The Update as of March 2017
In late October of last year, we reviewed VPR Brands, LP, which trades under the symbol VPRB. In the report we provided a full overview of the Company created as a result of the purchase of the wholesale assets of Vapor Corp.
In this new report we provided update on VPR Brands. We continue to be excited about this Company, as we believe the long-term growth prospects for E cigarettes and vaping are still strong. Additionally, we love to see companies deliver and CEO, Kevin Frija, has delivered to a significant degree on what he had set out to accomplish. We continue to believe there are few people more qualified to lead the Company as he has been an industry leader for many years and is well prepared to navigate the fast-changing regulatory situation occurring within this sector.
As a matter of introduction to investors who are unfamiliar with the VRP Brands story, VPR Brands was incorporated in 2004, changing its name to VPR Brands, LP during September of 2015. In addition to the new wholesale business, which mainly involves sales of product to retailers, the Company markets a brand of electronic cigarette e-liquids marketed under the brand name “Helium” to U.S.-based retailers. At the end of July 2016, the Company acquired the wholesale operations and assets of Vapor Corp.
So What’s New?
Even though results for the three-month period ending September 30, 2016 included only two months of combined revenues, the Company was still able to report a robust $608,354 and gross profits of $198,554. With operating expenses of about $313,000, the Company reported an operating loss of approximately $114,000. However, an operating loss was expected and it was substantially less than we had expected. With a full complement of quarterly revenue, we believe the Company would have been very close to operating profitability.
As impressed as we were with the September quarter’s income statement, we were even more impressed by the balance sheet. At September 30, 2016, the Company had current assets of $867,000 and current liabilities of only $304,000. $246,000 of the current liabilities were related to notes payable, which we believe will be relatively easy to refinance. The balance sheet improvements were significant.
Vape consumers love new products and a very willing to try the latest technologies that offer enhanced enjoyment and better convenience. Based on recent product introductions, it is clear Company management understands this also, as the flow of new products has been exceptional. During January and February, the Company announced new oil extract vapor battery technology that enables the miniaturization of vape pens, a new handheld vape line in a retro case, an improved STINGER product for the very successful Honey Stick brand, a new cannabis multi-tool, and a cannabis packaging initiative, in addition to several other enhancements to other products carried by the Company. It was certainly a busy product introduction period for the Company, but new introductions into this space are vital for long-term viability considering the highly capricious purchasing patterns of vape consumers.
Since our last report on this Company, there has been a merging of the vaping industry and the growing cannabis sector. VPR Brands must now be considered squarely within cannabis marketplace.
Considering the many changes within the Vape and cannabis consumer sectors, communication of the product and marketing message is more critical than ever. Nationwide, vape and cannabis-related industry events are extraordinarily well attended (many are literally sold out long waiting lists to attend or exhibit) as resellers, distributors and consumers actively seek information on the latest industry products.
Management has done an extraordinarily good job, in our opinion, in communicating its product message via the attendance on the tradeshow circuit. Attendance at these trade shows and conferences is often expensive, but it appears from the Company’s operating numbers that have recently been reported that such attendance has been done rather cost-effectively.
The downside of aggressive attendance at these events is that sometimes near-term revenues can suffer, but the long-term benefits can be significant. Nevertheless, we believe the investments the Company has made relative to these areas will likely pay off very significantly during the 1st half of calendar 2017.
We also noticed the Company has revamped its website and has started accepting direct online orders from consumers. This is a new potential source of meaningful revenue for the Company and we emphasize that during previous report periods no such revenues had been booked.
It will likely take several more months for us to see results from this area, but there is certainly potential, which would likely occur at strong gross margins. The Company has also opened a retail store and showroom utilizing some existing space. The Company is attempting to turn this into a profit center, but also indicates it has been able to introduce the business at very minimal expense. While the retail store sales to the public, we believe one of the most important aspects of the new operation maybe to show wholesale customers the full breadth of product the Company can bring to the marketplace. We certainly see upside potential from these initiatives.
Predicting the Soon to be Reported December Quarter Revenues
We are expecting the VPR to report robust growth for the soon to be reported December 2016 Quarter. Simply based on the two months of revenues reported for the three-month period ending September 2016, which was approximately $608,000, we would expect the Company to report revenues of approximately $900,000, with potential for upside of up to $1 million.
If we apply the cost structure seen during the September 2016 period to our expected revenue for the December quarter, it is possible the operating loss to be further curtailed. However, we would be disappointed if this happened as we believe there are substantial marketing opportunities available for the Company and that additional spending relative to this area is certainly warranted. Considering the experienced management team at the helm of VPR likely also believes this, we expect to see strong sales and marketing related expenses to be reported for the December quarter.
Therefore, we expect the Company to report an additional operating loss for the quarter. With that said, however, we believe it is important to point out that VPR has a significant opportunity to exert its strength in a market that is rapidly changing. This process is not inexpensive and as long as sales and marketing related expenses are reasonable, we believe investors will understand management objectives.
Simply put, the gauge of success relative to the December Quarter results should be revenue growth that comes about as a result of reasonable operating expense growth.
Introduction – VPR Brands, LP (OTC:VPRB)
VPR Brands, LP, which trades under the OTC stock symbol VPRB was organized in 2014 as a technology holding company with mainly intellectual property related assets for medical marijuana vaporizers, electric cigarette products and related components for both of these emerging technologies and markets. The assets included not only issued U.S. patents, but also several Chinese patents. VPR Brands was also active in the development of vaping products, particularly e-liquids.
At the end of July 2016, the Company acquired the wholesale operations and assets of Vapor Corp. (OTC:VPOR) in a transaction that included a one-year promissory note and a loan to the Company from Vapor Corp. secured by a 36-month note. The transaction firmly places VPR Brands in the wholesale market for vaping and e-cigarette products.
VPR Brands was incorporated in 2004, changing its name to VPR Brands, LP during September of 2015. In addition to the new wholesale business, which mainly involves sales of product to retailers, the Company markets a brand of electronic cigarette e-liquids marketed under the brand name “Helium” to U.S.-based retailers.
The Helium brand is an interesting innovation in e-liquids. Specifically, called Helium Hi Definition E-Liquid, it is a product that is cooled to 20 degrees below room temperature by mini-chillers or desktop chillers that are designed by the Company. This chilling process allows for the maintenance of optimum flavor and aroma and helps to preserve overall freshness of the liquid. This chilling process significantly reduces the escape of molecules from the e-liquid, providing the customer with a better overall vaping experience. Please see Exhibit One.
Exhibit One – VPR Brands Helium Hi Definition E-Liquid
Source: VPR Brands, LP
Other VPR Brands include the below. These are also shown in Exhibit Two:
§ Honey Stick a premium open tank mod specifically designed and intended to be used for essential oils and which is becoming popular in medical and recreational marijuana legal states.
§ Vaporin brand (vaporin.com) is a high quality entry-level range of product sold nationwide in smoke shops, convenience stores and gas stations.
§ VaporX brand (iVaporX.com) a premium mod and open tank system program for the experienced Vape customer all for under $100 and available at retail in custom display.
§ Hooka Stix brand Hooka flavor inspired “cigalikes” (which are electronic cigarettes designed to look as much as a tobacco cigarette as possible).
Exhibit Two – Selected VRP Brands, LP Product and Brands
Source: VPR Brands, LP
Integration of the New Wholesale Group
Over the coming months, Company management plans to take several steps to integrate the newly acquired wholesales business. All of the employees employed in the wholesale operation of Vapor Corp. have be integrated into the Company assuming similar roles in sales and logistics. We believe this is important as it will preserve continuity in the business allowing for the preservation of current customer relationships. Additional continuity is being preserved because all of the brands, trademarks, websites and customer accounts were also transferred over to VPR Brands.
The timing of the acquisition of Vapor Corps wholesale business was also very important. Within the E-cigarette and vaping industry significant upheaval is occurring due to a change in regulatory treatment by the FDA of these products.
The government had set August 8, 2016 as the cutoff date of any new product from being introduced at retail in the U.S. without first receiving premarket approval from the FDA. It is expected this provision will allow for products that were currently available prior to August 8, 2016 to remain in the marketplace likely through 2019.
Considering that no new products are being allowed to come into the marketplace, current wholesalers, such as VPR Brands, are especially well-positioned to provide product to retailers and consumers via online assets.
The Ultra Brief Vaping Tutorial
Electronic cigarettes, which are also often referred to simply as e-cigs or e-cigarettes, are handheld devices which deliver nicotine through atomization of e-liquids. These devices eliminate smoke and the other chemical components usually found in traditional burning cigarette products. E-liquids are the liquids that are atomized by the device. These liquids are usually propylene glycol or vegetable glycerin, or a combination of the two, combined with nicotine and flavorings.
The first major application for vaping technology was for tobacco harm reduction. While the effects of vaping on the human body are not yet fully known, it is generally considered less toxic than traditional tobacco cigarettes because the products do not produce smoke. The electronic cigarette industry was very effective in initially convincing regulators that the use of electronic cigarettes was away to reduce the health consequences of traditional tobacco usage, although the scientific evidence of this is still quite debatable.
There is a massive shift occurring in the market for electronic cigarettes and other related products. Where several years ago the major use of electronic cigarettes was as a replacement for traditional cigarettes, the prevalence of using electronic cigarette technologies for the consumption of cannabis is quickly sweeping the marketplace. Just as cigarette smokers are concerned about the health effects of inhaling smoke and the many chemical components, so too are cannabis users who are increasingly becoming aware of the health effects of traditional cannabis use via inhalation of the combusted cannabis flowers.
In addition to the reduction of the harmful effects of inhaling combusted cannabis flowers, there are other reasons for the increasing popularity of “vaping” cannabis. The chemical properties of Tetrahydrocannabinol (THC), the psychoactive constituent of cannabis, and other cannabinoids, are such that vaporization occurs at approximately 285°F. However, cannabis plant fibers begin to combust at approximately 400°F with fully burning cannabis reaching nearly 2,000°. This high temperature combustion results in many undesirable gases and chemicals reaching the lungs. This is particularly troublesome considering that most cannabis smokers incorrectly believe that holding in the smoke for a period of time will increase the absorption of THC, when in fact the only thing that is increasingly absorbed are the harmful chemicals.
Exhibit Three – What is Vaping?
The delivery of cannabinoids via electronic cigarette technology (vaping) yields a very different result. Typically, the vaporized gases consist of approximately 95% cannabinoids with the remaining 5% being oils left over from the plant material. The benefits of vaping cannabis extend beyond the obvious reduction in smoke, undesirable gases and chemicals. Of course, THC is simply one of the cannabinoids found in cannabis. Many people believe that the other cannabinoids, cannabidiol (CBC), in particular, have positive health benefits on the human body. Smoking cannabis flowers, primarily due to the high temperature combustion that occurs, destroys many of the cannabinoids, thus not providing some of the supposedly health benefits that many cannabis users desire. With the low temperature combustion that occurs with vaping, most of these cannabinoids are preserved and can be delivered into the body via the vapor.
Whether for traditional tobacco product use cessation or as a delivery mechanism for either medical or recreational cannabis usage, there is simply no debate about the sheer size of this market and the growth the market has experienced. As is outlined in Exhibit Four, growth rates in the United States in the major European economies have been extremely robust.
Exhibit Four – Booming Market Growth
Source: The Economist
While the market for electronic cigarettes, and related technologies, has grown rapidly over the past few years, it is still considerably smaller than the market for traditional smokable products. The market for electronic cigarettes, and related technologies, has grown from approximately $20 million in 2008 to around $1.5 billion in 2014. And as can be seen in Exhibit Five, while the market for smokable products continues to contract, it still dwarfs the electronic cigarette, and related technology, markets.
While there certainly has been a slow down in the growth rate for e-cigarettes and related technologies, the market is still of considerable size, as is reflected in Exhibit Six. Several analyst are predicting strong long-term growth for the industry.
Consulting firm EuroMonitor, for example, is predicting growth, as is outlined in Exhibit Five, to $50 billion in annual revenues by the year 2030 for approximately $6 billion in annual revenue currently. So, while there will clearly be period of accelerating and declining growth rates, the long term trends certainly point to continued market robustness.
Exhibit Five – The Declining Market for Smokeables
Exhibit Six – Market Forecast – Vaping Devices Worldwide
Source: EuroMonitor, LP
Based on our analysis, we believe investors may be in for a surprise when VPR Brands, Inc. reports its December quarter, which we believe will be filed with the SEC very soon.
We expect a minimum of $900,000 of revenue, but would not be surprised to see revenues in the $1.0 million range, with strong gross margins. We also expect to see little to no common share dilution in the upcoming report.
With the cash infusions, we will likely see several hundred thousand dollars of cash on the balance sheet.
We consider this Company to be well positioned in the wholesale business especially considering the changing regulatory environment. Companies that have been selling into this market space have seen their products grandfathered, while new products are almost effectively locked out of the marketplace until a lengthy and expensive regulatory approval process can take place.
Certainly, in our opinion, this is a major advantage for VPR Brands.
We also believe that investors have not focused on this Company because of the lack of information and clarity into the operations. The up coming quarterly SEC filing likely sheds light on the situation, which could be viewed very positively by investors.
Also in the positive column relative to any analysis of this Company is likely the experience of CEO, Kevin Frija. He is an industry veteran with arguably as much, or more experience, in wholesale e-cigarette and vaping products than any other manager or executive within this marketplace.
In the quarterly filing we will be watching for revenue levels, absence or presence of common share dilution, gross margins on the newly acquired wholesale business and management statements about the future of the Company.
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