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Vitality Products Inc
VPI-TSX.V / VPRIF: OTC
Price at Initiation: $0.17
52 Week Hi/Low: $0.10 / $0.40 |
| | Average Daily Volume (3month): 37K
Issued and Outstanding: 35,211,285 (41,211,285 post-financing)
Options: 2,100,000
Warrants: 3,125,000 at $0.25 (expire October 19, 2021) (9,125,000 post-financing)
Fully Diluted: 46,436,285 (52,436,285 post financing)
Market Capitalization: $6M ($7M post-financing)
Insider Ownership: 48% - 16,981,263
TTM Net Profit: ($197K)
TTM Revenues: $810K TTM EBITDA Loss: ($187K)
TTM Gross Profit: $592K (73%)
P/S: 7.4x
P/E: N/A
Debt: 1.5M
Cash: $700K ($1.7 million post-financing)
Last Financing: 2020 - $500K @$0.16 with full warrant at $0.25
Highlights - Year-Over-Year sales growth since 2014
- 3 Quarter’s of historical profitability.
- High gross margin (70%+).
- New products – doubled their product lineup.
- New market – Online subscription for supplements.
- Large distribution network in Canada – over 600+ stores.
- Strong brand and platform to accelerate growth.
- Underfunded & bootstrapped business, with limited financial support.
- Undiscovered.
About Vitality
Vitality Products Inc. (TSX-V: VPI) is a Vancouver based Company focused on manufacturing, marketing, and distributing premium quality natural health products, including vitamins, minerals, and nutritional supplements.
The Company has an award-winning line of clean vitamins and supplements, under the trade-marked brand, VITALITY®, which is marketed to natural health retailers and health and wellness conscious consumers, through both retail and online. Vitality has 101 NPNs (Natural Products Numbers) from Health Canada to sell products and manufactures their clean line in British Columbia, Canada.
Vitality’s award-winning product lineup consists of 11 products, of which VITALITY ®Power Iron + Organic Spirulina™ is their flagship product that targets iron deficiency. Products are sold in over 600 stores across Canada, and online on both Amazon.ca and Amazon.com in the United States.
Vitality has been funded through equity financings and government grants to support its product innovation and sales growth. Vitality plans to expand its retail geographic footprint by entering the U.S. marketplace. Additionally, Vitality is focused on growing its online business by offering customers a subscription-based solution for their natural health product needs.
Following the proven success of the line through repeat orders and same store sales growth, the Company is focused on expanding distribution and growing sales in-store and online; evaluating, researching, and developing new products for future distribution; and exploring new markets for its products.
Products In 2014, Vitality rebranded its business and launched its original 4 products based on leading sales categories: multivitamin, immunity and stress, sleep, and digestion. In 2016, Vitality added its marquee product VITALITY ®Power Iron + Organic Spirulina™. |
| VITALITY ®Power Iron + Organic Spirulina™, is Vitality’s market leading product, which accounted for more than 50% of the Company’s sales. The product helps target iron deficiency - One of the largest nutritional health problems in both developing and industrialized countries according to the World Health Organization. According to the WHO, iron deficiency is the top nutritional disorder in the world and it’s suggested that as many as 30% of people have anemia due to prolonged iron deficiency. In the US iron deficiency anemia is estimated to be an issue for between 2-5% of the female population. Without iron, the body cannot build red blood cells to deliver oxygen throughout the body.
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| While Vitality has 5 established products in key categories, the Company is expected to more than double its product lineup to 11 natural health products by June 2021. The new products are focused on: Good health and immunity, sleep and relaxation, women’s health, and kid’s health.
As part of the doubling of their product lineup Vitality has added: Magnesium + Chamomile for Kids; Magnesium + Chamomile for Adults in powder and capsules; Daily Iron + Organic Spirulina (a lower dose iron supplement to build on the success of Power Iron); Trace Minerals + Chlorella; and Vitality Glow with its first signature product Collagen + Cranberry to appeal to Vitality's female customer base.
All of Vitality’s products are made locally, BC, Canada, third-party tested, non-GMO (contain no genetically modified organisms), gluten-free, soy-free and vegan friendly. The Company’s products have been recognized throughout the industry, winning awards such as the Consumer 5 Alive Awards, Choice Award, Clean Choice Award and Best New Supplement Award. For each new product, they are either in the process of filing or have previously filed with the Food and Drug Administration (FDA) for sale in the United States.
Growth in Retail:
Vitality products are available for sale in over 600+ retail stores located in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, and Yukon.
Some of the retail stores include: Whole Foods, Choices, Vita Health, Thrifty Foods, Amaranth, Healthy Planet, Nature’s Fare, Nature’s House, Planet Organic, Nutter's, Old Fashion Foods, , Goodness Me, Nature Emporium, Nature’s sources.
Growth in retail locations below:
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| | Since 2013, Vitality has grown its retail footprint from 10+ retail stores to over 600+ retail stores. In an ultra-competitive industry, not only has Vitality added new retail locations across Canada, but they have expanded their shelf space as partners continue to add more of Vitality’s products.
Partnering with leading retailers such as Whole Foods, Choices, Well.ca, and Amazon, both validates the brand and quality of Vitality products. Moreover, all retailers have their own quality standards and process for product selection, and Vitality’s successive growth is a testament of their brand. While we anticipate that Vitality will continue to grow its retail footprint, the Company is focused on same-store sales growth.
There are two key distributors Vitality has partnered with that service 7,000 retailers across Canada. These two distributors are Acosta Canada Corporation and Purity Life Health Products LP (Purity Life).
With an established retail distribution across Canada, Vitality has direct access to both new and existing customers. As the Company continues to execute, the strategy is to leverage existing retail partnerships to penetrate new markets (such as the U.S. with over 7,000 natural health retailers) to expand its retail locations. Monitoring both the growth in retail locations and same-store sales will be a key performance indicator for investors.
Target Demographic
Women between the ages of 30 – 54 purchase over 60% of natural health products, and overall women account for approximately 80% of all sales. Vitality is a female-led business including the President, CEO, Chief Scientist, and sales team. Millennial women are a core demographic focus, especially pre-natal women who are pre-planning and pre-preparing to protect their children. This key demographic is digitally connected and focused on health and wellness. By targeting the household decision makers for nutrition, Vitality believes its marketing and promotional efforts to this demographic to be the most effective.
Market Overview
The global dietary supplements market was valued at USD 163.1 billion in 2019 and it is expected to grow with a CAGR of 6.5% over the forecast period of 2020-2026. The growth of the market is driven by the rise in awareness regarding preventive healthcare. In the past few years, the concept of preventive healthcare has come into popularity. As the name suggests, preventive healthcare focuses on the preventive measures for certain health issues rather than curing them when they occur. Moreover, the major media channels play an important role in spreading awareness about preventive healthcare. These media channels share information regarding preventive healthcare and products such as nutritious foods and dietary supplements. This, in turn, increases the demand for dietary supplements.
Natural health has quickly moved from a fragmented collection of individual health advocates to a highly organized and strategically driven industry. With the accelerating growth in the health and wellness industry, the vitamins and supplement markets are robust and recession resistant. In fact, it has been stated that dietary supplement usage has reached an all time high with over 70% of Americans and Canadians reporting they consume dietary supplements. Additionally, it should be highlighted that the impacts from COVID-19 have accelerated the explosion of ecommerce growth in natural health with over 50% of Americans purchasing on Amazon.
Share Structure
Vitality currently has 35,211,285 shares issued and outstanding. In addition, there are dilutive securities comprised of 2,100,000 options and 3,125,000 warrants for a fully diluted total of 46,436,285.
Additionally, accounting for the most recent private placement (pending close), for gross proceeds of $1.02 million. The issued and outstanding would become, 41,211,285, with and addition 6,000,000 warrants at $0.25 for a fully diluted total of 52,436,285.
The warrants are exercisable at $0.25 and expire October 2021. These warrants were issued from the financing in 2019 for 3.125M shares at $0.16 for gross proceeds of $500K.
Most of the options (1.65M) are exercisable at $0.13 with an expiration of May 2023.
Vitality also has two series of Class A preferred shares dating back to 1992 and 2002 issuance period. They both have a 6% per annum cumulative dividend payable annually with a redemption price of $10 per shares plus and cumulative dividends. Currently, both Class A, Series 1 and Series 3 preferred shares have dividends in arrears with a combined total of $344,944.
Insiders own 5,480,029 shares or about 48% of the Company. The largest shareholder is the Estate of William Neil Grant which holds 11,501,234 shares or 36.15% of the Company. William Neil Grant is the father of CEO Cheryl Grant and CFO Douglas Grant. The remaining 15.5% of the Company is held by the two largest shareholders, Cheryl Grant (2.9M) and Doug Grant (1.45M).
Valuation
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| | | Since Vitality rebranded and launched its products in 2014, the Company has grown their revenues from $5,301 to $810K TTM – A CAGR of 87%. Vitality has a strong gross margin business with roughly 70% gross margins – attributed to the development and distribution of their own proprietary formulas.
We anticipate growth to continue and recognize that growth in retail locations have strongly correlated with the current growth trajectory. Notably, the trailing twelve month (TTM) revenues have increased by 55% versus the same year prior.
Vitality is not profitable and has a small cash burn. Over the TTM Vitality has posted ($197K) in net losses. However, the Company has achieved three quarters of profitability in 2018 and 2020. The Company has shareholder deficits with approximately $2.9M in tax loss carry forwards to help shield future profits from income tax.
Based on the financing price of $0.17, and Vitality’s market capitalization of $6M, the Company is trading at a P/S of 7.4x. Factoring in the current debt of $1.5M, which are owed to related parties, Vitality is trading at an EV/S of 9x.
While Vitality’s sales are not classified as a traditional recurring revenue, we argue there is an element of recurring or repeatable revenues as customers continue to replenish their inventory – creating a consistent trend. However, we think there’s potential future value not being priced into the Company’s market price based on their online subscription-based model.
Vitality’s online sales through, Amazon.ca, Amazon.com and Vitality.ca have grown by 400% in 2020. Given that Vitality has a relatively small promotions budget, spending approximately $97K over the past three quarters, we believe with an increased advertising spend, Vitality’s online sales will become an accelerating growth driver – Which is not factored into the current valuation.
On financial metrics, Vitality is not cheap. However, we do recognize it has a smaller market capitalization, at only $6M, whereby it can rapidly grow into its valuation. Additionally, there’s considerable intangible value not showcased in the financials that we believe provides some downside protection.
Natural Products Numbers (NPN’s)
Under Health Canada's regulations implemented in 2004, condition-specific formulated products developed by any Company require Natural Health Product Numbers. Vitality has 101 NPN’s from Health Canada. The issuance of a product license means that the product has been assessed by Health Canada, found to be safe, effective and of high quality under its recommended condition of use. The development costs of formulating, testing, and registering 101 NPN’s with Health Canada exceed $500K. Historically, the Company has expensed all these development costs under its accounting policies. Therefore, this key strategic asset of the Company is not recognized on their balance sheets. The Company expects to generate income from the many years of investment in their NPNs.
Investment Property
In 2002, previous management of Vitality purchased a 5.17-acre property at 7594 Blaine Road, Washington from D.B.C. Financial Corporation. This long-term asset is recorded at its historical cost of $237,750 on the balance sheet. However, management has estimated the fair value of the investment property to be in the range of $428,863 to $714,772 based on comparable market prices for undeveloped land in Whatcom County. Management has also indicated that they may consider selling the property to bolster its cash position.
Distribution / Brand
Vitality has grown from 10+ retail stores to over 600+ across Canada. At the same time, the Company more than doubled its product lineup from 4 to 11 products. These developments have occurred with relatively limited capital for marketing and expansion. We believe that Vitality has a brand, albeit a smaller brand, that has good customer loyalty validated by its consistent growth in revenues. We recognize that there’s significant costs, both capital and time, to replicate Vitality’s distribution of 600+ stores and established relationships for Vitality to expand its shelf-space with their products.
What to look out for
Dilution and capital requirements
Vitality is currently not profitable and burning cash. While the Company is operating near break-even and the Q3 loss was only $45K, we anticipate the Company to increase its staffing personnel, and marketing initiatives. With the increase in both expenses the cash-burn is expected to increase with the intention of accelerating growth. Moreover, we do anticipate there being future dilution by both the exercise of existing warrants, and potentially new equity issues in the future.
Additionally, Vitality has $2.1M in redeemable preference shares and amounts owing to related parties. There is potential that Vitality eliminates these liabilities from its balance sheet by the issuance of new shares. Under a shares for debt transaction the Company could incur further dilution.
Fashionable Trends
Currently Vitality’s leading product, VITALITY ®Power Iron + Organic Spirulina™, makes up 53% of the Company’s revenue. As the Company continues to expand its products line-up, there’s potential risk that one of the new products wavers between high and low growth based on market trends. Some products may be fashionable this year, but not the next, resulting in revenue trends that are not consistent.
Ineffective Marketing for Online Sales
Core to our investment thesis is the value from the online subscription-based model. With a relatively limited marketing budget, Vitality has demonstrated effective marketing utility leading to revenue growth. However, there is potential risk that the marketing efforts are not effective with an increased budget to create a significant return on investment.
Final Thought
With limited capital resources, Vitality is revitalizing its business, developing a strong retail footprint, expanding its customer base, introduced new products and established a brand. This combination of developments has resulted in steady, consistent revenue growth from $0 in sales in 2014 to $810K (LTM) in sales in 2021. With an improving balance sheet, through a capital raise, we believe that Vitality has a strong platform for accelerated growth.
With high-margin products any incremental revenue growth will have a strong impact on Vitality’s bottom line. Vitality’s management have demonstrated they can achieve profitability, and while the business is near profitable, any excess cash flow should help the Company invest for future growth.
Vitality has multiple growth opportunities by expanding its product lineup at a very low cost, expanding geographically into the large US and International markets, and growing its online sales through both Amazon and its own online store. The most compelling opportunity is the commencement of a subscription model where Vitality can capture and leverage a growing long-term recurring revenue stream.
At current prices, we believe Vitality shares offer a very strong risk/reward opportunity for risk tolerant investors. Although, it should be highlighted that given the Company’s infancy, financial profile and market capitalization, we recognize this is a longer-term hold as the Company is very illiquid and undiscovered.
We think Vitality is compelling microcap opportunity and a strong buy up to $0.35.
Disclosure: Paul and Trevor own shares of Vitality Products Inc (VPI-TSX.V)
Financing History
2021 - $1.02M @$0.17 with full warrant at $0.25
2020 - $500K @$0.16 with full warrant at $0.25
2018 - $500K @$0.10 with full warrant at $0.15
Recent Headlines
2021 - Vitality Announces Increase in Private Placement
2021 - Vitality Announces Private Placement of $510,000 for Expansion
2021 - Vitality Launches Radio & Digital Media Campaign in BC to Increase Market Share
2021 - Vitality Strengthens its Brand at Whole Foods Canada with Listing of Six New Products
2021 - Vitality Appoints Colby Fackler as COO to Accelerate Sales Growth
2020 - Vitality Announces Third Quarter Results
2020 - Vitality Announces Closing of Private Placement of $500,000
2020 - Vitality Announces Second Quarter Results
2020 - Vitality Announces Private Placement of $500,000 for Expansion
2020 - Vitality Introduces New Products in Q2, Holds AGM and Announces Exercise of Stock Options
2020 - Vitality Announces First Quarter Results
2020 - VItality announces delay in filing of interim disclosure documents due to COVID-19
2020 - Vitality Announces Fourth Quarter and Year End Results
2020 - Vitality's Five New Products Enter Retail and Online in Canada
2020 - Vitality Announces Delay in Filing of Annual Disclosure Documents Due to COVID-19
2020 - Vitality Launches Into United States on Amazon.com With Supplements for Stress, Sleep, Immunity and Energy
2020 - Vitality Set to Double Vitamin and Supplement Line with Five New Products
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