After taking a long look at the landscape of the vaporizer industry the obvious trend is two-fold with the decline in e-cig popularity coupled with the increasing opportunity for companies producing vaporizers and e-liquid products gaining majority within the market. The tides have changed in a drastic way and unfortunately it's not to the benefit of this latest electronic cigarette M&A trend coming from Big Tobacco.

The commotion began earlier this summer when rumors were spreading that Lorillard (LO) maker of the blu e-cig was a possible buyout candidate from US tobacco company, Reynold’s America (RAI).  Well, the rumors were true and in fact Reynold’s made a $27.4Billion offer where shares of Lorillard skyrocketed.  Analysts at Wells Fargo (WFC) believe e-cigarette sales will surpass traditional tobacco where the industry is expected to hit $10 billion by 2017. With triple-digit growth rates still in its future, and tobacco sales declining, it’s assumed that the two will cross-over. Despite the previous growth of blu brand, its market share has fallen as a result of more competition within the space.


Both Reynolds and Altria (MO) rolled out their own e-cig brands with the addition of Vuse and Mark Ten, but this may not be the only reason for the rapid decline. As noted in a more recent Wells Fargo study, the overall appeal of e-cigarettes has diminished and smokers are looking for an alternative product that will offer both customizability and more choices. Analysts from Wells found that e-cig convenience store sales declined by 5.3% in the period ending 8/30/14, “Though category $ sales remain negative, the decline continued to moderate this period; we believe improved sequential category results since July have been underpinned by the ongoing national rollouts of MarkTen and Vuse…Further, we believe the sales decline is more reflective of volume moving to vapors-tanks- mods (VTMs) which tend to be sold in non-tracked channels (especially vape shops) as Nielsen e-cig data is not a proxy for the vapor category as a whole.” 

Many retailers have expressed that consumers have tried e-cigs and are either not content with the product or simply shifted to personal vaporizer products. Convenience stores for example, rank as one of the largest marketplaces for e-cig sales ($530M) but vaporizers have quickly begun taking up more shelf space and spots for point of sale advertising. Bonnie Herzog of Wells Fargo thinks that the first quarter of 2014 is where the industry started to really see the vapor trend gain a foothold and drive the combustible cig and e-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."

But here’s the thing, take a look at the vaporizer market and you’ll quickly begin to see how fragmented it actually is.  You have independently owned single store locations and head shops yet on the other end you have several public companies that have started to build their brands around the new vapor trend; still there has not been a clear market leader like there was with the e-cigarette industry.  With Big Tobacco seeming to be looking in the wrong direction for the “alternative smoking” industry, the top spot is up for grabs and we have been following a company that may be quickly growing to take that spot.
 

In looking at the current layout of the market today, you’ll certainly find companies out there that boast lofty numbers and inflated marketing programs that include heavy celebrity endorsements and over exaggerated development.  Nonetheless, when making a strong investment decision, knowing what else is out there is paramount.  For instance, Electronic Cigarettes International (ECIG) recently announced operating results for the second quarter and six months ending June 30 of this year. Net sales increased to $15.4 million for the six months ended June 30, 2014, an increase of 875% versus prior year with nearly 2/3 of this revenue coming in during the first quarter of 2014. The company even brought on actress and model Mischa Barton as the ECIG’s face to its VAPESTICK® Style Icon campaign.   But despite these developments, the company reported a net loss that was nearly 5 and a-half times larger than its total revs.  The company also trades at roughly 26 times revenue and has a good operating margin of 53% for the 6 months ending June 30. 

 Even with these results, the stock price has taken a plunge suffering a pull-back of more than $2 since July. It’s evident that the company will really need to ramp up its efforts during the second half of the year to turn around its stock price.  More importantly ECIG still seems to have a heavy focus on the electronic cigarette market and as noted by several analysts, this will most likely face heavy consolidation as vaporizers and e-liquids take on a larger appeal.

mCig, Inc. (MCIG) has also begun an aggressive branding strategy but like ECIG, still continues to focus more on the e-cigarette style products.  In its most recent press the company reported favorable progress numbers including a 1500% increase in revenues from an abysmal $12.5k last year to a second quarter “expected” number of $196k.  Gross margin was also healthy at just over 50% which does not reflect the “recent price increase of both the mCig® and VitaCig® which the company believes will contribute to an increase in Gross Profit Margin in subsequent quarters.”  As has been the case with the previously mentioned company, mCig has its “stars aligned” through a master royalty and consulting agreement with hip-hop ‘mogul’ Rick Ross.  Even though the company has seen a dramatic pullback in price, it appears that it is still moving forward with the planned S-1 filing for a spinoff, IPO, and dividend of VitaCig, Inc. So it will be interesting to see what kind of operational strategy will take shape as far as the stance on vaporizers once VitaCig becomes its own entity.

But once again, we are left with the lack of a true industry leader.  Both of these previously mentioned companies who’ve employed heavy R&D plus the addition of celebrities to support the brands have seen a dramatic drop in stock price.  Vaporin, Inc. (VAPO) is an interesting company that has just recently performed a 1-for-50-reverse. The Company is a distributor and marketer of vaporizers and e-liquids products. VAPO has also just released its second quarter earnings as well as its results for the first 6 months of 2014. 

Vaporin has earned about $600,000 so far this year with a gross profit margin of 41%. In addition, VAPO has obtained roughly $4.3million through equity purchases, which has helped the company increase its inventory and proceed with proper distribution to support the sales growth, and new product development of its vaporizer & e-liquid products. Also note that these raises were done where the effective purchase price was at or above $5 per share which currently would protect the market from any heavy dilution assuming the funding parties would want to at least break even.  

Moreover, the company recently announced that it is moving forward with its "fourth revenue driver" through rolling up vaporizer businesses within this highly fragmented industry. On September 3 the company announced the closing of its acquisition of The Vape Store (www.thevapestoreonline.com), and also just signed a lease to open a 5^th vape shop in Florida. With previously announced annualized revenue of $2.6million from the first four stores the company acquired, this new store could bump that number to somewhere in the ballpark of $3.25million if the new store has the same kind of revenue performance as the other 4.

In addition to this, the post reverse price puts this stock at a level that should attract a much more sophisticated investor audience as compared to when it was trading at less than $0.10. In fact the latest feature on Biz Journals . com shows that Billionaire Dr. Phillip Frost (who made his fortune treating diseases) is now an investor in this vaporizer and e-liquids company. Frost owns actually 10.8 percent of Vaporin, which operates out of the same building as his company Opko Health, according to SEC documents filed in August.

Instead of celebrity spokes people or social media campaigning, Vaporin is using the same strategy that blu used during its early development not only to gain an early market share in the vape space but also to establish itself as a potential leader in the vaporizer & e-liquids industry.  In addition to these revenue channels, the company has diversified through both an online sales approach & continuity program as well as its nationwide convenience store roll-out.  And if this wasn’t enough, Vaporin has taken a seat in the cannabis market through a product distribution agreement with Terra Tech Inc. (TRTC). 

If you look at all of these companies including Lorillard, Altria, Reynolds, mCig, and Electronic Cigarettes International they are all going against what top analysts like Wells Fargo are finding, which is to say that e-cigs are drastically declining in popularity and are now having to even adopt more of a “low price” strategy just to compete.  The facts remain that of the entire  $2.5billion vapor market, vaporizers, tanks and mods have surpassed the market share for E-Cigs by half a billion dollars with the majority of sales coming from brick and mortar retail.  

To this end, Vaporin has been the single stand-out that’s not only continuing to post quarter over quarter revenue growth but is also working to expand with the industry itself.  This past quarter the company reported revenues of $419k showing quarter over quarter growth of 130%. But say the company didn’t see growth at all over the next 2 quarters and simply maintained operations while taking in revenue from the vape stores.  Over the next four quarters that would put total revenue run rate somewhere around the $5million (*assuming an additional $3.25m from vape stores over the next four quarters). ECIG currently trades at a revenue multiple of about 26x and MCIG as of the closing of their fourth quarter ending in April is right around 300x but say that Vaporin simply settles the next four months out with no growth, maintains its current relationships, and takes in revenue from the vape stores; even at a conservative 10X multiple, not only would the market value be upwards of $50M but with a current OS of about 3.5 million shares, the market price for VAPO could be sitting somewhere around the $14-$18 range.  For these reasons and based on the overall amount of developments that the company has undertaken, Vaporin, Inc. remains the stand-out for a viable market leading company in this burgeoning vaporizer and e-liquids market.

*Note: Additional $1.625M from quarterly revenues based on an annualized $3.25m plus three quarters of company revs being $419,000 and first quarter revenues of $183,000

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