Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - Healthier Choices Management Corp. | c21811exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - Healthier Choices Management Corp. | c21811exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - Healthier Choices Management Corp. | c21811exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Amendment No. 1)
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
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 | |
of incorporation or organization) | Identification No.) | |
3001 Griffin Road | ||
Dania Beach, FL | 33312 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: 888-766-5351
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
o Large accelerated filer | o Accelerated filer | o Non-accelerated filer | þ Smaller reporting company | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
60,235,344 shares of Common Stock Issued and Outstanding as of May 12, 2011
Table of Contents
EXPLANATORY NOTE
Vapor Corp. (the Company) is filing this Amendment No. 1 to its Quarterly Report on Form
10-Q for the quarter ended March 31, 2011, as filed with the Securities and Exchange
Commission (the SEC) on May 16, 2011 (the Original Filing), to restate its unaudited
condensed consolidated financial statements for the three months ended March 31, 2011 and
2010 and related financial information contained therein 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, to correct the
weighted average number of common shares outstanding, and to correct for the valuation of
deferred tax assets. These accounting and reporting errors and the related adjustments resulted in an
understatement of net loss of $100,540 and $297,665 for the quarters ended March 31, 2011 and
2010, respectively, and an understatement of additional paid-in capital of $1,499,201
and$1,190,661 as of March 31, 2011 and December 31, 2010, respectively, and an overstatement
of retained earnings of $1,291,201 and $1,190,661 as of March 31, 2011 and December 31, 2010,
respectively.
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 March 31,
2011 and that its disclosure controls and procedures were ineffective at March 31, 2011
(see Item 4 of Part I, Controls and Procedures (Restated)).
Except as required to reflect the effects of the restatement for the items above, 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 Items 1, 2 and 4 of Part I and
Item 6 of Part II 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 6 of Part II of the Original Filing has
been amended to contain currently dated certifications pursuant to 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.
TABLE OF CONTENTS
Unaudited Financial StatementsMarch 31, 2011 and 2010: |
||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
12 | ||||||||
19 | ||||||||
21 | ||||||||
21 | ||||||||
21 | ||||||||
22 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)(RESTATED)
VAPOR CORP.
F/K/A MILLER DIVERSIFIED CORPORATION
(RESTATED)
(NOTE 4)
F/K/A MILLER DIVERSIFIED CORPORATION
(RESTATED)
(NOTE 4)
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2011 | December 31, 2010 | |||||||
(Unaudited) | (Audited) | |||||||
(Restated) | (Restated) | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash |
$ | 48,701 | $ | 65,734 | ||||
Due from merchant credit card processor, net
of reserve for chargebacks of $80,000 and
$80,000, respectively |
610,997 | 499,485 | ||||||
Accounts receivable, net of allowance of $5,000 |
455,076 | 304,391 | ||||||
Inventories |
566,664 | 924,809 | ||||||
Sundry current assets |
22,098 | 4,713 | ||||||
TOTAL ASSETS |
$ | 1,703,536 | $ | 1,799,132 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable and accrued expenses |
$ | 1,105,127 | $ | 1,001,122 | ||||
Income taxes payable |
173,471 | 173,471 | ||||||
TOTAL LIABILITIES |
1,278,598 | 1,174,593 | ||||||
STOCKHOLDERS EQUITY: |
||||||||
Preferred
stock, $0.001 per value, 1,000,000 shares authorized, none issued |
| | ||||||
Common stock, $.001 par value
250,000,000 shares authorized
60,185,344 and 60,135,344 shares issued and outstanding
and outstanding, respectively |
60,185 | 60,135 | ||||||
Additional paid-in capital |
1,567,766 | 1,537,776 | ||||||
Accumulated deficit |
(1,203,013 | ) | (973,372 | ) | ||||
TOTAL STOCKHOLDERS EQUITY |
424,938 | 624,539 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 1,703,536 | $ | 1,799,132 | ||||
See
notes to unaudited condensed consolidated financial statements
3
Table of Contents
VAPOR CORP.
F/K/A MILLER DIVERSIFIED CORPORATION
F/K/A MILLER DIVERSIFIED CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED | ||||||||
MARCH 31, | ||||||||
2011 | 2010 | |||||||
(Restated) | (Restated) | |||||||
SALES |
$ | 4,864,292 | $ | 1,875,642 | ||||
COSTS AND EXPENSES: |
||||||||
Cost of sales |
2,298,541 | 1,000,638 | ||||||
Selling, general and administrative |
2,786,852 | 1,123,285 | ||||||
Stock-based compensation expense |
8,540 | 297,665 | ||||||
TOTAL COSTS AND EXPENSES |
5,093,993 | 2,421,588 | ||||||
LOSS BEFORE INCOME TAX (CREDIT) |
(229,641 | ) | (545,946 | ) | ||||
Income tax (credit) |
| (99,000 | ) | |||||
NET LOSS |
$ | (229,641 | ) | $ | (446,946 | ) | ||
BASIC AND DILUTED NET LOSS PER COMMON SHARE |
$ | (0.00 | ) | $ | (0.01 | ) | ||
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING-BASIC AND DILUTED |
60,148,677 | 60,000,344 | ||||||
See notes to unaudited condensed consolidated financial statements
4
Table of Contents
VAPOR CORP.
F/K/A MILLER DIVERSIFIED CORPORATION
F/K/A MILLER DIVERSIFIED CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED | ||||||||
MARCH 31, | ||||||||
2011 | 2010 | |||||||
(Restated) | (Restated) | |||||||
OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (229,641 | ) | $ | (446,946 | ) | ||
Adjustments to reconcile net loss to
net cash provided by operating activities: |
||||||||
Stock-based compensation expense |
8,540 | 297,665 | ||||||
Deferred tax asset |
| (99,000 | ) | |||||
Stock issued for services |
21,500 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Due from merchant credit card processor |
(111,512 | ) | 19,550 | |||||
Accounts receivable |
(150,685 | ) | (61,612 | ) | ||||
Vendor deposits |
| (2,500 | ) | |||||
Inventories |
358,145 | (41,709 | ) | |||||
Sundry current assets |
(17,385 | ) | (3,180 | ) | ||||
Accounts payable and accrued expenses |
104,005 | 382,653 | ||||||
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
AND (DECREASE) INCREASE IN CASH |
(17,033 | ) | 44,921 | |||||
CASH BEGINNING OF PERIOD |
65,734 | 841 | ||||||
CASH END OF PERIOD |
$ | 48,701 | $ | 45,762 | ||||
See notes to unaudited condensed consolidated financial statements
5
Table of Contents
VAPOR CORP.
F/K/A MILLER DIVERSIFIED CORPORATION
F/K/A MILLER DIVERSIFIED CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
STATEMENTS
MARCH 31, 2011
1 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Business description
Vapor Corp. F/K/A Miller Diversified Corporation (the Company) is the holding company for
its wholly-owned subsidiary Smoke Anywhere U.S.A., Inc. The Company markets and
distributes electronic cigarettes under the Fifty-One®, Krave®, EZ Smoker®, and Green
Puffer®brands.
Basis of presentation
The accompanying condensed consolidated balance sheets as of March 31, 2011 and December
31, 2010, the condensed consolidated statements of operations for the three ended March 31,
2011 and 2010 and the condensed consolidated statements of cash flows for the three months
ended March 31, 2011 and 2010 have been prepared by the Company, and are unaudited. The
condensed consolidated balance sheet at December 31, 2010 has been derived from the
Companys restated audited consolidated financial statements at that date.
These unaudited condensed consolidated financial statements for the three months ended
March 31, 2010 were previously restated and included in the Companys Quarterly Report on
Form 10-Q/A (Amendment No. 1) for the quarterly period ended March 31, 2010 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 of
$297,665 for the quarter ended March 31, 2010 and an understatement of additional
paid-incapital of $586,790 as of March 31, 2010 and an overstatement of retained earnings
of $586,790 as of March 31, 2010.
6
Table of Contents
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted. These unaudited condensed consolidated
financial statements should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations and the restated audited
consolidated financial statements and related notes thereto as of and for the year ended
December 31, 2010 included in the Companys Annual Report on Form 10-K/A (Amendment No. 1)
for the year ended December 31, 2010.
In the opinion of management, all adjustments, consisting of normal recurring accruals
considered necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 2011 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2011.
Preferred Stock
The Companys amended and restated articles of incorporation authorize the Companys board
of directors to issue up to 1,000,000 shares of blank check preferred stock in one or
more series without stockholder approval. Each such series of preferred stock may have
such number of shares, designations, preferences, voting powers, qualifications, and
special or relative rights or privileges as determined by the Companys board of directors.
At December 31, 2010 and March 31, 2011, no shares of preferred stock were issued or
outstanding.
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
consolidated financial statements have been adjusted to give effect to this reverse stock
split.
7
Table of Contents
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 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, which is generally the vesting period. During the
quarters ended March 31, 2011 and 2010, the Company recognized stock-based compensation
expense of $8,540 and $297,665, respectively. For the period ended March 31, 2011 and 2010, the
expense of $8,540 and $297,665, respectively relates to the amortization of stock options to employees and
consultants. The Company granted 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,
from the granting of options to its 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 $0.375 per share in January 2010 which vest in 4 equal annual
installments valued at $136,644.
2 | LEASE COMMITMENTS |
The Company was obligated under an operating lease for its Florida office which calls for
minimum annual rentals of $23,000. The lease expired in December 2010. The Company
continued to lease those premises on a month-to-month basis through April 2011.
In March 2011 the Company entered into an operating lease for its new facilities which
expires in March 2013 and provides for minimum annual rentals of approximately $144,000.
8
Table of Contents
Rental expense charged to operations for the three March 31, 2011 and 2010 aggregated
approximately $19,000 and $23,000, respectively.
3 | LITIGATION |
From time to time the Company may be involved in various claims and legal actions arising
in the ordinary course of its business. There were no pending material claims or legal
matters as of March 31, 2011 other than the following matter.
On February 23, 2010 Smoke Anywhere USA, Inc., the Companys wholly owned subsidiary
(Smoke Anywhere), filed an arbitration against TransFirst, a company providing it credit
card transaction processing services, as required, in the event of a dispute under the
services contract by and between the parties. Smoke Anywhere is seeking to have certain
fees and fines levied on it reversed, in addition to demanding that certain monies held by
TransFirst, be released to it.
On May 15, 2011, the Company became aware that Ruyan Investment (Holdings) Limited has
named the Company, along with three other sellers of electronic cigarettes, in a lawsuit
alleging patent infringement under federal law. The lawsuit is Ruyan Investment (Holdings)
Limited vs. Smoking Everywhere, Inc. et. al. CV11-0367 GAF (FFMx) filed in the United
States District Court for the Central District of California. The lawsuit was amended on
May 5, 2011 to add the Company as a defendant. Because the lawsuit as amended has not been
accepted by the Court, the lawsuit has not been filed against, or served on, the Company.
The Company is in the process of evaluating the lawsuit pending it being filed against and
served on the Company.
4 | RESTATEMENT |
The Company has restated its condensed consolidated financial statements as at March 31,
2011 and 2010 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, the Company failed to properly calculate the weighted
average number of shares outstanding, and the Company failed to provide a valuation
allowance against its deferred tax asset at March 31, 2011. This error and the related
adjustments resulted in an understatement of net loss of $100,540 and $297,665 for the
three months ended March 31, 2011 and 2010, and an understatement of additional paid-in capital of $1,499,201 and $1,190,601 as
of March 31, 2011 and December 31, 2010, respectively, and an overstatement of retained
earnings of $1,291,201 and $1,190,601 as of March 31, 2011 and December 31, 2010,
respectively. Accordingly, the Companys condensed consolidated financial statements for
the quarterly periods ended March 31, 2011 and 2010 have been restated to correct for these
errors.
9
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 sheet as of March 31, 2011 and December 31, 2010:
The following table sets forth the effects of the restatement adjustments on the Companys condensed consolidated balance sheet as of March 31, 2011 and December 31, 2010:
VAPOR CORP.
f/k/a MILLER DIVERSIFIED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
f/k/a MILLER DIVERSIFIED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2011 | As of December 31, 2010 | |||||||||||||||
As | As | |||||||||||||||
Previously | Previously | |||||||||||||||
Recorded | As Restated | Recorded | As Restated | |||||||||||||
TOTAL ASSETS |
$ | 1,795,536 | $ | 1,703,536 | $ | 1,799,132 | $ | 1,799,132 | ||||||||
TOTAL LIABILITIES |
$ | 1,278,598 | $ | 1,278,598 | $ | 1,174,593 | $ | 1,174,593 | ||||||||
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, 60,185,344 and
60,135,344 issued and
outstanding as of March
31, 2011 and December 31,
2010, respectively |
60,185 | 60,185 | 60,135 | 60,135 | ||||||||||||
Additional paid-in capital |
68,565 | 1,567,766 | 347,155 | 1,537,776 | ||||||||||||
Retained earnings (accumulated deficit) |
88,188 | (1,203,013 | ) | 217,289 | (973,372 | ) | ||||||||||
TOTAL STOCKHOLDERS EQUITY |
516,938 | 424,938 | 624,539 | 624,539 | ||||||||||||
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY |
$ | 1,795,536 | $ | 1,703,536 | $ | 1,799,132 | $ | 1,799,132 | ||||||||
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Condensed Consolidated Statement of Operations Impact
The following table set forth the effects of the restatement adjustments on the Companys condensed consolidated operations for the three months ended March 31, 2011 and 2010:
The following table set forth the effects of the restatement adjustments on the Companys condensed consolidated operations for the three months ended March 31, 2011 and 2010:
VAPOR CORP.
f/k/a MILLER DIVERSIFIED CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
f/k/a MILLER DIVERSIFIED CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||
As | As | |||||||||||||||
Previously | Previously | |||||||||||||||
Recorded | As Restated | Recorded | As Restated | |||||||||||||
Stock-based compensation expense |
$ | | $ | 8,540 | $ | | $ | 297,665 | ||||||||
Total costs and expenses |
5,085,393 | 5,093,933 | 2,123,923 | 2,421,588 | ||||||||||||
(Loss) before income taxes (benefit) |
(221,101 | ) | (229,641 | ) | (248,281 | ) | (545,946 | ) | ||||||||
Income tax (benefit) |
(92,000 | ) | | (99,000 | ) | (99,000 | ) | |||||||||
Net (loss) |
$ | (129,101 | ) | $ | (229,641 | ) | $ | (149,281 | ) | $ | (446,946 | ) | ||||
Basic and diluted net (loss) per
common share |
$ | (0.002 | ) | ($0.00 | ) | $ | (0.004 | ) | $ | (0.01 | ) | |||||
Weighted average common shares
outstanding basic and diluted |
60,147,778 | 60,148,677 | 42,575,342 | 60,000,344 | ||||||||||||
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 three months ended March 31, 2011 and 2010:
The following table set forth the effects of the restatement adjustments on the Companys condensed consolidated statement of cash flows for the three months ended March 31, 2011 and 2010:
VAPOR CORP.
f/k/a MILLER DIVERSIFIED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
f/k/a MILLER DIVERSIFIED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||
As Previously | As | As Previously | As | |||||||||||||
Recorded | Restated | Recorded | Restated | |||||||||||||
Net (loss) |
$ | (129,101 | ) | $ | (229,641 | ) | $ | (149,281 | ) | $ | (446,946 | ) | ||||
Deferred tax liability |
(92,000 | ) | | | | |||||||||||
Stock-based compensation expense |
| 8,540 | | 297,665 | ||||||||||||
Net cash provided by (used in)
operating activities |
$ | (17,033 | ) | $ | (17,033 | ) | $ | 44,921 | $ | 44,921 | ||||||
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(RESTATED)
You should read the following Managements Discussion and Analysis together with our condensed
consolidated financial statements and related notes included elsewhere in this report.
Forward-Looking Statements
This report contains forward-looking statements and information relating to us that are based on
the beliefs of our management as well as assumptions made by, and information currently available
to, our management. When used in this report, the words believe, anticipate, expect,
estimate, intend, plan and similar expressions, as they relate to us or our management, are
intended to identify forward-looking statements. Although we believe that the plans, objectives,
expectations and prospects reflected in or suggested by our forward-looking statements are
reasonable, those statements involve risks, uncertainties and other factors that may cause our
actual results, performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by these forward-looking statements, and we can
give no assurance that our plans, objectives, expectations and prospects will be achieved.
Important factors that might cause our actual results to differ materially from the results
contemplated by the forward-looking statements are contained in the Risk Factors section of and
elsewhere in our Annual Report on Form 10-K/A (Amendment No. 1) for the fiscal year ended December
31, 2010 and in our subsequent filings with the Securities and Exchange Commission, and include,
among others, the following: competition, consumer acceptance of our products, changes in customer
preferences, reliance on Chinese suppliers and manufacturers, government regulation, product
liability claims and the availability, terms and deployment of capital, The terms Vapor Corp.,
Vapor, we, us, our, and the Company refer to Vapor 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.
12
Table of Contents
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. No customer accounted for more than 10% of net sales for the three
months ended March 31, 2011 and 2010.
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Income Taxes
In order to determine the quarterly provision for income taxes, we use an estimated annual
effective tax rate, which is based on expected annual income and statutory tax rates. Certain
significant or unusual items are separately recognized in the quarter during which they occur and
can be a source of variability in the effective tax rates from quarter to quarter. Income tax
expense for the three months ended March 31, 2011 and 2010 was $0 and $98,000, respectively. The
effective tax rate for the three months ended March 31, 2011 differs from the U.S. federal
statutory rate of 35% primarily due to state income taxes and stock-based compensation expense. We
file U.S. and state income tax returns in jurisdictions with various statutes of limitations. We
do not have any net operating loss carryforwards. Our consolidated federal tax return and any
state tax returns are not currently under examination.
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.
Stock-Based Compensation
We account 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 we expect
to receive the benefit, which is generally the vesting period. During the quarters ended
March 31, 2011 and 2010, the Company recognized stock-based compensation expense of $8,540
and $297,665, respectively. During the quarters ended March 31, 2011 and 2010, the Company
recognized stock-based compensation expense of $8,540 and $297,665, respectively.
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For the period ended March
31, 2011 and 2010, the expense of $8,540 and $297,665, respectively, relates to the amortization of stock options to employees
and consultants. The Company granted 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,
from the granting of options to its 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 $0.375 per share in January 2010 which vest in 4 equal annual
installments valued at $136,644.
Other Contingencies
In the ordinary course of business, we are involved in legal proceedings regarding contractual and
employment relationships, product liability claims, trademark rights, and a variety of other
matters. We record contingent liabilities resulting from claims against us, including related legal
costs, when a loss is assessed to be probable and the amount of the loss is reasonably estimable.
Assessing probability of loss and estimating probable losses requires analysis of multiple factors,
including in some cases judgments about the potential actions of third party claimants and courts.
Recorded contingent liabilities are based on the best information available and actual losses in
any future period are inherently uncertain. If future adjustments to estimated probable future
losses or actual losses exceed our recorded liability for such claims, we would record additional
charges as other (income) expense, net during the period in which the actual loss or change in
estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose
contingent liabilities when there is a reasonable possibility that the ultimate loss will
materially exceed the recorded liability. Currently, we do not believe that any of our pending
legal proceedings or claims will have a material impact on our financial position or results of
operations.
Results of Operations for the Three Months Ended March 31, 2011 Compared to the Three Months Ended
March 31, 2010
During the three months ended March 31, 2011 we had $4,864,292 in revenues. This was an increase of
$2,988,650 or approximately 159.3% for the three months ended March 31, 2010. Factors that
contributed positively to these increases,
include the following:
| Greater consumer demand through our direct sales efforts for our electronic cigarette products; |
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| An increase in repeat orders from our distributors and wholesale customers; | ||
| Residual orders for replacement cartridges from our existing customer base; and | ||
| Greater consumer awareness of our products from an increase in our advertising and sales efforts. |
Until the December 2010 U.S. Court of Appeals for the D.C. Circuit decision in Sottera, Inc. v.
Food & Drug Administration, 627 F.3d 891 (D.C. Cir. 2010) adverse to the U.S. Food and Drug
Administration (FDA), and denial of the FDAs en banc review on January 24, 2011, we believe the
FDAs previous public statements related to electronic cigarettes had a chilling effect on demand
for electronic cigarette products. Under this Court decision, the FDA is permitted to regulate
electronic cigarettes as tobacco products under the Family Smoking Prevention and Tobacco
Control Act of 2009 (the Tobacco Control Act). Under this Court decision, the FDA is not
permitted to regulate electronic cigarettes as drugs or devices or a combination product
under the Federal Food, Drug and Cosmetic Act unless they are marketed for therapeutic purposes.
The Tobacco Control Act grants the FDA broad authority over the manufacture, sale, marketing and
packaging of tobacco products, although the FDA is prohibited from issuing regulations banning all
cigarettes or all smokeless tobacco products, or requiring the reduction of nicotine yields of a
tobacco product to zero. If electronic cigarettes are classified by the FDA as tobacco products,
the outcome of the application of the Tobacco Control Act, including FDA requirements issued
thereunder, on electronic cigarettes generally and our electronic cigarettes specifically cannot be
predicted at this time. We hereinafter refer to this Court decision as the Sottera Court
Decision.
Since the Sottera Court Decision, however, we have experienced a pick up in retail demand for our
electronic cigarette products through our direct to consumer sales efforts. Direct to consumer
sales are more profitable to us and carry much larger gross margins than products sold through
re-sellers. We also have experienced an up-tick in interest for electronic cigarettes among big box
retailers, who have contacted us and requested proposals and plan-o-grams. We expect direct to
consumer sales demand will continue to grow, however we believe that sales through re-sellers will
be an increasingly large part of our sales channel mix.
Our operating expenses increased by $2,672,405 or 110% for the three months ended March 31, 2011 to
$5,093,993 from $2,421,588 for the three months ended
March 31, 2010. Operating expenses consists of: cost of sales and selling, general and
administrative expenses.
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Our cost of sales increased by $1,297,903 to $2,298,541 for the three months ended March 31, 2011.
This was an increase of 129.7%, as compared to cost of sales of $1,000,638 for the three months
ended March 31, 2010. The increase in our cost of sales is a result of an increase in units
purchased for re-sale.
Selling, general and administrative expenses for the three months ended March 31, 2011 were
$2,786,852 compared to selling general and administrative expenses of $1,123,285 for the three
months ended March 31, 2010. This increase included $70,600 in professional fees, lobbying costs
and legal fees incurred in our efforts to identify and comply with a yet to be established FDA
regulatory framework for electronic cigarette products. Our efforts in connection therewith,
included our decision on March 18, 2011, for our wholly owned subsidiary, Smoke Anywhere USA,
Inc., to file a motion to intervene as plaintiff in a proceeding against the FDA in a civil action
wherein plaintiff Sottera, sought a declaratory injunction against the FDA relating to its
authority to impose an import alert against electronic cigarettes as a drug and medical device. On
May 6, 2011, Sottera settled its action with FDA by agreeing to entry of Final Judgment against FDA
whereby it is ordered that FDA will comply with the Sottera Court Decision. Smoke Anywheres motion
to intervene was denied by the Court as moot given the order that FDA comply with the Sottera
Court Decision. Also, on March 21, 2011, the Company entered into a lease for its new corporate
offices, in connection with the lease, the Company incurred one-time costs of $17,595 and $12,000
of pre-paid rent. Total expenses for the quarter related to the Companys new offices were $29,595.
During the three months ended March 31, 2011 and 2010, we recognized stock-based compensation
expense of $8,540 and $297,665, respectively. During the quarters ended March 31, 2011 and 2010, the
Company recognized stock-based compensation expense of $8,540 and $297,665, respectively. For the period
ended March 31, 2011 and 2010, the expense of $8,540 and $297,665, respectively, relates to the amortization of stock options to
employees and consultants. The Company granted 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, from the granting of
options to its 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 $0.375 per share in January 2010 which vest in 4 equal annual installments valued
at $136,644.
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During the three months ended March 31, 2011 we had $0 in research and development costs. This was
unchanged from the three months ended March 31, 2010.
We had a net loss of $229,641 for the three months ended March 31, 2011, as compared to a net loss
of $446,946 for the three months ended March 31, 2010. For the three months ended March 31, 2011,
we incurred $100,195 in non-reoccurring expenses, as discussed above in the paragraph comparing our
selling, general and administrative expenses for the three months ended March 31, 2011 and 2010.
Liquidity and Capital Resources
We had total assets of $1,703,536 and $1,799,132 as of March 31, 2011 and December 31, 2010,
respectively.
We had total liabilities of $1, 278,598 and $1,174,593 as of March 31, 2011 and December 31, 2010,
respectively..
We had additional paid-in capital of $1,567,766 and $1,537,776 and accumulated deficit of $1,203,013
and $973,372 and total stockholders equity of $424,938 and $624,539 as of March 31, 2011 and
December 31, 2011, respectively.
Our net (decrease) increase in cash of ($17,033) and $44,921 for the three months ended March 31,
2011 and 2010, respectively, was due to the cash provided by (used in) operating activities, which
was primarily due to net loss of ($229,641) and ($446,946), decrease (increase) from merchant credit card
processors of ($111,512) and $19,550, accounts receivable of ($150,685) and ($61,612), inventories
of $358,145 and ($41,709), and increase from accounts payable and other accrued liabilities of
$104,055 and $382,653 and income tax assets of $0 and ($99,000), 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.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital resources that is
material to investors.
Item 4. Controls and Procedures. (RESTATED)
Restatement
As discussed elsewhere in this Amendment No. 1 and in Note 4 to the condensed consolidated
financial statements contained in Item 1 of Part I hereof, the Company has amended its Quarterly
Report on Form 10-Q/A for the quarterly period ended March 31, 2011 and 2010 to restate its
condensed consolidated financial statements as of March 31, 2011 and 2010 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, to correct the weighted
average number of common shares outstanding, and to provide a valuation allowance against its
deferred tax asset at March 31, 2011.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act) that are designed to provide reasonable assurance that the information required to be
disclosed by us in reports we file under the Exchange Act is (i) recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms and (ii) accumulated
and communicated to our management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot
provide absolute assurance that the objectives of the controls system are met, and no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any,
within a company have been detected.
Our management with the participation of our Chief Executive Officer and our Chief Financial
Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive and Chief Financial
Officer concluded that our
disclosure controls and procedures were ineffective in providing reasonable assurance of achieving
their objectives because of the two material weaknesses in internal control over financial
reporting disclosed in our Annual Report on Form 10-K/A (Amendment No. 1) for the year ended
December 31, 2010. In addition, we have identified an additional material weakness related to the
Company not valuing deferred tax assets properly as of March 31, 2011, as disclosed above.
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In light of the three material weakness, we performed additional post-closing procedures and
analyses, which are not part of our internal control over financial reporting, in order to prepare
the condensed consolidated financial statements included in this report. As a result of these
procedures and analyses, we believe our condensed consolidated financial statements included in
this report present fairly, in all material respects, our financial condition, results of
operations and cash flows for the periods presented.
Changes in Internal Control Over Financial Reporting
As disclosed in our Annual Report on Form 10-K/A (Amendment No. 1) for the year ended December 31,
2010, management and our independent registered public accounting firm have identified two material
weaknesses in our internal control over financial reporting. In addition, we have identified an
additional material weakness related to the Company not valuing deferred tax assets properly as of
March 31, 2011, as disclosed above.
Remediation of Material Weakness
We have commenced efforts to address the three material weakness in our internal control over
financial reporting and the ineffectiveness of our disclosure controls and procedures as of March
31, 2011. Our remediation plan includes the following actions:
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.
Although the remediation efforts are underway, the above material weakness will not be considered
remediated until new controls over financial reporting are fully designed and operating effectively
for an adequate period of time.
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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.
PART IIOTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 3 to the Companys condensed consolidated financial statements included
elsewhere in this report for the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On March 7, 2011 the Company issued a total of 100,000 shares of common stock, pursuant to a
consultancy agreement dated February 17, 2011. The Company terminated the agreement on May 3,
2011 and 50,000 shares are subject to return to the Company. The issuance of these shares was made
in reliance upon the exemption provided by Section 4(2) of the Securities Act of 1933 for
transactions by an issuer not involving a public offering.
Item 6. Exhibits. (Restated)
Exhibit | ||
Number | Exhibit Description | |
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) |
* | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, this 24 day of August 2011.
VAPOR CORP. |
||||
By: | /s/ Kevin Frija | |||
Kevin Frija | ||||
President, Chief Executive Officer and Chief Financial Officer |
||||
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