The Capitalist

About the Author The Capitalist

Consultant to the Hedge Fund Ranked #1 in its domestic class (#1 of 24 total), and in the Top 5% of 634 Global Long/Short Equity Funds by Evestment over the past 3 years.

Vapor Corp: Smoke Up Boys – Nothing Left But Butts… Target Zero

Vapor Corp. (NASDAQ:VPCO) is a company on the ropes. Over the last 12 months, its stock has dropped from $10 per share to a recent $1.80. From its website, its stated business model is to:

design, market, and distribute electronic cigarettes and accessories, under the Krave®, Fifty-One® (also known as Smoke 51), VaporX®, Hookah Stix®, Alternacig®, EZ Smoker®, Green Puffer®, Americig®, Fumaré™ and Smoke Star® brands.

In our opinion, this model has failed. Their brands are simply not popular – people don’t like them. Vapor’s financial results would seem to substantiate this. For the 3rd quarter, Vapor just reported

  • Net sales of $2.7 million compared with $6.4 million in 3rd quarter 2013,
  • Gross margins decreased to 24.2% from 38.9% in 3rd quarter 2013,
  • Selling, general and administrative expenses increased by approximately 56% to $2.6 million, compared with $1.7 million in 3rd quarter 2013, and
  • Net loss of $4.8 million compared with net income of $281,000 in 3rd quarter 2013.

If this isn’t bad enough, Vapor reported cash of $1.7 million on September 30 compared to $6.6 million at December 31, 2013. They’ve been burning cash at an unsustainable rate. An industry insider, who wishes to remain anonymous, told us that the CEO and CFO had put up personal guarantees on their homes for a $1 million loan in an effort to save the company. On Friday, Vapor announced an equity raise of $1.25 million at $1.10 per share or about 40% lower than where the stock was trading. It also came with 100% warrant coverage with a strike price of $2.00. Isn’t there a 20% down rule on a pipe transaction?

Consider this – Vapor reported $1.7 million in cash on September 30. Operating losses were $2.7 million, or $0.9 million per month. Assuming this pace has continued, and we see no reason why it hasn’t, means that cash would be down to $0.8 million by the end of October. By the end of November there would be no cash left. Do you now see the need for a $1.25 million immediate equity raise followed by $3.5 million more in one month?

Earlier last week, Vapor announced a merger with Vaporin (OTCQB:VAPO). Under the proposed terms, Vapor will give up 45% of the equity in the combined company to Vaporin. Before the merger, Vapor had a market valuation of $30 million-$40 million (depending on which day of the week you look at). Vaporin had a market value of about $7 million. Why would a $30-40 million company merge with a $7 million company and relinquish 45% ownership? Perhaps if Vaporin were some kind of a high-growth company with a technology advantage – but we don’t see that.

Vaporin recently acquired “The Vape Store”, four brick-and-mortar stores that sell vaporizers, tanks, mods (VTMs) and e-liquids products. This is a business with no exclusivity, no patents, and no barriers-to-entry. It’s just a store – anybody can do it, and there are thousands of Vape stores in the U.S. Keep in mind that Vaporin is currently OTC and had traded only about 10,000 shares per day (at about $2 per share) prior to the merger. So we have to ask the question – why give up 45% of your equity to this company?

And further – why the change in business model? At a minimum , the “merger” would represent proof that Vapor’s business model has failed. But more realistically, in our opinion, it represents a desperate move to save the company from bankruptcy.

Before the merger announcement, the stock had spiked up briefly on good volume for a few days. It reached a high of $3.83 per share on November 4 when 21 million shares traded. Was it a coincidence that this move occurred just before the merger was announced? We think not. Such a move is often indicative of a knowledgeable stockholder getting out before bad news becomes public – in this case, the bad news being the quarterly performance and the merger announcement. We imagine that someone had to be compensated for all this promotion right before seriously bad news. We believe there was a concerted effort to pump up the stock price ahead of the offering. Here are a few examples:

We think that it’s more than a coincidence that these postings came out right before the recent announcements and stock offering, moving the stock up on large volume.

The recent merger announcement states:

The first financing is expected to consist of a bridge loan where Michael Brauser and Barry Honig (the “Investors”) or their affiliates will purchase $1.0 million in senior secured convertible notes and warrants to purchase shares of the company’s common stock.

Michael Brauser and Barry Honig have been involved in other companies in the past:

  • They were investors in MusclePharm, a company that had a split-adjusted stock price of about $1,000 in 2010 and now sells for about $12. This article provides some color on MusclePharm.
  • This filing describes a lawsuit filed against them by Sunair for violation of federal security laws.
  • This post describes another lawsuit involving Barry Honig.

The press release further describes a $3.5 million financing to come. In our judgment, it can only be done at very dilutive terms to current stockholders, and we would expect a further decline in the stock price that almost always accompanies dilutive offerings. The 10-Q states that Vaporin did not fund this bridge but instead found high net-worth investors, not funds, for the convertible. We don’t see where Michael Brauser and Barry Honig have anything to lose here. They aren’t even doing the current financing – it was put out to other investors.

Conclusion: We see no value here, only a busted business model making a desperate attempt to avoid bankruptcy. Our target price is zero.

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