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Is Phillip Frost the Man to Bring Vaporizers to the Masses?

May 13, 2015 | About:

On Sept. 9, Vaporin, a Miami-based electronic cigarette retail and distribution company, reported that a month earlier billionaire investor Philip Frost had taken a 10.8% stake in the company. Two months later, on Nov. 10, Vapor Corp (VPCO), another company in the electronic cigarette and vaporizer space, announced its intention to merge with Vaporin, and on March 5, the company announced the completion of this merger.

As per the terms of the agreement, Vapor issued 13.59 million shares of common stock to Vaporin shareholders, and simultaneously completed a 3.5 million equity financing in conjunction with the closing of the transaction. According to the merger proposal, upon completion, Vaporin shareholders would own 45% of Vapor's common stock. Using Frost's reported 10.8% stake in Vaporin, and assuming a straight through transfer of volume, we can extrapolate that Frost now owns 4.86% of Vapor Corp.

At a time when Vapor Corp is looking to restructure and expand with a focus on establishing a national brand, Frost's involvement could prove crucial in helping the company achieve its goals. With this said, what is the renewed focus, what is the market potential for Vapor Corp, and why might this company be a rewarding speculative allocation over the coming 24 months?

First, a quick look at the company itself. Vapor Corp designs, markets, and distributes electronic cigarettes and accessories, under a host of brand names, including Krave®, Fifty-One® (also known as Smoke 51), VaporX®, Hookah Stix®, Alternacig®, EZ Smoker®, Green Puffer®, Americig®, Fumaré™ and Smoke Star® brands. The company offers disposable electronic cigarettes in multiple sizes, puff counts, styles, flavors and nicotine strengths; rechargeable vaporizers for use with either e-liquid solutions or dry herbs or leaf; and rechargeable electronic cigarettes, which are available in either two or three part units, also known as Duo or TRIO® products.

The company's products are distributed to and available at approximately 50,000 retail stores throughout the U.S. and Canada. It sells direct to consumer via e-commerce and company-owned brick-and-mortar retail locations operating under "The Vape Store" and "eMagine vapor" brands.

Any recent developments?

On April 2, the company announced a restructuring.

"With new management, new stores, new deals and new products, Vapor Corp. is well-positioned to rise above the competition and take a leadership role in what is currently a highly fragmented e-cig and vaporizer market," said Vapor's President and Director Greogry Brauser. "Vapor Corp.'s merger with Vaporin served as a catalyst for the Company's future success and has helped to pave the way for us to cast a wider net in the industry. Our goal is to reach new and veteran vaping consumers and continue to spread the word about our stores and our products."

How big is the market for the company's products?

VMR Products, a global leader in the electronic cigarette industry and the makers of the brand V2(R), reported in September last year that open system vaporizers had exceeded electronic cigarette sales by $500 million. Further, that sales surpassed $1 billion annually across both traditional and digital retail channels.

According to Wells Fargo Securities, open system vaporizers now contribute more than $1.5 billion to the overall electronic vaporizer market in the U.S., with electronic cigarettes accounting for $1 billion. This is key to Vapor Corp's expansion, as the company's merger with Vaporin, in combination with its shift in focus towards physical vaping locations, targets the larger (and faster growing) vaporizer space – not the electronic cigarette space.

"Open-tank systems give 'vapers' the ability to customize the experience to meet their needs, which has become a significant feature to many" reported Cynthia Cabrera, Executive Director of the Smoke-Free Alternatives Trade Association ("SFATA").

Why Vapor Corp? We have seen a number of incumbent tobacco companies move into the sector over the last 3 years, Lorillard, Inc. (LO), Philip Morris International, Inc. (PM) and Altria Group Inc. (MO) to name three, but each of these companies only generate a small portion of their revenues from electronic cigarette and vaporizer sales. This is not to say that there are not substantial revenues associated with the industry – as the numbers reported in the previous section show – but instead that any growth in the space is likely to have a muted effect on any concurrent change in these companies' market capitalization.

Vapor Corp offers what we might deem a "pure play" in the vaporizer sector. Growth in the space will have a direct and amplified effect on the company's market capitalization.

As a final note, it is important to note that this stock is not without risk. Its market capitalization is low, and the success of the industry as a whole depends on continued adoption of electronic cigarettes and vaporizers at a retail level. This noted, however, its focus on building a national vaporizer brand looks to position Vapor Corp to take advantage of continued adoption, and the involvement of Frost could be what is needed to drive an upside revaluation in the company's share price going forward.

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