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Summary

  • Incredible amount of optimism towards a company with virtually no sales or assets.
  • Plans to compete in highly competitive industry with no evidence that it could succeed.
  • Valuation implies a better than "best case scenario" prior to actual execution of the business plan.
  • Hive Ceramics was recently bought from the VAPE CEO in a deal that strips all voting rights away from shareholders.
  • CFO Jerome Kaiser mysteriously resigns in midst of massive run-up in the stock.

So my friend Alex, who is a perfect contrarian indicator, called me the other day to ask me how to trade stocks. The last investment idea he had was buying a bunch of Bitcoin at $1200, effectively calling the top of that market. This time he has an itch to "invest" (and I use that term lightly) in what he called the "Green Rush", after obviously seeing a show on CNBC or Discovery about the new frontier of marijuana millionaires. His idea is to open a trading account and go long some of the high-flying marijuana stocks. He didn't know which ones in particular, just that he wanted to put his stake in the claim. This was all I needed to hear to pique my interest. After not paying much attention to the industry in general over the past year as it has been harvesting, what I found was just mind boggling to say the least.

Today I will profile Vape Holdings (OTCQB:VAPE), an OTC stock with virtually zero sales or assets that trades at a $235 million valuation for reasons that simply escape me. Their website is full of ambitious plans of action in highly competitive industries but with no signs of any follow through. It reads more like a high school student's business plan project than a real active company, which I don't believe it is. Here is just a sampling of what Vape is engaged in the business of, which you can see is clearly nothing:

Vape Holdings is currently negotiating with a Colorado state-licensed enterprise...

Vape Holdings intends to pioneer standards of manufacturing stable, pure, and highly effective...

Vape Holdings expects to increase scale after achieving the proposed acquisition of an initial cannabis extraction facility...

Vape Holdings intends to build sales channels within the legal marijuana markets with unique hardware...

Vape Holdings is poised to introduce cutting-edge technology specifically for vaporization of cannabis...

I am used to seeing sales copy like this on stock decks being peddled by fast talking brokers in a Vancouver boiler room selling the next titanium horseshoe. But the scary thing here is that due to all the hype surrounding the marijuana "Green Rush", Vape Holdings is now ridiculously valued at $235 million and in reality it is not worth more than the value of corporate reverse merger public shell that it trades through. This is a company after all with virtually zero sales or assets, tangible or intangible. They do however know how to push all the right buttons with investors, like my friend Alex, who are blindly looking for exposure in this space with no regards for valuation or logic.

One area of the vapor industry that I know intimately well due to some high level Internet sales and execution strategy that I have been retained to lead for a major brand, is electronic cigarettes. I have written about this booming industry long before it became mainstream. As such I have access to many executives in the industry and benefit from an insider's perspective. So when I read the fluffy E-Cigarettes page on the Vape Holdings website, I could not help but be amused. The truth is, the electronic cigarette industry is a highly competitive space dominated by a few major players who control the vast amount of the traditional distribution through retailers with exclusive contracts. I am speaking about Lorillard (NYSE:LO), who owns Blu Cigs, which dominates the displays at convenience stores and gas stations across the United States. Also Altria (NYSE:MO) recently bought Green Smoke and will look to compete in this space in a big way.

My point is that the electronic cigarette business is not a market that is easily penetrable. Sure, some space exists on the Internet where brands with unique marketing like Bull Smoke are able to carve out a small niche, but on a grand scale I would classify the chances of creating a brand worthy of a $235 million market valuation to be slim to none. Green Smoke, which is a best case scenario for any electronic cigarette brand, sold for $110 million. With both Lorillard and Altria now out of the picture and RJ Reynolds (NYSE:RAI) committed to their Vuse brand, I expect the acquisition market to be slow and valuations of vapor companies to consequently come under pressure.

However, in Vape Holding's case, the market has already factored in a best case scenario for what is an extremely unlikely possibility to begin with, that they can not only effectively compete in the electronic cigarette business, but be a major player or be bought out for considerably more than the biggest players have ever received, all without even a single sale. Are these unreasonably high expectations? You be the judge. From their website:

In order to succeed in this fragmented marketplace, especially considering the entry of "big tobacco" and their associated marketing budgets, Vape Holdings has teamed up with two marketing powerhouses in order to improve ROI on marketing investments moving forward.

Well that explains it. Vape Holdings has retained two marketing companies that I've never even heard of that will take them from zero sales to millions upon millions overnight to justify their current $235 million valuation. The market is forward looking after all.

Just for fun, I spoke to Nick Molina, somebody with deep industry roots and CEO of International Vapor Group. I briefed him about Vape Holdings and their current market valuation, which is based on their plan to go from zero to hero overnight in the vapor business. Here are his thoughts regarding Vape Holding's prospects in this extremely competitive industry:

Every legitimate gold rush is accompanied with unscrupulous opportunists. These opportunists can only prosper where there is greed and there is plenty here. Everyone wants to ride that next dotcom boom and many are seeing cannabis as just that. While I think the opportunity in cannabis is real, it carries with it a tremendous amount of execution risk. Ask yourself this, is that risk priced into the stock price of VAPE? It doesn't sound like it to me.

If all of these reasons aren't enough to avoid an investment in Vape Holdings, perhaps a couple recent regulatory filings may raise an eyebrow or three. Firstly on February 28, Vape Holdings filed an 8-K stating that they have purchased the assets of HIVE Ceramics for 500,000 preferred shares of VAPE plus a one-time conversion ratio adjustment that will take place in two years that can issue up to 5 million more shares based on sales targets. Vape Holdings only has a little over 6.5 million shares outstanding at the moment. So this deal to acquire HIVE Ceramics, which is a company without even online ordering functionality on their sparse website, can effectively dilute Vape Holdings shareholders by as much as 50%. Even worse for Vape Holdings investors, these preferred shares carry 15 votes each, giving the beneficiaries of the deal immediate full control over the voting of matters concerning Vape Holdings. Now who are the beneficiaries? One of them is Kyle Tracey, the CEO of Vape Holdings.

Not surprisingly there has been some fallout to this tomfoolery, although details are sparse. On March 6, Vape Holdings CFO and board member Jerome Kaiser resigned abruptly. It is very unusual for an executive to resign in the midst of a historic expansion of his company's fortunes. What could the reasoning be to resign now, after all of this? Despite having virtually no sales or assets to speak of, one would think by all of the recent PR hype that Vape Holdings is firing on all cylinders. Fact is, even at the wildest projections that I can fathom, which are likely many years out, it would be nearly impossible to justify a market valuation of $235 million. But lucky for you Mr. Investor, here is your opportunity to pay for a potential best case scenario now before the plan is even properly conceived. That is the boat that investors in Vape Holdings are paddling in right now, straight to the edge of Niagara Falls. As Thomas Tusser so eloquently said, "A fool and his money are soon parted". I have contacted the company for their comments and to offer an opportunity to refute my research and analysis. As of now, I have yet to receive any response. I have no skin in this stock at the moment but am strongly considering initiating a short position. Buyer beware.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in VAPE over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.