HCMC Healthier Choices Management Corporation (PK)

VAPOR CORP. 3001 Griffin Road Dania Beach, Florida 33312 (888) 766-5351

NOTICE OF STOCKHOLDER ACTION BY WRITTEN CONSENT AND  INFORMATION STATEMENT   PURSUANT TO SECTION 14(C) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 14C-2 THEREUNDER

 

WE ARE NOT ASKING YOU FOR A PROXY AND

YOU ARE REQUESTED NOT TO SEND A PROXY

 

Dear Stockholders:

 

Vapor Corp. (“ Vapor ,” the “ Company ,” “ we ,” “ us ” or “ our ”) is furnishing to you this Notice of Stockholder Action by Written Consent and Information Statement to inform you that the holders of a majority of the outstanding shares of our common stock (the “ Majority Holders ”) have consented in writing (the “ Written Consent ”) pursuant to Section 228 of the Delaware General Corporation Law (the “ DGCL ”) to the issuance by us of up to 8,389,493 shares of our common stock pursuant to the terms and subject to the conditions of the Asset Purchase Agreement (as amended, the “ Asset Purchase Agreement ”) that we entered into on May 14, 2014 with International Vapor Group, Inc. (“ International Vapor Group ”), certain subsidiaries of International Vapor Group (together with International Vapor Group, “ IVG ”), the owners of International Vapor Group and our newly formed wholly-owned subsidiary IVGI Acquisition, Inc., pursuant to which we will purchase IVG’s online operations, wholesale operations and retail operations by acquiring substantially all of IVG’s assets and assuming certain of IVG’s liabilities in an asset purchase transaction (the “ Acquisition ”).

 

Because our shares of common stock are listed on The NASDAQ Capital Market, we are required pursuant to NASDAQ Listing Rule 5635(a) to obtain stockholder approval prior to the issuance of common stock in connection with the acquisition of the stock or assets of another company if the number of shares of common stock to be issued is or will be equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the common stock.

 

If we complete the Acquisition, we will issue up to 8,389,493 additional shares of our common stock, which represents approximately 51% of our total outstanding shares of common stock as of the date hereof.   Of these 8,389,493 shares of our common stock, we will issue 3,300,501 shares as payment of the stock portion of the fixed purchase price at the closing of the Acquisition, up to 43,200 shares, if any, after the closing as reimbursement for certain of IVG’s  inventory that is not part of the Acquisition and up to an additional 5,045,792 shares as earn-out payments which are contingent and based upon the post-closing performance of IVG’s online, wholesale and retail operations for the earn-out period and subject to satisfaction of the performance requirements set forth in the Asset Purchase Agreement.  In this Information Statement, we refer to these 8,389,493 shares of our common stock that are issuable for the Acquisition as the “ Acquisition Shares .”

 

The Acquisition Shares will be issued in reliance upon an exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Rule 506 of Regulation D thereunder, or another available exemption from registration as we may determine.

 

 

On July 31, 2014, the Majority Holders executed the Written Consent in accordance with Section 228 of the DGCL. The Majority Holders and their respective approximate ownership percentage of our common stock, which total in the aggregate 50.7% of the outstanding shares of our common stock, are as follows: Doron Ziv (9.1%), Jeffrey Holman (7.1%), Kevin Frija (6.2%), Isaac Galazan (5.1%), Adam Frija (4.7%), Tamar Galazan (4.0%), Jacob Levy (3.9%), Harlan Press (0.7%), Ryan Kavanaugh (0.6%), Angela Vaccaro (0.2%), Special Situations Fund III, L.P. (6.3%), Special Situations Cayman Fund, L.P. (1.8%) and Special Situations Private Equity Fund, L.P. (0.9%).

 

We are furnishing this Information Statement to inform our stockholders of record as of July 31, 2014 of the Majority Holders’ approval of the issuance of the Acquisition Shares.  This Information Statement constitutes the notice of corporate action without a meeting by less than unanimous consent of our stockholders required by Section 228(e) of the DGCL.

 

In accordance with Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as amended, the effective date of the Majority Holders’ approval of the issuance of the Acquisition Shares will be 20 days following the date that this Information Statement is first mailed to our stockholders of record on the foregoing record date, which will be on or about August [__], 2014. We expect the closing of the Acquisition to occur subsequently in September 2014.

 

August [__], 2014

 

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TABLE OF CONTENTS

 

 

 

SUMMARY

 

On May 14, 2014, we entered into the Asset Purchase Agreement.  On July 25, 2014, the Asset Purchase Agreement was amended by the First Amendment to the Asset Purchase Agreement.  Unless the context specifically indicates otherwise, in this Information Statement, we refer to the Asset Purchase Agreement, as amended by the First Amendment to the Asset Purchase Agreement.  As a result of the Acquisition, we will own IVG’s online, wholesale and retail operations.  For a description of IVG’s business, see the heading “ Information About IVG – Brief Description of the Business .” For a description of the background of the Acquisition, see the heading “ The Acquisition – Background of the Acquisition .”

 

This summary highlights selected information from this Information Statement and may not contain all of the information that is important to you. To better understand the Acquisition, you should read this entire Information Statement carefully, including the attached exhibits and other documents to which you are referred herein. For more information about Vapor, you should read our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014.

 

 

 

 

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QUESTIONS AND ANSWERS ABOUT THE ACQUISITION

 

The following are questions and related answers that address some of the questions you may have regarding the Acquisition and related matters. These questions and answers may not contain all of the information relevant to you, do not purport to summarize all material information relating to the Acquisition or any of the other matters discussed in this Information Statement, and are subject to, and are qualified in their entirety by, the more detailed information contained in or attached to this Information Statement. Therefore, please carefully read this Information Statement, including the exhibits, in its entirety.

 

Q. Why do we want to complete the Acquisition?

 

A. We believe that the Acquisition presents an opportunity to expand our business and enhance stockholder value. IVG’s online and retail operations are complimentary to our existing wholesale operations and will provide us with immediate access to new markets with established customers, an expanded portfolio of electronic cigarettes and vaporizers and enhanced brand awareness. The Acquisition is expected to give us opportunities to create economies of scale through our consolidation activities in order to increase our operating efficiencies. For example, we expect to have greater purchasing power with suppliers.

 

To review the reasons for the Acquisition in greater detail, see the heading “ The Acquisition - Reasons for the Acquisition .”

 

Q. What will happen as a result of the Acquisition?

 

A. Acquisition Sub, our wholly-owned subsidiary, will acquire IVG’s online, wholesale and retail operations as a result of the Acquisition. The Asset Purchase Agreement governs the Acquisition.  Copies of the Asset Purchase Agreement and the First Amendment to the Asset Purchase Agreement are attached to this Information Statement as Exhibits A-1 and A-2, respectively. You are encouraged to read them carefully.

 

To review the transaction details in greater detail, see the heading “ The Acquisition .”

 

Q. What will the owners of International Vapor Group receive as a result of the Acquisition?

 

A. The owners of International Vapor Group will receive up to $1.7 million in cash and $19.1 million in 3,300,501 shares of our common stock as payment of the fixed purchase price at closing.  After closing, the owners of International Vapor Group may receive up to $29.2 million in 5,045,792 shares of our common stock as earn-out payments which are contingent and based upon the post-closing performance of IVG’s online, wholesale and retail operations for the earn-out period and subject to the satisfaction of the performance requirements set forth in the Asset Purchase Agreement.  After closing, the owners of International Vapor Group may receive up to $250,000 in 43,200 shares of our common stock as reimbursement for certain of IVG’s inventory that is not part of the Acquisition.   In this Information Statement, we refer to these 8,389,493 shares of our common stock that are issuable for the Acquisition as the “ Acquisition Shares .”

 

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To review the dilutive effect on holders of shares of our common stock in greater detail, see the heading above “ Summary - Dilution ” and the heading below “ The Acquisition – Dilution. ”

 

Q.  Do Vapor’s stockholders have appraisal rights as a result of the Acquisition?

 

A. No. Our stockholders do not have appraisal rights under Delaware law in connection with the Acquisition.

 

Q.  Do International Vapor Group’s owners have appraisal rights as a result of the Acquisition?

 

A. No. International Vapor Group’s owners do not have appraisal rights under Delaware law in connection with the Acquisition.

 

Q. What are the U.S. federal income tax consequences of the Acquisition?

 

A. We have not obtained a tax opinion from legal counsel or tax experts on the Acquisition. The Acquisition is intended for federal income tax purposes to qualify as one or more reorganizations within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. We do not believe that the Acquisition will give rise to the recognition of gain or loss to us or our stockholders for U.S. federal income tax purposes.

 

Q.  What is the anticipated accounting treatment of the Acquisition?

 

A.   We anticipate accounting for the Acquisition as a business combination using the acquisition method of accounting for financial accounting purposes, whereby the estimated purchase price will be allocated to the assets and liabilities of IVG based on their estimated fair values on the closing date of the Acquisition, following Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations.

 

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Q. When do you expect to complete the Acquisition?

 

A. The effective date of the Written Consent of the Majority Holders will be 20 days following the mailing of this Information Statement to our stockholders of record on July 31, 2014, which will be on or about August [_], 2014. We expect the closing of the Acquisition to occur subsequently in September 2014.

 

Q. Are Vapor’s stockholders required to approve the Acquisition?

 

A. No, but our stockholders are required to approve the issuance of the Acquisition Shares which, in turn, is a pre-condition to the consummation of the Acquisition. Thus, the Majority Holders approved the issuance of the Acquisition Shares by the Written Consent. This Written Consent is sufficient to approve the issuance of the Acquisition Shares. Accordingly, the issuance of the Acquisition Shares will not be submitted to our other stockholders for a vote.

 

Q.  Whom should I contact with other questions?

 

A. If you have additional questions about the Acquisition or would like additional copies of this Information Statement, please contact us by either writing to Vapor Corp. at our principal executive offices located at 3001 Griffin Road, Dania Beach, Florida 33312, Attention: Corporate Secretary, or by calling us at (888) 766-5351.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Information Statement contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended,  that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this Information Statement, including statements regarding the expected timing, completion, and benefits of the Acquisition, other future events, our future financial performance, our future business strategy, and the plans and objectives of management for future operations, are forward-looking statements. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of these terms or other comparable terminology.

 

We may not realize all of the anticipated benefits of the Acquisition and our actual results after giving effect to the Acquisition could differ materially from the results anticipated in these forward-looking statements as a result of one or more of the following factors, which do not include all the risks that we will face as a result of the Acquisition:

 

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our ability  to  integrate IVG’s online, wholesale and retail operations with our existing operations;

 

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our ability to preserve IVG’s significant business relationships;

 

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our ability to achieve the anticipated cost savings and efficiencies from the Acquisition;

 

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our ability to retain IVG’s key employees and attract additional key employees;

 

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our ability to expand IVG’s retail operations in a timely and cost effective manner;

 

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our ability to raise capital on acceptable terms or at all to satisfy our greater working capital requirements to implement growth and strategic initiatives;

 

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our ability to manage changes in consumer preferences for IVG’s electronic cigarettes and vaporizers brands;

 

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our ability to integrate financial reporting and information technology systems;

 

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our ability to minimize the diversion of management’s attention from ongoing business concerns;

 

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our ability to establish and maintain appropriate internal controls over financial reporting and disclosure controls and procedures with regard to IVG’s online, wholesale and retail operations;

 

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additional and unforeseen expenses associated with the integration of IVG’s online, whole and retail operations; and

 

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the impact of existing and future legal and regulatory requirements on IVG’s online, wholesale and retail operations.

 

In addition, risks and uncertainties that could cause actual results to differ include, without limitation, general economic conditions, competition, consumer adoption of electronic cigarettes and vaporizers,  loss of key personnel, pricing pressures, brand reputation, consumer trends, acquisitions, new initiatives we undertake, product liabilities, intellectual property infringement claims, fluctuations in quarterly operating results, customer interest in our products, the effect of government regulation, our ability to manage growth and other risks and uncertainties included in our public filings with the Securities and Exchange Commission, including our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. We caution you that no forward-looking statement is a guarantee of future performance, and you should not place undue reliance on these forward-looking statements which reflect our view only as of the date of this Information Statement. We undertake no obligation to update any forward-looking information.  Further, the unaudited pro forma combined financial statements contained in this Information Statement are presented for illustrative purposes only, are based on various adjustments, assumptions, and preliminary estimates, and are not necessarily indicative of our financial condition or results of operations following the Acquisition.

 

THE ACQUISITION

 

General Information

 

The Majority Holders’ Written Consent approved the issuance of the Acquisition Shares, which is a condition to completing the Acquisition. The Asset Purchase Agreement provides that we will issue the Acquisition Shares as consideration of the Acquisition.

 

Because our shares of common stock are listed on The NASDAQ Capital Market, we are required pursuant to NASDAQ Listing Rule 5635(a) to obtain stockholder approval prior to the issuance of common stock in connection with the acquisition of the stock or assets of another company if the number of shares of common stock to be issued is or will be equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the common stock.

 

If we complete the Acquisition, we may issue all of the Acquisition Shares ( i.e ., 8,389,493), which represents approximately 51% of our total outstanding shares of common stock as of the date hereof.  We will issue 3,300,501 of the Acquisition Shares as payment of the stock portion of the fixed purchase price at the closing of the Acquisition, up to 43,200 of the Acquisition Shares, if any, after the closing as reimbursement for certain of IVG’s inventory that is not part of the Acquisition and up to an additional 5,045,792 of the Acquisition Shares as earn-out payments which are contingent and based upon the post-closing performance of IVG’s online, wholesale and retail operations for the earn-out period and subject to satisfaction of the performance requirements set forth in the Asset Purchase Agreement.

 

The Acquisition Shares will be issued in reliance upon an exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Rule 506 of Regulation D thereunder, or another available exemption from registration as we may determine.

 

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We are furnishing this Information Statement to inform our stockholders of record as of July 31, 2014 of the Majority Holders’ approval of the issuance of the Acquisition Shares.  This Information Statement constitutes the notice of corporate action without a meeting by less than unanimous consent of our stockholders required by Section 228(e) of the DGCL.

 

Background of the Acquisition

 

In early January 2014, the senior management of the Company and IVG commenced informal discussions about a potential transaction between the companies.

 

On January 28, 2014, the Company and IVG entered into a confidentiality agreement in contemplation of a potential transaction between the parties.

 

In February 2014, IVG provided the Company with preliminary due diligence information concerning its operations.

 

During February and March 2014, periodic, general discussions occurred between the senior management of the Company and IVG regarding potential operational synergies and the possibility of entering into a transaction to realize such synergies.

 

During February and March 2014, the parties negotiated a letter of intent for the Acquisition.

 

On March 20, 2014, the Company, IVG and certain owners of International Vapor Group entered into a letter of intent.

 

During March and April 2014, the Company continued to conduct due diligence on IVG’s operations, including, its financial and operating results and prospects.

 

During April and until execution of the Asset Purchase Agreement on May 14, 2014, the parties through their legal counsel negotiated the terms of the Asset Purchase Agreement and the Employment Agreements and the Registration Rights Agreement based in part on the provisions of the letter of intent and periodic meetings and discussions between their senior management.

 

During such period, the Company’s executive officers updated the Company’s board of directors regarding the negotiations and status of the transaction.

 

On May 13, 2014, the Company’s board of directors approved the Acquisition, the Asset Purchase Agreement, the Employment Agreements and the Registration Rights Agreement.

 

On May 14, 2014, the Company, IVG and all of the owners of International Vapor Group entered into the Asset Purchase Agreement.

 

On May 15, 2014, the Company issued a press release announcing the Asset Purchase Agreement and the Acquisition.

 

Between July 8 and July 25, 2014, the parties through their legal counsel negotiated the First Amendment to the Asset Purchase Agreement to extend the termination date of the Asset Purchase Agreement to September 30, 2014, rebrand certain aspects of the Acquired Business prior to the closing of the Acquisition, expand and modify certain of IVG’s and the International Vapor Group owners’ indemnity obligations and make certain other modifications to the Asset Purchase Agreement.

 

On July 24, 2014, Company’s board of directors approved the First Amendment to the Asset Purchase Agreement.

 

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On July 25, 2014, the parties entered into the First Amendment to the Asset Purchase Agreement.

 

On July 28, 2014, the Company issued a press release announcing the First Amendment to the Asset Purchase Agreement.

 

Reasons for the Acquisition

 

In reaching the decision to approve the Asset Purchase Agreement and the Acquisition and recommend it for approval to the Company’s stockholders, the board of directors consulted with the Company’s management and its legal advisor, and considered a variety of factors with respect to the Acquisition.  As discussed in greater detail below, these consultations included discussions regarding IVG’s strategic business plan, the costs and risks of executing that business plan, its past and current business operations and financial condition, its future prospects, the strategic rationale for the transaction, and the terms and conditions of the Asset Purchase Agreement. The following discussion of the information and factors considered by the Company’s board of directors is not exhaustive. In view of the wide variety of factors considered in connection with the Acquisition, the Company’s board of directors did not consider it practical, nor did it attempt, to quantify or otherwise assign relative weight to different factors it considered in reaching its decision. In addition, individual members of the Company’s board of directors may have given different weight to different factors. The Company’s board of directors considered this information as a whole, and overall considered it to be favorable to, and in support of, its determination and recommendations. Among the material information and factors considered by the Company’s board of directors were the following:

 

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Increased Scale . The Company’s board of directors considered that the Acquisition will allow the Company to diversify its operations to include a significant online and retail presence with enhanced scale and scope.   The scale, scope and diversification of the Company’s operations are expected to result in (i) increased financial stability, (ii) superior access to capital, (iii) greater purchasing power with suppliers, (iv) greater brand awareness and (v) greater market share.

 

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Strength of IVG’s Brands. The Company’s board of directors considered the strength of IVG’s electronic cigarette and vaporizer brands, including their South Beach Smoke ® and Ever Smoke ® brands and challenges confronting the Company to organically develop additional brands in a timely and cost effective manner.

 

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Online Presence. The Company’s board of directors considered IVG’s significant online presence and the Company’s ability to leverage such online presence as an additional distribution channel for the Company’s e-cigarettes and vaporizers and the challenges confronting the Company to organically expand its existing online presence.

 

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Retail Presence. The Company’s board of directors considered IVG’s retail presence and their management’s experience with retail expansion and developing retail brands. The Company’s ability to have a retail presence is expected to result in greater brand awareness, customer loyalty and a first-mover competitive advantage.

 

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Shared Strategic Vision . The Company’s board of directors considered that the Company’s and IVG’s management share a common strategic vision for the future of electronic cigarettes and vaporizers. Both management teams have developed strong chemistry together, in particular the fact that Nicolas Molina and David Epstein have agreed to join the Company’s management team and be chiefly responsible for managing IVG’s continuing online, wholesale and retail operations. Mr. Molina will serve as Senior Vice President of Retail & e-Commerce and Mr. Epstein will serve as Vice President of Wholesale.

 

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Cost Savings and Efficiencies . The Company’s board of directors considered that the Acquisition will result in cost savings from reducing redundant costs such as insurance, marketing and sales. The Company’s board of directors also considered efficiencies that will likely result from economies of scale, including having greater purchasing power with suppliers and leveraging IVG’s existing online and retail operations’ infrastructure.  While no assurance can be given that any particular level of cost savings or efficiencies can be achieved, the Company’s management believes that some meaningful benefits can be realized.

 

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Recommendation of Management . The Company’s board of directors considered the Company’s management’s recommendation in support of the Acquisition.

 

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Terms of the Asset Purchase Agreement . The Company’s board of directors reviewed the terms of the Asset Purchase Agreement, including the Earn-Out provisions and the mutuality of benefit in successfully achieving the performance requirements to receive Earn-Out payments, the degree of mutuality and symmetry of representations, obligations and rights of the parties under the Asset Purchase Agreement, the conditions to each party’s obligation to complete the Acquisition, and the instances in which each party is permitted to terminate the Asset Purchase Agreement.

 

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Likelihood of Completing the Acquisition . The Company’s board of directors considered the likelihood that the Acquisition will be completed, including receiving approval from the Company’s stockholders for issuance of the Acquisition Shares.

 

The Company’s board of directors also considered the potential risks of the Acquisition, including the following:

 

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IVG Business Risks . The Company’s board of directors considered the execution risk involved with IVG’s online, wholesale and retail operations. Some of these potential risks include a lack of sales in the wholesale and retail operations and current and future competitive pressures in these areas.

 

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Integration Risks . The Company’s board of directors considered the challenges inherent in the integrating IVG’s online, wholesale and retail operations including the possibility of not achieving the anticipated efficiencies and other benefits of the Acquisition.

 

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Diversion of Focus . The Company’s board of directors considered the risk of diverting management focus, employee attention and resources from other strategic opportunities and from operational matters while working to complete the Acquisition.

 

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Transaction Costs . The Company’s board of directors considered the substantial costs to be incurred in connection with the Acquisition, including the costs of integrating IVG’s online, wholesale and retail operations and the transaction expenses arising from the Acquisition.

 

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Dilution of Vapor Stockholders . The Company’s board of directors considered the immediate and substantial dilution of the equity interests and voting power of our stockholders upon completion of the Acquisition.

 

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Failure to Complete the Acquisition . The Company’s board of directors considered the risk that the Acquisition may not be completed, including the risk of being required to pay a termination fee to IVG under certain circumstances.

 

The   Company’s board of directors believed that, overall, the potential benefits of the Acquisition to the Company and its stockholders outweighed the risks considered by the Company’s board of directors.

 

The Company’s board of directors realized that there can be no assurance about future results, including results considered or expected as described in the factors listed above. It should be noted that this explanation of the Company’s board of directors’ reasoning and all other information presented in this section are forward-looking in nature and, therefore, should be read in light of the factors discussed under the heading “ Cautionary Statement Regarding Forward-Looking Statements. ”

 

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Dilution

 

The number of issued and outstanding shares of our common stock will be significantly increased by the issuance of the Acquisition Shares. As of July 31, 2014, 16,456,911 shares of our common stock were outstanding of 50,000,000 total authorized shares.  At the closing of the Acquisition, we will issue 3,300,501 of the Acquisition Shares as payment of the stock portion of the fixed purchase price, which will increase the number of outstanding shares of our common stock (as of July 31, 2014) by approximately 20%.  If we issue the 43,200 of the Acquisition Shares after the closing as reimbursement for certain of IVG’s inventory that is not part of the Acquisition and we issue all of the remaining 5,045,792 of the Acquisition Shares for Earn-Out payments then the number of outstanding shares of our common stock (as of July 31, 2014 and after giving effect to the issuance of the 3,300,501 of the Acquisition Shares at closing) will increase by approximately 26%. If the maximum number of Acquisition Shares (8,389,493) is issued under the Asset Purchase Agreement then the number of outstanding shares of our common stock will  increase (as of July 31, 2014) by approximately 51%. As a result, the percentage ownership interest that your shares represent in Vapor will be significantly reduced.

 

Material U.S. Federal Income Tax Consequences

 

We have not obtained a tax opinion from legal counsel or tax experts on the Acquisition. The Acquisition is intended for federal income tax purposes to qualify as one or more reorganizations within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. Based on the provisions of the Internal Revenue Code of 1986, as amended, existing United States Treasury regulations promulgated thereunder and administrative and judicial interpretations thereof, all as in effect as of the date hereof and all of which are subject to change (possibly with retroactive effect), we do not believe that the Acquisition will give rise to the recognition of gain or loses to us or our stockholders for U.S. federal income tax purposes.  The foregoing summary is for general information only and does not discuss any state, local, foreign or other tax consequences.

 

Anticipated Accounting Treatment

 

The Company anticipates accounting for the transaction as a business combination using the acquisition method of accounting for financial accounting purposes, whereby the estimated purchase price will be allocated to the assets and liabilities of IVG based on their estimated fair values on the closing date of the Acquisition, following Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business Combinations.

 

No Appraisal Rights

 

Holders of our common stock will not have appraisal rights under the Delaware General Corporation Law in connection with the Acquisition or the issuance of the Acquisition Shares pursuant to the Asset Purchase Agreement.

 

THE ASSET PURCHASE AGREEMENT

 

The following is a summary of the material terms of the Asset Purchase Agreement, as amended by the First Amendment to the Asset Purchase Agreement.  Copies of the Asset Purchase Agreement and the First Amendment to the Asset Purchase Agreement are attached as Exhibits A-1 and A-2, respectively, to this Information Statement and are incorporated by reference into this Information Statement. The following summary does not purport to be complete and is qualified in its entirety by reference to the Asset Purchase Agreement and the First Amendment to the Asset Purchase Agreement. You should refer to the full text of the Asset Purchase Agreement and the First Amendment to the Asset Purchase Agreement for details of the Acquisition and the terms and conditions of the Asset Purchase Agreement, as amended by the First Amendment to the Asset Purchase Agreement.

 

Also set forth below are summaries of the material terms of the Employment Agreements between Acquisition Sub and Nicolas Molina and David Epstein, the principal owners of International Vapor Group, and the Registration Rights Agreement.  Copies of the Employment Agreements are attached as Exhibit B-1 and Exhibit B-2 to this Information Statement and are incorporated by reference into this Information Statement. A copy of the Registration Rights Agreement is attached as Exhibit C to this Information Statement and is incorporated by reference in this Information Statement.  These summaries do not purport to be complete and are qualified in their entirety by reference to the Employment Agreements and the Registration Rights Agreement, as applicable. You should refer to the full text of the Employment Agreements and the Registration Rights Agreement for details of the terms and conditions of these Agreements.

 

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Description

 

Pursuant to Asset Purchase Agreement, the Company through Acquisition Sub will purchase IVG’s online, wholesale and retail operations by acquiring substantially all of IVG’s assets and assuming certain of IVG’s liabilities in the Acquisition.

 

IVG’s online, wholesale and retail operations are sometimes referred to herein as the “ Acquired Business .”

 

Acquired Assets and Assumed Liabilities

 

The acquired assets will consist of substantially all of IVG’s assets relating to the Acquired Business, including inventory (other than certain excluded inventory), accounts receivable, leasehold interests and intellectual property.  The acquired assets also include International Vapor Group’s ownership interests in its wholly-owed subsidiary through which it conducts its retail operations.  The acquired assets will not include excluded assets, such as IVG’s cash and merchant reserves.

 

The assumed liabilities will consist of all liabilities of IVG except retained liabilities. IVG will continue to be responsible for the retained liabilities after the closing of the Acquisition. Retained liabilities include, among others:

 

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all liabilities of IVG relating to or arising from indebtedness for borrowed money (estimated to be $1,300,000), any liabilities of the owners of International Vapor Group for any federal, state, local or foreign income taxes in respect of the Acquired Business arising or related to any period prior to the closing date of the Acquisition;

 

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any liabilities of IVG or any other person or entity for sales and use and payroll taxes related to the Acquired Business or acquired assets for all tax periods ending on or prior the closing date of the Acquisition and for that portion of any straddle period allocable to the portion of such period ending on the closing date of the Acquisition (to the extent not included in the calculation of IVG’s estimated net working capital at closing);

 

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all unknown liabilities up to $2,000,000;

 

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all liabilities relating to a finder’s fee agreement to which International Vapor Group is a party; and

 

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all liabilities relating to third party claims based on trademark infringement relating to the Acquired Business’ pre-closing use of the Vapor Zone ® brands.

 

Purchase Price

 

Under the terms of the Asset Purchase Agreement, the “Purchase Price” will be the sum of (x) $20,800,000 (the “ Fixed Purchase Price ”) plus (y) an earn-out aggregating up to a maximum of $29,200,000 (the “ Earn-Out ”).

 

Fixed Purchase Price

 

At the closing of the Acquisition, the Company will, through Acquisition Sub, pay the Fixed Purchase Price as follows: (i) $1.7 million in cash less any estimated net working capital shortfall if IVG’s net working capital at closing is less than negative $50,000 and (ii) $19.1 million in 3,300,501 of the Acquisition Shares (the “ Fixed Shares ”, which number of shares represents the quotient of the $19.1 million divided by $5.787 per share (the 30-trading day weighted average closing price per share of the Company’s common stock, as reported on the OTC Bulletin Board preceding May 14, 2014, the date of the Asset Purchase Agreement)).

 

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Earn-Out

 

Payments of the Earn-Out are contingent and based upon the post-closing performance of IVG’s wholesale, online operations and retail operations. Earn-Out payments are limited to $29,200,000 in 5,045,792 shares of our common stock comprising the Acquisition Shares and will be determined as follows:

 

●

Wholesale Operations . An amount equal to 200% of the audited revenues generated from IVG’s wholesale operations for the twelve (12) full calendar month period beginning on the first day of the month following the month in which the closing date occurs (the “ Earn-Out Start Date ”);

 

●

Online Operations . An amount equal to 100% of the amount by which the aggregate audited revenues generated from IVG’s online operations and the online sales of the Company and its affiliates (other than IVG’s online operations for the twelve (12) full calendar month period beginning on the Earn-Out Start Date) exceed the aggregate audited revenues generated by IVG’s online operations and the online sales of the Company for the calendar year ended December 31, 2013 subject to certain exclusions; and

 

●

Retail Operations . $50,000 for each retail store that is opened by the Company or any of its affiliates directly, or by franchisees of any of the foregoing, during the twenty four (24) months following the Earn-Out Start Date (the “ Measurement Period ”) so long as at least 75% of such retail stores that are opened during the Measurement Period generate positive cash flow for any three (3) months within any consecutive six (6) month period after being opened during the later of the Measurement Period or the twelve (12) full calendar months after expiration of the Measurement Period subject to certain exclusions.

 

Payments of the Earn-Out if and when earned will be paid by the Company, through Acquisition Sub, with up to 5,045,792 of the Acquisition Shares (the number of which will be equal to the quotient of an Earn-Out payment divided by $5.787 per share).

 

The Earn-Out, if any, shall be paid directly to the owners of International Vapor Group. 43.17% of the Earn-Out shall be paid to the owners of International Vapor Group pro rata based upon their respective ownership percentages, 40.28% of the Earn-Out shall be paid to Nicolas Molina pursuant to the terms of his Employment Agreement and 16.55% of the Earn-Out shall be paid to David Epstein pursuant to the terms of his Employment Agreement.  Messrs. Molina’s and Epstein’s Employments Agreements are described below under the heading “ –Employment Agreements. ”

 

In the event Acquisition Sub material breaches certain covenants regarding the operation of the Acquired Business after the closing of the Acquisition and such breach is either uncurable or is not cured after a 30-day notice and cure period, then the entire unpaid portion of the maximum amount of the Earn-Out ($29,200,000) from and after the date of such uncured material breach shall be deemed earned and payable in full to the owners of International Vapor Group within 10 business days thereafter.

 

As described below under “– Post-Closing Covenants-Noncompetition ” and “ –Employment Agreements” , the Earn-Out, in part, is subject to forfeiture by Messrs. Molina and Epstein and the other owners of International Vapor Group under limited circumstances.

 

Reimbursement for Certain Excluded Inventory

 

The Company may issue up to $250,000 in 43,200 shares of its common stock comprising the Acquisition Shares (which number of shares represents the quotient of the $250,000 divided by $5.787 per share) after the closing as reimbursement for certain of IVG’s inventory bearing the Vapor Zone ® brand that is not part of the Acquisition to the extent IVG is not able to sell such inventory within 120 days after the closing of the Acquisition.

 

12

 

Escrow

 

At the closing of the Acquisition, 453,430 shares of the Fixed Shares with a value of $2,624,000 will be deposited into escrow with a mutually acceptable escrow agent and will remain in escrow generally for a period of 27 months following the closing as a non-exclusive source to secure certain of IVG’s and International Vapor Group’s owner’s indemnification obligations under the Asset Purchase Agreement.  345,602 of these 453,430 shares that are to be deposited into the escrow are referred to herein as the “ General Escrow Shares .”  107,828 of these 453,430 shares that are to be deposited into the escrow are referred to herein as the “ Special Escrow Shares .”  In addition, 17,280 shares of the Fixed Shares with a value of $100,000 will be deposited into escrow following the closing as an exclusive source to reimburse the Company for up to $100,000 of post-closing costs its incurs for rebranding certain aspects of the Acquired Business.  These 17,280 shares of the Fixed Shares that are deposited into the escrow are referred to herein as the “ Rebranding Escrow Shares .”

 

Representations and Warranties

 

The Asset Purchase Agreement contains generally customary representations and warranties of each of IVG, International Vapor Group’s owners, the Company and Acquisition Sub. Certain of these representations and warranties in the Asset Purchase Agreement are qualified as to “materiality” or “material adverse effect” or “knowledge.” Further, certain of these representations and warranties are qualified by information in confidential disclosure schedules that the parties exchanged in connection with signing the Asset Purchase Agreement. While we do not believe that the schedules contain information securities laws require us to publicly disclose other than information that has already been so disclosed, the disclosure schedules contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the Asset Purchase Agreement. Accordingly, you should not rely on the representations and warranties as characterizations of the actual state of facts, since they are modified in important part by the underlying disclosure schedules. Moreover, information concerning the subject matter of the representations and warranties may have changed since the date of the Asset Purchase Agreement, which subsequent information may or may not be fully reflected in our public disclosures.

 

IVG’s representations and warranties relate to, among other things:

 

●

due organization, good standing and the requisite corporate power and authority to carry on the Acquired Business;

 

●

corporate power and authority to enter into, and consummate the transactions under, the Asset Purchase Agreement, the enforceability of the Asset Purchase Agreement;

 

●

capitalization;

 

●

ownership of the acquired assets;

 

●

the absence of violations of, or conflicts with, IVG’s governing documents, certain agreements, and applicable law of IVG as a result of entering into and performing IVG’s obligations under the Asset Purchase Agreement;

 

●

financial statements;

 

●

the absence of required governmental and third party consents in connection with the execution, delivery and performance of the Asset Purchase Agreement;

 

●

absence of undisclosed liabilities;

 

●

absence of certain changes or events;

 

●

inventories;

 

13

 

●

customers and suppliers;

 

●

tax  matters;

 

●

employee benefit matters;

 

●

environmental matters;

 

●

certain material contracts and the absence of any default under such contracts;

 

●

the absence of legal proceedings, investigations and governmental orders;

 

●

compliance with applicable laws and permits and regulatory matters; and

 

●

intellectual property.

 

The Company’s and Acquisition Sub’s representations and warranties relate to, among other things:

 

●

due organization, good standing and requisite corporate power and authority to carry on their respective business;

 

●

corporate power and authority to enter into, and consummate the transactions under, the Asset Purchase Agreement, the enforceability of the Asset Purchase Agreement;

 

●

capitalization;

 

●

the Acquisition Shares;

 

●

the absence of required governmental and third party consents in connection with the execution, delivery and performance of the Asset Purchase Agreement;

 

●

financial statements; and

 

●

filings with the SEC.

 

Pre-Closing Covenants and Agreements

 

Conduct of the Acquired Business Prior to Closing

 

During the period between the date of the Asset Purchase Agreement and the closing of the Acquisition, IVG has agreed, and the owners of International Vapor Group have agreed to cause IVG, to conduct the Acquired Business in the ordinary course consistent with past practice and use commercially reasonable efforts to keep available the services of present employees and salespersons and best efforts to preserve the goodwill, reputation and present relationships with suppliers, customers, licensors and others with which it has business relations other than actions taken with the Company’s prior written consent.

 

14

 

Exclusivity Prior to Closing

 

During the period between the date of the Asset Purchase Agreement and the closing of the Acquisition, IVG and the owners of International Vapor Group have agreed that they shall not, or they shall not permit their respective shareholders, officers, directors, advisors, agents or affiliates to:

 

●

encourage, initiate, solicit, entertain, negotiate, accept or discuss, directly or indirectly, any proposal or offer by a third party regarding (i) the sale of all or any material assets of IVG (other than the sale of inventory in the ordinary course of business consistent with past practice) or (ii) any sale of capital stock, merger, consolidation, public offering, recapitalization or other similar transaction involving IVG; or

 

●

provide any non-public financial or other confidential or proprietary information regarding IVG and/or Acquisition Sub to any person or entity (other than to the Company or Acquisition Sub or their respective representatives), or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or would reasonably be expected to result in, a third party acquisition contemplated above.

 

Further, IVG and the owners of International Vapor Group have agreed to immediately notify Vapor and Acquisition Sub if it or any of its representatives receives after the date of the Asset Purchase Agreement any indications of interest, requests for information or offers in respect of an acquisition proposal, and communicate to the Company and Acquisition Sub in reasonable detail the terms of any such indication, request or proposal (including the identity of such third party), and provide the Company and Acquisition Sub with copies of all written communications relating to any such indication, request or proposal.

 

Loans Prior to Closing

 

During the period between the date of the Asset Purchase Agreement and the closing of the Acquisition, the Company has agreed to provide International Vapor Group with up to $200,000 of purchase order inventory financing at an annual interest rate of 8% and secured by the inventory and related accounts receivable.  Also, the Company, at its discretion, has agreed to provide International Vapor Group with up to $500,000 of secured loans at an annual interest rate of 8% and personally guaranteed by the principal owners of International Vapor Group, namely Nicolas Molina, David Epstein and David Herrera, based on International Vapor Group’s submission of valid invoices for (i) certain inventory, (ii) attendance at trade shows and (iii) capital expenditures for the retail operations.  No more than $200,000 of these secured loans may be used for expenses incurred under clauses (ii) and (iii) of the preceding sentence.

 

At the closing of the Acquisition, all then outstanding loans will be included in the assumed liabilities and all asset acquired with such loan proceeds will be included in the acquired assets.  If the Asset Purchase Agreement is terminated for any reason, all then outstanding loans will be due and payable to the Company without any right of offset of any nature six (6) months after the termination of the Purchase Agreement without closing the Acquisition.

 

As of the date of this Information Statement, the Company has made loans to International Vapor Group in the aggregate principal amount of $500,000.

 

Rebranding

 

The Company and International Vapor Group have agreed that prior to the closing of the Acquisition the Acquired Business will cease using the Vapor Zone ® brands (the “ Discontinued Brand ”) and the Acquired Business, as necessary, will be rebranded with one or more new brands mutually agreed upon by the parties.   In this regard, International Vapor is obligated to use commercially reasonable efforts to resolve, through settlement, litigation or otherwise, any and all third party claims filed in court and still prosecutable (whether or not pending before any such court) against IVG at or prior to the closing of the Acquisition arising from a claim that the Acquired Business’ use of the Discontinued Brand infringes on or is likely to cause confusion with another’s mark or trade name, at International Vapor Group’s sole cost and expense, subject under certain circumstances to the prior written approval of the Company.  In addition, prior to the closing of the Acquisition, International Vapor Group is obligated, at its sole cost and expense, to actively advertise and brand market the new brand(s) in the  ordinary course of business consistent with its past practice of advertising and brand marketing the Discontinued Brand, and in addition to such ordinary course advertising and brand marketing, International Vapor Group is obligated, at its sole cost and expense, to actively advertise and brand market the new brand(s) by incurring costs and expenses up to, but not in excess of,  $50,000.

 

15

 

To the extent International Vapor Group does not complete the rebranding of the Acquired Business before the closing of the Acquisition, International Vapor Group is required to reimburse the Company for up to $100,000 of certain rebranding costs the Company incurs after the closing by releasing to the Company all or portion of the Rebranding Escrow Shares with a value equal to such rebranding costs.

 

The foregoing rebranding of the Acquired Business is referred to herein as the “ Rebranding .”

 

Real Estate Leases for New Retail Stores

 

Prior to the closing of the Acquisition, the Company has agreed to enter into up to ten (10) real estate leases for new retail stores that IVG desires to add to its retail operations and fund up to $41,000 of the associated lease security deposits and expenses for the build out of each such retail store.  The Company is required to obtain the approval of International Vapor Group before it funds any of the associated expenses for the build out of any such retail store.   If the Acquisition closes, any such real estate lease then in effect shall be included in the acquired assets and assumed liabilities, and each associated retail store shall be deemed a retail store opened during the Measurement Period for purposes of the calculation of the Earn-Out for IVG’s retail operations whether opened before or after the closing date.  If the Asset Purchase Agreement is terminated for any reason then the Company shall retain each such real estate lease then in effect and operate the associated retail store, in its sole and absolute discretion, either as (x) a franchised store of International Vapor Group pursuant to the franchise agreement then in use by International Vapor Group or (y) a non-franchised store, independent from International Vapor Group in any manner the Company deems appropriate, provided that the store is not permitted to use the Discontinued Brand or the new brand(s).

 

As of the date of this Information Statement, the Company has entered into 8 real estates lease for new retail stores.

 

Conditions to Closing the Acquisition

 

The Company’s and Acquisition Sub’s obligations to close the Acquisition are subject to the satisfaction or waiver, if applicable, by each party at or prior to the closing of the following conditions:

 

●

The representations and warranties of IVG and the owners of International Vapor Group contained in the Asset Purchase Agreement shall be true and correct in all respects as of the closing with the same force and effect as though made on and as of the closing (other than those representations and warranties that address matters only as of a particular date or only with respect to a specific period of time, which need only be accurate as of such date or with respect to such period), except where the failure of such representations and warranties to be true and correct would not have a “seller/owner material adverse effect”;

 

●

IVG and the owners of International Vapor Group shall have performed and complied with, in all material respects, all covenants and agreements required by the Asset Purchase Agreement to be performed or complied with by any of them on or prior to the closing;

 

●

No fact, event or circumstance shall have occurred which has had or could reasonably be expected to have a “seller/owner” material adverse effect;

 

●

IVG shall have obtained the required approvals of third parties;

 

●

No law, judgment, injunction or order shall be enacted, promulgated, entered or enforced by any court or governmental authority which would prohibit consummation by such party of the Acquisition;

 

●

Acquisition Sub shall have received fully executed payoff letters or UCC-3 termination statements and other terminations, pay offs and/or releases, or, at Acquisition Sub’s option, assignments, necessary to terminate, release or assign, as the case may be, all liens on the properties of IVG (including the acquired assets) and evidence of the complete satisfaction in full of all outstanding debt of IVG, the acquired assets and/or the Acquired Business; and

 

16

 

●

IVG and the owners of International Vapor Group shall have delivered or caused to be delivered certain certificates, agreements, documents and transfer and assignment instruments specified in the Asset Purchase Agreement.

 

IVG’s and the owners of International Vapor Group’s obligations to close the Acquisition are subject to the satisfaction or waiver, if applicable, by each party at or prior to the closing of the following conditions:

 

●

The representations and warranties of the Company and Acquisition Sub contained in Asset Purchase Agreement shall be true and correct in all respects as of the closing with the same force and effect as though made on and as of the closing (other than those representations and warranties that address matters only as of a particular date or only with respect to a specific period of time, which need only be accurate as of such date or with respect to such period), except where the failure of such representations and warranties to be true and correct would not have a “buyer/parent material adverse effect”;

 

●

The Company and Acquisition Sub shall have performed and complied with, in all material respects, all covenants and agreements required by the Asset Purchase Agreement to be performed or complied with by either of them on or prior to the closing;

 

●

No fact, event or circumstance shall have occurred which has had or could reasonably be expected to have a “buyer/parent” material adverse effect;

 

●

No law, judgment, injunction or order shall be enacted, promulgated, entered or enforced by any court or governmental authority which would prohibit consummation by such party of the Acquisition;

 

●

The Company shall have obtained the required approval of its stockholders for issuance of the Acquisition  Shares and NASDAQ’s approval of the listing of the Acquisition Shares on The NASDAQ Capital Market; and

 

●

The Company and Acquisition Sub, as applicable, shall have paid the cash portion of the Fixed Purchase Price and delivered the Fixed Shares portion of the Fixed Purchase Price and delivered or caused to be delivered certain certificates, documents and transfer and assignment instruments specified in the Asset Purchase Agreement.

 

Post-Closing Covenants

 

Confidentiality

 

After the closing of the Acquisition, IVG and the owners of International Vapor Group have agreed, severally and not jointly, that each such party will not, and each such party will use reasonable best efforts to cause such party’s affiliates and representatives not to, at any time directly or indirectly, without the prior written consent of the Company, disclose or use any confidential or proprietary information involving or relating to the Acquired Business, the acquired assets, the assumed liabilities or Acquisition Sub.

 

Noncompetition

 

Each of Nicolas Molina, David Epstein and David Herrera, the principal owners of International Vapor Group, have agreed, severally and not jointly, after the closing date through the five (5) year anniversary of the closing date, that neither he nor his affiliates will for his own account, jointly with another, or for or on behalf of any person or entity, directly or indirectly, anywhere in the world compete against the Acquired Business and otherwise interfere with the Acquired Business (including not soliciting employees, customers and suppliers and not making disparaging statements or communications).

 

17

 

19

 

International Vapor Group’s and its owners’ indemnification obligations for the DB Indemnity are uncapped and survive until expiration of the applicable statute of limitations.  International Vapor Group’s and its owners’ indemnification obligations for the DB Indemnity will be satisfied with cash payments.

 

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table provides information as of December 31, 2013 with respect to International Vapor Group’s non-qualified stock option plan, which was duly adopted by its stockholders on December 19, 2013. There are 5,495 shares of its common stock reserved for issuance under its equity incentive plan.

 

Plan Category		(a) Number of securities to be issued upon exercise of outstanding options, warrants, and rights				(b) Weighted-average exercise price of outstanding options, warrants and rights				(c) Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a))
Equity compensation plans approved by security holders			5,490			$	73.55				5
Equity compensation plans not approved by security holders		—				$	—				—
Total			5,490			$	73.55				5

 

 

 

 

 

 

Product Type		Size/ Puff Counts		Manufactured Suggested Retail Price
Disposable		King		$5.95
Disposable		King 2 pack		$9.95
Disposable		300		$9.95
Disposable		500		$12.95
Rechargeable		King		$19.95
Replacement Filters		5 King size		$9.95
Rechargeable		Standard		$19.95 to $79.95
Rechargeable		Deluxe		$89.95 to $189.95
Replacement Filters		5 Standard size		$12.95
Vaporizers		Liquid		$19.95 to $79.95
Vaporizers		Dry Herb		$129.95
E-Liquids		10 ml		$9.95

 

 

 

 

 

 

 

 

 

 

		Fiscal 2014								Fiscal 2013*								Fiscal 2012*
		High				Low				High				Low				High				Low
First Quarter		$	9.05			$	5.63			$	4.00			$	1.15			$	1.35			$	0.55
Second Quarter		$	6.75			$	3.90			$	6.60			$	1.95			$	1.35			$	0.55
Third Quarter (1)		$	5.09			$	4.00			$	5.85			$	3.80			$	1.50			$	0.85
Fourth Quarter			—				—			$	9.80			$	4.00			$	1.25			$	0.85

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table provides information as of December 31, 2013 with respect to our Equity Incentive Plan, which was duly adopted by our stockholders on November 24, 2009. There are 1,800,000 shares of our common stock reserved for issuance under our Equity Incentive Plan.

Plan Category			(a) Number of securities to be issued upon exercise of outstanding options, warrants, and rights				(b) Weighted-average exercise price of outstanding options, warrants and rights				(c) Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a))
Equity compensation plans approved by security holders				219,500			$	1.83				1,580,500
Equity compensation plans not approved by security holders				900,000			$	2.25				—
Total				1,119,500			$	2.17				1,580,500

 

 

 

 

 

 

 

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth information regarding the beneficial ownership of our common stock as of the record date by:

 

●

each person whom we know beneficially owns more than 5% of our common stock;

 

●

each of our named executive officers and directors; and

 

●

all of our executive officers and directors as a group.

 

Beneficial ownership and percentage ownership are determined in accordance with the rules and regulations of the SEC and include voting or investment power with respect to shares of stock. This information does not necessarily indicate beneficial ownership for any other purpose. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to warrants, options and other convertible securities held by that person that are currently convertible or exercisable, or convertible or exercisable within 60 days of the record date are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. The percentage of beneficial ownership is based on 16,456,911 shares of common stock outstanding on the record date.

 

47

 

 

Unless otherwise indicated and subject to community property laws where applicable, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. Unless otherwise indicated, the address for each person is our address at 3001 Griffin Road, Dania Beach, Florida 33312.

Name and Address of Beneficial Owner(1)			Number of Shares of Common Stock Beneficially Owned				Percentage of Common Stock Beneficially Owned
Greater than 5% Stockholders:
Doron Ziv (2)				1,626,822				9.7	%
Jeffrey Holman (3)				1,281,110				7.7	%
Kevin Frija (4)				1,201,439				7.2	%
Adam Frija (5)				1,012,944				6.1	%
Isaac Galazan (6)				963,469				5.8	%
Austin W. Marxe, David M. Greenhouse  and Adam C. Stettner (7)				1,482,026				9.0	%
Named Executive Officers and Directors (not otherwise included above):
Harlan Press (8)				143,665				*
Ryan Kavanaugh (9)				100,000				2.4	%
Robert J. Barrett III (9)				--				--
Angela Courtin (9)				--				--
Frank E. Jaumot (9)				2,000				*
All executive officers and directors as a group (7 persons)				1,568,108				9.4	%

 

*	Represents ownership of less than 1%.

(1)	This table and the information in the notes below are based upon information supplied by the named persons, including reports and amendments thereto filed on Schedule 13D, Schedule 13G, Form 3 and Form 4 with the SEC.

(2)

Includes 120,000 shares issuable upon exercise of currently exercisable stock options and 3,101 shares issuable upon exercise of currently exercisable common stock purchase warrants. The named person is an employee of our company and serves as a director of our operating subsidiary Smoke Anywhere USA, Inc.

(3)	Includes 120,000 shares issuable upon exercise of currently exercisable stock options. The named person serves as a member of our Board of Directors and as our Chief Executive Officer and President and serves as a director of our operating subsidiary Smoke Anywhere USA, Inc.

(4)	Includes 180,000 shares issuable upon exercise of currently exercisable stock options and 4,475 shares issuable upon exercise of currently exercisable common stock purchase warrants. The named person is our former Chief Executive Officer and a former member of our Board of Directors.

(5)	Includes 120,000 shares issuable upon exercise of currently exercisable stock options. The named person serves as our director of licensing and business development and is the brother of Mr. Kevin Frija, our former Chief Executive Officer.

(6)	Includes 120,000 shares issuable upon exercise of currently exercisable stock options. The named person serves as a director of our operating subsidiary Smoke Anywhere USA, Inc.

(7)

Consists of (i) 1,037,410 shares owned by Special Situations Fund III QP, L.P., or SSFQP, (ii) 296,411 shares owned by Special Situations Cayman Fund, L.P., or SSF Cayman, and (iii) 148,205 shares owned by Special Situations Private Equity Fund, L.P., or SSF Private Equity. MGP Advisers Limited Partnership, or MGP, is the general partner of SSFQP. AWM Investment Company, Inc., or AWM, is the general partner of MGP, the general partner of and investment adviser to SSF Cayman and the investment adviser to SSF Private Equity. Austin W. Marxe, David M. Greenhouse and Adam C. Stettner are the principal owners of MGP and AWM. Through their control of MGP and AWM, Messrs. Marxe, Greenhouse and Stettner share voting and investment control over the portfolio securities of each of the funds listed above. The address of Messrs. Marxe. Greenhouse and Stettner is 527 Madison Avenue, Suite 2600, New York, NY 10022.

(8)	Includes 30,000 shares issuable upon exercise of currently exercisable stock options and 3,101 shares issuable upon exercise of currently exercisable common stock purchase warrants. The named person serves as our Chief Financial Officer.

(9)	The named person serves as a member of our Board of Directors.

 

48

 

INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON

 

None of the Company’s executive officers or directors has a substantial interest, direct or indirect, by security holdings or otherwise in the Acquisition which is not shared by all of the Company’s stockholders.

 

DELIVERY OF MATERIALS

 

Securities and Exchange Commission rules permit a single Information Statement to be sent to any household at which two or more stockholders reside if they appear to be members of the same family. This procedure, referred to as householding, reduces the volume of duplicate information stockholders receive and reduces mailing and printing expenses. A number of brokerage firms have instituted householding. In accordance with a notice that is being sent to certain beneficial stockholders (who share a single address) only one Information Statement will be sent to that address unless any stockholder at that address gave contrary instructions. We will promptly deliver a copy of such materials to any stockholder requesting the same. However, if any such beneficial stockholder residing at such an address wishes to receive a separate Information Statement or if any stockholders who share an address wish to receive a single set of annual reports or information statements in the future, please contact Island Stock Transfer (our transfer agent & registrar) in writing by mailing to 15500 Roosevelt Boulevard, Suite 301, Clearwater, Florida 33760 or by faxing your request to 727-289-0069.   You can also contact us by calling 888-766-5351.

 

ADDITIONAL INFORMATION

 

The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and files reports and other information with the SEC. Such reports and other information filed by the Company may be inspected and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.20549.  Please call the SEC at 1-800-SEC-0330 for further information on the operation of the SEC’s public reference rooms. The SEC also maintains a website that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC. The address of the SEC’s web site is http://www.sec.gov .

 

49

 

F

INDEX TO FINANCIAL STATEMENTS OF IVG

		Page
Unaudited Financial Statements – March 31, 2014 and 2013
Condensed Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013 (audited)		F-4
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013		F-5
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013		F-6
Notes to Unaudited Condensed Consolidated Financial Statements		F-7
Audited Financial Statements – December 31, 2013 and 2012
Report of Kaufmann, Rossin & Co., Independent Registered Public Accounting Firm		F-15
Audited Consolidated Balance Sheets as of December 31, 2013 and December 31, 2012		F-17
Audited Consolidated Statements of Operations for the years ended December 31, 2013 and December 31, 2012		F-18
Audited Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2013 and December 31, 2012		F-19
Audited Consolidated Statements of Cash Flows for the years ended December 31, 2013 and December 31, 2012		F-20
Notes to Audited Consolidated Financial Statements		F-22

 

F-1

 

INDEX TO FINANCIAL STATEMENTS OF THE COMPANY

 

		Page
Unaudited Financial Statements – March 31, 2014 and 2013
Condensed Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013 (audited)		F-30
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013		F-31
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013		F-32
Notes to Unaudited Condensed Consolidated Financial Statements		F-33
Audited Financial Statements – December 31, 2013 and 2012
Report of Marcum LLP., Independent Registered Public Accounting Firm		F-47
Audited Consolidated Balance Sheets as of December 31, 2013 and December 31, 2012		F-48
Audited Consolidated Statements of Operations for the years ended December 31, 2013 and December 31, 2012		F-49
Audited Consolidated Statements of Changes in Stockholders’ Equity (Deficiency) for the years ended December 31, 2013 and December 31, 2012		F-50
Audited Consolidated Statements of Cash Flows for the years ended December 31, 2013 and December 31, 2012		F-51
Notes to Audited Consolidated Financial Statements		F-52

 

F-2

 

 

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

Unaudited Pro Forma Combined Balance Sheet as of March 31, 2014		F-78
Unaudited Pro Forma Combined Statement of Operations for the year ended December 31, 2013		F-80
Unaudited Pro Forma Combined Consolidated Statement of Operations for the three months ended March 31, 2014		F-81

 

F-3

 

 

 

 

 

See notes to condensed consolidated financial statements

 

F-5