VPR Brands LP (VPRB)

[Potfolio]

Wow! The volume this week was tremendous. With some new eye balls on this company I thought I’d type up some prior due diligence and you can all take it for what it’s worth. I also am using this for myself to remind me that this is just the beginning and cries of a pump/dump scam are extremely exaggerated.

Full disclosure I built a position of approximately 3 million shares (at $.035 average) which represents about 3.7% of the outstanding shares. In my own opinion the stock is not even remotely close to fairly valued, with potential and management team experience to get us towards dollar land. Also, I’ve seen above average valuations on pot sector companies so there is always the probability of an upside surprise at any time.

NOTE: In some cases I am going to go off memory so I believe these statements to be materially accurate. Open to dialogue if someone spots anything misleading or inaccurate.

The reason for the cheap valuation……

There is a very simple and logical reason for the cheap valuation and I think it’s important to understand…because it points to why all of a sudden there could be a shift in share price.

When VPR Brands (VPRB) acquired Vapor Wholesale assets for $870K they took out two loans – one was a $500K convertible with Diamond Rock @ either $0.50 or 35% share discount to 7 day average and the 2nd a $370K promissory note. For the convertible note it speaks volumes to me that Diamond Rock was WILLING to do the conversion at a price of $0.50 – although it did not pan out that way. A vicious dilution cycle consumed the stock in the 2nd half of 2017 as the share price hit a low of $0.01. It was especially hard because the stock started with such a low float and there just wasn’t enough investor awareness since they are relatively new. In addition, tax loss selling and likely shorting also impacted the share price as it was an easy OTC target.

As of close Friday, the share count sits at 80.2 million, which is up 3 million from the last time I checked a few weeks ago. My hunch is that many of the shares happened last week. Regardless, 3 million at $0.04 conversion would bring in $120K. That should conclude the convertible piece of their debt if you read through the SEC filings.

As a point of reference, there were a few months spans over the past 6 months where the new issued shares were between 50-85% of the volume traded. Share price is all about supply and demand – that left us with this awesome opportunity to grab shares at these low valuations. Moving forward, no new shares should make supply of the stock harder and demand will only grow IMO.

During this time, the CEO, Kevin Frija – even stepped in to try to purchase stock at around $0.35. That was good to see the insider confidence.

Note: Vapor Corp valuation exceeded $100M at one point to gain perspective on opportunity when it was on NASDAQ.

Key Investment Questions…

A. Is there a capable management team in place that is also aligned with creating shareholder value?

Kevin Frija current CEO of VPR Brands, and former CEO of Vapor Corp, has literally “done it before”. He took his last company from $1 million to $25 million in sales and 5 to 50 employees. His last company ultimately was the first E-Cigarette company to list on the NASDAQ just shortly after his departure (see video below of him on CNBC). He spent a year off and is now the CEO of VPR Brands (late 2015). In addition, he holds close to 18M shares and only takes a modest ~$140K salary.

From what I can tell Kevin passionately wants to build a great company here. From reading past press releases he has openly stated he is committed to transparency and shareholder valuation. The cancellation of warrants/options is just another indication of that. He also has stepped in and done multiple $100K loans now to prevent dilution at a lower share price.

https://finance.yahoo.com/news/soleil-capital-names-kevin-frija-130000817.html

https://www.cnbc.com/video/2013/12/19/e-cigarettes-regulation-will-be-good-for-clarity-ceo.html

Daniel Hoff, COO
Please go watch Dan’s videos on youtube under Vapor Store Direct. This one video here has over 15K views.
https://www.youtube.com/watch?v=HE1ok2hM8ak
Dan is a very passionate and his industry knowledge is second to no one. He was with Kevin at Vapor Corp.

In addition to Kevin and Dan they have built a nice team around them. Natasha does a great job with their Marketing – if you don’t follow them on twitter (CBDGOLDLINE, or HONEYSTICK on Instagram, FB, etc. you should)

Verdict: A+. I’m convinced you won’t find a more passionate, experienced and aligned management team then here. ESPECIALLY, any company with a market capitalization under $10 million. What a bargain. It would be great to see Dan have more of an equity stake in the shares, but last week in the 8K he did provide part of $100K as a loan.

2. Can I make significant money off current valuations?

In the first section I indicated why we are here. The current market cap at $.08 is $6.4 million. The company (with no growth) will achieve $4.5 million in revenue in 2018 but likely a bit more than that once CBD Gold Line get’s up and running. They convertible note is done. They continue to raise cash without dilution. As you will see later we have expanding margins, higher % of new products launched, increasing revs, lower S&A, etc. Many companies in this sector trade 5-10x revs. Quite quickly you can see that there is a lot of money to be made here. Only question is timing and is it 2, 3 or 4 truckloads.

VERDICT: Yes, A LOT!

3. Is the industry growing?

The Vaporizer industry is expected to grow to $50 billion by 2025 at a 23% CAGR. If VPR Brands can just MAINTAIN the business they have today sales could double nearly every 2 to 3 years.

https://bisresearch.com/industry-report/electronic-cigarette-market-size-forecast.html

VERDICT: Yes, A LOT!

4. Does the company have multiple revenue streams?

I always think this is key because it helps stabilize cash flow and reduce overall investment risk.

A majority of their revenue currently comes from the cannabis related vaporizers per last press release. These opportunities are well known (CA, Canada, Global, new rec states, federal re-class of schedule 1 drug, etc.) I'll move on.. ..

In addition, With the FDA ruling in August 2017 they can now have a "free runway" until 2022 selling E-CIGS. This is important because when Kevin (CEO) was w/VAPOR this was his bread and butter and crushed the growth of the KRAVE and VAPORIN brands. See news release and comments from company below.

"will reinvigorate the ecig industry and that puts us in an opportune position. Both our KRAVE and our VAPORIN brand of e-cigarettes are still very popular and gives us the foundation on which to start increasing sales within the ecig category," says Kevin Frija, CEO of VPR Brands LP. "We will begin shifting our focus back into the ecig category where our brands were once the top industry performers and now with a new 5-year clear runway from the FDA will allow us to grow sales and penetrate the market once again."

I personally believe this is huge news...since it aligns well with past experiences of management, brands they acquired, etc. From what I can tell their E-CIG sales were being phased out due to potential regulations.

In addition, their online store sells not only their own brands but other brands as well. Vapor Store Direct has a growing social media presence and an easy to use website.

I believe opportunities remain to do more private /white label and/or licensing deals with other industry players.

The investment from Greenlane to purchase VAPORNATION a few months ago also perked my attention. There might be an opportunity for the company to do more with their VAPORSTOREDIRECT website (either a sale to raise cash to focus on the HONEYSTICK brand, or move it more into the cannabis space with another industry player)

New Products – I’m not going to waste my time and list all of them but just scrolling through their websites there sales from new products launched last 6 months must be high. They continue to come out of a few new products each quarter.

CBD Goldline - www.cbdgoldline.com
http://www.cbdgoldline.com/

They have not yet had revenue from this but I suspect they will in Q2 and then take off in Q3. If you scroll through the website they have a lot of product displays that are made really well for retail. It’s important to note on their newsletter or website they have added two new distributors in the past 3 months..

FENIXSBT - http://www.fenixsbt.com/ (focus on convenience stores)
COREMARK - https://www.core-mark.com/ (leader in providing fresh to convenience stores)

It is important to note here that I believe Kevin has a lot of connections from his past experiences. In particular, he has the KRAVE brand when he was the former CEO of Vapor Corp in family dollar stores across areas of the United States. Need proof?

https://www.prnewswire.com/news-releases/vapor-corp-launches-krave-king-at-family-dollar-stores-nationwide-236713491.html

From 2013:
“"We are excited to expand the distribution of our KRAVE® KING brand of disposable e-cigarettes with the addition of 6,600 Family Dollar Store locations nationwide. Family Dollar represents the third national retail chain to carry our products, which we believe is a great indicator of our position for growth as a leading e-cigarette company," stated Vapor CEO, Kevin Frija. "With the same size and feel of a traditional cigarette, as well as exceptional taste and quality, the KRAVE® KING has the potential to lead the e-cigarette market."

I’m not suggesting this is a slam dunk here with VPR Brands but Kevin has the experience and connections to get it done. They also have now established the CBD Gold Line brand and have retail type kiosk. Fun to dream if they landed a deal like this today…$10,000 per store annually x 6,600 stores is $66M revs…probably takes the stock to $5+ a share. OK, not happening tomorrow – or next week – but my point here is this is all upside. Even a small pilot with someone is going to add substantial value for shareholders.

FDA E-Cig Announcement and Company Response

https://finance.yahoo.com/news/vpr-brands-lp-welcomes-fdas-123000860.html

Last Shareholder Letter (online store and more..)

https://www.otcmarkets.com/stock/VPRB/news/VPR-Brands-letter-to-shareholders?id=156806&b=y

5. Do they have the ability to expand and sustain margins?

Due to their online selling and private label business along with some recent higher priced product additions gross margins have improved over the last 6 quarters. Q1-2018 gross margins were 47% vs. 35% in Q1-2017.

In addition, if you read reviews on multiple websites – people LOVE the HoneyStick brand. It’s apparent by the sales trajectory and followers they have on social media.

https://www.sec.gov/cgi-bin/viewer?action=view&cik=1376231&accession_number=0001580957-18-000288&xbrl_type=v#

VERDICT: A- They will need to continue to be a leader in technology and also fight off fake imports from overseas. The good news is that they had OI from operations and if they can sustain these mid 40’s margins, they should be able to leverage fairly well as sales grow. I also believe CBD margins will be mid 40’s+.

6. Do they have aspirations to uplist?

From April press release:
"We have improved our capital structure by eliminating all outstanding options held by management, which totaled 30,000,000 shares. We have also started to reduce our potential short/long term debt exposure by working with investors to increase capital. We expect that this will all have a positive impact on long-term growth. As a public company, we believe that full transparency is the only way to gain shareholder trust. To that end, we are in the process of uplisting to the OTCQB and have authorized our transfer agent to participate in the OTC Markets group transfer agent verified shares program in an effort to aide current and potential shareholders in their due diligence."

https://www.otcmarkets.com/stock/VPRB/news/VPR-Brands-letter-to-shareholders?id=156806&b=y

VERDICT: C Yes, they apparently do. However, due to low cash as part of a growing company they seem to have put this on hold.

Other Helpful Links.

COO, Daniel Hoff, in Q1-2017. At the time the stock was $0.40-$0.50. He goes over the business strategy. Dan is the most passionate and best COO of a $8M market cap company in the world. Guaranteed.
https://www.youtube.com/watch?v=suyY3Z_WP6o
Online Websites & Social Media – growing….

https://www.instagram.com/vpr_brands/

http://www.vaporstoredirect.com/ - Company distribution website
www.vapehoneystick.com – Branded website
www.cbdgoldline.com – New CBD Product line