Vapor's (VPCO) CEO Jeff Holman on Q2 2014 Results - Earnings Call Transcript

Aug.14.14 | About: Vapor Corp. (VPCO)

Vapor Corp. (NASDAQ:VPCO)

Q2 2014 Results Earnings Conference Call

August 14, 2014 10:30 AM ET

Executives

Garth Russell - KCSA Strategic Communications, IR

Jeff Holman - President and CEO

Harlan Press - Chief Financial Officer

Analysts

Tony Brenner - ROTH Capital Partners

Bill Sutherland - Emerging Growth Equities

Operator

Please standby, we are about to begin. Good day. And welcome to the Vapor Corp. Second Quarter 2014 Earnings Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Garth Russell of KCSA Strategic Communications. Please go ahead, sir.

Garth Russell

Thank you. Before I turn the call over to management, I would like to make the following remarks concerning forward-looking statements. All statements made during this conference call that are not based on historical facts are forward-looking statements, words, anticipate, believe, estimate, expect, intend, will, assume, confidence, target, project and other similar expressions that may use to identify forward-looking statements.

These forward-looking statements are not guarantees of future performance and may involve and are subject to risks and factors that may affect Vapor Corp.’s business, financial conditions and operating results.

Some of the risks and factors that may effect such results are described in Vapor Corp.’s annual report on Form 10-K for the year ended December 31, 2013, or quarterly report on Form 10-Q for the quarter ended June 30, 2014.

Additional risks and factors maybe described from time-to-time in the company’s subsequent filings with the Securities and Exchange Commission to which your attention is directed. Therefore actual results and outcomes may differ materially from what is expressed or implied by these forward-looking statements. Vapor Corp. expressly disclaims any intend or obligation to update these forward-looking statements.

I would also like to point out that the remarks made during this conference call are based on future understandings that are believe to be accurate as of today’s date August 14, 2014. This call is the property of Vapor Corp. any distribution, transmission, broadcast or rebroadcast of this call in any form without the express written consent of the company is prohibited.

A digital replay of this call will be available through August 28, 2014 at (877) 870-5176 for U.S. toll free or (858) 384-5517 for international callers. The pin number is required 3679759. The replay will also be available at the company's website for a limited time.

At this time, it’s now my pleasure to turn the call over to Jeff Holman, President and Chief Executive Officer of Vapor Corp. Jeff, the floor is yours.

Jeff Holman

Thank you, Garth. Good morning, everyone. And welcome to Vapor Corp.’s second quarter 2014 earnings conference call. This morning, I am joined by our CFO, Mr. Harlan Press.

During today’s call, we will provide an overview of Vapor Corp.’s Q2 2014 operational and financial performance. After presenting our prepared remarks, we will conduct a Q&A session. Also note, that the company does not provide financial and operating guidance on a quarterly or annual basis. With that, let’s get started.

As I have stated in the past, Vapor Corp. is a technology company and as is the case with many emerging technology industries, rapid change is continuing in both the e-cigg and vaporizing markets.

The incredible growth rate in our industry has attracted many new players including tobacco which as anticipated has not cause in dislocation in the market. Conversely, a significant positive result of the tobaccos increased activity space with the launch of national media campaigns, which have generated broader public awareness in e-ciggs and vaporizers, as well as improve the public education curve through these types of products.

Over the past several months, we have continued with our innovation of products and we have proactively adjusted our product mix and made a rapid shift from e-ciggs to what I will call a revolutionary new category vaporizers, also referred to as tank smart USB. This shift is particularly disrupted to e-cigg category.

According to the Nielsen C-Store Database and Wells Fargo vaporizers are now account to more than 40% of the $2.5 billion combined e-cigg and vaporizers markets. It’s important to pause for a moment and remember that e-ciggs just came to the U.S. market in 2007 and naturally a large number of consumers are still in the process of trying different e-ciggs and vaporizer devices to determine their preferences.

Vapor Corp. was [Technical Difficulty] that vaporizers would likely become hurdle for e-cigg by a large number of customers and as a result, we made it a major part of our long-term growth strategy.

Vaporizers offer tremendous variety of flavors and levels of nicotine that allow the consumer to customize their experience, which is a great part of the field. Additionally, vaporizers are not design to look like a cigarette, so they have a more technological look and feel that consumers are often prefer.

The overall general flatting of e-cigg service is not only attributable to vaporizers as well. We believe this also due to the general overstocking of e-ciggs in the market in anticipation of increase demand by retailers and other suppliers. The data suggest that to-date only a fraction of adult smokers have even tried e-ciggs or vaporizers.

As such, we believe that what we are currently experiencing is near-term supply and demand issue, which organically given time, patience and stronger sell-through. This industry events couple with our own inventory overhang relative from our rebranding efforts, as well as the shift of our direct television marketing campaign contributed to sales of $6.1 million during the second of 2014 down slightly from $6.2 million of last year.

While some of the larger players are now taking market share of raising the existing e-cigarette market, we are confident that our rebranding efforts will position us to grow market share and capitalize on the existing e-cigg and vaporizer markets. In that respect, I am pleased to indicate that just this month, we acquired new distribution channels that should vaporizers to two new chain stores and have several others in our pipeline.

To drilldown of this program on the rebranding of our Krave e-cigg line, excuse me, is worth noting that an inventory overhang during this type of effort is expected. In times of the financial impact, we greatly resulted and are taking inventory position on our own product.

While this resulted in higher SG&A costs for the quarter, this was one-time occurrence and is what I refer too as a short-term pain for the long-term gain. On the positive note, much of this inventory has since been sold and we will see lesser impact from this over the remainder of 2014.

Looking ahead, we have worked diligently to maintain a strong position in the e-cigg market and to capitalize on the rapid growth of vaporizers. In fact, we remain ahead of the vaporizer trend as we continue to transition our portfolio to accommodate the growing demand from this driving category.

To support this effort as previously announced, we recently entered into the asset purchase agreement to acquire the online wholesale and retail operations of International Vapor Group, mostly know as IVG and certain of its subsidiaries, which will increase our online wholesale and retail presence.

On completing the acquisition of IVG's operation not only where we acquire major e-cigarette brand such as SOUTH BEACH SMOKE and EverSmoke, but we will also benefit from IVG’s retail operation in the form of its company-owned retail vapor stores.

In anticipation of closing this transaction, Vapor Corp. recently signed nine real estate leases for new retail store locations, which will increase IVG’s retail operation company-owned store count to 17.

While they are known as vapor zone, these new vapor five stores will significantly bolster our position in the market. IVG’s $15 million in revenue in 2013, $14.5 million of which was from online operations, we are excited to incorporate IVG’s operations into our portfolio. IVG’s strong online sales operations coupled with its retail operations expanding portfolio of company-owned stores will drive revenue and margins from Vapor Corp.

As per the amendment of the asset purchase agreement, the acquisition is expected to close no later than September 30th of 2014. In addition to the cutting edge products featured within our VaporX brand, we had also launched a new line of USA-made e-Liquids. These liquids are formulated in a special FDA registered pharmaceutical facility using pharmaceutical grade ingredients and are available in various flavors and nicotine strengths.

In our efforts to more -- excuse me again, in our efforts to market this launch and capitalize on our growing vaporizer product offering, earlier this month, we released first ever vaporizer infomercial showcasing our VaporX product. We expect this new and highly targeted direct marketing campaign to increase broad awareness and help improve sales for these new products from direct response as well as change in product mix.

We have strived to set ourselves apart from the competition in the vaporizer space with advancement in technologies. For example, we are continuing to make progress with our cutting-edge, volumetric vaporizer with patent pending fingerprint locking technology. As previously mentioned, our biometric model will likely debut by the end of this year.

As you can see, despite intensified industry competition and the rapid shift in demand for vaporizers, Vapor Corp. has remained nimble. We believe we have taken the appropriate steps to more effectively positioning ourselves for the future in the both e-cig and vaporizer markets.

A final notable achievement this quarter was our uplifting to the NASDAQ capital market, making the Vapor Corp. the first pure-play ecig and a vaporizer company to be lifted on a major exchange. This obviously will allow us to increase our presence in the public markets and broaden our shareholder base.

I will now ask Harlan Press, our CFO, to discuss our financial and operating results for the first quarter ended June 30, 2014. Harlan?

Harlan Press

Thank you, Jeff. For the second quarter of 2014, net sales were $6.1 million compared with $6.2 million for the same quarter last year. Cost of good sold in the second quarter of 2014 increased 22.1% to approximately $4.5 million compared with approximately $3.7 million for the same quarter in the previous year, primarily due to the change in product mix to higher distributor and wholesaler sales, an inventory provision reducing the carrying value of certain products and an increase in sales incentives to assist customers in selling certain product lines as a result of our rebranding efforts.

As customers complete the migration to vaporizers, tanks, and open vaporizer systems, we expect that our sales incentives will decrease. Gross margins in the second quarter of 2014 decreased to 25.3% from 39.8% as result of the inventory provision, the increase in sales incentives and the change in the product mix. However, gross margins increased 5.3 points from the first quarter of 2014 from 20% to 25.3%

Selling, general and administrative expenses for the quarter ended June 30, 2014 increased by approximately 57.2% to $2.4 million, compared to $1.6 million in the same quarter in the prior year. The increase was primarily attributable to non-cash stock compensation expenses attributable to the consulting agreement with Knight Global Services, professional fees associated with the private placement of common stock completed in October 2013, uplisting to the NASDAQ Capital Market and costs incurred in connection with the acquisition of IVG's operations.

Advertising expenses decreased approximately 12.2% to $800,000 for the quarter compared with $900,000 during the same quarter in 2013 due to a decrease in Internet advertising and the television direct marketing campaign for Alternacig brand, net of increased print advertising campaigns and participation in trade shows, and the initiation of several new marketing campaigns in which we sponsored several music concerts and continued various other advertising campaigns.

Operating loss was $1.7 million, compared with an operating income of $27,000 for the same quarter in the prior year. Interest expense for the quarters ended June 30, 2014 and 2013 were $29,182 and $76,899, respectively. Income tax benefit for the quarter ended June 30, 2014 was $700,000 million compared and income tax expense for the quarter ended June 30, 2013 was approximately $5,000. As a result of these items discussed, the net loss for the quarter ended June 30th was $1.1 million compared with a net loss of $55,000 for the quarter ended June 30, 2013.

Now, I’d like to present the result of operations for the six months ended June 30, 2014. Net sales for the six months ended June were approximately $10.9 million compared with approximately $12.5 million during the same period last year, a decrease of approximately 13.3%.

The decrease in revenue was primarily attributable to decreased sales from the television direct marketing campaign for the Alternacig brand. Decreased sales from online stores, inventory build leveling off and continued pipeline load from 2013, the increasing prevalence of vaporizers, tanks and open system vaporizer products that are marginalizing the e-cig category and the launches of new national competitors' branded products during the quarter.

Cost of goods sold in the six months ended June 30, 2014 increased 12.7% to approximately $8.4 million, compared with approximately $7.4 million in the same period in the previous year. Gross margins decreased to 23% in the six months ended June 30th compared with 40.8% in the same period in 2013 as a result of the inventory provision, increase in sales incentives and the change in the product mix.

Selling, general and administrative expenses for the six months ended June 30, 2014 increased by approximately 65% to $5.2 million, compared with $3.2 million, from the same…

Operator

Mr. Press, we cannot hear you at this time. Once again, Mr. Press, we cannot hear you at this time, please check your mute function.

Harlan Press

…..six months ended June 30, 2014 and 2013 was approximately $58,000 and $143,000 respectively. Income tax benefit for the six months ended June 30, 2014 was $1.4 million and income tax expense for the six months ended June 30, 2013 was approximately $9,000. Net loss for the six months ended June 30, 2014 was approximately $2.5 million, compared with net income of approximately $69,000 for the same period in 2013, as a result of the items that we discussed.

Now I would like to turn the call back over to Jeff for some closing remarks.

Jeff Holman

Thank you, Harlan. In summary, we will continue to work diligently to address the demand of this evolving industry. We have [Technical Difficulty] on the positive consumers, identify new trend that they emerge and remain ahead of the curve as a category leader with new profit offerings. We would like to thank our customers and our stockholders for all of your continued support.

And finally on behalf of our Board of Directors, Harlan Press and Christopher Santi, our COO, we would like to thank the Vapor Corp, team for all of their hard work and dedication for Vapor Corp.’s continued success. With both comments complete, we will open the call for questions. We would like to remind everyone that the company does not provide financial and operating guidance on a quarterly or annual basis. And accordingly, we will not address questions in that regard. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And we’ll take our first question from Tony Brenner with ROTH Capital Partners. Please go ahead sir.

Tony Brenner - ROTH Capital Partners

Thank you. I have a couple of questions. Could you tell us what’s your sales mix for Vapor products versus e-cigarette products. Once you mentioned that industry wide, vaporizers now are about 40% of the market. What’s your profile?

Jeff Holman

We’re still selling quantities of e-cig or cigarettes as well as vaporizers. We have customers that are buying both and we have customers that are just focusing on one category. Most of our new customers that we are opening are buying vaporizers. We don’t break down the mix between the two categories, but we’re seeing a shift move towards the vaporizers.

Tony Brenner - ROTH Capital Partners

Well, yeah, clearly there is a shift but I mean, the question is meant to imply that you’ve had a line of vapor products for a long time ahead of most of your competitors. And I mean a sense that I get is that you’re catching up to this trend rather than being ahead of the trend. Is that unfair?

Jeff Holman

Yeah. I think that is unfair, Tony. This is something that we identified publicly at Wells Fargo conference, almost a year ago.

Tony Brenner - ROTH Capital Partners

Yeah. I wasn’t there Jeff.

Jeff Holman

No. It’s okay. That’s fine. So yeah, it’s something that we have been working on that we are frankly entrenched in both with our own brands and that with the acquisition of IVG. So, no, I don't think that we’re catching up at all. I think that we are out there, we have been out there and again, we just opened couple of chain store for vaporizers, specifically and there are others in the pipeline, obviously, I won’t take name at this point.

But, no, I don’t think it will be fair to say that we’re catching up. I think that we’ve identify, first we were ahead of the curve, we’re in there first and we plan on maintaining our strong hold and increasing it in that category.

Tony Brenner - ROTH Capital Partners

You mentioned there was an incremental stock award for Knight in the second quarter. That wasn’t the original award, right, is this just a follow on?

Harlan Press

Yeah. That we -- Tony, we signed an agreement with Knight Global in the first quarter and that stock vest over 24 months period. So as the agreement continues, we expense the value of that stock each quarter. So, I’d say, just incurring the non-cash charges as the stock vest and as the agreement continues.

Tony Brenner - ROTH Capital Partners

But there should be additional awards for endorsements and additional regional placements. There was no such award for that in the second quarter, is that right?

Harlan Press

There are no awards that are in the contract for additional payments of any stock for any type of contracts or anything like that. The only additional compensation that’s available in the contract is if he becomes a representative for certain customers that we agree to let him represent us on then he would a rep commission on those customers.

Similar if any other rep brought us into an account as they currently do, they get a rep commission. It is not any more or less than what a normal rep would get paid for introduction and [Technical Difficulty] account.

Tony Brenner - ROTH Capital Partners

Okay.

Jeff Holman

But to be clear, Tony, there is no additional payment for him bringing us an endorsement deals or celebrities or anything of that nature. That’s part of this compensation package.

Tony Brenner - ROTH Capital Partners

I see. IVG will be accretive to earnings immediately or only overtime?

Jeff Holman

I think immediately. If you compare our online presence and their online presence, there’s a significant of up shift. In addition, we do not have presently Vapor Corp but did not have prior to this deal any company-owned retail stores. So that's another area that we are going to just fill in and then get stronger. So I think both of those areas are accretive to our existing model of distribution.

Tony Brenner - ROTH Capital Partners

Okay. Last question, you burned considerable amount of cash in the first half of the year. Half of your remaining cash will go for the acquisition and looking forward, I’m wondering, if it’s reasonable to expect a positive operating cash flow in the second half of the year?

Harlan Press

Well, we certainly have a goal to have a positive cash flow. We’ve also communicated in our filings that there might be a need to increase our liquidity and go into the marketplace to do so.

Tony Brenner - ROTH Capital Partners

Okay. Thank you.

Jeff Holman

Thank you, Tony. Always pleasure.

Operator

Well take our next question from Bill Sutherland with Emerging Growth Equities. Please go ahead, sir.

Bill Sutherland - Emerging Growth Equities

Yeah. Thanks. Good morning. I want to, hey, how are you guys doing?

Jeff Holman

Good Bill.

Bill Sutherland - Emerging Growth Equities

So I know you don’t want to provide the forward-looking kind of information but given the cost structure is out of line with kind of normal levels that you guys saw historically? Can -- I guess can we talk about gross margins in terms of the factors in the quarter and then how much of that normalizes this quarter next quarter?

Jeff Holman

Well, as we’ve discussed in the past, the gross margin is highly a component of the type of sales that we have participated in and we had large in commercial sales in the past that those products are going direct to a consumer. So that being sold at a manufactures just retail price which results in a high margins for the company.

The in commercial for the alternative cigg product which is cigg like new cigg -- stop planning that in commercial we began shooting a new in commercial for vaporizer products into the VaporX brand. So we’re starting to run that in commercial now. So we’re anticipating that in-commercial will convert and add to the top and bottom-line of the margin.

The other types of sales that we have are sales to distributors and wholesalers and those margins are in the middle area and as we changed and re-branded we have give reductions to customers that effected on our margins.

We’re hoping that the preponderance for that has work through and now we have lowest set of margins, it’s our private label business and we’ve seen (indiscernible) there is a significant amount of private label business. From the first quarter to second quarter we have improvement in margins because people have work through a good portion of the re-branding and good portion of the desire to switch from cigarettes to vaporizers.

So we’re hopeful and anticipating that margins will come back and be stronger. The business operations of international vapor have higher margins because the majority of their sales are through the end used consumers, so they are being sold at the manufactured suggested retail prices for the consumer, so they enjoy margins that are much higher and blending with us should increase the overall margins going forward.

Bill Sutherland - Emerging Growth Equities

Right. So the overhang for the inventory change out and the incentives to move the old products, could you essentially work through that in the quarter or is there more in Q3 to do?

Jeff Holman

Well, we directly work through it. We took an inventory provision to bring inventory down to a market price. As that inventory sales when you write inventory down you are writing it down to the price that you are selling at. So when you sell that inventory off it could have an impact on new margin.

Harlan Press

One point to remember also, Bill, that is, this was a calculated move by Vapor Corp. for the future to do this re-branding and in those calculation…

Bill Sutherland - Emerging Growth Equities

Right.

Harlan Press

… we realize that we were going to take a short-term pain on this and have to work through it. However, again, for the future, this brand has been very well-received to this point in time, we are very confident in the brand. We introduced a very cohesive branding and again, we’re looking for the long-terms gains from the short-term pain as I said earlier.

Bill Sutherland - Emerging Growth Equities

Harlan, you referenced revenue mix, was it materially different than say that first quarter or what kind of, where you generally run, but as far as those three pieces, can you guys?

Harlan Press

No. The mix in the first and second quarter’s were about the same this year, but last year there were significant in commercial sales.

Bill Sutherland - Emerging Growth Equities

Right. In the first three quarters of last year and then…

Harlan Press

Yes.

Bill Sutherland - Emerging Growth Equities

Okay. All right. And then, I was curious on the amended deal, I realize you are not going to -- the International Vapors are not going to use their retail name, but it extends to, I think, with the newness. But is that going pretty smoothly or have they already started that even before the deals closed?

Jeff Holman

Yes. Yes, they have. The transition is in underway. The new name again is Vapor 5 indicative of Fidelity for example. And we feel that that more personifies this brand moving forward. The stores are presently being changed over. The science is being changed over, the re-branding is happening. And so yes it’s already well underway even prior to the closing.

Bill Sutherland - Emerging Growth Equities

Okay. And then, are the new leases also in Florida?

Harlan Press

New leases are in other geographic areas. There are couples that represents the -- some expansion in Florida and then some -- most of the new leases are outside of Florida.

Bill Sutherland - Emerging Growth Equities

Okay. And then, Harlan, I guess one more question on margins. So OpEx also went high in quarter for a lot of factors. How do you see that kind of normalizing, looking into the back half? Is it -- it seems like lot going on. So it’s like discontinued around the time for a bit?

Harlan Press

Well, we have the consulting agreement as a three-year agreements. So we’re going to continue to incur the non-cash compensation expense on consulting agreements. As we continue to have to provide and do filings and the corporate actions related to the acquisition, or legal fees, and professional fees will be high. Our operating expenses have been grown in line with the prior year. These other expenses that have increased our SG&A.

Bill Sutherland - Emerging Growth Equities

Well, I’m also thinking about the fact that you got the new infomercial and just the model going forward?

Jeff Holman

Yeah, the infomercial runs into the advertising line of our operations. So we’ll generate the revenues and the advertising….

Bill Sutherland - Emerging Growth Equities

That’s correct.

Jeff Holman

Yeah.

Bill Sutherland - Emerging Growth Equities

Okay. It’s a direct expenses. I think that’s it for me. Thanks a lot guys.

Harlan Press

Thank you.

Jeff Holman

Thank you, Bill. Always a pleasure. Operator, Diaz?

Operator

That concludes today’s question-and-answer session. At this time, I would like to conference back over to our speakers for any additional closing remarks.

Jeff Holman

Okay. I would just like to say thank you once again [Technical Difficulty] and listen today and participate. We certainly appreciate it. And we wish you all a wonderful day.

Operator

And as a reminder to our audience, that does conclude today’s question-and-answer session and presentation. We appreciate your participation.

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