mCig, Inc. (OTCQB:MCIG) Q4 2016 Earnings Conference Call June 28, 2016 4:30 PM ET
Mike Hawkins - CFO
Ladies and gentlemen welcome to the mCig Inc. Shareholders Conference Call. My name is Mike Hawkins, the Chief Financial Officer, moderator, speaker for this conference call.
Before we begin, let me take the time to thank everyone for joining us and thank you for your interest in our company. Hopefully today, we can shed some light on to where we come from and where we're going.
Please note that all phones are currently on mute and will remain on mute throughout the call. The call is limited to a number of minutes available and we’ve got a lot we want to share with you.
We’ve asked our shareholders to share requests with us and a lot of you have responded. We will address as many of those questions we can during the shareholder update at the conclusion of my brief introduction.
If we don’t get to your question that you've submitted, press the star key and we'll respond to your question after the call. If during the call, you have a question you wish to ask and we have a chance to address it, you will need to send it to email@example.com and we have the opportunity to get to it, we will address that question.
Before we get started though, there are some things the attorneys are going to require me to tell you guys. So let’s skip that reading over with and then we'll get into our shareholder update.
Any statements I make that do not describe historical facts may constitute forward-looking statements and that term is defined in the Private Securities Litigation Reform Act of 1995. Any forward-looking statements are made based on current expectations, but are subject to a number of risks and uncertainties.
The factor that could cause actual future results to differ materially from current expectations include, but are not limited to risk and uncertainties related to the company’s ability to develop market and sell products based on its technology, the expected benefits and efficacy of the company's products and technology; the availability of substantial, additional funding for the company’s continuous operations and to conduct research and development and future product commercialization and the company's business, research, product development, regulatory approval, marketing and distribution plans and strategies.
Throughout the discussion today, when I speak of certain financial disclosures, they maybe non-GAAP disclosures for example EBITDA, which consists of earnings before interest, depreciation, taxes and amortization. These terms as the company defines them may not be comparable to a similarly titled measure used by other companies and is not a measure of performance presented in accordance with GAAP. The Company uses these terms as a measure of operating performance. These terms should not be considered as a substitute to the information contained in the financial statements, the 8Ks, the Form 10-Qs and the Form 10-Ks the company has filed.
So let’s get started. During today's call, there are three basic areas and I’m an outline kind of person, so I’m going to spell this for you out in an outline for those of you who wish to take notes for future reference.
There is three basic things I want to talk about. I want to talk about some of the new transactions that has affected the company recently. I want to talk about the new business modeling concepts, our vertical and horizontal growth strategies and finally I want to discuss the financial conditions of the company.
In no particular order, let’s first talk about the recent transactions. There is four recent transactions the company has made in the last few months that we believe have a positive impact on the company and will have a positive impact on the company for many years to come. The most obvious and recent event was when the company acquired the VitaCig business.
This seemed right at so many levels, management was extremely pleased with this outcome. Not only do we now have VitaCig back into the fold of mCig where we can cut the cost, stop the bleeding of cash to support that operation with no near future hope of seeing a return of that money. We have expanded our investment portfolio, I cannot speak to VitaCig’s past performance until such time if that information has been released to the public, but based upon the recent announcements and the recent 8-Ks filed by VitaCig and us, the shareholder doesn’t need to look far to see these obvious benefits.
Acquiring a $3.95 million MOQ contract, Minimum Order Quantity contract, we see an immediate impact on our financial statements in the strength of our company, but the two things that the company benefits from this transaction that aren’t so obvious is the transformation of the what's entitled due to mCig account on their books basically as a 46% owner at the time being an insider, we were funding that company, that was treated as a long-term payable, the odds of getting that paid back could have been difficult to achieve.
It’s now more likely we will get paid back the note due to mCig account has been converted into a promissory note with a definitive short term deadline for payment, which will bring additional cash into the business.
The company believes that the new business in VitaCig Inc, they haven’t changed their name yet, the disclosure has been made, Malecon Pharmacy, is much more valuable and that once awareness has been achieved, the value of our investment we believe will be actualized, should we maintain approximately a 10% interest in this new business operation we can elect to sell our position and fund our company probably for many years to come off of this one investment, or we can continue to hold that investment as the company begins to mature and grow.
On top of all that and getting to continue to own the investment in Malecon to seeing a definitive date on the return of capital we've put into VitaCig as well as bringing in those contracts into mCig’s account, there is still direct value provided to the shareholders of mCig who were issued shares during the spinoff and they are now much in a much stronger position in that particular company and we believe that the value of their shares will increase. We see this as a win for everybody.
The second event was when the company incorporated Scalable Solutions, Inc. in March of this year. We entered into our first construction contract in January as we begin to grow the opportunity began to take form and we recognized it's need for looking at this particular industry with a more direct intention.
We currently have four contracts. They're all underway and we have several in the pipeline, which we're looking to close. As these deals unfold, we’ll continue to make our shareholders aware of the status and what the benefits to the company will be.
One of the reasons why I was brought into the business was because of my history and particularly in the modular construction industry business. I have a background in that. In 1998 I was -- I've been at the United Nations to 47 different countries on the global housing crises around the world and the use of this rapid construction technology to provide solutions in the housing market. It’s that same technology that we're utilizing to grow and to construct these greenhouses, this [grow] [ph] facilities and we’re utilizing that expertise to manage that particular industry.
We’ve recently updated our shareholders on our particular contract with Greenleaf holdings. We're hosting an event there in July 15. Our shareholders are more than welcome to attend. We ask that a RSVP be sent to the company. It's not required, but in order for us to prepare adequately we would prefer if the shareholders would let us know that they intend to be there. It would be greatly appreciated.
But the company’s approach is to design and build contracts, to understand what we did with Greenleaf, we design and build contracts in a prepaid cost-plus basis. This is virtually unheard of in the industry where you're identifying what the cost of it is, you're getting prepaid for it and you're building in a percentage of profit.
While you can look at construction and construction is one of those deals where there is no hedging your bet of making a greater profit for reduction of cost if you can figure out how to do things cheaper. Construction is typically a very direct finite cost and whenever you can get into a contract where you've got no risk in loss in construction and you've got a percentage of profitability built into it and you're being prepaid to do that where you’re reconciling at the end of every month, which actual cost was to what you're prepaid, it’s a very good deal.
All our agreements the customers pay in advance. We have no cost of money for these projects build in. As such our bottom line is our bottom line. There are no hidden fees and we make full disclosure with our customers. There is nothing hidden from them. They see exactly what the cost is and what our profits are.
We show them actual cost, adding the agreed upon profit and management fees, reconcile the advancements made monthly. Now in the particular case of Greenleaf, we decided they could provide us some more marketing and promotional expertise that we think is critical to the spreading of the mCig name and awareness across the globe, that we believe that there were some promotional expertise that they could help us in our long term, we've elected to convert some of that profit into a project on our quid pro quo exchange of services.
These are services had they paid us, the profit on this project, we would have expended to develop this marketing and promotion anyways because we need to do that.
The third thing that many folks have enquired about the status of Rollie's. The company is pleased to announce that it designed, developed and acquired its first machine for Rollie's. Representatives of the companies have spent the last several months working with our choice manufacturing and producing machines so that we can begin this adventure. The company is in discussions with dispensaries Nevada and Massachusetts, which is considering as its alpha site to roll out these services.
The business model is very simple. Our machines will allow dispensary to cut its cost in half by reproducing or by producing a re-sellable marijuana cigarette. Currently the process is archaic. Dispensaries hire folks who come in and roll the cigarettes by hand. There is no guarantee of measurement or quality of production.
Our machines will cut their cost in half while giving them predefined parameters that they can set to have definable measuring metrics in order to produce the same quality product every time.
With the average dispensaries selling as many as 1,000 units per day in Nevada, is kind of where we’re looking to start in, it’s quick to see what the benefits are. In order to provide a wider service target though the company requires a license.
The only way of implementing this project right now is to physically lug the machine to the dispensaries and make the units onsite, with the proper licensing and facility, a better solution is available.
The company is continuing to look for partnership in which their license to be shared to expand the services and its potential. We’re still modeling several different variations of the services we intend to offer and we look forward to the day that we can finally roll out their service to the population, to the public.
The fourth recent event, which will be more readily defined in the upcoming [410k] [ph] scheduled for release in July is the compartmentalization of our business elements. We've discussed two elements already, Rollie's and Scalable Solutions. There is two other compartments I wish to address as we believe they will have a long-lasting impact on the company and its business.
The first is Internet sales. The company had tremendous growth in Internet sales, but the market is still in its infancy and there is plenty of room to grow in this market. We have a dedicated team working to enhance our Internet presence, advance our market penetration in both our own proprietary blends and products as well as a retailer of some of the most popular products out there.
By consolidating all Internet sales under one umbrella, we're capable of cutting cost, picking up on trends quicker and improving our customer base and customer service. We believe this consolidation will make us a leader in the internet sales of production -- of products in our industry. We will be prepared for the rapidly changing playing field quickly and exact.
The second area of compartmentalization I want to talk about is our intellectual property. The company is determined to project and preserve its intellectual properties. We intend to protect it in two ways.
The first is to separate the intellectual properties from the basic operations which [indiscernible] vulnerable to potential litigation in the future. This is relatively a standard practice, which the company has incorporated.
The second is through national and international registrations and laws. For example, the company is aware that a former manager of VitaCig while acting as the CEO of that publicly traded entity filed an assignment with the USPTO granting the rights to certain trademarks in his own personal company. The company is aware that an alleged document was used as part of that filing. The company does not believe this document to be authentic.
The company is expecting an opinion of counsel in this particular matter and want to address the issue in the very near future. It is interesting to note that this mark has not yet being granted and is contested.
Furthermore, the company believes that even if the mark is granted, it would be unenforceable against the company as the company had prior knowledge in use of the mark. And finally the mark has been issued in the European theatre to our partner as required of our expansion into that theatre.
That's about the grass and I hope that I haven’t lost anyone yet. We started a couple more categories I want to talk about. So let’s talk about what’s new and on the horizon of mCig. It’s important to note that the company has developed a vertical and horizontal approach to strategic business growth.
There are elements in this particular industry where mCig is well positioned, well known. Our acquisition of Vapolution a year ago and VitaCig, our reflections on how we intend to grow horizontally, expanding our roots deeper into the market that have been our bread and butter for the past year.
We've seen tremendous growth in this market and we continue to dig our roots deeper into the market, but all this has brought forth a couple of issues that we needed that we had to address. We had to deal with the bank and merchant services decisions to consider how we process payments.
This created a huge downturn in the third quarter of this fiscal year and you saw the difference between the second and the third quarter earnings and there was a tremendous drop off. Part of this was because of the inability to process with merchant services.
We have corrected that. We have moved forward with that and we have created a solution whereby we can continue and did continue to offer our products online with the capability of processing with banks and with the merchant's business accounts.
But we also are looking to expand horizontally our services into new markets. We have a clear path in front of us [indiscernible] the cultivation and grow. We're going to continue to look at that opportunity. We have several that are potential expansions and we’re studying the viability. When this time is right and the right opportunity is there we are positioned to take advantage of it and move into this sector.
With the issues that we've learnt from the merchant services side and other issues that have popped up of the opportunity for additional services in this particular industry and we're looking at solutions that we can offer to help others avoid the pit falls that we've been a victim to over the last year.
We have a good game plan for strategic growth. We’ve discussed our most recent transactions and provided some insight to management thoughts and desires to how best move forward.
But I can say we dealt with some setbacks, nothing is ever always rosy. There are two setbacks the company wishes to inform its shareholders of. Everyone has read the financial statements and should have noticed the drop in the sales. We discussed -- as it moves more into the mainstream, we expect the burden to be tampered and dwindled for this merchant services issue.
And very few banks, virtually none in the U.S. that are FDIC insured, will process payments for products in this industry. Most companies have had to look internationally for processing power and have faced with massive reserves, lengthy delays in payment transfers and high cost of money. That’s if they can find someone to process their payments.
This hasn’t been helped by the high industry rate of fraudulent credit card transactions, but we've managed to navigate that minefield and we have a strong position, but it took us a while to overcome. We believe that our solution has created another opportunity for us to explore and we are exploring it.
The second setback was the failure of one of our prime contracts that fell to meet its obligation it was contractually bound to fulfill. The company is still addressing the issue and hopes to resolve the differences, but even with these minor setbacks, the company remains viable and strong. Let's discussed today's announcements and the financial conditions of the company.
The company’s financial condition is overall strong. The announcement today of our earnings and revenue demonstrates the company’s continued progression. We are trending favorably. With revenues up over 200% and cost curve over 200%, this continued path will lead to profitability.
There are two specific items I wish to discuss with the shareholders concerning the financial growth of the business. I’ll remind everyone that our numbers disclosed are unaudited. We're in the audit process right now. We intend to release these audited numbers on schedule and file the Form-10K as required.
The first point that must be made that the company has no toxic debt. There are no financial pitfalls that could see the shareholders lose their value in this business.
No one can foreclose on the business. Many early stage companies survive all toxic debt and 90% of those end up being owned by the debt holders or are liquidated. They’re depriving the shareholders of any compensation or even a partial payback of their invested dollars.
The Management have been able to eliminate these risks to our shareholders, while continuing to grow the business. A simple mathematical equation says when your sales grow at a greater percentage, then your margin of profit you require cash to maintain operations.
The company has been able to secure equitable positions to cover this growth without relying on toxic debt. Not all debt is toxic and at some point the company may choose to enter into debt instrument, but only when there is a viable and strategic reason to do so. The company will not borrow to survive. We don’t need to. We don’t need to put our shareholders at risk for that and we won’t.
The company virtually cash flows its operations. The main source of losses for the company has been stock-based compensation. The company has decreased stock-based compensation by two thirds year-over end.
The company is currently considering the implementation of a stock option plan that will virtually eliminate stock-based compensation and tie performance of employees in the company together. We believe this will have an immediate and dramatic effect on the company’s performance from a financial perspective.
So as a recap, we’ve got to talk about some of the recent transactions. We have talked about management’s philosophy and new events in the company and we have talked about this financial viability. Now to some of the questions.
When we ask the shareholders to provide us questions, we were fortunate to get to quite a few response and like I said, I’m not going to have time to go over all the questions. Those that I don’t have the opportunity to get to, I will personally address them to you and respond to your questions.
The first question asked why the Shareholder Call? Why now? It’s an interesting question, why not now? I can’t speak for the past decisions of management prior to me being becoming the Interim CFO for the business and I don’t think I would want to anyways. I want to focus on the company going forward.
It’s important that our shareholders are well informed. The more our base is informed, the higher the probability of our shares values being reflective of our actual value will be achieved. So we’re going to continue to offer these shareholder updates on a quarterly basis.
Next question. Question is one of the greatest assets to any organization and its people, it seems hard to retain key personnel at mCig. How is the company addressing this issue?
Once again, I thank you guys for sending in these questions. There are some really tough questions to address and key management people is one of them, but retaining quality people, I don’t think is just an mCig problem in this particular market. It’s a problem across the Board, but I’m not going to look back but looking forward, we believe key personnel will continue to be added as we grow.
We continue to look for strong leadership and we got a good staff member, we try and keep them. After one I’m the Interim CFO. My agreement expires in September. If I meet the qualifications of strong leadership, then hopefully I will be extended on a more permanent basis, but only time will tell if I measure up to what’s needed in this particular company.
No one in the organization will be able to rest on its models. We don’t -- we task our management team to lead and produce. We have a fiduciary responsibility to our shareholders and we would do everything we can to increase their value and if you can't do it then you’ll get replaced.
Those who don’t perform and understand this fiduciary responsibility or are self serving will be gone. The next question, how can you justify the company paying 900,000 shares instant stock and employee that has done absolutely nothing to improve the value of the company?
These questions partially directed right at me and I sincerely hope I earn it. As I’ve discussed in the initial discussion, we’re looking at an employee stock option plan that bears little cost in the company and ties performance directly to rewards so that any dilutive effect of issuing stock to its employees over term by that value brought by that individual.
Next question, late filing seemed to be common place. Will there be a point in time where on-time filings can be expected?
It is Management's intention to file everything on time, every time. Sometimes mitigating certain expenses and third party requirement is prevented, but we're going to continue to strive to meet the deadlines and file as a company and do better and ensure that we hit our requirements.
Next question, keys to the successes of a lot of businesses is the focus on mergers and acquisitions. What if any focus is being considered on this front?
Well this question was actually asked before our most recent announcement. I think our most recent announcement actually answers this question. Now, I also addressed this in my initial thoughts.
We will continue though to consider mergers and acquisitions as a strategic tool available to us. Of course we got to be cautious about this. There are issues from a financial perspective that we have to be cognizant of when we look at mergers and acquisitions, for example during last year’s audit the company was impaired its position in Vapolution, which was a company that we own a 100% of and treat as an investment.
While this impairment had an immediate effect on the financials as we had to write of $625,000 invested, the acquisition is still considered by management a good acquisition. We just didn’t quite do it the way we should have done it.
With the expansion of new products, participation in multiple trade shows of Vapolution, we got high hopes this investment will prove to provide benefits to the company going forward.
But we used that lesson learnt in how we dealt with VitaCig in this most recent acquisition, which is why the $3.95 million in MOU contracts is considered in off-book asset. Before disclosure we've let everybody know that these contracts exist, but we treat them as an off balance sheet transaction, so that it doesn’t reflect either positively or negatively going forward.
It’s the viability of how we operate and deliver on those contracts that will be measured towards the success going forward, not some theoretical application from a financial perspective we have to book keep.
What are the long-term plans and goals of the company? Good question, we're looking -- our intent is to grow vertically and horizontally. We want to come better at what we do best and we want to be the industry leader. We want to be positioned to step in during the changing times, providing our services to those that need to navigate the waters of change and to expand into new markets. That’s our goal.
What’s our new mission and vision statement is the next question we had and these two questions kind of go hand in hand with each other. The company’s goal and visions are very clear to management and hopefully have been well defined throughout this conference call.
The company has not adopted a new mission statement or vision at this time. We're still committed to being a diversified company servicing the legal Cannabis camp and CBD markets. We will address the adoption of a mission statement and vision statement in the very near future.
The next question is where can we collaborate all of those contracts that Paul said are on the verge of being worked by mCig? Validation of contracts comes through performance on the financial statements. We made public disclosures of all contracts that are material to the company.
The SEC is very specific on what requires filing with an 8-K. Some of you can elect to file those contracts on 8-K as well, provided it doesn’t violate confidentiality. So it’s a difficult thing other than the disclosures we made to collaborate or corroborate, but rest assured that our third-party independent auditors are provided copies of every contract that we do. Our audited financial statements and public filings via 8-K, 10-Qs, 10-Ks corroborate our contracts.
Next question? If a bank is willing to lend $1 million, it would prove to stockholders that the business is really good since finance will have to be verified by a third-party? Are you considering to open a line of credit?
At this time the company has no intentions of opening a line of credit. We're not -- we have no desire to take on any toxic debt and we would never borrow $1 million for the sake of borrowing $1 million to prove viability. If the time comes and we need an independent line of credit to expand our business operations and then we will look at it and do so at that time.
Next question? Are we staying with the current account company or as always, will it change after reporting? We have no intentions of changing our auditing firm. There is nothing in the words of that change.
Next question? When will mCig be profitable? The company’s current cash flow, the company currently cash flows its operations. The trend seem to indicate from a financial reporting perspective that profitability is achievable in our very near future, but it’s relative. We believe we are profitable. Our revenues are growing and our assets are appreciated. We’re doing more out there than our competitors are.
Next question? When will we get the share price higher and this seems to be on the minds of all the shareholders and that's what everybody wants an answer to.
Unfortunately, the bottom line is the company doesn’t control the share price. We strongly believe our stock is currently undervalued. We will continue to grow the business and focus on the things that bring wealth to our shareholders. We trust the market will eventually catch up and take notice of what we as management are doing with the success of the company.
Next question, in line with mCig keeps investing heavily in new products and seems like a very strong company. It seems the stock is stuck between $0.03 and $0.04 a share. Why is the stock not raising?
As I just stated, the company doesn’t control the stock price and we strongly believe we’re way undervalued. There seems to be a lot negativity right now in this particular sector as a whole. We believe the industry while we're seeing some major changes though in the very near future and these changes will have a positive effect on the company's stature.
Meanwhile we'll continue to focus on the business and bring wealth to our shareholders. That's what we can do is grow the business.
Now I do notice that there seems to be a lot of message words. I perfectly don’t go to them. I get advice from them in once a while, but there seems to be some points of cyber rolling and the stuff that happens on the messages boards. We've recently learnt that our competitors, one of our competitors has taken on this tactic of going in there and speaking bad about the company as a way to tort our shareholder interest.
Once again we don’t give much credence to that. We won’t participate in that. We believe that ultimately in the end, if we continue to do the business and grow the business, the shareholder value will correct itself.
Next question, will it be a stock split in the mCig near future? There is no plans of a stock split. The only way we would consider a stock split would be if we were entertaining an uplift to the NASDAQ or we were looking at some type of multimillion-dollar capital raise, but none of that is in the plans, it’s not needed, we're cash flow positive, we’re growing our business both vertically and horizontally. A stock split has not been entertained at all in company discussions.
The next question goes in line with that, since more steps are being taken to list the company on a critical stock exchange such as NASDAQ or the New York Stock Exchange. We're positioned for such a move and we’ll continue to keep the company in a readiness state. We have no debt. We’re well positioned to do that. The decision to up lift though; we need to take into account the cost of that, the current revenues, the percentage of profitability we have, the share price that we're currently at and there is a lot of other mitigating circumstances the management is going to make a decision with the best to try to move up on a different platform.
We always continue to look at those opportunities and as the companies grow when it’s being viable to make that move, we’ll make the move.
Next question, what effect if any will the new regulations have on the company? mCig currently does not cross the green line. Our services are related to the lifestyle products and CVD brands, construction build outs, management and services. We’re insulated from the market and legal changes as they relate to cannabis and CVD.
Furthermore, we're a global company with reach into five continents. We will continue to expand our business internationally to offset any potential regulations in the USA that might time its growth temporarily.
And I believe this is the last question that we’re going to address. It’s been 41 minutes and we will let it to 45 minute call. So the last question I will address, once again if I’ve not addressed your questions, I would do so at the end of the call. You will hear back from us and I apologize for not being able to address your question today.
The last question was how do you see the DEA reschedule Marijuana will affect the top line? If the DEA reschedule Cannabis, there will be an enormous need for the services like the one that mCig provides to help the industry with expansion.
We feel we’re in a better position than most as we carry no debt and are revenue produce. While getting into the verticals .like construction, they stand a benefit to most from a favorable ruling. So in a nutshell, we believe that we positioned ourselves to move forward with the decisions that are being made and that we can navigate either way or anyway that the legislation goes.
Thank you for participating in the shareholder call. If you have any questions, feel free to contact us at firstname.lastname@example.org. We look forward to the next phone call. We will have a shareholder update call in three months. Thank you and have a good evening.
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