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  • Vaporin Inc Comes Out Swinging In Q1 Looking To Gain First Mover Advantage And Capture Market Share In Burgeoning Vaporizer & E-Liquids Industry 1 comment
    Aug 11, 2014 11:10 AM | about stocks: TRTC, VAPO

    Aggressive sales, coast-to-coast distribution, and a diversified revenue model are all key traits of a company working to become a market leader in any industry. In my mind Vaporin, Inc. (OTCQB:VAPO) is one of the top companies to view within the space for a few very specific reasons that make it a #1 contender to quickly gain market share within this billion dollar industry:

    Key features to why I think Vaporin is a #1 contender in the space

    1. VAPO has implemented national retail distribution channels
    2. The company offers a diversified suite of vaporizers & e-liquids available online, in stores, and even in vending machines.
    3. Within its first 2 month of operations under the new business model VAPO has already generated $183,000 in revenue.
    4. Vaporin has pushed to become one of the most recognizable brands in convenience stores nation wide through the company's point of sale advertising strategy.
    5. Vaporin has entered into additional markets to include the ever-growing marijuana space.

    If we look at this vape industry as a whole, it's just starting to gain in popularity as you'll see later in this article. Ironically, as big tobacco spends billion of dollars to gain ground in the e-cig space (most notably Reynold's America's $27.4B acquisition of Lorillard), they may actually soon find themselves behind the 8-ball when it comes to vaporizer sales. In fact as you'll read, the vaporizer & e-liquids space has quickly begun to grow, taking both market share and shelf space away from these products. In a recent review of the industry by Wells Fargo analyst Bonnie Herzog, the "Vapor Category" is starting to more meaningfully displace combustible cigarette volume. A direct result of this decline can be seen through the recent drop in sales of Blu e-cigs by more than 35%.

    Christopher Growe, an analyst with Stifel Nicolaus, said the earnings decrease led him to lower his fiscal 2014 earnings forecast by 9 cents to $3.33 a share.

    "We believe the blu eCigs category growth has been pressured by the proliferation of 'open-tank' vapor products…We estimate a 24% revenue decline for the year (for blu eCigs) and a $55 million operating loss for the division as the company invests heavily in the blu brand globally."

    This alone shows the massive impact that the vaporizer market has had on a once dominant player (NYSE:BLU) who held over 40% of the e-cig market.

    Vaporizers Quickly Gain Mass Appeal over E-Cigs

    Numerous retailers across the country have identified that many consumers have tried e-cigs and are either dissatisfied and went back to combustible cigarettes or "graduated" to personal vaporizer products. For example, convenience stores rank as one of the largest marketplaces for e-cig sales ($530M) however vaporizers are quickly taking up more "real estate" not only from the shelves but from many of the point of sale advertising spots as well. Analyst Bonnie Herzog is one who thinks that the first quarter of 2014 is where we start to really see the vapor trend take hold and drive the combustible cig decline rate at an accelerated pace.

    "Bottom line, retailers are starting to either discontinue or take shelf space away from disposable e-cigs to make room for personal vaporizers given their attractive growth & margins."

    In previous reports, Herzog found that e-cig sales declined 12.9% in the four weeks ended July 5 from the prior period because of lower prices and as smokers migrated to vaporizers. Herzog estimates that tanks and e-cigarettes have a combined market of about $2.5 billion with $1.4 Billion attributed to e-cig sales and $1.1 Billion to Vaporizers; she believes that tanks will overtake the latter in the next decade.

    Retailers, Ms. Herzog said, are even starting to discontinue or take shelf space away from e-cigs to make room for tanks, "given their attractive growth and margins." In fact, one of the most prominent retailers of these products, convenience stores, have also realized slower growth rates in both e-cig sales as well as traditional cigarette products.

    (click to enlarge)

    (click to enlarge)

    "Importantly, we note Vapors-Tanks- Mods (OTC:VTMS) are under-represented in Nielsen but are growing 2x faster than the vapor category based on our "Tobacco Talk" survey. Investors have been questioning if the investments that are behind vapor justify a possible longer time line to contribute to the bottom line. While we remain bullish on the category long term, we acknowledge near-term e-cig profitability could be soft, particularly as volume moves to VTMs. Bottom line - we continue to believe vapor consumption could surpass combustible cigs in the next decade."

    -Bonnie Herzog, Wells Fargo Analyst-

    Even though vapor tanks are thought of by consumers as being hunkier than the standard e-cig, they do allow smokers and would-be quitters to customize nicotine levels, as well as to puff thousands of flavors. A cult-like following is likely to grow as "vaping" becomes more fashionable and more stores carry the battery-powered metal tubes in a wide range of colors. As a result e-cigarette sales are slimmer this year, prompting manufacturers to invest in the next generation of inhalant products ... as well as smokers.

    Aggressive Implementation of Point of Sale Advertising to Gain Market Share

    There is however something to be learned here from the "spirit of" e-cig industry and for Vaporin that "something", is an aggressive point of sale or POS advertising. Think about Blu e-cigs when they first came out they targeted everything from gas stations to head shops, and you really couldn't go anywhere without seeing some kind of marketing material. This paired with a first-to-market advantage gave Blu the upper hand in the e-cig space when it first became popular. Now that e-cigarettes have begun to fall by the wayside as a result of the introduction of the vaporizer, Vaporin is using the same strategy as Blu used early in its development not only to gain an early market share in the vape market but also to establish itself as the leader in the vaporizer & e-liquids industry as opposed to e-cigarettes.

    Through its aggressive POS driven marketing strategy, VAPO has begun to develop sophisticated distribution channels that span the nation. In its first quarter report, Vaporin identified that a key distribution tactic moving forward will be through convenience stores in densely populated geographies such as the New York Metropolitan area with the aid of "well-known and established distributors" in addition to distribution outlets throughout the US.

    I had the pleasure of speaking with company CEO Scott Frohman who would not specifically name his east coast distributor but did express that they are "the largest in the Northeast" with distribution from Pennsylvania up through New England. He also had outlined the company's national roll-out strategy for distribution to the mid-West and West Coast via several channels that have been established this year.

    This demonstrates the company's ability to not only create a footprint but to also rapidly expand on it to create the most amount of brand awareness for Vaporin. By focusing nationally, VAPO should be able to grab market share that much quicker allowing it to truly achieve that role as the market leader

    The image above is a Vaporin display in the Danbury Mall.

    Trend in Online Retail Suggest More Growth Potential for Companies in online marketplace

    This leads me to the next point that Mr. Frohman was incredibly passionate about which is Vaporin's online sales model. According to Vaporin's CEO, his experience in marketing has allowed the company to capitalize on the "membership program" approach not only to set up a strong stream of repeat revenue but also to implement a "customer base building" strategy. Once customers sign up for the vaporizer trial, they will continue to receive e-liquid packages each month to follow. Mr. Frohman said that Vaporin has had "thousands of new trial customer sign-ups". The monetization on this would be paramount based on the overall production costs of these e liquid bottles and the general lack of effort put into cancellation after initiating a trial offer by most consumers.

    Coinciding with the online strategy is Vaporin's traditional online sales approach. Directly on the site, a customer can order a vaporizer kit or replacement e-liquids and have them shipped (for free) directly to their homes. According to a recent Forrester Research e-retail forecast, found that increased shopping by consumers on mobile phones and tablets will help propel the growth of online retail sales. Increased spending by digital natives-consumers who grew up using the Internet from their earliest years-will also contribute to the growth as they move into their prime spending years. Forrester's report showed e-retail's share of total retail sales will continue to inch upward, from 8% in 2013 to 11% in 2018. The dollar growth from the actual 2013 figure of $263 billion to the forecast $414 billion for 2018 is 57.4%, places VAPO's sales model in line with the current market trend poised for growth over the next several years.

    Diversifying through Innovation: New Vending Machine Distribution

    As another revenue driver, VAPO also has announced that it would begin distributing product through an exclusive agreement with Seaga Manufacturing, via its Vapestation vending solution. The focus is to set up these vending machines in highly populated locations that "attract consumers over the age of 21". These would include places like night clubs, strip clubs, and bars. In May, Vaporin deployed the first of its Vapestations initially being rolled out in South Florida, Las Vegas, & Illinois.

    Until recent, some states like California wanted to ban the sale of vapor products in vending machines. That's all changed and in a recent Sacremento Bee article, the writer explains how a proposal to ban the sale of vapor products in California vending machines died in an Assembly committee Wednesday as both sides accused the other of advancing the interests of tobacco companies at the expense of public health.

    Now that this has been decided, the market is open for new companies to implement distribution through these machines. This distribution strategy provides a key consumer demographic with access to Vaporin's products in areas that otherwise would not supply them. The deployment of these machines is not only a competitive advantage, but will also add another revenue stream to VAPO's business. In my opinion, this is probably a minor revenue driver at this time simply for the reason that there are states that do not allow these kinds of machines but nonetheless, Vaporin does have another way to monetize its product mix and expand further into the vaporizer and e-liquids market.

    Diversification Through Alternative Markets: Vaporin and the Marijuana Industry

    Recent news of agreements with Terra Tech (OTCQB:TRTC) shows that Vaporin has also made an entry into the cannabis marketplace. In the June release, Terra Tech states that it will purchase Vaporin's proprietary vaporizer products for resale throughout their cannabis dispensary network in California, Colorado, Washington and Oregon. Vaporin "anticipates generating revenue from this distribution agreement during the third quarter of 2014."

    More states are seeing the benefits to legalization of both forms of marijuana (recreational & medicinal) and this being said, New York, Florida, and Illinois for instance, have all implemented programs that revolve not only around the medical aspect but also very specific delivery methods of the drug that do not involve actually smoking the plant. Since vaporizing is considered a smokeless alternative, the market potential for Vaporin has potential for growth as more states continue to realize the overall benefits of implementing an MJ program.

    Putting it All Together: Numbers Don't Lie

    Based on VAPO's most recent 10-Q, the financial results suggest favorable consideration to meet its goal of added expansion. Revenues for the quarter show that the company was able to generate roughly $180k. Assets show to have increased by more than 150% due mostly to a jump in accounts receivable and inventories. As of March 30th, inventories equated to roughly $658k, which was an increase of almost 110% above those in the previous quarter.

    In addition to the above, Vaporin's financing activities have allowed the company to obtain roughly $3.5million through equity purchases at a pps of $0.10 and without warrants. It shouldn't be a surprise at this point the obvious benefit to additional capital, which should firm up the company's ability to aggressively go after increased market share through its point of sale advertising strategy. For companies looking to become market leaders and build brand recognition, a top-heavy approach to creating a strong advertising campaign is a cornerstone taking a majority of customers in the market. Blu, for instance, spent $40 million in 2013 on its advertising and was known as the market leader for e-cigs. Through a similar marketing approach, Vaporin has shown that it's willing to spend the money in order to become the market leader for vaporizers and e-liquids.

    Note that Vaporin underwent its name and symbol change early in February, which means it has been able to accomplish all of this in a very short time frame. I for one will be looking for its next earnings report to confirm that the company has (or has not) obtained an increase in market share while continuing to drive its revenues.

    The Risks

    Obvious risks with Vaporin include higher volatility in lower priced stocks and the legal ramifications that coincide with the marijuana industry. Additionally, it would seem that the FDA has taken an active role in monitoring the health aspects of vaping but I believe it's still too early to tell what those could actually be. Vaporin has also shown several potential risks through its latest quarterly filing. The company has identified an increase of $778,000 in operating expenses, which are most likely due to an increase in advertising and promotion expense as a result of the aggressive point of sale advertising and online media development; the filings show that the company spent roughly $215,000 on this alone.

    VAPO also saw an increase of about $529,000 in general and administrative costs (which includes an increase in stock based consulting of $255,000) and an increase in professional fees of approximately $31,000. A net loss was realized as a direct result of top-heavy efforts to grow and develop operations, as well as gaining market share. Similar to Blu brands approach, Mr. Frohman explained that the company's focus is to rapidly gain market share both strategically and financially. His approach to a top heavy advertising and development plan should pave the road for Vaporin to reap the rewards once this infrastructure is securely in place at a national level.

    Conclusion

    In the case of VAPO, the company has already foreseen the consumer shift from e-cigs to vaporizers & e-liquids and accordingly has begun to establish itself not only in the traditional vape space but has also moved into the cannabis industry. Additionally Vaporin has focused on growth driven opportunities to obtain a larger market share. Despite the previously mentioned risks regarding market volatility, financial loss in the first quarter, and the current state of the cannabis & vapor industries, it appears that management firmly believes the current mix of national distribution, online "customer base building" efforts, an aggressive point of sale marketing program, and additional opportunities in the marijuana sector should put Vaporin as the #1 contender to grab a larger share of the vaporizer & e-liquids market.

    My final thought on this is that Vaporin has in fact identified an opportunity with the launch of a vaporizer & e-liquid product and based on the growing mass appeal of vaping compared to the previous popularity of e-cigs, VAPO has made it very clear that they are on the path to becoming a strong company. One thing is for sure: companies are releasing second quarter earnings right now and I'll be interested to see how much growth Vaporin has seen over the last 3 full months of operations. If it keeps up the pace the company had during the first quarter, I personally believe that VAPO should begin to emerge as the vaporizer & e-liquid market leader.

    Contributor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

    Themes: long-ideas Stocks: TRTC, VAPO
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Comments (1)
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  • ocls_pk
    , contributor
    Comments (107) | Send Message
     
    Great article. looking forward to its growth.

     

    What do you make of the following?
    1. Exclusve contract with Chromadex (OTCQB:CDXC) in which Dr. Frost is a significant investor?

     

    2. Company being headquartered close to Frost Gamma investments trust location on Biscayne Blvd in Miami.

     

    and
    3. Frohman and Dr. Frost used to be co-investors of USEL?
    12 Aug, 02:35 AM Reply Like
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