VPR Brands LP (VPRB)

[Potfolio]

As a new investor of VPR Brands (VPRB) I’ve tried to complete some due diligence on the company and welcome feedback. Bottom line, with the market capitalization < $3M, I believe this is a screaming buy and have been a buyer in the $0.02-$0.04 range.

Management & VAPOR Wholesale Acquisition
Kevin Frija (CEO) was the former CEO of Vapor Corp that took them from a few million in sales to $25-30M over a few years (market cap height of I believe $100M). He also oversaw the move to the NASDAQ. If you look up a chart of VAPOR adjusted for splits it is crazy…the new management had to dilute due to ultimately poor decisions buying retail stores. Recently VPR Brands acquired Vapor Corp Wholesale assets for a good price (although the convertible note I don’t understand why they did that, more to come)

Share Structure (So far…)
The last 10Q stated they had ~54M shares outstanding but in the “subsequent events” they had to issue another 6M due to the convertible loan from the acquisition. Really hurts because share price is so slow the conversion happened at $0.01!! The convertible loan is almost complete and a move to being cash flow positive is near. This I believe brings share structure to 60M O/S….and will likely grow to let’s say ~65-70M O/S during Q1/Q2 2018 at current cash burn rate prior to cash flow turning around. This isn’t terrible --- but ultimately, I see it as one of the key drivers of the negative reaction in the stock price. This has expanded a small float quite a bit in a short period of time and with the lack of news in the 2nd half of the year, it has been a vicious downward cycle. Not a good thing for earlier investors --- but has given us a great opportunity to buy on the cheap. Volume has picked up now here in the $0.02-$0.04 cent range as the float is being gobbled up and investors find the valuation attractive of $2-2.5M market cap (.5x sales!)

Sales / Brand
The move to focus in the Cannabis space is huge…and HONEYSTICK is a top brand
https://www.marketwatch.com/story/vpr-brands-honeystick-and-gold-nugget-extracts-place-1st-2nd-and-3rd-at-the-high-times-cannabis-cup-2017-04-27
Looking at the recent 10Q last week they show sales growth from $0.6M to $0.9M (+33%). With the CA rec launch in Jan 1 combined with hopefully some new product introductions soon by the company I believe will be a catalyst for continued growth.
The company also received good news in the E-CIG space from the FDA in August.
https://www.marketwatch.com/story/vpr-brands-lp-welcomes-the-fdas-recent-announcement-regarding-electronic-cigarette-regulations-2017-08-01
With the delay until 2022 they will be able to put some efforts into growing their KRAVE and VAPORIN brands. As you see in the 10Q as well the company speaks about continue penetration in the China space for ECIGS.
“We currently market a brand of electronic cigarette e-liquids marketed under the brand “Helium” in the United States and are undertaking efforts to establish distribution of our electronic cigarette e-liquids brand in China. We are currently also identifying electronic cigarette companies that may be infringing our patents and exploring options to license and or enforce our patents”
http://www.otcmarkets.com/edgar/GetFilingHtml?FilingID=12395008

Not getting into details here but their online websites also work very well and I’m sure have some attractive margins.

Ultimately, the company needs to have sales growth accelerate soon and with a growing cannabis industry, strong brand, online presence, ECIG’s opportunity and a CEO who has LITERALLY DONE IT BEFORE….I think we will see that. Q3 financials last week even showed the start.

While researching, I did see the noise in Q1 when they paid a “advertising company” to promote the product which has caused a stir with earlier investors. I honestly don’t know what went on there but I believe that VPR Brands had good intentions and that is now in the past.

My personal conclusion is that with these small market cap companies you better have strong management and I believe Kevin is just that. He has taken previous company to the NASDAQ, grown sales 10x, etc. He has strong financial interest to add value to the share price. Combine that with a strong brand, growing sales and growing cannabis market that we have a solid risk/reward here.

Speculations here but let's assume $4M in revenues in 2017 – and they are able to grow to $6M in 2018 and $8M in 2019. On $8M in sales, due to their online/wholesale structure and 41% operating margins it is reasonable to assume they could make $1M on the $8M. $1M in 2019 earnings x 25 Forward PE (for a company growing might even be low) is a $25M market cap or $0.33/share. That is my conservative target. If Kevin can build this company into a $15M business you could be talking about $3-4M in OI or closer to $1 share price in 2019/2020.

Risk/Reward at $0.02-0.04 though - I'm in!