Step Aside E-Cigarettes... Make Way For Vape

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Includes: RFMK, VAPOD, VPOR
by: Harold Goldmeier

Summary

Vaping is the next generation for "smokers" birthing from e-cigs.

The business is in its infancy with companies and consumer outlets fragmented, leaving few opportunities yet for investors.

High margins, rapidly growing sales, and heightened awareness from Big Tobacco are indicators there are bound to be new companies entering the business and going public.

My handy dictionary does not include the word "vape." It tells me about vapor and vaporizers like the kind you use when your baby has a stuffed nose and wheezing. Google vape and vaping and thousands of responses appear. Vape is the next generation industry birthing from e-cigarettes.

Let me caution that many of the barriers facing the e-cigarette industry I outline in previous Seeking Alpha articles are prescient concerns for this business.

We are on the cusp of a new industry that offers angel investors and risk takers short-term growth opportunities. Entrepreneurs are hoping vape will take its place next to "go Google it, " or "don't just sit there, Xerox something." For vapers, "It's better for people to vape indoors than smoke outdoors." There already are vape and hookah bars and shops, and online vape sales destinations. Vaping equipment sells as a supplement or improvement to e-cigarettes and marijuana delivery systems.

Norm Bour, Founder of VapeMentorS, advises traditional smoke shops (the kinds with the wooden native American Chief out front) to capitalize on their locations as socializing centers (what Starbucks is to coffee shops). The CEO of Lorillard (NYSE:LO) recently gave a boost to vaping, claiming "a vaporizer could deliver superior consumer experience at better value" than e-cigs.

The Wall Street Journal believes that vaporizer sales "are cutting into Blu's business" (the e-cig of Lorillard).

Bour encourages owners to bring in vape equipment and e-liquid flavorings. They don't produce smoke, and are legal for young people to use, who, more than anyone else, are looking for places to socialize. Foremost, vape shops are very profitable. One trade industry association estimates there are 16,000 vape and hookah shops in the U.S., up from 10,000 in less than a year.

Scott Frohman, CEO of Vaporin (VAPO, former symbol [OTCQB: VAPOD]), tells Seeking Alpha his company just purchased brick and mortar locations to supplement Vaporin's online sales. Online sales produced a 43% gross profit second quarter. April through June sales were $420k, and four stores' sales are expected to add another $660k per quarter. He plans building a national chain of vape stores from four now open and one on the way. VAPOD also has plans to expand online sales through aggressive marketing campaigns. In September, Frohman announced a 1:50 reverse stock split claiming it made the stock more attractive to institutional investors. It appears not so far.

According to a recap of 2013 Vapetoberfest, Southern California is the zenith with more than 160 vape shops. The Electronic Cigarette Convention in Anaheim drew 18,000 vapers and industry professionals. Vapetoberfest drew over 40 vendors with names and products like Ghost Modder, Zen, Kato Hammers, Chi-You, and Surfire King. A 24 karat gold-plated titanium hybrid was introduced.

Briefly, personal vaporizers or MODs (modified flashlights or metal tubes to fit an atomizer and vaporize flavorings, nicotine, and marijuana) are a new class of e-cigs. MODs offer more control over flavorings and the strength of the nicotine "hit." MODs "can easily surpass any other electronic cigarette or tobacco cigarette," according to VAPOD's web site.

The MOD battery lasts all day, and ranges from 3 volts to 6, making it attractive to heavy smokers who want to find the perfect blends for each vaper. The user can control the heat and voltage for flavorings, nicotine, and those using it for the marijuana high; a Seeking Alpha article describes VAPOD's link into this last market. MODs are more supplements to e-cigs because MODs are larger and a bit heavier. Whereas other companies in the industry are banking on e-cigs as their go to market products with MODs as back up sales, Vaporin promotes MODs and tanks (VTMs) supplemented by e-cigs sales.

For example, Vapor Group (OTCQB:VPOR), selling for two cents per share down from its 52-week high of 45 cents, defines its mission to provide e-cigs that are convenient and economical without even mentioning vaping devices. Nevertheless, the company's newest devices in the making are state-of-the art vaporizers for the vaping market. They "will add considerably to our revenues and market share in the year ahead." Other companies including Big Tobacco selling through convenience stores are more inclined to a DIY MOD kit.

Finally, Rapid Fire Marketing (OTCPK:RFMK), selling for much less than a penny per share with no recorded sales or market products that I can locate, touts itself as "the only publicly traded company for vaporizers" that will no longer sell vaporizers with off-the-shelf technology. RFMK has been looking to move from the Pinksheet listing to OTCBB. It seeks strategic partners to grow the vape equipment business "to grow through acquisitions of companies or technologies that are synergistic with our business plan."

Vaporin is the most logical play for investors in the vaporizer business, though it is a very risky investment. Vaporizers and e-liquids are going to be, if not already, its primary business in a growing $2.5b vaporizer industry. VAPOD has a stable online presence and a business plan for expanding sales through very profitable vape stores. Frohman also told Seeking Alpha the company is looking to establish an R&D pharmaceutical lab in California to develop safe flavorings and e-liquids that fully comply with health standards and agency regulations.

In addition to its business plan, Vaporin added a strategic partner and active advisor with the addition of Dr. Phillip Frost. He owns nearly 11% of Vaporin stock. His company, OPKO Health Inc. (NYSEMKT:OPK) has a market cap over $3.5b, with revenues up 105% in 2013, and Frost's personal wealth is estimated at $4b.

I believe Frohman is fully invested as an enthusiastic, but realistic chief executive and leader. His transparency builds trust within an organization and investors. He brings gravitas to the Dr. Seuss directive that, "Unless someone like you cares a whole awful lot, nothing is going to get better. It's not."

Disclosure: The author is long OPK.

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.

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