that we have looked at. I do think that our investors if something came along. We thought it was opportunities and it was a solid return and it was positive accretive to us we would do something. So we’re not adverse to it, but we’re not out there searching I get some calls every once in a while you are doing well and kiosk would you like to buy our company, no thank you we’re doing this or that.

But we haven’t, strategically we haven’t written a document that says this would be great to purchase and here is what we would be good to purchase not a company, but more importantly here are the elements that if we could find a company like this it would be a good investment. We haven’t done that work, okay. And I believe in doing that work first and then when the right opportunity comes along you know what it is and you can evaluate it.

On the opportunity, Cannabis no we have not done anything, although we are here in Colorado and I’ve had calls from people wanting good vaping equipment, which they think ours are pretty solid and I haven’t really taking any of those meetings.

Unidentified Analyst

Okay, thank you.

Operator

Thank you. There are no further questions at this time. I would like to turn the conference back over to management for any closing comments.

Dan O’Neill

It’s Dan speaking. Thank you very much for your support. I know the stock bounces up and down we’re trying to get that fixed. But as I said and I’d like to reiterate that will be based on my ability to deliver and our team’s ability to deliver, more my important my role of guiding I guess to be able to be consistent strong results and continuous improvement on the profitability, and that’s where we’re focused. And I think the Agee’s question with respect to a sound IR strategy and executing our strategy is very valid to that -- to the achievement of that goal. Otherwise thank you very much and we look forward to speaking to you again 45 days or so and we’ll announce that in about 30 days when we will be doing that.

Operator

Thank you. Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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