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EX-32.1 - EXHIBIT 32.1(RESTATED) - Healthier Choices Management Corp. | c21812exv32w1.htm |
EX-21.1 - EXHIBIT 21.1 - Healthier Choices Management Corp. | c21812exv21w1.htm |
EX-31.2 - EXHIBIT 31.2(RESTATED) - Healthier Choices Management Corp. | c21812exv31w2.htm |
EX-31.1 - EXHIBIT 31.1(RESTATED) - Healthier Choices Management Corp. | c21812exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Amendment No. 1)
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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 | |
of incorporation or organization) | No.) | |
3001 Griffin Road | ||
Dania Beach, FL | 33312 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: 888-482-7671
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
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.
Yes þ No o
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 (§229.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(section 229.405 of this chapter) is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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.
Large accelerated filer o
|
Accelerated filer o | Non-accelerated filer o | Smaller Reporting Company þ | |||
(Do not check if smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes o No þ
The aggregate market value of the voting and non-voting stock held by non-affiliates of the
registrant, as of March 31, 2011, was approximately $20,098,122 based upon the closing price
reported for such date on the Over the Counter Bulletin Board market. For purposes of this
disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares
of common stock and shares held by executive officers and directors of the registrant have been excluded because such persons may be deemed to be affiliates.
This determination of executive officer or affiliate status is not necessarily a conclusive
determination for other purposes.
60,135,344 shares of Common Stock Issued and Outstanding as of March 30, 2011
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EXPLANATORY NOTE
Vapor Corp. (the Company) is amending its Annual Report on Form 10-K for the year
ended December 31, 2010 (the Original Filing), as filed with the Securities and
Exchange Commission (SEC) on March 30, 2011, to restate its audited consolidated
financial statements as of December 31, 2010 and 2009 and for the years then ended to
reflect the effects of accounting and reporting errors, to include stock based
compensation expense for employee and non-employee stock options issued on October 1,
2009 and January 1, 2010, and to correct the weighted average number of common shares
outstanding. These accounting and reporting errors and the related adjustments resulted
in an understatement of net loss and additional paid in capital of $901,536 and
$1,190,661, respectively, and an overstatement of retained earnings of $1,190,661 for the
year ended December 31, 2010. These accounting and reporting errors and the related
adjustments resulted in an understatement of net loss and additional paid in capital of
$289,125 and $289,125, respectively, and an overstatement of retained earnings of
$289,125 for the year ended December 31, 2009.
In addition, the Company has concluded that these accounting and reporting errors
constitute a material weakness in the Companys internal control over financial reporting
as of December 31, 2010 and that its disclosure controls and procedures were ineffective
at December 31, 2010 (see Item 9A(T) of Part II, Controls and Procedures (Restated) and
Managements Report on Internal Control Over Financial Reporting (Restated).
Except as required to reflect the effects of the restatement for the items above and the
correction of various typographical errors, no additional modifications or updates in this
Amendment No. 1 have been made to the Original Filing. Information not affected by the
restatement remains unchanged and reflects the disclosures made at the time of the Original
Filing. This Amendment No. 1 does not describe other events occurring after the Original
Filing, including exhibits, or modify or update those disclosures affected by subsequent
events. This Amendment No. 1 should be read in conjunction with the Companys filings made
with the SEC subsequent to the filing of the Original Filing, as those filings may have been
amended, as information in such reports and documents may update or supersede certain
information contained in this Amendment No. 1. Accordingly, this Amendment No. 1 only amends
and restates the Risk Factor entitled We Depend On The Efforts Of our Management. Our Management Team Lacks Experience In Managing A Public
Company and the Obligations Incident to Being a Public Company Will Place Significant Demands
on Our Management. We Have Existing Material Weaknesses In Our Internal Control Over
Financial Reporting and Are Trying to Remediate these Material Weaknesses contained in Item
1A of Part I, Items 7 and 9A(T) of Part II, Item 11 of Part III and Item 15 of Part IV of the
Original Filing, in each case, solely as a result of, and to reflect, the restatement, and no
other information in the Original Filing is amended hereby. Additionally, pursuant to the
rules of the SEC, Item 15 of Part IV of the Original Filing has been amended to contain
currently dated certifications pursuant Sections 302 and 906 of the Sarbanes-Oxley Act of
2002, which are attached to this Amendment No. 1 as Exhibits 31.1, 31.2 and 32.1 and an
updated signature page. As noted above, this Amendment No. 1 corrects various typographical
errors contained in the Original Filing.
VAPOR, CORP.
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Exhibit 32.1(Restated) |
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The Business section and other parts of this Annual Report on Form 10-K/A (Form 10-K/A) contain
forward-looking statements that involve risks and uncertainties. Many of the forward-looking
statements are located in Managements Discussion and Analysis of Financial Condition and Results
of Operations. Forward-looking statements provide current expectations of future events based on
certain assumptions and include any statement that does not directly relate to any historical or
current fact. Forward-looking statements can also be identified by words such as anticipates,
believes, estimates, expects, intends, plans, predicts, and similar terms.
Forward-looking statements are not guarantees of future performance and the Companys actual
results may differ significantly from the results discussed in the forward-looking statements.
Factors that might cause such differences include, but are not limited to, those discussed in the
subsection entitled Risk Factors under Part I, Item 1A of this Form 10-K/A, which are
incorporated herein by reference. The Company assumes no obligation to revise or update any
forward-looking statements for any reason, except as required by law.
PART I
Item 1. Business
Company Background
Vapor Corp. and its wholly owned subsidiaries (collectively Vapor or the Company) design,
market, 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 smoke, tar, ash, or carbon monoxide. Designed to
look like a traditional cigarette, each e-cigarette consists of three parts: the nicotine
cartridge, the atomizer or heating element, and the battery and electronics.
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. The Companys fiscal year is the 52 or 53-week period that
ends on the last day of December. Unless otherwise stated, all information presented in this Form
10-K is based on the Companys fiscal calendar. The Company was originally incorporated as Miller
Diversified Corp in 1987 as a Nevada corporation, and operated in the commercial cattle feeding
business until October 31, 2003 when the company sold substantially all of its assets and became a
discontinued operation. On September 1, 2009, the Company acquired Smoke Anywhere USA, Inc. in a
reverse triangular merger; and as a result of the merger Smoke Anywhere became our sole operating
business. On January 7, 2010 the Company changed its name to Vapor Corp. Our corporate website is
located at www.vapor-corp.com.
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The Electronic Cigarette
Electronic cigarettes are electronic devices, the functional elements include: 1) a small plastic
cartridge that contains a liquid nicotine solution,2) the atomizer, which is a heating element that
vaporizes the liquid nicotine so that it can be inhaled, and; 3) the electronics, which include: a
rechargeable lithium-ion battery and an LED which illuminates to indicate use.
When a user draws air through the device, the air flow is detected by a sensor, which activates a
heating element that vaporizes the solution stored in the mouthpiece/cartridge, the solution is
then vaporized and it is this vapor that is inhaled by the user. The solution depending on the
model may or may not contain nicotine and may or not be flavored. We sell our products in a kit, or
as separate components. We also offer for sale replacement cartridges to be used with our
non-disposable electronic cigarettes when the cartridges become depleted.
We sell a variety of electronic cigarettes; rechargeable and disposable. E-cigarettes are
available in two varieties, a two-piece unit which we market under our DUO® product line and our
three-piece unit, which we market under our TRIO® product line.
The DUO®
The DUOs 2-part construction (battery component and cartridge) features a disposable all-in-one
atomized cartridge (also known as a cartomizer). This cartomizer is replaced when the nicotine
solution is depleted from use. The all-in-one configuration eliminates the need for maintenance of
a separate atomizer.
The TRIO®
The TRIOs 3-part construction (battery component, atomizer, and cartridge)features a separate
atomizer from the cartridge;the atomizer is reused and requires separate maintenance over its
useful life. Replacement atomizers are available for sale and are easily serviceable by the user.
In the TRIO, the only thing that needs to be replaced is the nicotine cartridge.
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Cartridges and Accessories
We also market, refill cartridges in an assortment of flavors and nicotine levels, including a no
nicotine cartridge. In addition to other accessories including but not limited to USB, home and car
charging devices; carrying cases, replacement parts and other accessories.
Our products are relatively new to market, as is the industry in which we operate. Regulations are
emerging that will shape the manner and form in which we operate our business and develop our
business plans and strategies going forward. We expect our products will be regulated by the U.S.
Food and Drug Administration (FDA), state and municipal government, and foreign governmental agencies for those respective countries in which we
sell our products. Complying with said regulations will be a critical element of our business
operations and success.
The Market for Our Products
We market our e-cigarettes as an alternative to traditional tobacco cigarettes. Electronic
cigarettes offer a smoking experience without the burning of tobacco leaf and as a result,
electronic cigarettes offer its users the ability to satisfy their nicotine cravings without smoke,
tar, ash or carbon monoxide, and in many cases electronic cigarettes may be used where tobacco
burning cigarettes may not.
According to the American Heart Association, there are approximately 45 million smokers in the
United States and the World health Organization reports that globally, approximately 15 billion
cigarettes are smoked on a daily basis. In 2009, based on industry estimates, electronic cigarette
sales were estimated at $100 million, with more than half a million consumers in the U.S. alone
(according to the Electronic Cigarette Association, a Washington D.C. based industry trade group,
formed in May, 2009,) which equates to approximately 0.1% of the $86.8 billion of cigarette and
cigar sold in the U.S in 2006 according to the U.S. Department of Agriculture, Economic Research
Service.
Our products, in addition to being sold online and through our direct response television marketing
campaigns, are currently sold in convenience stores, tobacco shops and at kiosk locations in
shopping malls throughout the country. We believe that electronic cigarettes offer smokers a
superior experience to tobacco burning cigarettes and are far more convenient when they can be used
where traditional cigarettes cannot.
Electronic cigarettes, since their introduction to the US market have largely been sold online,
while tobacco products, most notably cigarettes are currently sold in approximately 150,000 retail
locations. We believe that future growth of electronic cigarettes is dependent on higher volume,
lower margin sales channels, like the broad based distribution network through which cigarettes
are sold, and as such, We are focusing on growing our retail distribution reach by entering into
distribution agreements with large and established value added resellers and by focusing our sales
efforts on regional and national retail chains. We believe that these higher volume lower margin
opportunities are critical towards broadening the reach and appeal of e-cigarettes and as
electronic cigarettes become more widely known and available,the market for our products will grow.
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Distribution and Sales
The distribution and sales strategy for our products is tailored to the characteristics of each
market, whether it is geographical or demographical.
Our sales and distribution channels are:
| Internet affiliate marketing through independent sales persons. | ||
| Direct Sales and Distribution, where we have set up our own distribution directly to retailers. | ||
| Single independent distributors who are responsible for distribution within a single market. | ||
| Exclusive Territory and Exclusive Channel Distribution, where distributors have an exclusive territory within a country or an exclusive right to sell within a distribution channel (e.g. gas station.) | ||
| Distribution through wholesalers, where we supply either national or regional wholesalers who then service retailers. | ||
| Internet/E-commerce Sales, where we sell directly to end users through one of our internet websites and or landing pages. | ||
| Internet/E-commerce Sales, where we sell directly to end users through one of our internet websites and or landing pages. | ||
| Direct response television marketing. |
Our distribution and sales channels are supported by internal sales and customer service personnel.
We generate sales and leads through domestic and international trade-shows, telesales, Internet
marketing, Internet affiliates and direct response television marketing. We depend on a network of
internal and external sales representatives to maintain and grow our business and the revenues we
generate.
Competition
We compete with other sellers of electronic cigarettes; the nature of our competitors is varied as
the market is highly fragmented and the barriers to entry into the business are low. Our direct
competitors sell products that are substantially similar to ours and through the same channels
through which we sell our electronic cigarette products. We compete with these direct competitors
for sales through distributors, wholesalers and retailers, including but not limited to national
chain stores, tobacco shops, gas stations, travel stores, shopping mall kiosks, in addition to
direct to public sales through the Internet, mail order and telesales.
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As a general matter, we have access to and market and sell the similar electronic cigarettes as our
competitors and since we sell our products at substantially similar prices as our competitors;
accordingly, the key competitive factors for our success is the quality of service we offer our
customers, the scope and effectiveness of our marketing efforts, including media advertising
campaigns and, increasingly, the ability to identify and develop new sources of customers.
Part of our business strategy focuses on the establishment of contractual relationships with
distributors. We are aware that e-cigarette competitors in the industry are also seeking to enter
into such contractual relationships. In many cases, competitors for such contracts may have greater
management, human, and financial resources than we do for entering into such contracts and for
attracting distributor relationships.
Certain of our electronic cigarette competitors may have better control of their supply and
distribution, be, better established, larger and better financed than our Company, however we
believe that as a public company we will have better access to capital, management and resources
needed to build our business and pursue any regulatory approvals that may be needed in connection
with future sales of our products, as the law demands it.
We also compete with the worlds largest tobacco companies Big Tobacco as our products deliver
nicotine like traditional cigarette and tobacco products. Big Tobacco has nearly limitless
resources, global distribution networks in place and a customer base that is fiercely loyal to
their brands. Additionally, if tobacco companies seek to compete against us in offering alternative
products to traditional cigarettes, namely e-cigarettes or similar alternatives, (i.e.R.J.
Reynolds have filed a patent application for an e-cigarette-like device which they refer to as a
Tobacco-Containing Smoking Article) our ability to differentiate ourselves based on the
uniqueness of our product offering will be gone and competing against them will be an even greater
challenge.
Moreover, based on consumer use and demand we may find ourselves competing with not only the
worlds largest tobacco companies but the worlds largest pharmaceutical companies as well, Big
pharma. Both big pharma and big tobacco have limitless resources with which to compete against us
and both have far greater resources than us and we would be hard pressed to compete successfully
against either industrys participants.
Source and Availability of Raw Materials
We believe that an adequate supply of product and raw materials will be available to us as needed
and from multiple sources and suppliers.
Trademarks
We have been awarded trademarks on certain of our brands, including: Krave®, EZsmoker®, Smoke
Star®, Fifty-One® and Green Puffer®. We have and continue to market, develop and invest in each of
these brands.
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Government Regulation
On January 24, 2011, The United States Court of Appeals for the District of Columbia Circuit denied
a petition for an en banc review of the Courts December 7, 2010 opinion which affirmed the United
States District Court for the District of Columbias January 14, 2010 opinion and ordered
that...the FDA cannot regulate customarily marketed tobacco products under the FDCAs [Food Drug
and Cosmetic Act] drug/device provisions, that it can regulate tobacco products marketed for
therapeutic purposes under those provisions, and that it can regulate customarily marketed tobacco products under the Tobacco Act [Family
Smoking Prevention and Tobacco Control Act FSPTCA] and that ...Regarding harm to third parties
and to the public interest, the district court observed that the FDA had cited no evidence to show
that electronic cigarettes harmed anyone. To this end, the Court further ordered that the FDAs
motion to reinstate stay of preliminary injunction be dismissed as moot setting aside import alert
66-41, which the FDA issued, in early 2009, which sought to restrict imports of electronic
cigarettes into the United States.
The Tobacco Act, in its construction does not speak directly to electronic cigarettes and as such,
we have contacted the FDA for guidance on how to comply with the FSPTCA. To date the FDA has not
provided us guidance nor have they published any materials, which would suggest how to comply with
the Tobacco Act. We anticipate that regulations and guidance will be forthcoming and we intend,
within the best of our abilities, to operate in accordance with FDA regulations.
Presently, several municipal and state governments are contemplating, enacting and or have enacted
legislation which recognizes electronic cigarettes as tobacco products and imposes on their sales
and use, similar and or the same restrictions that are presently applied to traditional tobacco
cigarettes; which include a prohibition on sales to minors and restrictions as to where electronic
cigarettes may be used.
There are several pieces of legislation that currently regulate cigarettes and other tobacco
products, namely, The Prevent All Cigarette Trafficking Act (the PACT Act,) Jenkins ACT and the
Federal Cigarette Labeling and Advertising Act. Currently, none of these acts specifically apply to
electronic cigarettes, however should these acts be amended to include electronic cigarettes we
would be subjected to regulations that would significantly affect our current business operations
and likely result in significant costs to the company in its efforts to comply with each of these
Acts.
Employees
We employ 21 full-time and 3 part-time employees. Our employees are not unionized and we believe we
have good relations with our employees.
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Available Information
The Companys Annual Report on Form 10-K/A Amendment 1, Quarterly Reports on Form 10-Q and 10-Q/A,
Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d)
of the Securities Exchange Act of 1934, as amended (Exchange Act), are filed with the U.S.
Securities and Exchange Commission (the SEC). Such reports and other information filed by the
Company with the SEC are available free of charge on the Companys website at
www.vapor-corp.com when such reports are available on the SEC website. The public may read
and copy any materials filed by the Company with the SEC at the SECs Public Reference Room at 100
F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC at www.sec.gov. The
contents of these websites are not incorporated into this filing. Further, the Companys references
to the URLs for these websites are intended to be inactive textual references only.
Item 1A. Risk Factors
Risks Related to Our Business
We Market a Single Class of Products, Which may be Subject to Certain Government Regulations, Whose
Approval We may or may not be Able to Achieve.
Electronic cigarettes, which are our sole product offering, are new to the marketplace and may be
subject to regulation as a tobacco product and possibly as a drug and drug device if marketed using
therapeutic claims. Most E-cigarettes are sold as a means of delivering nicotine to the body. The
Food and Drug Administration (FDA) is the regulatory agency which oversees tobacco products;
however at present it is unclear what, if any regulatory process is required to import, market,
manufacture and or distribute-cigarettes. To date the FDA has not established a definitive policy
regulating electronic cigarettes.
We intend to use reasonable efforts to file for the appropriate approvals to allow us to sell our
product in the United States, however we have no indication that at present we will be able to
afford to pursue regulatory approval and that if we are able to pursue said approval we have no
assurances that the outcome of said approval process will result in our products being approved by
the FDA. Moreover, if the FDA establishes a regulatory process that we are unable or unwilling to
comply with our business, results of operations, financial condition and prospects would be
adversely affected. (See section Government Regulation.)
We Depend On The Efforts Of our Management. Our Management Team Lacks Experience In Managing A
Public Company and the Obligations Incident to Being a Public Company Will Place Significant
Demands on Our Management. We Have Existing Material Weaknesses In Our Internal Control Over
Financial Reporting and Are Trying to Remediate these Material Weaknesses. (Restated)
Our officers lack experience in running a public company. Our success is substantially dependent on
the performance of our executive officers. In particular, our success depends substantially on the
continued efforts of our executive officers and our Board of Directors.
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As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002 and
the related rules and regulations of the SEC, including periodic reports, disclosures and more
complex accounting rules. As directed by Section 404 of Sarbanes-Oxley, the SEC adopted rules
requiring public companies to include a report of management on a companys internal control over
financial reporting in their Annual Report on Form 10-K. Based on current rules, we are required to report under Section 404(a) of
Sarbanes-Oxley regarding the effectiveness of our internal control over financial reporting. As
described in Item 9A(T) of this report, we have material weaknesses in our internal control over
financial reporting and disclosure controls and our management has concluded that we did not
maintain effective internal control over financial reporting as of December 31, 2010. As further
described in Item 9A(T) of this report, we have taken steps to remediate the material weaknesses.
However, there is no assurance that our remediation efforts will be successful on a timely basis or
at all. If these material weaknesses persist, it may be necessary to make further restatements of
our consolidated financial statements and investors will not be able to rely on the completeness
and accuracy of the financial information contained in our filings with the SEC and this could
potentially subject us to sanctions or investigations by the SEC or other regulatory authorities or
stockholder litigation.
Currently, we do not have key person life insurance on Mr. Frija our sole executive officer and
board member and may be unable to obtain such insurance in the near future due to high cost or
other reasons. The loss of the services of Mr. Frija or any of our key employees could have a
material adverse effect on our business, if we are unable to find suitable replacements.
The Former Shareholder of Smoke Anywhere USA Are Controlling Stockholders, Our Stockholders May Be
Unable To Affect Corporate Activity Without The Support Of These Individuals.
The former shareholders of Smoke Anywhere USA, Inc. as a result of our reverse merger collectively
own a majority of our outstanding common stock and, therefore, are able to control all matters
requiring approval of our stockholders. Accordingly, our other stockholders may not be able to
effect corporate action after this offering without the supporting vote of one or more of these
individuals.
Our Limited Operating History Makes it Difficult to Evaluate Our Future Performance.
Our limited operating history makes it difficult to evaluate our current business and our
prospects. The likelihood of our future success must be viewed in light of the problems, expenses,
difficulties, delays and complications often encountered in the operation of a new business and new
industry and product category, where failures of new companies and products are common. We are
subject to the risks inherent in the ownership and operation of a development stage company,
including regulatory setbacks and delays, fluctuations in expenses, competition and government
regulation. If we fail to address these risks and uncertainties our business, results of
operations, financial condition and prospects would be adversely affected.
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We Cannot Predict Our Future Capital Needs And We May Not Be Able To Secure Additional Financing.
We believe that the cash we have on hand, together with anticipated revenues from operations will
be sufficient to meet our presently anticipated working capital and capital expenditure
requirements for existing operations for at least the next twelve months, however our belief is
based on our operating plan which in turn is based on assumptions, which may prove to be incorrect.
As a result, our financial resources may not be sufficient to satisfy our capital requirements for this period.
However, we may require additional working capital to support our operations during any regulatory
period, as established by the FDA under the Tobacco Act, wherein we may be precluded from marketing
and or selling electronic cigarettes. We expect to raise any required additional funds through
public or private equity offerings, debt financings, corporate collaborations, governmental
research grants may in some cases be available to us. We may also seek to raise additional capital
to fund additional product development efforts, even if we have sufficient funds for our planned
operations.
There can be no assurance that any such required additional funding will be available to us at all
or available on terms acceptable to us. Further, we currently have no credit facility or similar
financing currently available. And any debt financing, if available, may involve restrictive
covenants, which may limit our operating flexibility with respect to certain business matters. If
additional funds are raised through the issuance of equity securities, the percentage ownership of
our existing stockholders will be reduced and our stockholders will experience additional dilution
in net tangible book value per share. If adequate funds are not available on acceptable terms, we
may be unable to successfully market our products, take advantage of future opportunities, repay
debt obligations as they become due or respond to competitive pressures, any and all of which would
have an adverse effect on our business.
Our Product Faces Intense Media Attention and Public Pressure
Our product is new to the marketplace and since its introduction certain members of the media,
politicians, government regulators and advocate groups, including independent doctors have called
for an outright ban of all electronic cigarettes, pending regulatory review and a demonstration of
safety. A ban of this type would likely have the effect of terminating our United States sales and
marketing efforts, of certain products, which we may currently market or have, plans to market in
the future. Such a ban would also likely cause public confusion as to which products are the
subject of the ban and which are not and would have a material adverse effect on our business,
financial condition and performance.
Our Products Contain Nicotine Which is Considered to be a Highly Addictive Substance.
Certain of our electronic cigarette and electronic cigarette cartridges contain nicotine, a
chemical found in cigarettes and other tobacco products which is considered to be highly addictive.
The Family Smoking Prevention and Tobacco Control Act, empowers the FDA to regulate the amount of
nicotine found in tobacco products, but may not require the reduction of nicotine yields of a
tobacco product to zero. Any FDA regulation may require us to reformulate, recall and or
discontinue certain of the products we may sell from time to time, which may have a material
adverse effect on our ability to market our products and have a material adverse effect on our
business, financial condition, results of operations, cash flows and/or future prospects.
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The Market For Electronic Cigarettes Is Uncertain And Is Still Evolving.
Electronic cigarettes having recently been introduced to market, are at an early stage of
development and are evolving rapidly and are characterized by an increasing number of
market entrants. Our future revenues and any future profits are substantially dependent upon the
widespread acceptance and use of e-cigarettes. Rapid growth in the use of, and interest in,
e-cigarettes is a recent phenomenon, and may not continue on a lasting basis. The demand and market
acceptance for these products is subject to a high level of uncertainty.
Our Products may not Serve their Intended Purpose.
An independent study of certain brands of electronic cigarettes, not including our brands, found
that the electronic cigarettes tested, delivered little to no measurable nicotine. We are not aware
of the methods or protocols of this study used to test the electronic cigarettes and have not
independently verified the studys results. Nor have we conducted our own empirical studies to
determine the delivered nicotine in the vapor drawn from our products. We also do not know if the
electronic cigarettes tested were manufactured in the same factories in which are products are
manufactured. If our products are found to not serve their intended purpose, including delivering
nicotine to their users, we may face a decline in sales of our products, an upsurge of requests for
refunds, private civil actions and or state or federal unfair business practices actions; any of
which could have a material adverse effect on our business, financial condition, results of
operations, cash flows and/or future prospects.
Our Business may be Affected if we are Taxed Like Other Tobacco Products or if we are Required to
Collect and Remit Sales Tax on Certain of our Internet Sales
Presently our products are not taxed like cigarettes or other tobacco products, all of which have
faced significant increases in the amount of taxes collected on the sale of their products. Should
state and federal governments and or taxing authorities impose taxes similar to those levied
against cigarettes and tobacco products on our products, it may have a material adverse effect on
the demand for our products. Moreover we may be unable to establish the systems and processes
needed to track and submit the taxes we collect through Internet sales, which would limit our
ability to market our products through our websites which would have a material adverse effect on
our revenues, operation and financial condition.
States such as New York, Hawaii, Rhode Island and North Carolina have begun collecting taxes on
Internet sales where companies have used independent contractors in those states to solicit sales
from residents of that state. The requirement to collect track and remit taxes based on independent
affiliate sales may require us to increase our prices, which may effect demand for our products or
conversely reduce our net profit margin; either of which would have a material adverse effect on
our revenues, financial condition and operating results.
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Downturns In The Economy May Affect the Demand for our Products and our Financial Performance
Electronic cigarettes are new to market and may be regarded by users as a novelty item and
expendable as such demand for our products may be extra sensitive to economic conditions. When
economic conditions are prosperous, discretionary spending increases; conversely, when economic
conditions are unfavorable, discretionary spending declines. Any significant decline in general
corporate conditions or the economy that affect consumer spending could have a material adverse
effect on the Companys business and consequently, upon an investment in the Common Stock of our Company.
We may Become Dependent on Foreign Sales to Maintain Our Business.
If the FDA or other state or Federal government agencies restrict or prohibit the sale electronic
cigarettes in the United States, in part or in whole, our ability to maintain our business will
become dependent on our ability to successfully commercialize our product and brands in foreign
jurisdictions where our product can be sold. Our inability to establish distribution in foreign
jurisdictions, specifically those that allow for the sale of e-cigarettes will deprive us of the
operating revenue we require to fund any domestic regulatory approval effort and continue to
maintain our business operations.
Foreign Commercialization Will Result in Additional Costs and Expenses.
Commercializing our product in foreign countries will likely require us to expend additional
resources which may reduce our profit margins; additional expenses including but not limited to,
local language advertising and marketing materials, packaging, translating product documentation,
additionally we may be required to retain foreign counsel to ensure compliance with foreign laws,
regulations and taxing regimes, in addition to drafting and enforcing contracts with foreign
distributors.
If we fail to commercialize our products in foreign jurisdictions we may find ourselves at a
competitive disadvantage not only in those foreign jurisdictions but also in each market in which
we have a presence. If we are unable to be competitive we risk losing market share, a decrease in
operating revenues all of which would have a material adverse effect on our financial condition and
our ability to operate our business.
Our Success is Dependent Upon Our Marketing Efforts.
We have limited marketing experience in marketing electronic cigarettes and limited financial,
personnel and other resources to undertake extensive marketing activities. If we are unable to
generate significant market awareness for our products and our brands our operations may not
generate sufficient revenues for us to execute our business plan, generate revenues and achieve
profitable operations.
We Rely on the Efforts of Our Outside Independent Sales Force to Generate Sales.
We rely, in part, on the efforts of our independent sales distributors to purchase and distribute
our product to wholesalers and or retailers to generate revenues. No single distributor currently
accounts for a material percentage of our revenues and we believe that should any of these
relationships terminate we would be able to find suitable replacements, however any change in
distributors or our ability to timely replace any given distributor would have a material adverse
effect on our business, prospects, financial condition and results of operations.
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We rely, in part, on the efforts of outside independent salespersons and Internet sales affiliates
to generate sales for our company. No single independent salesperson of Internet affiliate
currently accounts for a material percentage of our revenues and we believe that should any of
these relationships terminate we would be able to find suitable replacements, however any loss of
these independent sales persons or our Internet sales affiliates could have a material adverse
effect on our business, prospects, financial condition and results of operations.
We May Not Be Able to Adapt to Trends In our Industry.
We may not be able to adapt as the e-cigarette industry and customer demand evolves; whether
attributable to regulatory constraints, mismanagement or a lack of financial resources or, our
failure to respond in a timely manner; to new technologies, customer preferences, changing market
conditions or new developments in our industry. Any of the failures to adapt or inabilities
described herein or otherwise would have a material adverse effect on our business, prospects,
financial condition and results of operations.
Existing or Pending Patents Could Prevent Us From Operating Our Business In Its Present Form.
Ruyan, a Chinese company, has made certain public claims as to their ownership of a Chinese patent
relating to an Atomizing Electronic Cigarette. We currently purchase our products from Chinese
manufacturers other than Ruyan. Should Ruyans patent be valid and enforceable and cover the
devices we purchase from our suppliers, we may be forced to pay more for our products or we may be
cutoff from our supply. We may also face a potential action by Ruyan, which we may be forced to
defend and which we may ultimately lose. Should any of these events occur, they are likely to have
a material adverse effect on our ability to operate our business as a going concern.
R. J. Reynolds one of the largest tobacco companies in the world has filed a patent application for
a Tobacco-Containing Smoking Article. If R.J. Reynolds patent is awarded and our products are
found to be infringing on their patent, our business, prospects, financial condition and results of
operations could be materially and adversely affected.
Neither Ruyan or R.J. Reynolds has contacted us regarding any possible infringement of their
intellectual property rights nor has any party commenced or threatened to commence any legal action
against us. If we are required to participate in litigation we may not have the resources to fund
the required litigation costs, which may adversely affect our business prospects, financial
condition and results of operations.
In the event that either Ruyan or R. J. Reynolds patents are enforceable against us, we may be
required to obtain a license to the covered intellectual property or substantially modify or
redesign our existing product line in order to continue operations. We can offer no assurance that
a license would be available on acceptable terms or at all, or that we will be able to revise our
business model economically, efficiently or at all.
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We Depend On Third Party Suppliers and Manufacturers For Our Electronic Cigarette Products.
We do not own or control our supply chain our suppliers or our suppliers suppliers, therefore we
are unable to control or ensure our supply of products or the consistency of those products. We
depend on third-party suppliers and manufacturers for our electronic cigarettes, which includes,
but is not limited to, our electrical components, technology, flavorings and essences. Our
customers associate certain characteristics of our products including the weight, feel, draw,
flavor, packaging and other unique attributes of our products to the brands we market, distribute
and sell. Any interruption in supply and or consistency of our products may harm our relationships
and goodwill with customers, and have a materially adverse affect on our cash flow and our operations.
Although we believe that several alternative sources for our products are available, any failure to
obtain the components, chemicals constituents and manufacturing services necessary for the
production of our products would have a material adverse effect on our business and prevent us from
timely execution of our business plan and may result in additional expenditures of time and money
in seeking viable new sources of supply and manufacturer alternatives.
Moreover our inability to replicate those certain characteristics of our products, which our
customers associate and enjoy, which are unique to our brands, may cause a loss of customer
loyalty, patronage and goodwill and which may have a material adverse effect on our business.
We Use Chinese Manufacturers for the Production of Our Products.
Our suppliers and product manufacturers are based in China. Certain Chinese factories and the
products they export have recently been the source of safety concerns and recalls, which is
generally attributed to lax regulatory, quality control and safety standards. Should Chinese
factories continue to draw public criticism for exporting unsafe products, whether those products
relate to us or not we may be adversely and materially affected by the stigma associated with
Chinese production, which would effect our business operation, our revenues and our financial
projections and prospects.
Moreover, products manufactured by our Chinese suppliers that are not considered safe and or those
products that do not comply with U.S. safety and health standards may cause significant harm and or
death to persons who use the product and subject us to liability and potential legal claims and
cause injury to our reputation, goodwill and operating results.
Product Exchanges, Returns, Warranty Claims, Defect and Recalls May Adversely Affect Our Business
Any and all products are subject to customer service claims, malfunctions and defects, which may
subject us to requests for product exchanges, returns, warranty claims and recalls. If we are
unable to maintain an acceptable degree of quality control of our products we will incur costs of
replacing and or recalling our products and servicing our customers. Any product returns,
exchanges, and or recalls we may make will have a material adverse effect on our business, our
operations and our profitability and will likely result in the loss of customers and goodwill.
Moreover products that do not meet our quality control standards and or those products that do not
comply with U.S. safety and health standards or that may be defective may reduce the effectiveness,
enjoyment and or cause harm to property, person and or death to persons who use the product. Any
such instance will likely result in claims against us and potentially subject us to liability and
legal claims which may cause injury to our reputation, goodwill and operating results.
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We May Be Unable To Promote And Maintain Our Brands.
We believe that establishing and maintaining the brand identities of our products is a critical
aspect of attracting and expanding a large client base. Promotion and enhancement of our brands
will depend largely on our success in continuing to provide high quality products. If our customers
and end users do not perceive our products to be of high quality, or if we introduce new products or enter into new business ventures that are not
favorably received by our customers and end users, we will risk diluting our brand identities and
decreasing their attractiveness to existing and potential customers.
Moreover, in order to attract and retain customers and to promote and maintain our brand equity in
response to competitive pressures, we may have to increase substantially our financial commitment
to creating and maintaining a distinct brand loyalty among our customers. If we incur significant
expenses in an attempt to promote and maintain our brands, our profitability will likely be
impaired.
We Depend on Our Intellectual Property Rights to Distinguish our Brands and Products.
Our current and future business activities, products and brands may infringe upon the proprietary
rights of others, and third parties may assert infringement claims against us. Any such claims and
resulting litigation could subject us to significant liability for damages and could result in the
invalidation of our proprietary rights. Even if not meritorious, such claims could be
time-consuming, expensive to defend and could result in the diversion of our managements time and
attention. In addition, this diversion of managerial resources could have a material adverse effect
on our business, prospects, financial condition and results of operations.
We Expect that New Products and/or Brands We Develop will Expose Us to Risks That May be Difficult
to Identify Until Such Products and/or Brands are Launched.
We are currently developing, and in the future will continue to develop, new products and brands,
the risks of which will be difficult to ascertain until these products and or brands are
commercially launched. For example, we are developing new formulations, packaging and distribution
channels. Any negative events or results that may arise as we develop new products or brands may
adversely affect our reputation, business, financial condition and results of operations.
Our Ability to Implement our Strategy of Attracting and Retaining Employees may be Impaired by the
Uncertainty in our Business due to the FDAs public Statements.
Recent FDA statements with respect to electronic cigarette products, the uncertainty of present and
future regulations is likely to injure our ability to compete for talented employees and managers,
who may be drawn to more established companies and as a result, we may be unable to attract
talented employees, managers, consultants and contractors to help us grow our business.
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We may Encounter Difficulties in Managing Our Growth, Which Would Adversely Affect Our Results of
Operations.
If we are successful in growing our business we will need to significantly expand our operations,
which could put significant strain on our management and our operational and financial resources.
To manage future growth, we will need to hire, train, and manage additional employees. Concurrent
with expanding our operational and marketing capabilities, we will also need to increase our
product development activities. We may not be able to support, financially or otherwise, future
growth, or hire, train, motivate, and manage the required personnel. Our failure to manage growth
effectively could limit our ability to achieve our goals.
Our success in managing our growth will depend in part on the ability of our executive officers to
continue to implement and improve our operational, management, information and financial control
systems and to expand, train and manage our employee base, and particularly to attract, expand,
train, manage and retain a sales force to market our products on acceptable terms. Our inability to
manage growth effectively could cause our operating costs to grow at a faster pace than we
currently anticipate, and could have a material adverse effect on our business, financial
condition, results of operations and prospects.
We Face a Risk of Product Liability Claims and may not be Able to Obtain Adequate Insurance.
Our business exposes us to potential liability risks that may arise from the sale and use of our
products. Liability claims may be expensive to defend and result in large judgments against us. We
currently carry liability insurance, however there is no assurance that it will continue to be
available to us at an affordable price if at all. Our insurance may not reimburse us, or the
coverage may not be sufficient to cover claims made against us. We cannot predict any or all of the
possible harms or side effects that may result from the use of our current products or any future
products and, therefore, the amount of insurance coverage we currently hold may not be adequate to
cover all liabilities we might incur. If we are sued for any injury allegedly caused by our
products, our liability could exceed our ability to pay the liability. Whether or not we are
ultimately successful in any adverse litigation, such litigation could consume substantial amounts
of our financial and managerial resources, all of which could have a material adverse effect on our
business, financial condition, results of operations, prospects and stock price.
We do not presently carry product recall insurance and there is no assurance that it would be
available to us at a reasonable cost or at all. In the event we were required to recall certain
products due to defects or safety concerns, the costs associated with recalling those products,
might be greater than we can afford and as a result could have a material adverse effect on our
abilities to maintain operations.
We Face Substantial And Increasing Competition.
We face intense competition from direct and indirect competitors, including big pharma, big
tobacco and other known and established or yet to be formed electronic cigarette companies, each
of whom pose a competitive threat to our current business and future prospects. We expect
competition to intensify in the future. Certain of these companies are either currently competing
with us or are focusing significant resources on providing products that will compete with our
electronic cigarette product offerings in the future.
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There can be no assurance that we will be able to compete successfully against any of our
competitors, some of whom have far greater resources, capital, experience, market penetration,
sales and distribution channels than us. We have no assurances that we will be able to compete with
these competitors and that we will be successful in operating our business and ever achieving
profitability. Our inability to successfully compete against these or any of our competitors will
have a material adverse effect our business, results of operations and financial condition.
We Face Competition from Foreign Importers Who Do Not Comply With Government Regulation
We face competition from foreign sellers of electronic cigarettes who may illegally ship their
products in to the United States for direct delivery to customers. These market participants will
not have the added cost and expense of complying with U.S. regulations and taxes and as a result
will be able to offer their product at a more competitive price than us and potentially capture
market share. Moreover, should we be unable to sell certain of our products during any regulatory
approval process we have no assurances that we will be able to recapture those customers that we
lost to our foreign domiciled competitors during any blackout periods, wherein we were not
permitted to sell our products. This competitive disadvantage may have a material adverse impact on
our ability to compete with competitors, which may result in a loss of revenue and market share and
hamper our ability to generate revenue and continue to operate as a going concern.
Internet Security Poses a Risk To Our E-Commerce Sales.
At present we generate a portion of our revenues through the sale of our products through our
websites. We manage our websites and e-commerce platform internally and as a result any compromise
of our security or misappropriation of proprietary information could have a material adverse effect
on our business, prospects, financial condition and results of operations. We rely on encryption
and authentication technology licensed from other companies to provide the security and
authentication necessary to effect secure Internet transmission of confidential information, such
as credit and other proprietary information. Advances in computer capabilities, new discoveries in
the field of cryptography or other events or developments may result in a compromise or breach of
the technology used by us to protect client transaction data. Anyone who is able to circumvent our
security measures could misappropriate proprietary information or cause material interruptions in
our operations. We may be required to expend significant capital and other resources to protect
against security breaches or to minimize problems caused by security breaches. To the extent that
our activities or the activities of others involve the storage and transmission of proprietary
information, security breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. For example the storage and loss of credit card numbers, that
may reside on our servers and be used directly by us or by our service suppliers (ex. merchant
account processors). Our security measures may not prevent security breaches. Our failure to
prevent these security breaches may result in consumer distrust and may result in a loss of sales
and resultantly a loss of revenues.
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Our Earnings Could be Adversely Affected by Currency Exchange Rates and Currency Devaluations.
The bulk of our revenues are currently generated in U.S. dollars, however our manufacturers and
suppliers are located in China. Fluctuations in exchange rates between our respective currencies
could result in higher production and supply costs to us which would have an adverse effect on our
profit margins and our business operation if we re not willing or able to pass those costs on to
our customers or effectively hedge our currency exposure.
Moreover, if we attempt to hedge our risk in the currency markets and are unsuccessful
and or if our competitors are more successful arbitraging the currency risk we may find ourselves
at a competitive disadvantage to other market participants which would have a material adverse
effect on our business operations.
Risks Related to Government Regulation
Restrictions On the Use of Our Products may Reduce the Attractiveness and Demand for Our Electronic
Cigarettes.
Our product since it emits no smoke and no smell can be used in places where the use of traditional
tobacco burning cigarettes is prohibited. Should city, state or federal regulators, municipalities,
local governments and private industry likewise restrict the use of e-cigarettes from use in those
same places where cigarettes can not be smoked, our customers may reduce or otherwise cease using
our products entirely, which would have a material adverse effect on our business, financial
condition and performance.
Regulation of Tobacco Products by State and Local Government.
State and local governments currently legislate and regulate tobacco products, including what is
considered a tobacco product, how tobacco taxes are calculated and collected, to whom tobacco
products can be sold and by whom, in addition to where tobacco products, specifically cigarettes
may be smoked and where they may not. Certain municipalities have enacted local ordinances which
preclude the use of e-cigarettes where traditional tobacco burning cigarettes cannot be used and
certain states have proposed legislation that would categorize electronic cigarettes as tobacco
products, equivalent to their tobacco burning counterparts. If these bills become laws, electronic
cigarettes may lose their appeal as an alternative to cigarettes; which may have the effect of
reducing the demand for our products and as a result have a material adverse effect on our
business, results of operations and financial condition.
State Actions Against Us May have a Material Effect on our Ability to Sell Our Products.
On February 15, 2010, in response to a civil investigative demand from the Office of the Attorney
General of the State of Maine, we voluntarily executed a assurance of discontinuance, with the
state of Maine, which restricts our ability to sell electronic cigarettes in the state of Maine
until such time as we obtain a retail tobacco license in the state. While suspending sales to
residents of Maine is not material to our operations, other electronic cigarette companies have
entered into similar agreements with other states, such as the state of Oregon. If numerous states
and or more populous states or states in which we generate significant revenues bring actions to
restrict sales of our products, by us or our re-sale customers, and if we are unable to
satisfactorily responded to their concerns and or acquire the necessary licenses, permissions or
permits and or if those licenses permissions or permits are overly burdensome or costly to obtain
and or if those licenses, permissions or permits are not available to us; we may be required to
cease sales and distribution of our products to those states, which would have a material adverse
effect on our business operations.
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FDA Authority Under the Food Drug and Cosmetics Act; Prohibition Against Therapeutic Claims.
Electronic cigarettes, if marketed or sold in connection with therapeutic claims, (i.e.
smoking cessation claims, claims to cure treat or mitigate a disease) would be subject to the FDAs
regulatory authority under the Food Drug and Cosmetics Act. We do not make therapeutic claims in
connection with our marketing and or sales of our electronic cigarettes. Any violation of law with
respect to the companys marketing materials, and or labeling could expose the Company to liability
including but not limited to fines, sanctions, administrative actions, detention and seizure of
product, penalties, civil actions and or criminal prosecution each of which could have a material
adverse effect on the Companys business, reputation, results of operations and financial
condition.
The Family Smoking Prevention and Tobacco Control Act Grants the FDA Authority to Regulate Tobacco
Products and How they are Marketed and Sold.
On June 22, 2009 the Family Smoking Prevention and Tobacco Control Act (the Act) was signed into
law. The effect of this legislation on our business is presently unknown and may place limits on
our ability to market and or distribute our products and or bring new products to market. The
legislation may impose costly and resource intensive processes to gain regulatory approval to
market our products and there is no certainty that we will have the capital, resources necessary to
comply with the regulation or that we would be ultimately successful in receiving the necessary
approvals to continue marketing our product under the provisions of the Act. Specifically the Act
grants the FDA the authority to regulate tobacco products including but not limited to how they are
marketed, the level of nicotine and the method for introducing new tobacco products to market. The
legislation eliminates all flavoring other than menthol for cigarettes, yet under the legislation
the FDA is not empowered to ban certain tobacco products or require that the nicotine in tobacco
products be reduced to zero. While the legislation does not mention electronic cigarettes, the Act
and a U.S. Federal District Appellate court have suggested that the FDA may regulate electronic
cigarettes as tobacco products under the Act. Until the FDA establishes the regulatory processes to
regulate electronic cigarettes under the Act, we do not know how and to what degree we will be
regulated. Moreover, if the FDA establishes a regulatory process that we are unable or unwilling to
comply with our business, results of operations, financial condition and prospects would be
adversely and materially affected. See section Government Regulation.
The FDA has Issued an Import Alert, Which has Limited Our Ability to Import Certain of Our Products
As a result of FDA import alert 66-41 US Customs has from time to time temporarily and in some
instances indefinitely detained products sent to us by our Chinese suppliers. If the FDA and or
customs modifies the import alert from its current form which allows US customs discretion to
release our products to us, to a mandatory and definitive hold we will no longer be able to ensure
a supply of product for US sales, which will have material adverse effect on our ability to
generate revenues, as domestic sales currently account for a significant portion of our revenue.
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Actions by the FDA Adverse to Our Company and Our Products may Restrict our Ability to do Business
Domestically and Internationally.
When the United States Food and Drug Administration, the largest and most pervasive health
regulator in the world sought to categorize and regulate electronic cigarettes as a drug and
medical device, it had a chilling effect on health regulators of foreign governments who similarly
sought to regulate e-cigarettes in the same manner. Although,
the FDA can no longer regulate e-cigarettes as a drug device, absent therapeutic claims, other
foreign health regulators have not modified their policies toward e-cigarettes. In the event that
other foreign government agencies do not alter their position on electronic cigarettes to conform
with US policies, we would be precluded from selling efforts in those respective countries, which
would have a material adverse effect on our growth prospects, which would limit our sales and
revenue potentials.
Federal Cigarette and Tobacco Laws, if Applied to Electronic Cigarettes Would Materially Affect Our
Business
While none of the following cigarette laws currently apply to electronic cigarettes, any such
amendment that would require compliance by us with the: The Prevent All Cigarette Trafficking Act
(the PACT Act) which prohibits the use of the Postal Service to mail most tobacco products and
which amends the Jenkins Act, which would require individuals and businesses that make interstate
sales of cigarettes or smokeless tobacco to comply with state tax laws and the Federal Cigarette
Labeling and Advertising Act, which governs how cigarettes can be advertised and marketed, would
have a material effect on how we operate our business, how we market our products, and derive
revenue. Each of these laws, if applied to electronic cigarettes would significantly increase our
cost of compliance, our profit margins, the attractiveness to consumers of or products and all of
which would have a material adverse effect on our revenues, financial condition and operating
results.
Changes in Governmental Regulation May Affect the Countries in Which we Sell Our products
Foreign jurisdiction have varying policies and laws with respect to the use of electronic
cigarettes that vaporize nicotine, countries such as the United Kingdom do not restrict its use
while other countries such as Thailand have instituted a total ban. If countries such as the United
Kingdom reverse their stance or should other countries who have a neutral stance move towards
prohibition, it will have a direct impact on our ability to market our products and will have a
material adverse effect on our business.
We may Face the Same Governmental Actions Aimed at Cigarettes and Other Tobacco Products.
Tobacco industry expects significant regulatory developments to take place over the next few years,
driven principally by the World Health Organizations Framework Convention on Tobacco Control
(FCTC). The FCTC is the first international public health treaty on tobacco, and its objective is
to establish a global agenda for tobacco regulation with the purpose of reducing initiation of
tobacco use and encouraging cessation. Regulatory initiatives that have been proposed, introduced
or enacted include:
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| the levying of substantial and increasing tax and duty charges; | ||
| restrictions or bans on advertising, marketing and sponsorship; | ||
| the display of larger health warnings, graphic health warnings and other labeling requirements; | ||
| restrictions on packaging design, including the use of colors and generic packaging; | ||
| restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines; | ||
| requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels; | ||
| requirements regarding testing, disclosure and use of tobacco product ingredients; | ||
| increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors; | ||
| elimination of duty free allowances for travelers; and | ||
| encouraging litigation against tobacco companies. |
Operating income could be significantly affected by any significant decrease in demand for our
products, any significant increase in the cost of complying with new regulatory requirements.
Risks Related to Ownership of Our Stock
Our Board of Directors is Authorized to Issue Additional Shares of Our Stock Which Would Dilute
Existing Shareholders.
We are currently authorized to authorize up to 250,000,000 shares of common stock, of which
60,135,344 shares are currently issued and outstanding. Additional shares of our common stock may
be issued by our board of directors for such consideration as they may consider sufficient without
seeking stockholder approval. The issuance of additional shares of common stock in the future will
reduce the proportionate ownership and voting power of current stockholders.
Your Percentage Ownership of our Common Shares may be Diluted by Future Share Issuances
To the extent we issue new shares to fund acquisitions, to raise additional capital, to compensate
employees and other persons your percentage ownership of our shares will be diluted.
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We Do Not Intend To Pay Future Cash Dividends.
We currently do not anticipate paying cash dividends on our common stock at any time in the near
future. We may never pay cash dividends or distributions on our common stock. Any credit agreements
which we may enter into with institutional lenders may restrict our ability to pay dividends.
Whether we pay cash dividends in the future will be at the discretion of our board of directors and
will be dependent upon our financial condition, results of operations, capital requirements and any
other factors that the board of directors decides is relevant.
Our Common Stock is Illiquid And Should A Market For Our Securities Develop The Price Of Our Securities May Be Volatile.
Our shares are currently listed on the Over the Counter Bulletin Board, the market for our
securities is and will likely remain illiquid. This means that as an investor you will likely have
a difficult time selling our Common Stock at market. Furthermore because of the small amount of
shares that will be outstanding and or in the public float, the market price of our common stock
may experience significant volatility. Other factors that may contribute to volatility should a
market for our Common Stock develop are, our quarterly results, announcements by us or our
competitors regarding acquisitions or dispositions, loss of existing clients, new procedures or
technology, litigation, changes in general conditions in the economy and general market conditions
could cause the market price of the common stock to fluctuate substantially. In addition, the stock
market has experienced significant price and volume fluctuations that have particularly affected
the trading prices of equity securities of many technology and Internet companies. Frequently,
these price and volume fluctuations have been unrelated to the operating performance of the
affected companies.
Future Sales Of Our Common Stock May Depress Our Stock Price.
If our controlling stockholders sell substantial amounts of our common stock in the public market
following this merger or at any time in the future, the market price of our common stock could
fall.
Existing Shareholders beneficially hold approximately 60,135,344 Shares of which approximately
41,871,088 shares are in the public float and are eligible to be sold free of any restrictions. All
other Shares are held by affiliates of the Company. The Company can make no prediction as to the
effect, if any, that sale of Shares, or the availability of Shares for future sale, will have on
the market price of the Shares prevailing from time to time. Sales of substantial amounts of Shares
in the public market, or the perception that such sales could occur, could depress prevailing
market prices for the Shares. Such sales may also make it more difficult for the Company to sell
equity securities or equity-related securities in the future at a time and price, which it deems
appropriate.
Broker-Dealers may be discouraged from effecting transactions in our common stock because they may
be considered a Penny Stock and are subject to the applicable Penny Stock rules.
Rules 15g-1 through 15g-9 promulgated under the Exchange Act impose sales practice and disclosure
requirements on certain brokers-dealers who engage in certain transactions involving a penny
stock. Subject to certain exceptions, a penny stock generally includes any non-NASDAQ equity
security that has a market price of less than $5.00 per share. There is currently no established
price quotation for our shares, however, we expect that initial quotations will not exceed $5.00
and there is the possibility that the
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quoted shares price may never exceed $5.00, and that our
common stock will be deemed penny stock for the purposes of the Exchange Act. The additional sales
practice and disclosure requirements imposed upon brokers-dealers may discourage broker-dealers
from effecting transactions in our common stock, which could severely limit the market liquidity of
the stock and impede the sale of our stock in the secondary market. Specifically, any broker-dealer
selling penny stock to anyone other than an established customer or accredited investor,
generally, an individual with net worth in excess of $1,000,000 or an annual income exceeding
$200,000, or $300,000 together with his or her spouse, must make a special suitability determination for the purchaser and must receive the
purchasers written consent to the transaction prior to sale, unless the broker-dealer or the
transaction is otherwise exempt. In addition, the penny stock regulations require the broker-dealer
to deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the
United States Securities and Exchange Commission relating to the penny stock market, unless the
broker-dealer or the transaction is otherwise exempt. A broker-dealer is also required to disclose
commissions payable to the broker-dealer and the registered representative and current quotations
for the securities. Finally, a broker-dealer is required to send monthly statements disclosing
recent price information with respect to the penny stock held in a customers account and
information with respect to the limited market in penny stocks.
Item 2. Properties.
Our principal executive offices are located at 3101 Hallandale Beach Boulevard #100, Pembroke Park,
Florida 33009. We are currently leasing approximately 1,750 sq. ft. for $2,756 per month on a
month-to-month lease.
We lease additional warehouse space, which is currently owned in part by Mr. Frija, our PEO and PFO
and certain of our affiliates, at a price, which we believe is more favorable than we could
otherwise, secure. We believe that existing facilities are suitable and adequate for our current
needs. If we require additional space, we believe that we will be able to secure such space on
commercially reasonable terms without undue operational disruption.
Item 3 Legal Proceedings.
As of December 31, 2010, the end of the annual period covered by this report, the Company was
subject to the various legal proceedings and claims discussed below, as well as certain other legal
proceedings and claims that have not been fully resolved and that have arisen in the ordinary
course of business. In the opinion of management, the Company does not have a potential liability
related to any current legal proceedings and claims that would individually or in the aggregate
materially adversely affect its financial condition or operating results. However, the results of
legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in any of
these legal matters or should several of these legal matters be resolved against the Company in the
same reporting period, the operating results of a particular reporting period could be materially
adversely affected.
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Smoke Anywhere USA, Inc. v. TransFirst
On February 23, 2010 Smoke Anywhere USA, Inc., our wholly owned subsidiary, filed an arbitration
against TransFirst, a company providing us credit card transaction processing services, as
required, in the event of a dispute under the services contract by
and between the parties. We are seeking to have certain fees and fines levied on the company
reversed, in addition to demanding that certain monies held by TransFirst, be released to the
Company.
PART II
Item 5 Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
The Companys common stock is traded on the Over-the-Counter Bulletin Board market under the symbol
VPCO. For purposes of this Item the existence of limited or sporadic quotations should not of
itself be deemed to constitute an established public trading market.
Price Range of Common Stock
The price range per share of common stock presented below represents the highest and lowest sales
prices for the Companys common stock on the over-the-counter Bulletin Board market during each
quarter of the two most recent years. The quotations listed below reflect sporadic trading activity
in the companys stock and does not represent the existence of an established public trading market
for our securities.
Fourth | Third | Second | First | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Fiscal 2009
price range per
common share |
$ | 1.275-0.15 | $ | 0.75-.25 | $ | 0.475-0.0375 | $ | 0.075-0.0375 | ||||||||
Fiscal 2010
price range per
common share |
$ | 0.20-0.60 | $ | 0.15- 0.40 | $ | 0.14-0.49 | $ | 0.14-0.90 |
Holders
As of March 31, 2011, there were 1,425 shareholders of record.
Dividends
The Company did not declare or pay cash dividends in either 2010 or 2009. The Company anticipates
that for the foreseeable future it will retain any earnings for use in the operation of its
business.
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 7. Managements Discussion And Analysis Of Financial Condition And
Results Of Operation(Restated)
Our Managements Discussion and Analysis should be read in conjunction with our audited
consolidated financial statements and related notes included elsewhere in this report.
Forward-Looking Statements
This current 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. These statements reflect
managements current view of us concerning future events and are subject to certain risks,
uncertainties and assumptions, including among many others: a general economic downturn; a downturn
in the securities markets; federal or state laws or regulations having an adverse effect on
proposed transactions that we desire to effect; Securities and Exchange Commission regulations
which affect trading in the securities of penny stocks,; and other risks and uncertainties.
Should any of these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described in this report as anticipated,
estimated or expected. The accompanying information contained herein, including, without
limitation, the information set forth under the heading Risk Factors identifies important
additional factors that could materially adversely affect actual results and performance. You are
urged to carefully consider these factors. All forward-looking statements attributable to us are
expressly qualified in their entirety by the foregoing cautionary statement. The terms Vapor
Corp., Vapor, we, us, our, and the Company refer to Vapor Corp. 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.
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The Companys 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.
Stock-Based Compensation
We account for stock-based compensation under ASC Topic 718, Compensation-Stock Compensation (ASC
Topic 18). These standards define a fair value based method of accounting for stock-based
compensation. In accordance with ASC Topic 718, the cost of stock-based compensation is measured at
the grant date based on the value of the award and is recognized over the vesting period. The value
of the stock-based award is determined using the Black-Scholes-Merton valuation model, whereby
compensation cost is the excess of the fair value of the award as determined by the valuation model
at the grant date or other measurement date over the amount that must be paid to acquire the stock.
The resulting amount is charged to expense on the straight-line basis over the period in which we
expect to receive the benefit, which is generally the vesting period.
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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.
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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 Year ended December 31, 2010 Compared to the Year ended December 31,
2009
During the year ended December 31, 2010, we had $10,917,101 in revenues. This was an increase of
$2,959,854 or approximately 37% from the year ended December 31, 2009. Several factors contributed
positively to these increases, including the following:
| Greater consumer demand 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; | ||
| Positive returns from an increase in our advertising and sales efforts. |
Revenues did not increase proportionate to our cost of sales due to the fact that gross margins
shrank as a result of a proportionate increase in lower margin sales to value added re-sellers such
as wholesalers and distributors, over direct to consumer sales, through our online store and our
direct response television marketing. We believe the growth of our sales channel mix, represents a
maturation of electronic cigarettes as a product category and we believe that future growth will
come through an expansion of our distribution network, building towards the 150,000 locations that
currently sell tobacco products.
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Our
operating expenses increased by $4,208,684 or 54.6% for the year ended December 31, 2010 to
$11,918,325 from $7,709,641 from the year ended December 31, 2009.
Our cost of sales increased by $3,018,996 to $6,058,297 for the year ended December 31, 2010. This
was an increase of 99%, as compared to cost of sales of $3,039,301 for the year ended December
31, 2009. The increase in our cost of sales is a result of an increase in units purchased for
re-sale. The increase is attributable to
an increase in the number of units purchased and not the cost of the units purchased, moreover costs per unit decreased year
over year due in part to, efficiencies at our suppliers, industry pricing pressures and
negotiations based on volume discounts. As discussed above, lower margin sales accounted for a
disproportionate increase in revenues relative to the amount of product we sold.
Selling,
general and administrative expenses for the year ended
December 31, 2010 were $4,958,492
compared to selling general and administrative expenses of $4,381,215 for the year ended December
31, 2009. This increase included $124,214 in professional fees and lobbying costs incurred in our
efforts to identify and comply with a yet to be established FDA regulatory framework for electronic
cigarette products and a one time payment of $288,000 paid ratably over 12 months to the former
shareholders of Smoke Anywhere for services rendered during the transition period, $216,000 of
which was paid in the fiscal year ended December 31, 2010.
During the year ended December 31, 2010 and 2009, we recognized stock-based compensation expense of
$901,536 and $289,125, respectively. The increase in stock-based compensation expense relates to
amortization of stock options granted to our President and Chief Executive Officer to purchase
900,000 shares of our common stock in October 2009 valued at $231,300 and from the granting of
options to our employees and consultants to purchase 3,600,000 shares of our common stock in
October 2009, valued at $925,200.
During the year ended December 31, 2010, we had $0 in research and development costs. This was
unchanged from the period ended December 31, 2009.
We had net loss of ($1,002,224) for the year ended December 31, 2010, as compared to net income of
$45,606 for the year ended December 31, 2009. The decrease in net income was primarily due to the
$612,411 increase in stock-based compensation expense and the $340,214 we paid in consulting fees,
$216,000 of which was a one-time charge against earnings and we expect that the costs associated
with our lobbying efforts will decrease and eventually end once the regulatory framework for
electronic cigarettes is established.
Liquidity and Capital Resources
During the year ended December 31, 2010, we had total assets of $1,799,132 compared to $1,359,300
of total assets for the year ended December 31, 2009. This was an increase of $439,832 or 32% which
is attributable to an increase in inventory, a cash reserve related to product sold and monies held
by our credit card payment processor and an increase in accounts receivable as a result of year
over year sales growth.
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During
the year ended December 31, 2010, we had total liabilities of
$1,174,593 as compared to
total liabilities of $655,823 for the year ended December 31, 2009. This was an increase of
$538,364 or 82%. Liabilities for the period include monies due to factories for inventory,
advertising and media purchases, insurance, accounting fees, unpaid commissions and unpaid
consulting fees.
During the year ended December 31, 2010, we had additional paid in capital of $1,537,776, an
accumulated deficit of ($973,372) and total stockholders equity of $624,539, as compared to year
ended December 31, 2009, we had additional paid in capital of $614,625, retained earnings of
$28,852 and total stockholders equity of $703,477.
Our net cash provided by operating activities was $64,893 for the year ended December 31, 2010
which included net loss of $1,002,224, stock-based compensation expense of $901,536 and accounts
payable and accrued expenses of $547,332. Net cash used in operating activities for the year ended
December 31, 2009 was $320,921, which included net income of $45,606, stock-based compensation
expense of $289,125, and accounts payable and accrued expenses of $445,896. For the years ended
December 31, 2010 and 2009, the acquisition and purchase of inventories was $97,397 and $816,099,
respectively.
We believe that our cash on hand and anticipated cash flow from operations will provide sufficient
liquidity and capital resources for our anticipated working capital and capital expenditure
requirements for at least the next twelve months. However, we may need to raise capital in the form
of equity or debt financing. There are no assurances that we will be able to raise capital, if
needed, on terms acceptable to us or at all.
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 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
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Item 9A. Controls and Procedures (Restated)
Restatement
As discussed elsewhere in this Amendment No. 1 and in Note 8 to the audited consolidated financial
statements contained in Part IV, Item 15 hereof, the Company has amended its Annual Report on Form
10-K for the year ended December 31, 2010 to restate its audited consolidated financial statements
as of December 31, 2010 and 2009 and for the years then ended to reflect the effects of accounting
and reporting errors, to include stock based compensation expense for employee and non-employee
stock options issued on October 1, 2009, and to correct the weighted average number of common
shares outstanding.
Evaluation of Disclosure Controls and Procedures (Restated)
In our Annual Report on Form 10-K for the year ended December 31, 2010 (the Original Filing), as
filed with the SEC on March 30, 2011, our chief executive officer and chief financial officer
(principal executive officer and principal financial officer) evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rule 13a-15(e) promulgated under the
Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by the
Original Filing. Based on that evaluation, our management initially concluded that our disclosure
controls and procedures were effective in reaching a reasonable level of assurance that information
required to be included in our reports filed or submitted under the Exchange Act as of such time
was recorded, processed, summarized, and reported within the time period specified in the SECs
rules and forms and such information was accumulated and communicated as appropriate to allow
timely decisions regarding required disclosures. Disclosure controls and procedures are defined as
those controls and other procedures of an issuer that are designed to ensure that the information
required to be disclosed by the issuer in the reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified in the Commissions
rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Act is accumulated and communicated to the issuers management,
including its principal executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure.
In connection with the restatement discussed above, our chief executive officer and chief financial
officer (principal executive officer and principal financial officer) reevaluated the effectiveness
of our disclosure controls and procedures as of December 31, 2010 pursuant to SEC Rule 13a-15(b)
under the Exchange Act. As a result of such reevaluation and the material weakness in our internal
control over financial reporting described below, our management has now concluded that our
disclosure controls and procedures were not effective as of December 31, 2010.
Managements Report on Internal Control Over Financial Reporting (Restated)
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). In the
Original Filing, management concluded that we maintained effective internal control over financial
reporting as of December 31, 2010. However, in connection with the restatement discussed in Note 8
to our audited consolidated financial statements included elsewhere herein, management has
subsequently determined that the following material weakness existed as of December 31, 2010. The
material weaknesses in our disclosure control procedures are as follows:
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1. | We did not maintain effective controls over its accounting for stock-based compensation expense for employee and non-employee stock options in accordance with ASC Topic 718, Compensation-Stock Compensation. | ||
2. | We did not properly calculate the weighted average number of common shares outstanding for the year ending December 31, 2010. |
As a result of this material weakness, management has concluded that the Company did not
maintain effective internal control over financial reporting as of December 31, 2010 based on the
criteria set forth in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Accordingly, management has restated its
report on internal control over financial reporting.
We have taken steps to remediate the identified material weaknesses and we intend to continue
to implement measures to remediate the identified material weaknesses including, but not
necessarily limited to, the following:
We are actively seeking to hire additional, qualified finance and accounting staff with significant
depth and expertise to supplement existing personnel, including a Chief Financial Officer. During
the third quarter of 2011, we retained an independent financial consultant to advise us on the
organization and composition of the finance and accounting department. We will establish a formal
review process of significant accounting transactions that includes participation of the Chief
Executive Officer, the Chief Financial Officer and the Companys corporate legal counsel.
There is no assurance that our remediation efforts will be successful on a timely basis or at all.
If these material weaknesses persist, it may be necessary to make further restatements of our
consolidated financial statements and investors will not be able to rely on the completeness and
accuracy of the financial information contained in our filings with the SEC and this could
potentially subject us to sanctions or investigations by the SEC or other regulatory authorities or
stockholder litigation.
Item 9B. Other Information.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Directors
The names of our director(s) and certain information about them, as of December 31, 2010, are set
forth below:
Name of Director | Age | Position with Company | Director since | |||||||||
Kevin Frija |
39 | Director | June 9, 2009 |
Executive Officers
The names of our executive officer(s) and certain information about them, as of December 31, 2010,
are set forth below:
Name of Officer | Age | Position with Company | Officer since | |||||||||
Kevin Frija |
39 | Chief Executive Officer and Chief Financial Officer | November 5, 2009 |
Kevin Frija
Mr. Kevin Frija is the companys CEO, CFO and Chairman of the Board of Directors, Mr. Frija is the
Companys sole executive officer and director and has been such, since June 9, 2009. Kevin has over
20 years of experience, particularly in the areas of sourcing, manufacturing, supply chain
management, marketing, advertising, and licensing. Prior to Kevins involvement in the Company,
Kevin operated and Ingear, Inc. a swim and resort wear company based in Miami, Florida. Kevin,
currently and on a limited basis assists Ingear in a managerial capacity.
Board Committees
The Board does not have a standing Audit and Finance Committee (the Audit Committee), or
Compensation Committee and Nominating and Corporate Governance Committee (the Nominating
Committee). Since the Board is comprised solely of our sole executive officer, we do not have any
independent board members or an independent board.
Director Compensation
We do not currently have any non-employee directors and no additional compensation is currently
paid to Mr. Frija in connection with his directorship over and above his employee-based
compensation.
Code of Ethics
The Company has a code of ethics, Business Conduct: Code of Conduct and Policy, that applies to
all of the Companys employees, including its principal executive officer, principal financial
officer and principal accounting officer, and the Board. A copy of this code is available on the
Companys website at www.vapor-corp. The Company intends to disclose any changes in or waivers from
its code of ethics by posting such information on its website or by filing a Current Report on Form
8-K.
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Item 11. Executive Compensation (Restated)
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
SUMMARY COMPENSATION TABLE
Nonequity | Nonqualified | |||||||||||||||||||||||||||||||||||
incentive | deferred | |||||||||||||||||||||||||||||||||||
Name & Principal | Stock | Option | plan | compensation | All Other | |||||||||||||||||||||||||||||||
Position(1)(2) | Year | Salary $ | Bonus $ | Awards $ | Awards $ | compensation $ | earnings $ | Compensation $ | Total $ | |||||||||||||||||||||||||||
Kevin Frija PEO, PAO and Director |
2010 | 72,000 | 26,000 | | | | | | 98,000 | |||||||||||||||||||||||||||
Kevin Frija PEO, PAO and Director |
2009 | 27,000 | 12,000 | | $ | 231,300 | (1) | | | | 270,300 |
(1) | The amount indicated for this column represents the aggregate grant date fair value of the awards during the year as calculated in accordance with ASC Topic 718, Compensation-Stock Compensation), without regard to forfeiture assumption. For more information regarding the valuation of stock-based awards , refer to Notes 1 and 8 to our audited consolidated financial statements included elsewhere in this report. |
Arrangements with Named Executive Officer
Effective October 1, 2009, we entered into an employment agreement with Mr. Frija to serve as
our Chief Executive and sole director. The agreement expired on September 10, 2010 and we have
continued to employ Mr. Frija in such positions at the same annual base salary and on at-will
basis. The agreement provided for the payment of $72,000 in annual base salary, a one-time bonus of
$48,000 payable ratably over a 12 month period and an award of stock options to purchase up to
900,000 shares of our common stock, which vested monthly on a pro-rata basis over 12 months, and
are exercisable at $0.45 per share.
Outstanding Equity Awards at 2010 Year-End
The following table presents information regarding the outstanding equity awards held by each of
the named executive officers as of December 31, 2010, including the vesting dates for the portions
of these awards that had not vested as of that date.
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END | ||||||||||||||||||||||||||||||||||||
OPTION AWARDS | STOCK AWARDS | |||||||||||||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||||||||||
Equity | Incentive | |||||||||||||||||||||||||||||||||||
Incentive | Plan | |||||||||||||||||||||||||||||||||||
Market | Plan | Awards: | ||||||||||||||||||||||||||||||||||
Value | Awards: | Market or | ||||||||||||||||||||||||||||||||||
Equity | Equity | Number | of | Number | Payout Value | |||||||||||||||||||||||||||||||
Incentive | Incentive | of | Shares | of | of | |||||||||||||||||||||||||||||||
Plan | Plan | Shares | or | Unearned | Unearned | |||||||||||||||||||||||||||||||
Awards: | Awards: | or | Units | Shares, | Shares, | |||||||||||||||||||||||||||||||
Number | Number of | Number of | Units of | of | Units or | Units | ||||||||||||||||||||||||||||||
Of | Securities | Securities | Stock | Stock | Other | or other | ||||||||||||||||||||||||||||||
Securities | Underlying | Underlying | that | that | Rights | Rights | ||||||||||||||||||||||||||||||
Underlying | Unexercised | Unexercised | Option | Option | have | Have | that | that | ||||||||||||||||||||||||||||
Unexercised | Options | Unearned | Exercise | Expiration | not | not | have not | have not | ||||||||||||||||||||||||||||
Options | Unexercisable | Options | Price | Date | Vested | Vested | Vested | Vested | ||||||||||||||||||||||||||||
Name | Exercisable | (#) | (#) | ($) | ($) | (#) | ($) | (#) | ($) | |||||||||||||||||||||||||||
(a) | (#) (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | |||||||||||||||||||||||||||
Kevin
Frija,
PEO |
900,000 | | | 0.45 | 10/01/2015 | | | | |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities authorized for issuance under equity compensation plans.
Equity Compensation Plan Information
Number of securities | ||||||||||||
Number of securities to be | Weighted-average exercise | remaining available | ||||||||||
issued | price of | for future issuance under | ||||||||||
upon exercise of outstanding | outstanding options, warrants and | equity compensation plans | ||||||||||
Plan category | options, warrants and rights | rights | (excluding securities reflected in column | |||||||||
(a)) | ||||||||||||
(a) | (b) | (c) | ||||||||||
Equity compensation
plans approved by
security holders |
708,000 | $ | 0.375 | 99,292,000 | ||||||||
Equity compensation
plans not approved
by security holders |
4,500,000 | $ | 0.45 | | ||||||||
Total |
5,208,000 | $ | 0.439 | 99,292,000 | ||||||||
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain beneficial owners. The following table provides the names and
addresses of each person known to own directly or beneficially more than 5% of our outstanding
Common Stock (as determined in accordance with Rule 13d-3 under the Exchange Act) as of December
31, 2010.
Shares | Percentage of | |||||||
Beneficially | Beneficial | |||||||
Name and address of beneficial owner | Owned(1) | Ownership(1) | ||||||
5% Stockholders
|
||||||||
Adam Frija |
4,464,720 | 7.43 | % | |||||
Tamar Galazan |
5,900,000 | 9.813 | % | |||||
Named Executive Officers& Directors
|
||||||||
Kevin Frija |
4,314,000 | 7.19 | % | |||||
Isaac Galazan |
4,169,640 | 16.95 | % | |||||
Jeffrey Holman |
5,625,548 | 9.36 | % | |||||
Doron Ziv |
6,945,120 | 11.55 | % | |||||
All Current Officers and Directors
As a Group (4 person) |
21,054,308 | 35.01 | % |
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(1) | Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and subject to the community property laws where applicable, to the Companys knowledge the persons named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Unless otherwise indicated, the address for each person is the Companys address at 3101 W. Hallandale Boulevard #100, Hallandale, Florida 33009. | |
(2) | On December 31, 20010 there were 60,135,344 shares of our common stock outstanding and no shares of preferred stock issued and outstanding. | |
(3) | In determining the percent of voting stock owned by a person (a) the numerator is the number of shares of common stock beneficially owned by the person, including shares the beneficial ownership of which may be acquired within 60 days upon the exercise of options or warrants or conversion of convertible securities, and (b) the denominator is the total of (i) the 60,135,344 shares of common stock and (ii) any shares of common stock which the person has the right to acquire within 60 days upon the exercise of options or warrants or conversion of convertible securities. Neither the numerator nor the denominator includes shares which may be issued upon the exercise of any other options or warrants or the conversion of any other convertible securities. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The Company has entered into indemnity agreements its sole officer and director which provides,
among other things, that the Company will indemnify such officer or director, under the
circumstances and to the extent provided for therein, for expenses, judgments, fines and
settlements such officer or director may be required to pay in actions or proceedings which they
are or may be made a party by reason of their position as a director, officer or other agent of the
Company, and otherwise to the full extent permitted under Nevada law and the Amended and Restated
Bylaws of the Company.
We currently contract for warehousing and certain fulfillment services with a company that is
jointly owned by our president, Kevin Frija and our shareholder Jacob Levy. Services are rendered
on an at will basis and can be cancelled at anytime without notice. We believe that we are
receiving more favorable terms than we would be able to receive from an unrelated third party.
Director Independence
The company is currently traded on the FINRA (formerly NASD) Over the Counter Bulletin Board. The
OTCBB does not have any director independence requirements. Mr. Frija is presently our sole
executive officer and director and as such we do not have an independent board of directors.
We have indemnification agreements with our current director, the directors of our wholly owned and
operating subsidiary, our sole officer and some of our key employees.
Other than as described above under this section Certain Relationships and Related Transactions,
since the beginning of our last fiscal year, we have not entered into any transactions, nor are
there any currently proposed transactions, between us and a related party where the amount involved
exceeds, or would exceed, $120,000, and in which any related person had or will have a direct or
indirect material interest. We believe the terms of the transactions described above were
comparable to terms we could have obtained in arms length dealings with unrelated third parties.
35
Table of Contents
Item 14. Principal Accounting Fees and Services.
AUDIT FEES
The aggregate fees billed by our auditors, Paritz & Company, P.A., for professional services
rendered for the audit of our annual financial statements for fiscal year ended December 31, 2010
and review of our interim financial statements for the third quarter of 2010 was approximately
$10,039.
The aggregate fees billed by our auditors for professional services rendered for the audit of our
annual financial statements for fiscal year ended December 31, 2010 was approximately $6,274.
AUDIT RELATED FEES
During the last two fiscal years, no fees were billed or incurred for assurance or related services
by our auditors that were reasonably related to the audit or review of financial statements
reported above.
TAX FEES
Tax preparation fees billed for the fiscal years ended December 31, 2009 was approximately $1,980,
we have not yet accrued any tax preparation fees for the Year ending December 31, 2010.
ALL OTHER FEES
During the last two fiscal years, no other fees were billed or incurred for services by our
auditors other than the fees noted above.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report
(1) All financial statements
36
Table of Contents
Index to Audited Consolidated Financial Statements
39 | ||||
Audited
Consolidated Statements of Operations for the two years ended
December 31, 2010 and December 31, 2009 (Restated) |
40 | |||
41 | ||||
42 | ||||
44 | ||||
38 | ||||
(2) Financial Statement Schedules
All financial statement schedules have been omitted, since the required information is not
applicable or is not
present in amounts sufficient to require submission of the schedule, or because the information
required is included in the consolidated financial statements and notes thereto.
(b) Exhibits required by Item 601 of Regulation S-K
The information required by this Item is set forth on the exhibit index that follows the signature
page of this report.
Paritz & Company, P.A.
VAPOR CORP.
(FORMERLY MILLER DIVERSIFIED CORPORATION)
(FORMERLY MILLER DIVERSIFIED CORPORATION)
CONSOLIDATED FINANCIAL STATEMENTS
(RESTATED)
(NOTE 8)
WITH
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
(RESTATED)
(NOTE 8)
WITH
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
As of DECEMBER 31, 2010 AND 2009
37
Table of Contents
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
Board of Directors
Vapor Corp.
(formerly Miller Diversified Corporation)
Hallandale, Florida
Vapor Corp.
(formerly Miller Diversified Corporation)
Hallandale, Florida
We have audited the accompanying consolidated balance sheets of Vapor Corp. (formerly Miller
Diversified Corporation) (the Company) as of December 31, 2010 and 2009 and the related
consolidated statements of operations, stockholders equity and cash flows for the years then
ended. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 8 to the consolidated financial statements, the accompanying consolidated
balance sheets as of December 31, 2010 and 2009 and the related consolidated statements of
operations, stockholders equity and cash flows for the years then ended have been restated.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vapor Corp. (formerly Miller Diversified Corporation), as of December 31, 2010 and 2009 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vapor Corp. (formerly Miller Diversified Corporation), as of December 31, 2010 and 2009 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
PARITZ & COMPANY, P.A.
Hackensack, New Jersey
March 26, 2011(except for the effect of the restatement discussed in Note 8 to the consolidated
financial statements, for which the date is August 18, 2011).
38
Table of Contents
VAPOR CORP.
(FORMERLY MILLER DIVERSIFIED CORPORATION)
(FORMERLY MILLER DIVERSIFIED CORPORATION)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, | ||||||||
2010 | 2009 | |||||||
(Restated) | (Restated) | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash |
$ | 65,734 | $ | 841 | ||||
Due from merchant credit card processor, net of
reserve for charge-backs of $80,000 and $60,000, respectively |
499,485 | 361,623 | ||||||
Accounts receivable, net of allowance of $5,000 |
304,391 | | ||||||
Vendor deposits |
| 169,424 | ||||||
Inventories |
924,809 | 827,412 | ||||||
Sundry current assets |
4,713 | | ||||||
TOTAL CURRENT ASSETS |
1,799,132 | 1,359,300 | ||||||
TOTAL ASSETS |
$ | 1,799,132 | $ | 1,359,300 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable and accrued expenses |
$ | 1,001,122 | $ | 453,823 | ||||
Income taxes payable |
173,471 | 202,000 | ||||||
TOTAL CURRENT LIABILITIES |
1,174,593 | 655,823 | ||||||
STOCKHOLDERS EQUITY: |
||||||||
Preferred stock, $.001 par value,
1,000,000 shares authorized, none issued |
| | ||||||
Common stock, $.001 par value,
250,000,000 shares authorized
60,135,344 and 60,000,344 shares issued and outstanding, in 2010 and
2009, respectively |
60,135 | 60,000 | ||||||
Additional paid-in capital |
1,537,776 | 614,625 | ||||||
(Accumulated deficit) retained earnings |
(973,372 | ) | 28,852 | |||||
TOTAL STOCKHOLDERS EQUITY |
624,539 | 703,477 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 1,799,132 | $ | 1,359,300 | ||||
See notes to audited consolidated financial statements
39
Table of Contents
VAPOR CORP.
(FORMERLY MILLER DIVERSIFIED CORPORATION)
(FORMERLY MILLER DIVERSIFIED CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, | ||||||||
2010 | 2009 | |||||||
(Restated) | (Restated) | |||||||
SALES |
$ | 10,917,101 | $ | 7,957,247 | ||||
COSTS AND EXPENSES: |
||||||||
Cost of sales |
6,058,297 | 3,039,301 | ||||||
Selling, general and administrative |
4,958,492 | 4,381,215 | ||||||
Stock-based compensation expense |
901,536 | 289,125 | ||||||
TOTAL COSTS AND EXPENSES |
11,918,325 | 7,709,641 | ||||||
(LOSS) INCOME BEFORE INCOME TAXES |
(1,001,224 | ) | 247,606 | |||||
Income taxes |
1,000 | 202,000 | ||||||
NET (LOSS) INCOME |
$ | (1,002,224 | ) | $ | 45,606 | |||
BASIC AND DILUTED NET (LOSS) INCOME PER COMMON SHARE |
$ | (0.02 | ) | $ | 0.00 | |||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING BASIC AND DILUTED |
60,040,015 | 60,000,344 | ||||||
See notes to audited consolidated financial statements
40
Table of Contents
VAPOR CORP.
(FORMERLY MILLER DIVERSIFIED CORPORATION)
(FORMERLY MILLER DIVERSIFIED CORPORATION)
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (RESTATED)
Additional | (Accumulated Deficit) | |||||||||||||||||||
Common Shares | Paid-In | Retained | ||||||||||||||||||
Number | Amount | Capital | Earnings | Total | ||||||||||||||||
BALANCE JANUARY 1, 2009 |
100 | $ | 100 | $ | 375,400 | $ | (16,754 | ) | $ | 358,746 | ||||||||||
Elimination of Miller Diversified Corporation equity and
common stock in connection with reverse merger |
60,000,244 | 59,900 | (59,900 | ) | | | ||||||||||||||
Additional investment by stockholder |
| | 10,000 | | 10,000 | |||||||||||||||
Stock-based compensation expense |
289,125 | 289,125 | ||||||||||||||||||
Net income |
| | | 45,606 | 45,606 | |||||||||||||||
BALANCE DECEMBER 31, 2009 |
60,000,344 | 60,000 | 614,625 | 28,852 | 703,477 | |||||||||||||||
Stock-based compensation expense |
901,536 | |||||||||||||||||||
Stock issued for services |
135,000 | 135 | 21,615 | | 21,750 | |||||||||||||||
Net loss |
| | | (1,002,224 | ) | (1,0002,224 | ) | |||||||||||||
BALANCE DECEMBER 31, 2010 |
60,135,344 | $ | 60,135 | $ | 1,537,776 | $ | (973,372 | ) | $ | 624,539 | ||||||||||
See notes to audited consolidated financial statements
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Table of Contents
VAPOR CORP.
(FORMERLY MILLER DIVERSIFIED CORPORATION)
(FORMERLY MILLER DIVERSIFIED CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, | ||||||||
2010 | 2009 | |||||||
(Restated) | (Restated) | |||||||
OPERATING ACTIVITIES: |
||||||||
Net (loss) income |
$ | (1,002,224 | ) | $ | 45,606 | |||
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating activities: |
||||||||
Stock-based compensation expense |
901,536 | 289,125 | ||||||
Reserve for charge-backs |
20,000 | 30,000 | ||||||
Stock issued for services |
21,750 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Due from merchant credit card processor |
(137,862 | ) | (391,623 | ) | ||||
Accounts receivable |
(324,391 | ) | ||||||
Vendor deposits |
169,424 | (109,424 | ) | |||||
Inventories |
(97,397 | ) | (816,099 | ) | ||||
Sundry current assets |
(4,713 | ) | 4,755 | |||||
Accounts payable and accrued expenses |
547,332 | 445,929 | ||||||
Income taxes payable |
(28,562 | ) | 202,000 | |||||
Customer deposits |
| (21,190 | ) | |||||
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
64,893 | (320,921 | ) | |||||
FINANCING ACTIVITIES: |
||||||||
Additional investment by shareholder |
| 10,000 | ||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES |
| 10,000 | ||||||
INCREASE (DECREASE) IN CASH |
64,893 | (310,921 | ) | |||||
CASH BEGINNING OF YEAR |
841 | 311,762 | ||||||
CASH END OF YEAR |
$ | 65,734 | $ | 841 | ||||
See notes to audited consolidated financial statements
42
Table of Contents
VAPOR CORP.
(FORMERLY MILLER DIVERSIFIED CORPORATION)
(FORMERLY MILLER DIVERSIFIED CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
1 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Business description | ||
Vapor Corp. (formerly Miller Diversified Corporation) (Miller) is the holding company for its wholly owned subsidiary Smoke Anywhere U.S.A., Inc. (Smoke). The Company markets and distributes electronic cigarettes under the Fifty-OneTM, KraveTM, EZ SmokerTM and Green PufferTM brands. | ||
On September 1, 2009 Miller on entered into a definitive agreement with Smoke, a Florida Corporation, whereby Miller acquired 100% of the issued and outstanding shares of Smoke. As a result of the transaction, Smoke became a wholly owned subsidiary of Miller. On November 5, 2009 Miller and Smoke completed, subject to certain post-closing undertakings, the transaction. For accounting purposes, this transaction is being accounted for as a reverse merger, since the stockholders of Smoke own a majority of the issued and outstanding shares of common stock of Miller and the directors and executive officers of Smoke now own and control in excess of 80% of Millers outstanding stock. | ||
The merger has been accounted for as a reverse merger under the acquisition method of accounting because there was a change of control. Accordingly, Smoke is treated as the continuing entity for accounting purposes, whereas the entity formally known as Miller is the legal surviving entity. | ||
Use of estimates in the preparation of financial statements | ||
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period. Actual results could differ from those estimates. | ||
Cash | ||
The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. The Companys accounts at these institutions may, at times, exceed the Federally insured limits. The Company has not experienced any losses in such accounts. |
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Table of Contents
Inventories | ||
Inventories, consisting of merchandise purchased for resale, are valued at the lower of cost (determined on the first-in, first-out basis) or market (replacement cost). | ||
Revenue recognition | ||
The Company recognizes revenue from product sales or services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability 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 sales to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss upon the Companys delivery to the carrier. Return allowances, which reduce product revenue, are estimated using historical experience. Revenue from product sales and services rendered is recorded net of sales and consumption taxes. | ||
The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases, inducement offers, such as offers for future discounts subject to a minimum current purchase, and other similar offers. Current discount offers, when accepted by the Companys customers, are treated as a reduction to the purchase price of the related transaction, while inducement offers, when accepted by its customers, are treated as a reduction to purchase price based on estimated future redemption rates. Redemption rates are estimated using the Companys historical experience for similar inducement offers. Current discount offers and inducement offers are presented as a net amount in net sales. | ||
Advertising | ||
The Company expenses advertising as incurred. As of December 31, 2010 and 2009, the Company incurred advertising expenses of $1,830,000 and $970,806, respectively. | ||
Stock-Based Compensation | ||
The Company accounts for stock-based compensation under ASC Topic 718, Compensation-Stock Compensation (ASC Topic 718). These standards define a fair value based method of accounting for stock-based compensation. In accordance with ASC Topic 718, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using the Black-Scholes-Merton valuation model, whereby compensation cost is the excess of the fair value of the award as determined by the valuation model at the grant date or other measurement date over the amount that must be paid to acquire the stock. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, |
45
Table of Contents
which is generally the vesting period. During the years ended December 31, 2010 and 2009, the Company recognized stock based compensation expense of $901,536 and $289,125, respectively. The $901,536 and $289,125 relates to the amortization expense associated with the granting of options to its President and Chief Executive Officer to purchase 900,000 shares of the Companys common stock at an exercise price of $0.45 per share in October 2009 which vested in 12 equal monthly installments valued at $231,300 and from the granting of options to employees and consultants to purchase 3,600,000 shares of the Companys common stock at an exercise price of $0.45 per share in October 2009 which vested in 12 equal monthly installments valued at $925,000 and 708,000 shares of the Companys common stock at an exercise price of $0.375 per share in January 2010 which vest in 4 equal annual installments valued at $136,644. | ||
Reverse Stock Split | ||
On February 10, 2010, the Company effected a 2.5:1 reverse stock split on its then outstanding shares of common stock. As a result of the reverse stock split, the outstanding shares of the Companys common stock were reduced to 10,000,000 from 50,000,000. In connection therewith, fractional shares were rounded up to whole shares and as a result, an additional 344 shares of common stock were issued to certain stockholders of the Company. No consideration was received by the Company for the shares of its common stock issued as a result of rounding up the fractional shares. All share amounts in the accompanying audited consolidated financial statements have been adjusted to give effect to this reverse stock split. | ||
New accounting pronouncements | ||
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on the Companys accounting and reporting. The Company believes that such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not be material to its financial position, results of operations and cash flows when implemented. |
2 | DUE FROM MERCHANT CREDIT CARD PROCESSOR |
Due from merchant credit card processor represents monies held in reserve by the Companys former credit card processors. The funds are expected to be released to the Company no later than June 30, 2011 pending satisfaction of their reserve requirements and expiration of charge backs/refunds from customers. |
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Table of Contents
3 | INCOME TAXES |
The income tax expense (benefit) consists of the following: |
Year ended December 31, | ||||||||
2010 | 2009 | |||||||
Federal: |
||||||||
Current |
$ | 900 | $ | 173,000 | ||||
Deferred |
(3,000 | ) | | |||||
State: |
||||||||
Current |
100 | 29,000 | ||||||
Deferred |
(1,000 | ) | | |||||
Change in valuation allowance |
4,000 | | ||||||
Income tax expense |
$ | 1,000 | $ | 202,000 | ||||
Year ended December 31, | ||||||||
2010 | 2009 | |||||||
U.S. Federal statutory rate |
-2 | % | 34 | % | ||||
State income tax, net of Federal benefits |
-1 | % | 4 | % | ||||
Increase in valuation allowance |
4 | % | | |||||
Income tax expense |
1 | % | 38 | % | ||||
Year ended December 31, | ||||||||
2010 | 2009 | |||||||
Deferred tax asset |
||||||||
Net operating loss |
$ | 4,000 | $ | | ||||
Total deferred tax asset |
4,000 | | ||||||
Valuation allowance |
(4,000 | ) | | |||||
Deferred tax asset, net of valuation allowance |
$ | | $ | | ||||
4 | RELATED PARTY TRANSACTIONS |
The Company utilizes the services of an entity that is owned 50% by the CEO of the Company. The entity performs fulfillment services and leasing of warehouse space for the Company at a cost that is approximately equal to what these services would cost from an unrelated third party. Amounts paid to this entity for the year ended December 31, 2010 approximately $65,000. |
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Table of Contents
5 | LEASE COMMITMENTS |
The Company is obligated under an operating lease for its Florida office, which calls for minimum annual rentals of $23,000. The lease expires in December 2010. | ||
Rental expense charged to operations for the year ended December 31, 2010 aggregated approximately $26,000. |
6 | CONTINGENCIES, LITIGATION AND GENERAL COMMENTS |
The Company is subject to various legal proceedings and claims, which have arisen in the ordinary course of its business and have not been fully adjudicated. These actions, when ultimately concluded and determined, will not, in the opinion of management, have a material adverse effect on results of operations or the financial condition of the Company. |
7 | SUBSEQUENT EVENTS |
Management evaluated all activity of the Company through March 26, 2011 (the issue date of the financial statements). There were no material subsequent events as of that date. |
8 | RESTATEMENT |
The Company has restated its consolidated financial statements as at December 31, 2010 and 2009 because the Company failed to record stock-based compensation expense for employee and non-employee stock options in accordance with ASC Topic 718, Compensation-Stock Compensation and the Company failed to properly calculate the weighted average number of common shares outstanding. This error and the related adjustments resulted in an understatement of net loss and additional paid in capital of $901,536 and $1,190,661, respectively, and an overstatement of retained earnings of $1,190,661 for the year ended December 31, 2010. This error and the related adjustments resulted in an understatement of net loss and additional paid in capital of $289,125 and $289,125, respectively, and an overstatement of retained earnings of $289,125 for the year ended December 31, 2009. Accordingly, the Companys consolidated financial statements for the year ended December 31, 2010 and 2009 have been restated to correct for these errors. |
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Table of Contents
Condensed Consolidated Balance Sheet impact
The following table sets forth the effects of the restatement adjustments on the Companys
condensed consolidated balance sheets as of December 31, 2010 and 2009:
VAPOR CORP.
f/k/a MILLER DIVERSIFIED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
f/k/a MILLER DIVERSIFIED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 2010 | As of December 31, 2009 | |||||||||||||||
As Previously | As Previously | |||||||||||||||
Recorded | As Restated | Recorded | As Restated | |||||||||||||
TOTAL ASSETS |
$ | 1,799,132 | $ | 1,799,132 | $ | 1,359,300 | $ | 1,359,300 | ||||||||
TOTAL LIABILITIES |
$ | 1,174,593 | $ | 1,174,593 | $ | 655,823 | $ | 655,823 | ||||||||
STOCKHOLDERS EQUITY |
||||||||||||||||
Preferred Stock, $0.001
par value, 1,000,000
shares authorized, none
issued |
| | | | ||||||||||||
Common stock, .001 par
value; 250,000,000 shares
authorized, 60,135,344 and
60,000,344 issued and
outstanding as of December
31, 2010 and December 31,
2009, respectively |
60,135 | 60,135 | 60,000 | 60,000 | ||||||||||||
Additional paid-in capital |
347,115 | 1,537,776 | 325,500 | 614,625 | ||||||||||||
Retained earnings (deficit) |
217,289 | (973,372 | ) | 317,977 | 28,852 | |||||||||||
TOTAL STOCKHOLDERS EQUITY |
624,539 | 624,539 | 703,477 | 703,477 | ||||||||||||
TOTAL LIABILITIES AND
STOCKHOLDER EQUITY |
$ | 1,799,132 | $ | 1,799,132 | $ | 1,359,300 | $ | 1,359,300 | ||||||||
Condensed Consolidated Statement of Operations impact
The following table set forth the effects of the restatement adjustments on the Companys condensed
consolidated statements of operations for the years ended December 31, 2010 and 2009, 2010:
VAPOR CORP.
f/k/a MILLER DIVERSIFIED CORPORATION
CONSOLIDATEDSTATEMENT OF OPERATIONS
f/k/a MILLER DIVERSIFIED CORPORATION
CONSOLIDATEDSTATEMENT OF OPERATIONS
YEAR ENDED | YEAR ENDED | |||||||||||||||
DECEMBER 31, 2010 | DECEMBER 31, 2009 | |||||||||||||||
As Previously | As Previously | |||||||||||||||
Recorded | As Restated | Recorded | As Restated | |||||||||||||
Stock-based compensation expense |
$ | | $ | 901,536 | $ | | $ | 289,125 | ||||||||
TOTAL COSTS AND EXPENSES |
11,016,789 | 11,918,325 | 7,420,516 | 7,709,641 | ||||||||||||
INCOME (LOSS) BEFORE INCOME
TAXES |
(99,688 | ) | (1,001,224 | ) | 536,731 | 247,606 | ||||||||||
NET INCOME (LOSS) |
$ | (100.688 | ) | $ | (1,002,224 | ) | $ | 334,731 | $ | 45,606 | ||||||
BASIC AND DILUTED NET INCOME
(LOSS) PER COMMON SHARE |
$ | (0.002 | ) | $ | (0.02 | ) | $ | 0.014 | $ | 0.00 | ||||||
Weighted average common shares
outstanding basic and
diluted |
60,039,436 | 60,040,015 | 24,301,159 | 60,000,344 | ||||||||||||
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Condensed Consolidated Statement of Cash Flows impact
The following table set forth the effects of the restatement adjustments on the Companys condensed
consolidated statement of cash flows for the years ended December 31, 2010 and 2009:
VAPOR CORP.
f/k/a MILLER DIVERSIFIED CORPORATION
CONSOLIDATEDSTATEMENTS OF CASH FLOWS
f/k/a MILLER DIVERSIFIED CORPORATION
CONSOLIDATEDSTATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2010 | YEAR ENDED DECEMBER 31, 2009 | |||||||||||||||
As Previously | As Previously | |||||||||||||||
Recorded | As Restated | Recorded | As Restated | |||||||||||||
NET INCOME (LOSS) |
$ | (100,688 | ) | $ | (1,002,224 | ) | $ | 334,731 | $ | 45,606 | ||||||
Stock-based compensation expense |
| 901,536 | | 289,125 | ||||||||||||
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES |
$ | 64,893 | $ | 64,893 | $ | (320,921 | ) | $ | (320,921 | ) |
Condensed Consolidated Statements of Shareholders Equity impact-
The following table set forth the effects of the restatement adjustments on the Companys condensed
consolidated statements of shareholders equity for the years ended December 31, 2010 and 2009:
VAPOR CORP.
f/k/a MILLER DIVERSIFIED CORPORATION
CONSOLIDATEDSTATEMENT OF STOCKHOLDERS EQUITY
f/k/a MILLER DIVERSIFIED CORPORATION
CONSOLIDATEDSTATEMENT OF STOCKHOLDERS EQUITY
YEAR ENDED DECEMBER 31, 2009 | ||||||||||||||||
As Previously Recorded | As Restated | |||||||||||||||
Additional | Retained | Additional | Retained | |||||||||||||
Paid-In | Earnings | Paid-In | Earnings | |||||||||||||
Capital | (Deficit) | Capital | (Deficit) | |||||||||||||
Stock-based compensation expense |
$ | | $ | | $ | 289,125 | $ | | ||||||||
NET INCOME |
| 334,731 | | 45,606 | ||||||||||||
BALANCE DECEMBER 31, 2009 |
$ | 325,500 | $ | 317,977 | $ | 614,625 | $ | 28,852 | ||||||||
YEAR ENDED DECEMBER 31, 2010 | ||||||||||||||||
As Previously Recorded | As Restated | |||||||||||||||
Additional | Retained | Additional | Retained | |||||||||||||
Paid-In | Earnings | Paid-In | Earnings | |||||||||||||
Capital | (Deficit) | Capital | (Deficit) | |||||||||||||
Stock-based compensation expense |
$ | | $ | | $ | 901,536 | $ | | ||||||||
NET (LOSS) |
| (100,688 | ) | | (1,002,224 | ) | ||||||||||
BALANCE DECEMBER 31, 2010 |
$ | 347,115 | $ | 217,289 | $ | 1,537,776 | $ | (973,372 | ) | |||||||
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EXHIBIT INDEX
Incorporated by Reference | ||||||
Filing Date/ | ||||||
Exhibit | Period End | |||||
Number | Exhibit Description | Form | Date | |||
3.1 |
Amended and
Restated Articles of Incorporation, filed with the
Secretary of State of the State of
Nevada on January 4, 2010. |
DEF-14C | 12/10/09 | |||
3.2 |
By-Laws of the Registrant, as amended. |
8-K | 01/10/86 | |||
4.1 |
Form of
Stock Certificate of the Registrant. |
10-Q | 12/30/06 | |||
10.1* | VAPOR CORP Equity Incentive Plan. |
DEF-14C | 12/10/09 | |||
14.1 |
Code of Ethics |
10-K | 03/31/2010 | |||
21.1** |
Subsidiaries of the Registrant. |
|||||
24.1** |
Power of Attorney (included on the
Signature Page of this Annual Report
on Form 10-K). |
|||||
31.1** |
Rule 13a-14(a) / 15d-14(a)
Certification of Chief Executive
Officer. (Restated) |
|||||
31.2** |
Rule 13a-14(a) / 15d-14(a)
Certification of Chief Financial
Officer. (Restated) |
|||||
32.1** |
Section 1350 Certifications of Chief
Executive Officer and Chief Financial
Officer. (Restated) |
* | Indicates management contract or compensatory plan or arrangement. | |
** | Filed herewith. |
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SIGNATURES (RESTATED)
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 24th day of August 2011.
VAPOR CORP. |
||||
By: | /s/ Kevin Frija | |||
Kevin Frija | ||||
President, Chief Executive Officer and Chief Financial Officer | ||||
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Kevin Frija attorney-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Annual Report on Form 10-K/A, and to file the same, with
exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated:
Name | Title | Date | ||
/s/ Kevin Frija
|
Chief Executive Officer, Chief Financial Officer and Director (Principal Executive Officer & Principal Financial Officer) | August 24 , 2011 |
52