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EX-31.1 - EXHIBIT 31.1 - Healthier Choices Management Corp.c21811exv31w1.htm
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EX-31.2 - EXHIBIT 31.2 - Healthier Choices Management Corp.c21811exv31w2.htm
Table of Contents

 
 
UNITED STATES
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)
Registrant’s telephone number, including area code: 888-766-5351
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes     o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes     o No
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
 
 

 

 


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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 Company’s 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 Company’s 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.

 

 


 

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Unaudited Financial Statements—March 31, 2011 and 2010:
   
 
  3
 
  4
 
  5
 
  6
 
  12
 
  19
 
 
 
  21
 
  21
 
  21
 
  22
 
   
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1

 

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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)(RESTATED)
VAPOR CORP.
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

 

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VAPOR CORP.
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

 

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VAPOR CORP.
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

 

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VAPOR CORP.
F/K/A MILLER DIVERSIFIED CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
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 Company’s 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 Company’s 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.

 

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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 Management’s 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 Company’s 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 Company’s amended and restated articles of incorporation authorize the Company’s 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 Company’s 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 Company’s 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.

 

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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 Company’s 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 Company’s 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 Company’s 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.

 

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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 Company’s wholly owned subsidiary (“Smoke Anywhere”), filed an arbitration against TransFirst, a company providing it credit card transaction processing services, as required, in the event of a dispute under the services contract by and between the parties. Smoke Anywhere is seeking to have certain fees and fines levied on it reversed, in addition to demanding that certain monies held by TransFirst, be released to it.
On May 15, 2011, the Company became aware that Ruyan Investment (Holdings) Limited has named the Company, along with three other sellers of electronic cigarettes, in a lawsuit alleging patent infringement under federal law. The lawsuit is Ruyan Investment (Holdings) Limited vs. Smoking Everywhere, Inc. et. al. CV11-0367 GAF (FFMx) filed in the United States District Court for the Central District of California. The lawsuit was amended on May 5, 2011 to add the Company as a defendant. Because the lawsuit as amended has not been accepted by the Court, the lawsuit has not been filed against, or served on, the Company. The Company is in the process of evaluating the lawsuit pending it being filed against and served on the Company.
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 Company’s condensed consolidated financial statements for the quarterly periods ended March 31, 2011 and 2010 have been restated to correct for these errors.

 

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Condensed Consolidated Balance Sheet Impact —
The following table sets forth the effects of the restatement adjustments on the Company’s 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
                                 
    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 Company’s 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
                                 
    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 Company’s 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
                                 
    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. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (RESTATED)
You should read the following Management’s 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.

 

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The Company’s business strategy leverages its unique ability to design, market and develop multiple e-cigarette brands and to bring those brands to market through its multiple distribution channels. The Company sells its products through its online stores, its direct response television marketing efforts, to retail channels through its direct sales force, and through third-party wholesalers, retailers, and value-added resellers.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make significant estimates and judgments that affect the amounts reported in the consolidated financial statements and the accompanying notes. These items are regularly monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. The estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from the estimates.
Revenue Recognition
Net sales consist primarily of revenue from the sale of electronic cigarettes, replacement cartridges, components for electronic cigarettes and related accessories. We recognize revenue from product sales when the persuasive evidence of an arrangement exists, delivery has occurred and collect-ability is reasonably assured. Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded when the products are shipped and title passes to customers. Retail items sold to customers are made pursuant to sales contracts that generally provide for transfer of both title and risk of loss upon our delivery to the carrier. Return allowances, which reduce product revenue by our best estimate of expected product returns, are estimated using historical experience. Revenue from product sales and services rendered is recorded net of sales taxes. 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 Company’s 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 Company’s 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 Company’s 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 FDA’s en banc review on January 24, 2011, we believe the FDA’s previous public statements related to electronic cigarettes had a chilling effect on demand for electronic cigarette products. 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 Anywhere’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 SEC’s 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 Company’s 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 II—OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 3 to the Company’s condensed consolidated financial statements included elsewhere in this report for the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On March 7, 2011 the Company issued a total of 100,000 shares of common stock, pursuant to a consultancy agreement dated February 17, 2011. The Company terminated the agreement on May 3, 2011 and 50,000 shares are subject to return to the Company. The issuance of these shares was made in reliance upon the exemption provided by Section 4(2) of the Securities Act of 1933 for transactions by an issuer not involving a public offering.
Item 6. Exhibits. (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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