UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-19001

VAPOR CORP.

(Exact name of Registrant as specified in its charter)

Nevada		84-1070932
(State or other jurisdiction		(I.R.S. Employer Identification No.)
of incorporation or organization)
3001 Griffin Road
Dania Beach, FL		33312
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 888-766-5351

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No [uncheck both boxes]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

o Large accelerated filer		o Accelerated filer		o Non-accelerated filer		þ Smaller reporting company
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

60,235,344 shares of Common Stock Issued and Outstanding as of May 12, 2011

 

 

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Financial Statements—March 31, 2011 and 2010:
Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010			3
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010			4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010			5
Notes to Condensed Consolidated Financial Statements			6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			7
ITEM 4. CONTROLS AND PROCEDURES			13
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			14
ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS			14
ITEM 6. EXHIBITS			14
SIGNATURES			15
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

VAPOR CORPORATION
F/K/A MILLER DIVERSIFIED CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

		March 31, 2011				December 31, 2010
		(Unaudited)				(Audited)
ASSETS
CURRENT ASSETS:
Cash		$	48,701			$	65,734
Due from merchant credit card processor, net of reserve for chargebacks of $80,000 and $80,000, respectively			610,997				499,485
Accounts receivable, net of allowance of $5,000			455,076				304,391
Inventories			566,664				924,809
Sundry current assets			22,098				4,713
TOTAL CURRENT ASSETS			1,703,536				1,799,132
DEFERRED TAX ASSET			92,000				—
TOTAL ASSETS		$	1,795,536			$	1,799,132
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses		$	1,105,127			$	1,001,122
Income taxes payable			173,471				173,471
TOTAL CURRENT LIABILITIES			1,278,598				1,174,593
STOCKHOLDERS’ EQUITY:
Common stock, $.001 par value 250,000,000 shares authorized 60,185,000 and 60,135,000 shares issued and outstanding and outstanding, respectively			60,185				60,135
Additional paid-in capital			368,565				347,115
Retained earnings			88,188				217,289
TOTAL STOCKHOLDERS’ EQUITY			516,938				624,539
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,795,536			$	1,799,132

See notes to financial statements

VAPOR CORPORATION
F/K/A MILLER DIVERSIFIED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		THREE MONTHS ENDED MARCH 31,
		2011				2010
SALES		$	4,864,292			$	1,875,642
COSTS AND EXPENSES:
Cost of sales			2,298,541				1,000,638
Selling, general and administrative			2,786,852				1,123,285
TOTAL COSTS AND EXPENSES			5,085,393				2,123,923
LOSS BEFORE INCOME TAX CREDIT			(221,101	)			(248,281	)
Income tax credit			(92,000	)			(99,000	)
NET LOSS		$	(129,101	)		$	(149,281	)
BASIC AND DILUTED NET LOSS PER COMMON SHARE		$	(0.02	)		$	(0.04	)
WEIGHTED AVERAGE NUMBER OF OUTSTANDING SHARES			60,147,778				42,575,342

See notes to financial statements

VAPOR CORPORATION
F/K/A MILLER DIVERSIFIED CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		THREE MONTHS ENDED
		MARCH 31,
		2011				2010
OPERATING ACTIVITIES:
Net loss		$	(129,101	)		$	(149,281	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Deferred tax asset			(92,000	)			(99,000	)
Stock issued for services			21,500				—
Changes in operating assets and liabilities:
Due from merchant credit card processor			(111,512	)			19,550
Accounts receivable			(150,685	)			(61,612	)
Vendor deposits			—				(2,500	)
Inventories			358,145				(41,709	)
Sundry current assets			(17,385	)			(3,180	)
Accounts payable and accrued expenses			104,005				382,653
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES AND (DECREASE) INCREASE IN CASH			(17,033	)			44,921
CASH — BEGINNING OF PERIOD			65,734				841
CASH — END OF PERIOD		$	48,701			$	45,762

See notes to financial statements

VAPOR CORPORATION
F/K/A MILLER DIVERSIFIED CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011
(Unaudited)

1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business description

Vapor Corporation F/K/A Miller Diversified Corporation (the “Company”) is the holding company for its wholly-owned subsidiary Smoke Anywhere U.S.A., Inc. The Company markets and distributes personal vaporizers under the Fifty-OneTM, KraveTM, EZ SmokerTM, and Green PufferTM brands.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included, Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 For further information, refer to the Company’s audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on 10-K for the year ended December 31, 2010, as filed with the Securities and Exchange Commission.

2

LEASE COMMITMENTS

The Company is committed under an operating lease for its office space which expires in December 2011 and provides for minimum annual rentals of approximately $23,000. Rental expense for the three months ended March 31, 2011 aggregated approximately $7,000.

In March 2011 the Company entered into an operating lease for its new facilities which expires in March 2013 and provides for minimum annual rentals of approximately $144,000. Rental expense for the three months ended March 31, 2011 aggregated approximately $12,000.

3

LITIGATION

From time to time the Company may be involved in various claims and legal actions arising in the ordinary course of its business. There were no pending material claims or legal matters as of March 31, 2011 other than the following matter.

On February 23, 2010 Smoke Anywhere USA, Inc., the Company’s wholly owned subsidiary (“Smoke Anywhere”), filed an arbitration against TransFirst, a company providing it credit card transaction processing services, as required, in the event of a dispute under the services contract by and between the parties. Smoke Anywhere is seeking to have certain fees and fines levied on it reversed, in addition to demanding that certain monies held by TransFirst, be released to it.

On May 15, 2011, the Company became aware that Ruyan Investment (Holdings) Limited has named the Company, along with three other sellers of electronic cigarettes, in a lawsuit alleging patent infringement under federal law. The lawsuit is Ruyan Investment (Holdings) Limited vs. Smoking Everywhere, Inc. et. al. CV11-0367 GAF (FFMx) filed in the United States District Court for the Central District of California. The lawsuit was amended on May 5, 2011 to add the Company as a defendant. Because the lawsuit as amended has not been accepted by the Court, the lawsuit has not been filed against, or served on, the Company. The Company is in the process of evaluating the lawsuit pending it being filed against and served on the Company.

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Management’s Discussion and Analysis should be read in conjunction with our financial statements included in this quarterly report.

Forward-Looking Statements

This report contains forward-looking statements and information relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, our management. When used in this report, the words “believe,” “anticipate,” “expect,” “estimate,” “intend”, “plan” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved. Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the “Risk Factors” section of and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and in our subsequent filings with the Securities and Exchange Commission, and include, among others, the following: competition, consumer acceptance of our products, changes in customer preferences, reliance on Chinese suppliers and manufacturers, government regulation, product liability claims and the availability, terms and deployment of capital, The terms “Vapor Corp,” “Vapor,” “we,” “us,” “our,” and the “Company” refer to Vapor Corporation and the terms “Smoke Anywhere USA,” and “Smoke” refer to our wholly owned subsidiary Smoke Anywhere USA, Inc.”

Executive Overview

The Company designs, markets, and distribute electronic cigarettes, under the Fifty-One^®, Krave^®, EZ Smoker^®, Smoke Star^® and Green Puffer^® brands. “Electronic cigarettes” or “e-cigarettes,” are battery-powered products that enable users to inhale nicotine vapor without fire, smoke, tar, ash, or carbon monoxide.

The Company participates directly in the highly competitive and fragmented e-cigarette market, but also faces competition from tobacco companies. Electronic cigarettes are relatively new products and the Company is continually working to introduce its product and brands to customers. The Company believes increased investment in marketing and advertising programs is critical to increasing product and brand awareness and that sales of its innovative and differentiated products are enhanced by knowledgeable salespersons who can convey the value and benefits electronic cigarettes have to offer over traditional tobacco burning cigarettes.

The Company’s business strategy leverages its unique ability to design, market and develop multiple e-cigarette brands and to bring those brands to market through its multiple distribution channels. The Company sells its products through its online stores, its direct response television marketing efforts, to retail channels through its direct sales force, and through third-party wholesalers, retailers, and value-added resellers.

Critical Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make significant estimates and judgments that affect the amounts reported in the consolidated financial statements and the accompanying notes. These items are regularly monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. The estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from the estimates.

Revenue Recognition

Net sales consist primarily of revenue from the sale of electronic cigarettes, replacement cartridges, components for electronic cigarettes and related accessories. We recognize revenue from product sales when the persuasive evidence of an arrangement exists, delivery has occurred and collect-ability is reasonably assured. Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded when the products are shipped and title passes to customers. Retail items sold to customers are made pursuant to sales contracts that generally provide for transfer of both title and risk of loss upon our delivery to the carrier. Return allowances, which reduce product revenue by our best estimate of expected product returns, are estimated using historical experience. Revenue from product sales and services rendered is recorded net of sales taxes.

Income Taxes

We record valuation allowances against our deferred tax assets. Realization of deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our deferred tax asset, which increases our income tax expense in the period when such determination is made.

In addition, we do not plan to record U.S. income tax expense for foreign earnings that we have determined to be indefinitely reinvested offshore, thus reducing our overall income tax expense. The amount of earnings designated as indefinitely reinvested offshore is based upon the actual deployment of such earnings in our offshore assets and our expectations of the future cash needs of our U.S. and foreign entities. Income tax considerations are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore.

We carefully review all factors that drive the ultimate disposition of foreign earnings determined to be reinvested offshore, and apply stringent standards to overcoming the presumption of repatriation. Despite this approach, because the determination involves our future plans and expectations of future events, the possibility exists that amounts declared as indefinitely reinvested offshore may ultimately be repatriated. For instance, the actual cash needs of our U.S. entities may exceed our current expectations, or the actual cash needs of our foreign entities may be less than our current expectations. This would result in additional income tax expense in the year we determined that amounts were no longer indefinitely reinvested offshore. Conversely, our approach may also result in a determination that accumulated foreign earnings (for which U.S. income taxes have been provided) will be indefinitely reinvested offshore. In this case, our income tax expense would be reduced in the year of such determination.

On an interim basis, we estimate what our effective tax rate will be for the full fiscal year. The estimated annual effective tax rate is then applied to the year-to-date pre-tax income excluding infrequently occurring or unusual items, to determine the year-to-date tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate.

We account for uncertain tax positions on a quarterly basis, we reevaluate the probability that a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in income tax expense.

Other Contingencies

In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, product liability claims, trademark rights, and a variety of other matters. We record contingent liabilities resulting from claims against us, including related legal costs, when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges as other (income) expense, net during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will materially exceed the recorded liability. Currently, we do not believe that any of our pending legal proceedings or claims will have a material impact on our financial position or results of operations.

Results of Operations for the Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010

During the three months ended March 31, 2011 we had $4,864,292 in revenues. This was an increase of $2,988,650 or approximately 159.3% for the three months ended March 31, 2010. Factors that contributed positively to these increases, include the following:

	•		Greater consumer demand through our direct sales efforts for our electronic cigarette products;
	•		An increase in repeat orders from our distributors and wholesale customers;
	•		Residual orders for replacement cartridges from our existing customer base; and
	•		Greater consumer awareness of our products from an increase in our advertising and sales efforts.

Until the December 7, 2010 D.C. Circuit Court of Appeals decision adverse to the U.S. Food and Drug Administration (‘FDA”), and denial of the FDA’s en banc review on January 24, 2011, we believe the FDA’s previous public statements related to electronic cigarettes had a chilling effect on demand for electronic cigarette products. Since the Court’s decision that electronic cigarettes are not subject to the FDA’s review as a drug and medical device but as a tobacco product, we have experienced a pick up in retail demand for our electronic cigarette products through our direct to consumer sales efforts. Direct to consumer sales are more profitable to the Company and carry much larger gross margins than products sold through re-sellers. We also have experienced an up-tick in interest for electronic cigarettes among big box retailers, who have contacted us and requested proposals and plan-o-grams. We expect direct to consumer demand will continue to grow, however we believe that sales through re-sellers will be an increasingly large part of our sales channel mix.

Our operating expenses increased by $1,663,567 or 148.09% for the three months ended March 31, 2011 to $2,786,852 from $1,123,285 for the three months ended March 31, 2010. Operating expenses consists of: cost of sales and selling, general and administrative expenses.

Our cost of sales increased by $1,297,903 to $2,298,541 for the three months ended March 31, 2011. This was an increase of 129.7%, as compared to cost of sales of $1,000,638 for the three months ended March 31, 2010. The increase in our cost of sales is a result of an increase in units purchased for re-sale.

Selling, general and administrative expenses for the three months ended March 31, 2011 were $2,786,852 compared to selling general and administrative expenses of $1,123,285 for the three months ended March 31, 2010. This increase included $70,600 in professional fees, lobbying costs and legal fees incurred in our efforts to identify and comply with a yet to be established FDA regulatory framework for electronic cigarette products. Our efforts in connection therewith, included our decision on March 18, 2011, for our wholly owned subsidiary, Smoke Anywhere USA, Inc., to file a motion to intervene as plaintiff in a proceeding against the FDA in a civil action wherein plaintiff Sottera, sought a declaratory injunction against the FDA relating to its authority to impose an import alert against electronic cigarettes as a drug and medical device. On May 6, 2011 Sottera settled its action with FDA by agreeing to entry of Final Judgment against FDA whereby it is ordered that FDA will comply with the decision in  Sottera v. FDA, 627 F.3d 891 (D.C. Cir. 2010) regarding its jurisdiction to regulate e-cigarettes. Smoke Anywhere’s motion to intervene was denied by the Court as moot given the order that FDA comply with the D.C. Circuit Court of Appeals decision discussed above. Also, on March 21, 2011 the Company entered into a lease for its new corporate offices, in connection with the lease, the Company incurred one time costs of $17,595 and $12,000 of pre-paid rent. Total expenses for the quarter related to the Company’s new offices were $29,595.

During the three months ended March 31, 2011 we had $0 in research and development costs. This was unchanged from the three months ended March 31, 2010.

We had a net loss of $129,101 for the three months ended March 31, 2011, as compared to a net loss of $149,281 for the three months ended March 31, 2010. For the three months ended March 31, 2011, we incurred $100,195 in non-reoccurring expenses, as discussed above in the paragraph comparing our selling, general and administrative expenses for the three months ended March 31, 2011 and 2010. Excluding these items, we had a net loss of $28,906 or $0.00047 per share.

Liquidity and Capital Resources

During the three months ended March 31, 2011 we had total assets of $1,795,536.

During the three months ended March 31, 2011 we had total liabilities of $1,278,598.

We had retained earnings of $88,188 and total stockholders’ equity of $516,938 as of March 31, 2011.

Our net cash used in operating activities was $17,033 for the three months ended March 31, 2011 which included net loss of $129,101, the acquisition and purchase of inventories in the amount of $358,145 and accounts payable and other accrued liabilities of $104,005.

Net cash provided by operating activities for the three months ended March 31, 2010 was $44,921, which included a net loss of $149,281, the acquisition and purchase of inventories in the amount of $(41,709) and accounts payable and other accrued liabilities of $382,653.

We expect cash flows from operations to sufficiently fund our working capital requirements for the foreseeable future, though we may need to raise capital in equity or debt financings. However, there is no assurance we will be able to raise capital, if needed, on terms acceptable to us or at all. Cash flows from operations were sufficient to fund our requirements during this period.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Item 4.		Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer (who serves as our principal executive officer, principal financial and accounting officer) has evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of March 31, 2011. Based on this evaluation, he has concluded that our disclosure controls and procedures were effective as of March 31, 2011.

Changes in Internal Control over Financial Reporting

During the first quarter ended March 31, 2011, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities Exchange Act Rules 13a-15 or 15d-15 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.		Legal Proceedings.

Reference is made to Note 3 to the Company’s condensed consolidated financial statements included elsewhere in this report for the information required by this Item.

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.

On March 7, 2011 the Company issued a total of 100,000 shares of common stock, pursuant to a consultancy agreement dated February 17, 2011. The Company terminated the agreement on May 3, 2011 and 50,000 shares are subject to return to the Company. The issuance of these shares was made in reliance upon the exemption provided by Section 4(2) of the Securities Act of 1933 for transactions by an issuer not involving a public offering.

Item 6.		Exhibits.

Exhibit
Number				Exhibit Description
	31.1 *			Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer.
	31.2 *			Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.
	32.1 *			Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 13th day of May 2011.