NEW YORK (TheStreet) -- Recently TheStreet reported in a short video that the company Vapor Group (VPOR) had completed a private placement. The company felt compelled to "clarify" several points in a press release. The company's response also triggered an angry Twitter campaign defending Vapor Group.
Even in its clarification, however, the company itself agreed that what was reported in that video was accurate.
Vapor Group is a micro-cap company that has reported a net loss for the past three years. It would not warrant significant attention except that it represents a nascent industry that is facing some considerable obstacles to growth.
For one, big tobacco has entered the space -- in particular, Reynolds (RAI - Get Report) and Lorillard (LO) . These companies have deep pockets and can sustain losses as they build their businesses. It will be very difficult for the all of the smaller early e-cigarette players (not just Vapor Group) to go up against these powerhouses. Reynolds is particularly impressive with its product and commitment to the market. That presence is a negative headwind that bears mentioning to investors.
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In its press release, Vapor Group addressed this point.
Yes, there are bigger players in the e-cigarette space than we are -- players with considerable mass distribution muscle such as the traditional cigarette companies. But remember that the e-cigarette industry is still in its infancy, and typically market and technological leadership changes frequently and rapidly at this stage of a newborn sector's life. . . . We don't think we are going away soon. . . . .
A second big negative is that the FDA has put e-cigarettes in its cross hairs. They want to regulate this product and the e-cigarette companies are fighting it. In a small sample the FDA found some chemicals that troubled them and may warrant regulating the market. The FDA wasn't targeting Vapor Group's products, but Vapor Group, along with others in the space, could suffer the burden of such regulation.
The company responded to that concern:
We produce the highest quality e-liquids in the world and can prove it. Our e-liquids are unmatched by any competitor in terms of their purity, high quality, and the steps that we take to protect our customers. All our e-liquids are formulated and mixed exclusively in the U.S. by an FDA registered laboratory by degreed professionals, in accordance with cGMP guidelines (21 CFR part 111) . . . we welcome future FDA jurisdiction over our category and their issuance of quality guidelines to the industry. It can only help to increase the confidence of our customers in our products quality and safety. When the forthcoming FDA standards arrive, we know that we will be able to easily meet or exceed them.
Regarding the company's use of the proceeds to market its electronic cigarettes, Vapor Group responds:
And yes, 'we are taking on debt to market our e-cigarettes'. Yet, the debt is being used judiciously to drive incremental revenue and gross margin across our brands, not to pay expenses or items that don't provide a more immediate return-on-investment.
The company also addressed TheStreet's statement that the bond conversion is dilutive. Hanover, the company that provided the private placement, doesn't have to convert if it gets paid back, but the company had $63,000 in revenue last year and needs to pay back double that amount this year. The SEC filing also indicates the company would be in default if the stock price drops below the 18-cent threshold. The filing reads:
If at any time after the Holding Period, the Common Stock is trading below $0.18, the Company will be considered in default of the Convertible Notes.
The company's response:
[Y]es, if the stock isn't trading 6 months from now at $.18, Vapor Group would be in default of this financing. We all know that should Hanover convert, the conversion would be dilutive. But Hanover still has to wait to convert. Needless to say, our management team has a great incentive to drive the business to pay down the Notes to limit such dilution and to drive the business' metrics so that our price per share is solidly above $.18 in 6 months from its current trading range. In fairness, remember that both Vapor Group and Hanover aren't in this deal to have it go into default.
This company's press release triggered current shareholders to attack TheStreet via Twitter. They were understandably upset that the stock was down 26% since May 6. Their outcry, however, has not been able to stop the stock's slide.
Two other vaporizer companies, not mentioned in the video, have sold off as well. Over two days, M-Cig (MCIG) fell 17% and Vape Holdings (VAPE) fell 23%. The Pot Index on the Main Street site at TheStreet dropped 6%.
At the time of TheStreet's earlier article, the stock was trading at 11 cents. Vapor believes the stock will easily be above 18 cents in six months. They write:
[W]e believe that in 6 months' time, the $.18 per share default price will be academic and a concern no more.
It is at $0.0885 now. It will need to more than double in six months. It has dropped from roughly 40 cents since March, long before the video was taped.
-- Written by Debra Borchardt in New York.