Electronic Cigarettes International Group's (ECIG) CEO Dan O'Neill on Q1 2016 Results - Earnings Call Transcript

| About: Electronic Cigarettes (ECIGQ)

Electronic Cigarettes International Group Limited (ECIG) Q1 2016 Earnings Conference Call May 16, 2016 5:00 PM ET


Matt Steinberg - IR, The Piacente Group

Dan O'Neill - CEO

Phil Anderson - CFO


Greetings, and welcome to the Electronic Cigarettes International Group’s First Quarter 2016 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, Doug and good afternoon everyone. Welcome to the Electronic Cigarettes International Group’s first quarter 2016 earnings conference call. The earnings release is distributed over the wire after the close of the financial market today, which is also available on the Company’s Web site 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 including our Form 10-Q for the three months ended March 31, 2016, 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 Web site. These documents may be obtained from the SEC or by visiting the Investor Relations section of our Web site.

All information provided on this call is as of today, May 16, 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

Thanks Matt. Good afternoon everyone. I would just like to start off by saying I’d be misleading you all if anyone thought I was happy with the Q1 results, I am certainly not. We can point and try to bury the fact that bury as in fact can be proud of our profit aspect of our profitable goal -- our profitable growth goal, sorry. But honestly it's not a very rewarding quarter in terms of the volume growth and the volume potential we had, we miss that. The gross profit margins are strong year-over-year and after even when you have to include the royalty charge which was quite significant. And the decrease significant huge improvement in operating expenses, they are big wins. However, the year-over-year growth is a disappointment and personally I was forecasting and believing may be much higher.

In evaluating what went wrong in the results versus our expectations, I point to three primary factors and take three points into consideration. 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, I am going to talk a lot more about those and more importantly what the resolutions we have incorporated in those areas at the latter part of the conversation today.

The second point is resolution, well obviously to the point of the 12% and 8%, we have to resolve our capital structure and it's clearly our priority over the next three months. It's a focus that we started on about three weeks ago, we are spending a lot of time on it. We have identified a lot of areas that are alternatives going forward. And we think we have alternatives that would be acceptable to the investors, but as I have said we are about one-third of the way through that process. Obviously have had to be cleared up and finalized prior to our next call. And so we are looking at the end and the completion of that with new alternatives by mid-June.

The second disappointing event was after spending 10 months to gain Walmart as a customer and it was a grueling 10 months getting out of a big depth that we owed them in the past moving that forward, and Phil and I joined in June, July while let's say in March, and April of last year, so a little sooner. We started working on that. The account notified us, we did our first sales as you know the big one where we actually got revenue and generated revenue in September 22nd.

But Walmart announced to us in January, a bit through January that they would be exiting the category. We understood that at the time to believe that would be a slow transition and that orders would keep coming in for the first quarter. We did receive small orders, more distribution orders to distribution centers that were still meeting product but they haven't come close to the original Q1 forecast, and that was a big part of our volume expectations and it would have had a big impact on our Q1 results.

The third major factor and this is pointing a finger more directly was on the part of management and the inability to meet the time tables that were forecasting. This may have been overzealous targets but as a team in totality around the world we missed several key dates. And I will speak to the changes that we made under that particular topic, when I review the strategic pillars.

Now the profit component of the profitable growth strategy continues to improve. We continue to make improvements with gross profits up 5%. As I mentioned that that's despite the new royalty payments we have kicked in, and impact our gross profit mix started in Q1, operating expenses were down over 50% in Q1 and we see that to continue into the future and maybe even improving in that area as we go and get further down the year. We have made many changes and are making changes to try to impact the expense line even further for an annual basis and as a result the net income improved year-over-year although it still remains negative as you've seen.

Now I'm going to turn the conversation over to Phil and then I'll come back after his conversation. Thank you.

Phil Anderson

Thanks, Dan. During the quarter ECIG’s gross margin increased 2% quarter-over-quarter due impart to the introduction late in the March quarter of an improved replacement cartridge for the advanced baking system products, which cost less for us to obtain the product. We have reduced SG&A expense by 7% quarter-over-quarter and further reductions are expected. The contribution of the Denver based finance and accounting department hired in 2015, we have reduced DSOs or day sales outstanding from 28 days since September 30th to 20 days on December 31st DSOs fell a further four days to 16 days at the end of the first quarter. As many of you know the Company recently changed auditors from a Grand Rapids Michigan based firm to a Denver based firm and the Company should realize a substantial cost reduction for audit and review work over the course of this year.

Thank you for your attention and I am now turning the call back to Dan.

Dan O'Neill

Okay. Thanks, Phil. Now the way I’d like to address the second part of this conversation and to help add and also simplify number one, and add continuity I’d like to review it based on the six core strategy unless you compare meeting-to-meeting and it keeps us focused on what our key priorities are. The first one is the establish VIP as an international premium brand. Without question the VIP brand remains one of the most well recognized brands in the UK, it’s a cornerstone of our Company when you look at same-store sales year-over-year on our kiosk sales year-over-year they are up 5.4% on a 12 month basis they were up 3.1% in the quarter, which is very solid and given the size of the units it's very, very important.

The challenge has been with some of our new kiosks. Last year we launched 50 kiosks. The sales velocity of about 20% of these locations is slower than we forecasted. The problem has been identified as a trial problem. Now, excuse me, when we first launched the kiosk we were basically in a Greenfield area so you would launch a kiosk, the sale of vaping products was relatively new, there was not several alternatives where people could go and more importantly habits hadn’t been formed but if you were a ECIG vaping consumer you were already going to your corner store, your local bake shop to get your product.

Where we entered a lot of these new kiosks they were not Greenfield operations, so people had already started or had their habit of going to your corner store or the corner bake shop and you had friends there. So that represented a completely different problem for us or challenge I would say so in that we finally we identified took us a while to identify what is going on and therefore we had to execute a different plan to make it happen. So we the management, we had a lot of discussions on how to speed up the rate of trial, as we know that the conversion on this product is super high. When you go to our ecommerce site our conversion there is 25%, so we know conversion is super, super, super positive.

So now what we would do when we were opening up or pre-opening up excuse me, prior to opening up kiosk we now have pre-opening promotions, you saw a picture on the news release with that van, well that van is a mobile unit that a month before a kiosk is going to open in point X, we go there and we get trial going we get samples given out, we get program trial product to give to your friends and they talk about the new location, so we are now in advance of opening, we do that type and to help reduce that trial period. We also have opening blige teams which will be new I will talk about that when I will talk about adding our organization strength and now and we also have support teams after openings.

So one of the examples and we saw it a lot is when of the 50 we opened last year, we just didn’t have the money to have enough people to go there and support the team. If you open up a new fast food restaurant senior management comes in, junior management comes in and they help out in the store for the opening and give a lot of promotions, we just didn’t have that type of talent available or the people available to do that. So we have been hiring new people and the other element in our kiosk is our commercial director who is super great, was given the added responsibility to her kiosk responsibility of international and she was going off, doing international and expanding her responsibilities and we saw her absence on the day-to-day business as being hurting the kiosks so over the last while we have addressed that and again I'll talk to that under the strategic core strategy number four.

The VIP kiosk U.S. in FlatIron malls north of Denver we were just re-launched it, and it is about third month of corporation we were just starting to pick up sales and moving forward. We were given notice by the mall owner that he had a change of heart regarding ECIG product in his mall, so he basically eliminated, he then notified us and one other ECIG store and two were specific kiosk so there was another kiosk people driving there were two stores selling electronic cigarettes that everyone had to close down their sales. So, just as we were getting up and running we moved it out. Now new launch plans are being pulled together by our new Chief Marketing Officer Monsell, and I'll talk briefly about that.

There is one other point before leaving VIP, that I think is important and I think it's very valuable for us to get a feel for the value of the brand and value of the U.S. and UK companies. Recently a company in the UK Ten Motives was purchased by British American Tobacco. Now I kind of look at Ten Motives is a different type of company, it's more of a company like they expected sales in the traditional trade and it’s quite aggressive in the trade. It has about equal sales, a few million dollars less than does our VIP product in fact when you take in Vapestick and VIP together we are probably $4 million or $5 million a year annually above Ten Motives. They were recently purchased and these are estimates and they are hard to get the numbers but in speaking with our UK guys they pulled this together for me.

They were sold this -- looking at may be $32 million to $33 million a year in revenue. They were sold recently for $75 million U.S. and we have a premium brand selling $6 million or $7 million, $5 million or $6 million a year more and so I look at that and go in, we are evaluating the company as is their value there. I think there is strong value there because of our total product and we are continuing to grow so we have to be able to -- if we continue to execute and execute better over the next couple of years I think we will be in a -- even the next quarter, two quarters, at the end of this year we are going to be in a very, very strong value creating situation.

Then the second strategy is the utilized FIN in Vapestick as traditional retail brand. FIN was below forecast due to that change of plans at Walmart which I mentioned, however it's become a growing e-commerce business for ECIG with strong gross profit margins and also the e-commerce business represents an outlet for some high inventory products with excess inventory or high inventory levels which been very, very valuable to us in terms of promotion. So that area continues to grow.

Vapestick in the U.S. continues to slowly expand sales with plans to launch an ecommerce business in the short term. The UK integration of Vapestick and Must Have, Must Have is the main company that’s a name of the company off which VIP was created, so the UK integration of Vapestick and Must Have, we moved management, we moved their offices, we moved their warehouse, customer service has all been completed. The move from non-profitable accounts has impacted revenue it is down about 50% on Vapestick in the quarter. However, profits increased over 70%, so this is this trade off that we want to keep giving away product and transitioning out of it, no we don’t. So the profitable growth strategy would took priority over revenue in the first quarter, a positive overall result on profitability and we will do that trade off any day and it is as far as we are concerned the correct strategy.

The expansion into alternative channels has been a major focus over the four months, both in the UK and the USA, ecommerce has been a primary focus. In the U.S., I mentioned the FIN ecommerce site as it was launched and is growing monthly. The UK has been extremely active, playing a little bit a catch up with respect to the VIP site, mostly updating it, bringing some news there, we have updated the Vapestick site and we are preparing to launch a new supermarket of liquids, as liquids are driving the overall business in the UK and there is increased competition. So we will not only use our own kiosks to expand our liquids, but we are going to go on a site and work with one of our primary manufactures and launch of joint site selling liquids. So that’s a big upside and we were hoping that that would be done earlier in the year and hopefully the plans are that it should get out and introduced in the month of May.

Our global ecommerce business which operates in the U.S. as well as several countries in Europe had a very strong quarter with strong gross margins. The challenge for this business is to improve the overall expense line required to drive the business. And we have a group of three or four people here in the company evaluating how to do that, the risk volume profit risk there, but that’s a matter of being a -- we have the volume. The ecommerce group works very strongly there, it's a matter of how do we unlock some of these expense inhibitors and I think we should have a recommendation next week where we will discuss with the business people on how to make that happen.

Organizational talent, it has been the area that has received the most attention in the first quarter and continued overlapped into the second quarter for both the U.S. and UK. The current talent pool has been spread way too think to address all the opportunities facing us. The breadth of responsibility of numerous people in the company had to be narrowed so that attention to detail could be improved and we could adhere to time tables. People were just too many -- were wearing too many hats and the time tables began to slip and if I say back, I would say that’s probably the greatest thing that impacted our performance over the quarter, not the fact that overall we are down and brands are failing and this is none of that, it is just a matter of fact that we missed a lot of what we had agreed to do and it's just a matter of too many hats for too few people.

So with respect to the overall talent base, first at the CFO position, and I am not saying this is an improvement in talent, it's a change here, and I am sure you have read it in the press release, Phil has decided to resign from the company, you can ask him questions about it at the end if he so desire, affective May 23rd. As you all know, I feel very strongly about having a team together in Denver, and despite trying to get Phil and his family to move to Denver. He has very, very strong family ties in New York where he lives with his spouse and two children and his wife has a great job, a full time job in the city. And his kids go to school in the city, and one of the sons goes to school in the city and it's just too much to ask for him to be here on a regular basis week in and week out especially in demands. He has done a great job in trying to maintain that. He is also agreed to remain with the company over the next three months, and help us to working in the recapitalization of the company.

Also there was a press release with respect to Bill Siemens. He has been hired as the new CFO replacing Phil and he will start Monday and the two would overlaps for probably three months. Bill has lived in Denver area for several years, he went through his MBA, did his graduation in MBA from here he has 20 years in private and public corporations. He is focused a lot on the building of refinancing companies and building small companies, he knows the pressures associated with that, his overall references were incredible and I'm super happy to have him on board and over the next three months period of giving him a chance to understand the reconstruction of the capital, but it will also if I brought him on and Phil had decided to leave immediately it would have left us with a very difficult transition where one of our most difficult things coming up is the recap. So Phil is going to help with that focused on that Bill will obviously contribute to that but at the same time he will get to look other elements of the organization.

The other change in the U.S. Company is Monsell Darville you've read his press release as well, he joined us April 1st. He is an award winning marketing professional he also has 20 years of experience. His has worked in a couple of small launch new -- small startup companies launching new alcohol products, capitalizing on his 18 years with Bacardi his latest position at Bacardi of Vice President of Brand Management. He is now and the thing that I like and appealed to me not only was he is a sound marketer, but he has had a lot of experience with regulated industries, working with the government, understanding the rules and regulations. He is not going to just cry about them he is just going to work it around them and make it happen, the regulations are here we can all scream and yell but we have to work within those regulations. So, that's a big addition and we welcome those two individuals to our company and we are sad to see Phil go but as I said he will contribute to us and Phil is the type of character that whenever we need to chat he will be there to help us out so that's not a major problem.

In the UK we've done a lot of major changes over the last six weeks with the primary goal of narrowing responsibilities and driving focus on execution. Those are the goals of the changes so Don Haynes, who was currently the Finance Director, will increase his role to Finance Director of Finance and Operating Director. He will take over a couple of projects that were on the other peoples’ in areas of responsibility primarily warehousing and shipping which will be a big relief to David Ryder. Dave was one of the original partners, he has been wearing numerous hats, a lot of things going on he joined the company to improve the ecommerce business, did a phenomenal job in driving the ecommerce and recently he has been responsible for ecommerce new products, contacts with suppliers, generating new sources of suppliers in the UK. All the new products activities that they do, all the new regulations that to the last two years have been done and he has done an outstanding job in all those areas.

So in conversation with Dave I wanted to understand A; what do you like doing the most? And where do you want to focus his time? And ecommerce came out immediately and he also wanted to focus on new products, one of the areas that we tentatively while we lost for a short period of time or fell behind him is our kiosk were known where as the go to place for new products and the newest creations, because one person had so much responsibility plus was working on all the regulations, we fell behind there. So Dave is going to continue to work on new products in ecommerce, but we are out the job description has been written to him we are out doing a search and I'm leaving tomorrow morning to go back to the UK and hopefully on Thursday I will meet a couple of the people, candidates for a new ecommerce person who will work directly for the Dave.

Miguel Corral who is one of the original founders, his whole love of businesses is sales and providing Don with more of the operating role and a lot more of the day-to-day business and follow-up and guidance of the total company that frees Miguel up to do a lot of the things which he likes to do which is spend a lot more time on sales, that’s his primary love he has talked to me about it. We have had a lot of discussion with these three people and I am trying to get them focused so they can spend more time and attention to the specific areas that they have contributed to and to play a little bit catch up for us.

Louise Stamper is our commercial director, back in September she has done all the launches, done a great job of -- she is new in the company probably about 15 months, 16 months has done a phenomenon job in driving our kiosk performance, launching new ones, upgrading them, getting in the best malls in the country. Just an incredible hard worker and very, very good last October, November when we started doing a lot of our international conversations and business relationship with the Central Europe and actually in parts of Africa she had to tick the ball, and tick x amount -- 50% of her time away from the kiosk business and that we feel was probably a mistake on our part the management’s part due to why her work into two parts, so we have asked her and she is very happy to go back and spend 100% of her time in kiosk getting them back up to speed and growing that business in a manner similar to last year. To do the international job we hired a new person I interviewed him back in near the end of the April they started on May 6th and they have already left and come back from their first day of work was getting on a plane and travelling in Africa and it’s comeback from their first visit there.

So those are the changes and you can see very, very clearly where we have narrowed the responsibilities, expanded a number of people, our management people and we are going to focus on execution. In addition to that as I mentioned previously we will be adding six specialists to our kiosk area, three will be a blige team for helping kiosk that are suffering or falling behind in their sales going in and helping them and identifying the training, improving their training. And those people I will see tomorrow, or no Wednesday and Thursday, where they are in hiring those, but we should be down the road. We also will be hiring three people dedicated to assist in new location openings, how to generate enthusiasm around the kiosk, bring people to the kiosks, who are in the malls and moving there. We have also put out a job description for a new HR person we have been working without one -- without a senior HR person we feel given the size of the keep people that is over 270 people in the UK company that we need a full time HR person and we are trying to focus on an individual who had experience in franchise business whether it be primarily a fast food area where you see them with their blige teams and their new product teams and their re-vitalization teams.

So we are searching for that person and you can see by the focus that we have identified where we feel we have identified where we are weak, we have put activities together to address it and we are moving forward especially while both in the UK and USA, but I think if you look at it with the international focus with the UK focus, with U.S. focus we obviously are not happy I am personally super not happy about the results, puts me in a difficult position even having to have this conversation and I don't want it to be a common theme we are the individuals in the company are willing to accept poor performance.

Okay. The last, the latter is two other strategies that number four is critical, as I mentioned the low cost provider is the fifth strategy excuse me, can be observed in the points made by Phil earlier as well as the clear impact if you just look at the P&L and gross profit and expense level. There is a lot of things we are doing, good example would be our new audit firm, it’s Denver-based again I want things here, great experience, much more cost efficient than our previous provider, another point China FirstUnion one of our main suppliers has been a great partner in developing improved products at lower cost, and Phil also mentioned that. So we are building relationships with these suppliers, got to a great relationship with a liquid supplier in the UK, so there are very, they are very-very solid and we are improving especially we were a year ago when we weren’t paying most of these suppliers.

Working capital the fifth area and as we have talked about in our sixth area -- the sixth final area of communication, with respect to the six strategic pillars, I mentioned at the outset of the call, the interest payments -- they are there is no question a limiting factor of growth and, it's -- our interest is currently at $2.7 million quarterly, it's simply too much of a burn for the company to bare. As you all aware our notes come due in July and August, I mentioned that earlier, Phil and I have dedicated our efforts on working towards a solution of restructuring the debt and as I mentioned Bill will assist us especially because he has done this in the Denver area. We will look for some input from several sources and one of them will be people who have investment groups who have done this before. So we feel pretty comfortable that will have a broad enough outlook, a broad enough review of what can be done to be able to present to the current debtholders a plan that makes sense, a plan they want to invest in and obviously a plan that will give us a longer runway to develop the overall value and create value for shareholders that we need, and that we haven't delivered to this point in time.

Prior to ending the call, there are a couple of points I would like to address, but once again I want to thank Phil for his willingness to stick around for a clear transition. I just was very much appreciative, I mentioned that a couple of times. A couple of questions that are probably going to come out and I think valuable in speaking now the FDA ruling one of our thoughts why do we feel, what do we think about them, well I think it's pretty broad, despite the length of the document and I am sure none of you read it page-to-page it is 499 pages, I think that we can summarize in several key points. Sales to minors is prohibited in 90 days and we have the capability to do that, that’s not an issue that we knew, we have been pretty good on that a lot of our ecommerce business already, that’s not a major factors. Manufactures have three years to obtain FDA approval for products that’s gives us enough lead time, we knew that was coming. So that’s not a problem, I think the -- it's just the matter of executing the vape shops and most of the small businesses, we anticipate will have to exit the industry, it's really, really in fact it will impact the competitive set. These small companies will be really-really hurt -- will be hurt possibly. But to nowhere near at the extent that the small businesses will be.

Our UK Company has already gone through the complete process, which goes into effect in the next five to seven days. So we have had a really, really good learning. Our strategic plan that we completed in September of last year, had most of the FDA changes identified, we have had a lot of time to do it, to look at it and I have spoken to our major suppliers and [Audio Gap] and get these things over with as soon as possible. The one key learning that you take away from the UK lesson is that we have signed an individual who had a full time job, Dave Ryder to also doing that. We are not going to make that mistake twice because it hurt our business once. I have already spoken to one individual, I mean I’ll follow up with them, we have a couple other leads on people that we would bring them in as a consultant or part time employees say look, we just want you to focus on this, we don’t enough -- we don’t want to distract others and try to keep their fingers in two different place. So that will be a point we are doing.

Now, one other point that seems to have bossed a lot of emphasis and power is that people are overlooking and on April 29th, Tom Cole a congressman from Oklahoma amended the agricultural appropriations bill and to change the grandfather date for deemed tobacco products to August of 2016, now the current law by the FDA goes all the way back to 2007 and this person the congressman Tom Cole has already fastened the house an application and it's been passed 31 to 19 and obviously it's still has to go through a lot of processes but that's out there as well we are not counting on that as the savior, as we are going ahead and going after all the changes that are required. But it's a big factor and it's still there.

The other situation is there has been a lot of, a lot that’s scrubbed up in the last week, there is a meeting of the ECIG association on Wednesday which will be part of that call, but there is already a lots of legal action going against the FDA about this whole law. So that's -- it's there we knew it was coming, we knew we would have time to react and will go forward and we will respond to it and if we have a new product that has no connection to the past, we may have to split costs with our manufacturer but we are not the manufacturer we are the seller it will impact us, will it impact price? Possibly, there is a huge gap between us and the industry on a prep-up basis so it will impact possibly, but it will be business as usual for us, we will do -- we will get the products out there hopefully the Cole, the congressman’s law will move forward and make it easier for everyone but in the meantime we will operate under the belief that the FDA rules will continue. I am not sure if you want to add questions after the call that is fine.

Now the one other change and there has been a lot of changes that I've already talked about in terms of people, regarding Investor Relations where we are transitioning to a new outside agency Dennard and Lascar Associates and that's effective tomorrow we look forward to improving our investment communications, there has been millions of complains to me online about my restrictiveness in how we respond and how much we tell and how much we communicate. And I don’t want to point out that at our current IR firm I've been somewhat restrictive there. I want to build the stock on value but not on hype and there is a combination there, which we are getting together with Dennard and Lascar next week for two days to work out a plan of where we are going and how we want to communicate, so hopefully that will meet the shareholders request and The Piacente Group I'd like to thank them for their assistance over the last 14 months.

So that is where I'd like to leave the call off I'll open it to questions, Phil and I are both here, the new CFO is on the line, but not on the line for questions. I think it's unfair to roll him into the wolves right of the bat, and he hasn’t even started in the company yet so I'll turn it over and be open for questions. Thank you.

Question-and-Answer Session


Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ray Irvine, a Private Investor. Pleas proceed with your question.

Unidentified Analyst

Dan, Ray Irvine here. Glad that you are sticking around through some of the top stuffs that we didn’t anticipate, good to hear that you recognized the need to be more communicative with shareholders, but I want to address one particular issue that I think our problem with the public markets is twofold, one is obviously I think we need more communication, more detail, it's kind of expected within the OTC market, but we really don’t have an audience outside of the existing shareholder base, so even if we increase the communications we are not increasing the audience for the communications, do you agree that we need to have a proactive effort to broaden the audience for our message and is that going to be a part of the discussions that you are going to be having next week with the new firm?

Dan O'Neill

Yes, and the answer -- and thanks for your question. The answer is yes right the yes, yes, yes. I mean the situation is I have been -- I don’t want to build false hopes and be as if you want to hype with [indiscernible]. I had a lot of conversation when I was interviewing different firms about what their abilities are to get out there and get us meeting and interview and presentations. I didn’t want at the ROTH Conference as everyone knows.

Unidentified Analyst


Dan O'Neill

Went reasonably well I think the response was positive. But I always seemed to think there is this, I am going to get out and sale crazy the stock and then it's going to be the bump. So that what I -- what we plan to do we are going to meet as I said next -- I comeback on Monday, Sunday from the UK and then Tuesday and Wednesday we have a meeting. And what I want to do is set up a plan but then the first question you are going to say to me "oh you are going to grade before you do the recap" well that will be pretty crazy as well. So what we will do is once we get comfortable or once we have the recap done and it gives us a longer runway then I want to be very aggressive in going out and bringing in new shareholders and that’s the plan because I can't go out and say "oh look at this see how great we are doing we have all these opportunities we made these changes" and then come back and say " well yes, we only have a runway till July or August". In terms of if you are -- how long do we have right now at this second that’s the length of time, how long will we have after we renegotiate I hope a lot longer than we had the last time. So that’s going to be the driver once we get that done, and I ain’t saying this because you can -- everyone on this call can say, yes you told it three times you were going to -- but that is I think the hurdle that once we get over that and people say "oh yes, a year, two years, three years, four years" whatever the timeframe is it shows the whole different respect by our shareholder base or debtholder base man they believed that we can do this that should change the whole parameters and then and especially I want to go to the UK where everyone knows how strong the brand is and you walk down the street and you see it and you know it's not only.

Unidentified Analyst


Dan O'Neill

…in the Walgreens of the world it’s everywhere.

Unidentified analyst

Sure I do appreciate that part of your style Dan that you are not a typical kind of bumped and dumb OTC CEO that anybody has been evolved this market is well to familiar with. I would just leave you with one piece advise and that is you probably want to get the process started in advance of the recap just to get people looking at the company putting it on the radar screen so that when you do execute on it, and you have got that story to tell you have already got people that are anticipating that news and so you don’t have to start from scratch at that point.

Dan O'Neill

Okay well I wrote down that point, we will bring that up in the meeting and evaluate it with the new team on Tuesday and Wednesday of next week but I am sure with the number of emails you send me you will remind me of that.

Unidentified analyst

Yes you can count on that Dan [Multiple Speakers] anyways thank you for your time.


Our next question comes from the line of [Don] [Douglas Grignon] from [Clean State]. Please proceed with your question.

Unidentified analyst

Well gentlemen, one question two parts. What do you see Dan as you primary say two competitive advantages holistically as a company and then following that if one of them is the kiosk strategy in the UK do you see that translate into the U.S. so where we are at, at that? Thank you.

Dan O'Neill

Great, good questions and I would have answered that differently than I do now because I would have answered that differently a year ago from what I know now and it’s -- and I have evolved into this. You know that pretty much on the nail on the head when you talked about it, it's our distribution network if you think of our distribution network currently with 175 kiosks and you think of how long it would take a major company to distribute product okay, so with my experience in my three months to get your product in 80% of distribution. We can get any new product to market and that’s why we are a fast follower and it works for us. Because we can get our -- we can find a product and have it in 175 kiosks and hopefully 200 kiosks by the end of this year, in four days, three days okay. And all our competitors understand that and see that and look at it as a huge competitive advantage.

I personally have come to believe that’s a huge -- an incredible competitive advantage, A; because getting the product there sooner but also our kiosks aren’t advertised and people say well you haven’t done advertising, and we have showed you pictures of our kiosk, that’s advertising. So if they cut advertising on this industry that’s the name of our product. VIP is the name of the product we just have to have the name on our kiosk. There is super, a lot of advantages to it, it's also personal sales, drawing people in and letting them you come inside the booth, you engage with our people. So there is a whole bunch of -- and I believe that is what impacts the conversion rate so high as you walk in and well I don’t like men follow -- well try this it is a vanilla and then what's your favorite taste, vanilla or Chocó whatever, well not Chocó obviously but -- so you can have those conversations, they walk away with a printed out here is the combination that you like best okay and you walk away.

Now, so I look at that as a huge plus and when we talk about international, which we have done a lot in the last three months going out and sort of beginning to plant, not plant the flag but bringing the flag to place with the plant. My first question out to this people is can you do a kiosk say why do we want to do retail, and I said what I would like to do kiosk there is always a trade off. But the kiosk without question is a huge competitive advantage and if we keep building it, you think of the value we would create, if we ever did want to sell this company and pick Tobacone to buy and we are saying look we have 300 kiosks and that’s your distribution network, and you don’t have to pay listing fees and you don’t -- and you can control it, and there is no competitors. What if a competitor came to us from the U.S. and said could we use your distribution network. That would be a decision, is it a conflict with VIP and could we sell that as a tool and make money by letting other people utilize other maybe one, we don’t want it to be a smallest board of product, but one product looking at it in the same. This is probably, maybe a good opportunity for us to expand to a very strong brand, a U.S. brand or whatever a different brand.

Now, in addition to that when we talk to our suppliers, we have say -- and they will show us a product, this has already happened or it is happening as we speak. They show us a product and it's a unique new product, they come to us and say look, here is a new product, we say we want exclusivity, they say we won’t give you exclusivity we can give you 100 to 200 locations in the UK in a week. And the conversation changes, so there is a whole bunch of super strong leverage points about those kiosks, that’s part one of your question. Part two of your question, is very intriguing we went into our first mall, because there was right after that explosion happened to that young man and within his face, and the owner of the mall came to that and we want on to this, okay. The owner of several malls, we were one of them, we don’t want to have that risk, we don’t want to be associated with that, now that was before the FDA regulations, so we might have an opportunity to go back.

We do have several ideas that I think are really good on how to -- if you think about the magnitude of the situation we are facing, okay we have 175 right now in the UK, we each year you clean some up you go down a bit so the net difference, last year it was net 50, this year not sure, okay. So you sit there and how do you do if you have that many in the country the size of the UK, that includes Ireland as well where there is 33. You think holy smokes that we have a real power house in the U.S., how big you would be how big many of you have to have and how do you go about doing that. And again here we were with EMEA is kind of two cooking battle washer trying to do that at the same time and Monsell and we've had a -- he and I had a lot of conversations about how to execute its strategy, do we go by region do we by somebody do we just focus in a certain part of the U.S. that's what we are looking at, and trying to evaluate. We will -- a lot of these big shops go out of business because of what this new law is given that's come out or there is an opportunity to go tied to a guy who has 10 big shops and say what if we can come your supplier we turn these over to VIP shops those are the types of things we are looking at and there is a bunch that we can do and we just need -- I just don’t have time to do it and hopefully we can get that done and look at it before the end of the fiscal year.


Our next question comes from the line of Rick O'Brien, a Private Investor. Please proceed with your question.

Unidentified Analyst

I was just wondering I've seen you guys turn the ship around slowly but surely, would there be any possibility of a 5 to 1 RS coming up soon?

Dan O'Neill

Phil can give us an opinion on this as well. I just -- I feel uncomfortable in answering that I would say no would be my first off the top of my head, but remember we are going into this deal here where we are trying to work out a program for the investors to stay with us and reduce our interest rates, so I just hesitate to answer to that question or respond to that at the current time but -- and I don’t want to [Multiple Speakers] answer you so it must be happening and I'm going well no that's not the case but I just don’t know -- I don’t have an answer because I have not given any thought to that.

[Multiple Speakers]

Phil Anderson

If we were going to pursue a reserve stock split we would file a proxy statement to shareholders there would be a shareholder vote and a period for comment that would be a fairly lengthy process. I think process when we did at the beginning part of 2015 took about 60 to 75 days start to finish that you might infer because there is no proxy or preliminary proxy which has been issued you might -- you can obviously conclude we are not pursing one today.

Unidentified Analyst

No I understand well I didn’t want to put you guys on the spot, I'm just looking at the overall -- what's your new team hiring all bunch of people I just figured you might have to raise some capital in that sense would be positive for a long-term investment?

Dan O'Neill

I mean if we were I would or as Phil said it would be a long process it is not currently it is not something currently we are considering or thinking about. At some point there is opportunities with some good companies out there that if we got our act together and go to our debtors and say hey there is an opportunity or at FIN we got our act together and we got our results rolling I mean my first thing that I would love to be able to say to our debtor is look we got a loan at a bank it's ex-number of years, we've had some good results and let's pay you out and move on with a normal loan that are reasonable interest rate I mean 10 years of time and we could just continue to expand the company, that would be, that's what I see as going if you said it is something what's way down the road but that's Dan's head at the top of my head not a plan it's not written it's just looking at things out there that I think would be very valuable to us if we could ever deliver what the opportunities are that are in front of us would just give us a much broader opportunity base.

Unidentified Analyst

I am sorry -- no you said foresight I think you guys are doing a great job. Phil's got to stay in New York with his wife and family, makes sense nice transition coming. I think it's more positive than negative right now and thank you for your time.


This does conclude the Q&A session. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful evening.

Dan O'Neill

Thank you very much.

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