As
filed with the Securities and Exchange Commission on July 10, 2015
Registration
Statement No. 333- 204599
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Amendment
No. 1 to
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF 1933
VAPOR
CORP.
(Exact
name of registrant as specified in its charter)
Delaware |
|
2100 |
|
84-1070932 |
(State
or other jurisdiction of
incorporation
or organization) |
|
(Primary
Standard Industrial
Classification
Code Number) |
|
(I.R.S.
Employer
Identification
Number) |
3001
Griffin Road
Dania
Beach, Florida 33312
(888)
766-5351
(Address
and telephone number of registrant’s principal executive offices)
Jeffrey
Holman
Chief
Executive Officer
Vapor
Corp.
3001
Griffin Road
Dania
Beach, Florida 33312
(888)
766-5351
(Name,
address, including zip code, and telephone number, including area code, of agent for service)
Copies
to:
Brian
S. Bernstein |
|
Ralph
V. De Martino |
Michael
D. Harris |
|
Cavas
S. Pavri |
Nason,
Yeager, Gerson, White & Lioce, P.A. |
|
Schiff
Hardin LLP |
1645
Palm Beach Lakes Blvd., Suite 1200 |
|
901
K Street, NW Suite 700 |
West
Palm Beach, Florida 33401 |
|
Washington,
DC 20001 |
(561)
686-3307 |
|
(202)
778–6400 |
Approximate
date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If
any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933 check the following box: [X]
If
this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration statement number of the earlier effective registration statement
for the same offering. [ ]
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ] |
|
Accelerated
filer [ ] |
Non-accelerated
filer [ ] (Do not check if a smaller reporting company) |
|
Smaller reporting
company [X] |
The
registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until
the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities
and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
PRELIMINARY
PROSPECTUS |
|
SUBJECT
TO COMPLETION |
|
DATED
JULY 10, 2015 |
VAPOR
CORP.
Up
to 3,800,000 Units Consisting of
Shares
of Series A Convertible Preferred Stock and
Series
A Warrants
We are offering by this prospectus up to 3,800,000
units, with each unit consisting of one-fourth of a share of our Series A Convertible Preferred Stock convertible
into five shares of common stock and 10 Series A Warrants each exercisable into one share of common stock (the “Units”).
The Units are being offered at a price of $[_____] per Unit. The Units, the Series A Convertible Preferred Stock and the Series
A Warrants will not be certificated.
The
shares of Series A Convertible Preferred Stock and the Series A Warrants will automatically separate six months after the date
of this prospectus. However, the shares of Series A Convertible Preferred Stock and the Series A Warrants will separate prior
to the expiration of the six-month period if at any time after 30 days from the date of this prospectus either (i) the closing
price of our common stock is greater than $[_____] per share for 10 consecutive trading days (a “Trading Separation Trigger”),
(ii) the Series A Warrants are exercised for cash (solely with respect to the Units that included the exercised Series A Warrants)
(a “Cash Warrant Exercise Trigger”) or (iii) the Units are delisted (a “Delisting Trigger”) from the Nasdaq
Capital Market for any reason (such earlier date, the “Separation Trigger Date”). We refer to this separation prior
to the six-month period as an Early Separation. The Units will become separable: (i) 15 days after the Trading Separation Trigger
date or (ii) immediately after the Series A Warrants are exercised for cash (solely with respect to the Units that included the
exercised Series A Warrants) or a Delisting Trigger. In the event of an Early Separation, the Preferred Stock will become convertible
into common stock: (i) immediately upon the separation of the Unit if a Trading Separation Trigger or a Delisting Trigger occurs,
or (ii) on the six month anniversary of the date of this prospectus (unless an earlier Trading Separation Trigger or Delisting
Trigger occurs) on the occurrence of a Cash Warrant Exercise Trigger.
Each one-fourth of a share of Series
A Convertible Preferred Stock will be convertible at the option of the holder into five shares of common stock upon the
separation of the Units , provided that upon a Cash Warrant Exercise Trigger the Series A Convertible Preferred Stock will not
be convertible until six-months after the date of this prospectus (unless an Early Separation occurs due to a Trading Separation
Trigger or Delisting Trigger). The Series A Warrants have an exercise price of $[_____]. The Series A Warrants will expire
on the fifth anniversary of the date of this prospectus. This prospectus also covers the shares of common stock issuable from
time to time upon the exercise of the Series A Warrants or the conversion of the Series A Convertible Preferred Stock. This prospectus
also covers the Units and underlying securities issuable upon exercise of the unit purchase option to be issued to the underwriters.
Our
common stock is listed on the Nasdaq Capital Market under the symbol “VPCO.” On July 9, 2015, the last reported
sales price of our common stock on the Nasdaq Capital Market was $1.39 per share. On July 8, 2015, the Company
effectuated a one-for-five reverse stock split of its common stock. There is no market for our Units. We have applied for
the listing of the Units on the Nasdaq Capital Market under the trading symbol “VPCOU”. If this offering is completed,
trading of the Units will not commence until the closing of the offering, which we expect to occur on [_____], 2015. We do not
intend to list the Series A Convertible Preferred Stock or the Series A Warrants on the Nasdaq Capital Market, any other national
securities exchange or any other nationally recognized trading system.
Before
investing in our Units, preferred stock and warrants exercisable for common stock, you should carefully read the discussion
of “Risk Factors” beginning on page 5. Any investment in our company is highly speculative and could result in the
loss of your entire investment. Neither the Securities and Exchange Commission nor any state securities commission has approved
or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
|
|
Per
Unit |
|
Total |
Public
offering price |
|
|
|
|
Underwriting
commissions (1) |
|
|
|
|
Offering
proceeds to us, before expenses |
|
|
|
|
(1) |
Does
not include other compensation payable to Dawson James Securities, Inc., the representative
of the underwriters. See “Underwriting.”
|
The
underwriters are selling the Units in this offering on a “best efforts” basis. The underwriters are not required to
sell any specific number or dollar amount of Units, but will use their best efforts to sell the securities offered. Because this
is a best efforts offering, the underwriters do not have an obligation to purchase any securities, and, as a result, there is
a possibility that we may not receive any proceeds from the offering.
The
underwriters expect to deliver the securities to investors upon payment approximately three business days following acceptance
of an order.
This
offering shall terminate upon the earlier of [_____________], 2015 or the receipt of a notice of termination from the underwriters.
Dawson
James Securities, Inc.
The
date of this prospectus is [_____], 2015.
TABLE
OF CONTENTS
We
have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus
or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for,
and can provide no assurance as to the reliability of, any other information that others may give to you. The information contained
in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or
any sale of our common stock.
Unless
the context requires otherwise references to “Vapor”, the “Company,”
“we,” “us” or “our” refer to Vapor Corp., a Delaware corporation. When we refer to
“Smoke Anywhere” we are referring to Smoke Anywhere USA, Inc., our wholly-owned subsidiary. When we refer to
Vaporin, we are referring to Vaporin, Inc., a company we merged with in March 2015. All warrant, option, common stock and
per share of common stock information in this prospectus gives effect to the 1-for-5 reverse split of our common stock
effectuated on July 8, 2015.
PROSPECTUS
SUMMARY
The
following information is a summary of the prospectus and it does not contain all of the information you should consider before
investing in our securities. You should read the entire prospectus carefully, including the “Risk Factors” section
and our financial statements and the notes relating to the financial statements, before making an investment decision.
Our
Company
We
operate nine Florida-based vape stores (and expects to open two more in the next three weeks) and are focusing on
expanding the number of Company operated stores as well as launching a franchise program. We also design, market, and distribute
vaporizers, e-liquids, electronic cigarettes and accessories under the emagine vaporTM, Krave®, Fifty-One® (also known
as Smoke 51), Vapor X®, Hookah Stix® and Alternacig® brands. We also design and develop private label brands for our
distribution customers. Third party manufacturers manufacture our products to meet our design specifications. We market our products
as alternatives to traditional tobacco cigarettes and cigars. In 2014, as a response to market product demand changes, Vapor began
to shift its primary focus from electronic cigarettes to vaporizers. “Vaporizers” and “electronic cigarettes,”
or “e-cigarettes,” are battery-powered products that enable users to inhale nicotine vapor without smoke, tar, ash,
or carbon monoxide.
We
offer our vaporizers and e-cigarettes and related products through our vape stores , online, to retail channels through
our direct sales force, and through third party wholesalers, retailers and value-added resellers. Retailers of our products include
small-box discount retailers, big-box retailers, gas stations, drug stores, convenience stores, and tobacco shops and kiosk locations
in shopping malls throughout the United States. Vapor leverages its ability to design, market and develop multiple vaporizer and
e-cigarette brands and to bring those brands to market through its multiple distribution channels including the vape stores, online
and through retail operations operated by third parties. The Company’s business strategy is currently focused on a multi-pronged
approach to diversify our revenue streams to include the Vape Store brick-and-mortar retail locations which Vaporin had successfully
deployed.
Our
Corporate Information
The
Company was originally incorporated under the name Consolidated Mining International, Inc. in 1985. On November 5, 2009, the Company
acquired Smoke Anywhere a distributor of electronic cigarettes, in a reverse triangular merger. On January 7, 2010, the Company
changed its name to Vapor Corp. The Company reincorporated in the State of Delaware from the State of Nevada effective on December
31, 2013. On March 3, 2015, the Company merged with Vaporin and was the surviving and controlling entity.
Our
executive offices are located at 3001 Griffin Road, Dania Beach, Florida 33312, and our telephone number is (888) 766-5351. Our
website is located at www.vapor-corp.com. The information contained on, or that can be accessed through, our website is not incorporated
by reference in this prospectus and should not be considered a part of this prospectus.
THE
OFFERING
Price
per Unit. |
|
$[____]
per Unit. |
|
|
|
Securities
we are offering; Separation of the Units
|
|
Up
to 3,800,000 Units. Each Unit consists of one-fourth of a share of Series
A Convertible Preferred Stock, convertible into five shares of common stock and
10 Series A Warrants each exercisable for one share of common stock.
The shares
of Series A Convertible Preferred Stock and the Series A Warrants will automatically separate six months after the date of this
prospectus. However, the shares of Series A Convertible Preferred Stock and the Series A Warrants will separate prior to the expiration
of the six-month period if at any time after 30 days from the date of this prospectus there is an Early Separation. The Units
will become separable: (i) 15 days after the Trading Separation Trigger date or (ii) immediately after a Cash Warrant Exercise
Trigger (solely with respect to the Units that included the exercised Series A Warrants) or a Delisting Trigger. In the event
of an Early Separation, the Preferred Stock will become convertible into common stock: (i) immediately upon a Trading Separation
Trigger or a Delisting Trigger, or (ii) on the six month anniversary of the date of this prospectus if the separation occurs
due to a Cash Warrant Exercise Trigger (unless an earlier Trading Separation Trigger or Delisting Trigger occurs ).
We are also registering the shares of common stock issuable upon conversion of the Series A Convertible Preferred Stock and the
exercise or exchange of the Series A Warrants.
|
|
|
|
Series A Convertible
Preferred Stock we are offering |
|
Each
one-fourth of a share of Series A Convertible Preferred Stock will be convertible into
five shares of common stock upon the separation of the Units, provided that upon a Cash
Warrant Exercise Trigger the Series A Convertible Preferred Stock will not be convertible
until six-months after the date of this prospectus (unless an Early Separation occurs
due to a Trading Separation Trigger or Delisting Trigger). For additional information,
see “Description of Capital Stock—Preferred Stock Included in the Units Offered
Hereby” on page 56 of this prospectus.
|
|
|
|
Series A Warrants
we are offering |
|
Each
Series A Warrant is exercisable for one share of common stock. The Series A Warrants have an exercise price of $[___] and
are exercisable upon the separation of the Units ; provided they may be exercised for cash 30 days from the date of this
prospectus, which will cause a Cash Warrant Exercise Trigger. The Series A Warrants will expire on the fifth anniversary
of the date of this prospectus. For additional information, see “Description of Capital Stock—Warrants Included
in the Units Offered Hereby” on page 56 of this prospectus. |
|
|
|
Best Efforts |
|
The
underwriters are selling the Units offered in this prospectus on a “best efforts” basis and are not required to
sell any specific number or dollar amount of the Units offered by this prospectus, but will use their best efforts to sell
the Units. |
|
|
|
Common stock
outstanding before this offering |
|
7, 600,657
shares
|
|
|
|
Common stock
to be outstanding immediately after this offering |
|
7,600,657 ,
which assumes no conversion of the Series A Convertible Preferred Stock or exercise of the Series A Warrants. |
|
|
|
Use of proceeds |
|
Assuming
we complete the maximum offering, we estimate that the net proceeds from this offering
will be approximately $[_______] million, at a public offering price of $[_______] per
Unit, after deducting the underwriting commissions and estimated offering expenses payable
by us. Since this is a “best efforts” offering, there is no assurance that
any Units will be sold, and therefore no assurance that there will be any proceeds. We
intend to use the net proceeds from this offering as follows:
|
|
|
|
|
|
|
(i) |
approximately
$4.97 million to repay indebtedness; |
|
|
|
|
|
|
(ii) |
approximately
$[_______] million to acquire and/or build vape stores; |
|
|
|
|
|
|
(iii) |
approximately
$[_______] million in sales and marketing expenses; and |
|
|
|
|
|
|
(iv) |
the
remaining proceeds, if any, will be used for general corporate purposes, including working capital. See “Use of Proceeds”
for a more complete description of the intended use of proceeds from this offering. |
|
|
|
Risk Factors |
|
Investing
in our securities involves substantial risks. You should read the “Risk Factors” section starting on page 5 for
a discussion of factors to consider carefully before deciding to invest in our securities. |
|
|
|
Nasdaq
Capital Market symbol for our common stock |
|
VPCO |
|
|
|
Proposed Nasdaq
Capital Market symbol for our Units |
|
We
intend to apply for listing of the Units on the Nasdaq Capital Market under the symbol “VPCOU”. No assurance can
be given that such listing will be approved or that a trading market will develop. |
The number
of shares of our common stock outstanding before and after this offering, as set forth in the table above, is based on 6,727,152
shares outstanding as of March 31, 2015 and excludes as of that date:
|
● |
up
to 19,000,000 shares of common stock issuable upon the full conversion of the Series
A Convertible Preferred Stock offered hereby and up to 38,000,000 shares of common stock
upon the full exercise of the Series A Warrants assuming the warrants are exercised for
cash (if the warrants are exercised on a cashless basis as described in “Description
of Capital Stock – Warrant Included in the Units Offered Hereby” the number
of shares of common stock issuable is indeterminate);
|
|
|
|
|
● |
up
to 950,000 shares of common stock issuable upon the full conversion of the Series A Convertible
Preferred Stock offered hereby and up to 1,900,000 shares of common stock upon the full
exercise of the Series A Warrants assuming the warrants are exercised for cash included
in the unit purchase option to be issued to the representative of the underwriters in
connection with this offering (if the warrants are exercised on a cashless basis as described
in “Description of Capital Stock – Warrant Included in the Units Offered
Hereby” the number of shares of common stock issuable is indeterminate);
|
|
|
|
|
● |
248,567
shares of common stock issuable upon the exercise of outstanding stock options; |
|
|
|
|
● |
841,981
shares of common stock issuable upon the full exercise of previously issued warrants to purchase shares of common stock; |
|
|
|
|
● |
378,047 shares of common stock issuable upon
the delivery of fully vested restricted stock units;
|
|
|
|
|
● |
358,682
shares of our common stock underlying outstanding convertible notes; and |
|
|
|
|
● |
38,000,000 shares of common stock issuable
upon exercise of the warrants issued to the public in connection with this offering. |
Unless otherwise
indicated, all information in this prospectus:
|
● |
assumes 7,600,657 shares
of our common stock outstanding immediately prior to the closing of this offering;
|
|
|
|
|
● |
assumes
no exercise of the representative’s unit purchase option; and |
|
|
|
|
● |
assumes
no exercise of any outstanding options or warrants to purchase common stock. |
SUMMARY
FINANCIAL DATA
The
summary financial data set forth below should be read in conjunction with our financial statements and the related notes, “Selected
Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this prospectus.
We
derived the statement of operations data for the fiscal years ended December 31, 2014 and 2013 and balance sheet data as of December
31, 2014 and 2013 from our audited consolidated financial statements appearing elsewhere in this prospectus. We derived the statement
of operations data for the three months ended March 31, 2015 and 2014 and balance sheet data as of March 31, 2015 from our unaudited
condensed consolidated financial statements appearing elsewhere in this prospectus.
| |
Years
Ended December
31, | | |
Three
Months Ended March
31, | |
| |
2014 | | |
2013 | | |
2015 | | |
2014 | |
| |
| | |
| | |
(unaudited) | |
| |
| |
Statement of Operations Data: | |
| | | |
| | | |
| | | |
| | |
Sales, Net | |
$ | 15,279,859 | | |
$ | 25,990,228 | | |
$ | 1,468,621 | | |
$ | 4,792,544 | |
Cost of Goods
Sold | |
| 14, 497 ,254 | | |
| 16,300,333 | | |
| 1,651,110 | | |
| 3,831,928 | |
| |
| | | |
| | | |
| | | |
| | |
Gross (Loss) Profit | |
| 782,605 | | |
| 9,689,895 | | |
| (182,489 | ) | |
| 960,616 | |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative | |
| 11,126,759 | | |
| 6,464,969 | | |
| 3,243,189 | | |
| 2,769,726 | |
Advertising | |
| 2,374,329 | | |
| 2,264,807 | | |
| 105,177 | | |
| 367,615 | |
| |
| | | |
| | | |
| | | |
| | |
Total operating
expenses | |
| 13,501,088 | | |
| 8,729,776 | | |
| 3,348,366 | | |
| 3,137,341 | |
| |
| | | |
| | | |
| | | |
| | |
Operating (loss)
income | |
| (12,718,483 | ) | |
| 960,119 | | |
| (3,530,855 | ) | |
| (2,176,725 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other expense | |
| | | |
| | | |
| | | |
| | |
Induced conversion expense | |
| - | | |
| (299,577 | ) | |
| - | | |
| - | |
Amortization of deferred financing costs | |
| (17,458 | ) | |
| - | | |
| (34,917 | ) | |
| - | |
Change in fair value of derivative liabilities | |
| - | | |
| - | | |
| (37,965 | ) | |
| - | |
Interest expense | |
| (348,975 | ) | |
| (383,981 | ) | |
| (378,775 | ) | |
| (28,434 | ) |
Interest income | |
| - | | |
| - | | |
| 1,316 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Total other expenses | |
| (366,433 | ) | |
| (683,558 | ) | |
| (450,341 | ) | |
| (28,434 | ) |
| |
| | | |
| | | |
| | | |
| | |
(LOSS) INCOME BEFORE INCOME TAX (EXPENSE)
BENEFIT | |
| (13,084,916 | ) | |
| 276,561 | | |
| (3,981,196 | ) | |
| (2,205,159 | ) |
Income tax (expense) benefit | |
| (767,333 | ) | |
| 524,791 | | |
| - | | |
| 752,400 | |
| |
| | | |
| | | |
| | | |
| | |
NET (LOSS) INCOME | |
$ | (13,852,249 | ) | |
$ | 801,352 | | |
$ | (3,981,196 | ) | |
$ | (1,452,759 | |
| |
| | | |
| | | |
| | | |
| | |
BASIC (LOSS) EARNINGS PER COMMON SHARE | |
$ | ( 4.22 | ) | |
$ | 0.31 | | |
$ | ( 0.89 | ) | |
$ | ( 0.45 | ) |
| |
| | | |
| | | |
| | | |
| | |
DILUTED (LOSS) EARNINGS PER COMMON SHARE | |
$ | ( 4.22 | ) | |
$ | 0.30 | | |
$ | ( 0.89 | ) | |
$ | ( 0.45 | ) |
| |
| | | |
| | | |
| | | |
| | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC | |
| 3,283,030 | | |
| 2,563,697 | | |
| 4,494,855 | | |
| 3,253,550 | |
| |
| | | |
| | | |
| | | |
| | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – DILUTED | |
| 3,283,030 | | |
| 2,637,273 | | |
| 4,494,855 | | |
| 3,253,550 | |
| |
As
of December 31, | | |
As
of |
|
| |
2014 | | |
2013 | | |
March
31, 2015 | |
| |
| | | |
| | | |
| (unaudited)
| |
Balance Sheet Data: | |
| | | |
| | | |
| | |
Cash | |
$ | 471,194 | | |
$ | 6,570,215 | | |
$ | 1,911,199 | |
Working capital (deficit)
| |
| 127,874 | | |
| 11,657,615 | | |
| (811,970 | ) |
Intangibles assets, net of accumulated depreciation | |
| - | | |
| - | | |
| 2,058,423 | |
Goodwill | |
| - | | |
| - | | |
| 15,654,484 | |
Total assets | |
| 4,928,483 | | |
| 13,962,375 | | |
| 24,052,575 | |
Senior convertible notes payable –
related parties, net of debt discount | |
| 156,250 | | |
| - | | |
| 468,750 | |
Convertible notes, net of debt discount | |
| - | | |
| - | | |
| 517,579 | |
Notes payable – related party | |
| - | | |
| - | | |
| 1,000,000 | |
Term Loan | |
| 750,000 | | |
| 478,847 | | |
| 523,727 | |
Total stockholders’ equity | |
$ | 811,810 | | |
$ | 11,751,584 | | |
$ | 17,519,578 | |
RISK
FACTORS
An
investment in our securities involves a high degree of risk. Before you invest in our securities, you should give careful consideration
to the following risk factors, in addition to the other information included in this prospectus, including our financial statements
and related notes, before deciding whether to invest in our securities. The occurrence of any of the adverse developments described
in the following risk factors could materially and adversely harm our business, financial condition, results of operations or
prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Our
ability to continue as a going concern is in substantial doubt absent obtaining adequate new debt or equity financing, successful
completion of this offering or generating sufficient revenue from operations.
Our
liquidity and capital resources have decreased significantly as a result of our net operating losses. Although we completed a
Private Placement and received net proceeds of approximately $1.46 million as of June 22, 2015 and have taken other actions
to manage our cash on hand and working capital and to increase cash flows from operating and financing activities, there is no
assurance we will have sufficient liquidity and capital resources to fund our business. As of March 31, 2015, we had negative
working capital of approximately $(811,970) compared to $127,874 at December 31, 2014, a decrease of approximately $940,000. Our
consolidated financial statements for the year ended December 31, 2014 indicate there is substantial doubt about our ability to
continue as a going concern as we require additional equity and/or debt financing to continue our operations. As of the date of
this prospectus, we believe we have enough cash on hand to fund our operations for three months.
The underwriters are offering
the Units on a “best efforts” basis. The underwriters are not required to sell any specific number or dollar amount
of Units, but will use their best efforts to sell the Units. As a “best efforts” offering, there can be no assurance
that the offering contemplated hereby will ultimately be consummated or will result in any proceeds being made to us. The success
of this offering will impact our ability to finance operations over the next 12 months. If no Units are sold in this offering,
or if we sell only a minimum number of Units yielding insufficient gross proceeds, we may be unable to successfully fund our operations,
or execute on our business plan. This would result in a material adverse effect on our business, prospects, financial condition,
and results of operations.
We
have incurred losses in the past and cannot assure you that we will achieve or maintain profitable operations.
As
of March 31, 2015, we had an accumulated deficit of approximately $19.2 million. Our accumulated deficit is primarily due
to, among other reasons, the establishment of our business infrastructure and operations, stock-based compensation expenses
and increases in our marketing expenditures. Additionally, Vapor did not anticipate the shift from e-cigarettes which caused
in part the large losses beginning in 2014. For the three months ended March 31, 2015 and 2014, we had net losses of
$3,981,196 and $1,452,759, respectively. For the year ended December 31, 2014, we had a net loss of $13,852,249 compared to
net income of $801,352 for the year ended December 31, 2013. Unless we raise at least $11 million in this offering,
there is no assurance we will have sufficient liquidity and capital resources available to fund our business for the next
12 months. Our liquidity and capital resources have decreased significantly as a result of the net operating losses we
incurred during the year ended December 31, 2014. We cannot assure you that we will be able to generate operating profits in
the future on a sustainable basis or at all as we continue to expand our infrastructure, open additional retail stores,
further develop our marketing efforts and otherwise implement our growth initiatives. Working capital limitations continue to
impinge on our day-to-day operations, thus contributing to continued operating losses.
Because
of changes in our industry, it is difficult to accurately predict our future sales and appropriately budget our expenses.
We
acquired Smoke Anywhere, a distributor of electronic cigarettes, in November 2009 and Vaporin in March 2015. Smoke Anywhere commenced
its business in 2008 and Vaporin commenced its operations in 2013. Because our industry is still evolving, it is difficult to
accurately predict our future sales and appropriately budget our expenses. Additionally, our operations will be subject to risks
inherent in the establishment of a developing new business as well as a new business model of deploying new vape stores, including,
among other things, efficiently deploying our capital, costs or difficulties relating to the integration of the merger with Vaporin,
developing our products, opening retail stores, developing and implementing our marketing campaigns and strategies and developing
brand awareness and acceptance of our products. Our ability to generate future sales will be dependent on a number of factors,
many of which are beyond our control, including the pricing of competing products, overall demand for our products, changes in
consumer preferences, market competition and government regulation. Assuming we are successful in raising funds in this offering,
we will expand our vape stores and marketing and advertising campaigns and operational expenditures in anticipation of
future sales growth. If our sales do not increase as anticipated, we could incur significant losses due to our higher infrastructure
expense levels if we are not able to decrease our advertising and operating expenses in a timely manner to offset any shortfall
in future sales.
The
potential regulation of vaporizers and electronic cigarettes by the United States Food and Drug Administration may materially
adversely affect our business.
On
April 24, 2014, the United States Food and Drug Administration, or the FDA, released proposed rules that would extend its
regulatory authority to vaporizers, electronic cigarettes and certain other tobacco products under the Family Smoking Prevention
and Tobacco Control Act of 2009, or the Tobacco Control Act. Our references to electronic cigarettes in these risk factors
are intended to include vaporizers, unless otherwise clear from the context. We note that the proposed rules would require
that electronic cigarette manufacturers (i) register with the FDA and report electronic cigarette product and ingredient listings;
(ii) market new electronic cigarette products only after FDA review; (iii) only make direct and implied claims of reduced risk
if the FDA confirms that scientific evidence supports the claim and that marketing the electronic cigarette product will benefit
public health as a whole; (iv) not distribute free samples; (v) implement minimum age and identification restrictions to prevent
sales to individuals under age 18; (vi) include a health warning; and (vii) not sell electronic cigarettes in vending machines,
unless in a facility that never admits youth.
More
recently, on July 1, 2015, the FDA published a document entitled “Advanced Notice of Proposed Rulemaking,” or the
Advance. Through the Advance, the FDA solicited public comments on whether it should issue rules with respect to nicotine exposure
warning and child-resistant packaging for e-liquids containing nicotine. Following public comment, the FDA may issue proposed
rules in furtherance of the purposes outlined in the Advance and ultimately pass the rules as proposed or in modified form.
It
is not known how long the regulatory process to finalize and implement any of these rules may take. Accordingly, although we cannot
predict the content of any final rules from the proposed rules or the impact they may have, we believe that if the final rules
enacted are materially more stringent then the proposed rules they could have a material adverse effect on our business, financial
conditions and results of operations.
For
a description of risks related to other government regulations, please see “Risks Related to Government Regulation”
in this Section.
The
recent development of electronic cigarettes has not allowed the medical profession to study the long-term health effects of electronic
cigarette use.
Because
electronic cigarettes were recently developed the medical profession has not had a sufficient period of time to study the long-term
health effects of electronic cigarette use. Currently, therefore, there is no way of knowing whether or not electronic cigarettes
are safe for their intended use. If the medical profession were to determine conclusively that electronic cigarette usage poses
long-term health risks, electronic cigarette usage could decline, which could have a material adverse effect on our business,
results of operations and financial condition.
Our
business, results of operations and financial condition could be adversely affected if our products are taxed like other
tobacco products or if we are required to collect and remit sales tax on certain of our Internet sales.
Presently
the sale of electronic cigarettes is not subject to federal, state and local excise taxes like the sale of conventional cigarettes
or other tobacco products, all of which have faced significant increases in the amount of taxes collected on their sales. Should
federal, state and local governments and or other taxing authorities impose excise taxes similar to those levied against conventional
cigarettes and tobacco products on our products, it may have a material adverse effect on the demand for our products, as consumers
may be unwilling to pay the increased costs for our products.
We
may be unable to establish the systems and processes needed to track and submit the excise and sales taxes we collect through
Internet sales, which would limit our ability to market our products through our websites which would have a material adverse
effect on our business, results of operations and financial condition. A number of states including New York, North Carolina,
Texas and California have begun collecting sales taxes on Internet sales where companies have used independent contractors in
those states to solicit sales from residents of that state. The requirement to collect, track and remit sales taxes based on independent
affiliate sales may require us to increase our prices, which may affect demand for our products or conversely reduce our net profit
margin, either of which would have a material adverse effect on our business, results of operations and financial condition.
The
market for electronic cigarettes is a niche market, subject to a great deal of uncertainty and is still evolving.
Vaporizers
and electronic cigarettes, having recently been introduced to market, are at an early stage of development, represent a niche
market and are evolving rapidly and are characterized by an increasing number of market entrants. Our future sales and any future
profits are substantially dependent upon the widespread acceptance and use of electronic cigarettes. Rapid growth in the use of,
and interest in, electronic cigarettes is recent, and may not continue on a lasting basis. The demand and market acceptance for
these products is subject to a high level of uncertainty. Therefore, we are subject to all of the business risks associated with
a new enterprise in a niche market, including risks of unforeseen capital requirements, failure of widespread market acceptance
of electronic cigarettes, in general or, specifically our products, failure to establish business relationships and competitive
disadvantages as against larger and more established competitors.
Because
we face intense competition from big tobacco companies and other competitors, our failure to compete effectively could have a
material adverse effect on our business, results of operations and financial condition.
Competition
in the electronic cigarette industry is intense. The nature of our competitors is varied as the market is highly fragmented and
the barriers to entry into the business are low.
We
compete primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, advertising and price.
We are subject to highly competitive conditions in all aspects of our business. The competitive environment and our competitive
position can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors’ introduction
of low-priced products or innovative products, cigarette excise taxes, higher absolute prices and larger gaps between price categories,
and product regulation that diminishes the ability to differentiate tobacco products.
Our
principal competitors are “big tobacco”, U.S. cigarette manufacturers of both conventional tobacco cigarettes and
electronic cigarettes like Altria Group, Inc., Lorillard, Inc. and Reynolds American Inc. We compete against “big tobacco”
which offers not only conventional tobacco cigarettes and electronic cigarettes but also smokeless tobacco products such
as “snus” (a form of moist ground smokeless tobacco that is usually sold in sachet form that resembles small tea bags),
chewing tobacco and snuff. Furthermore, we believe that “big tobacco” will devote more attention and resources to
developing and offering electronic cigarettes (including vaporizers) as the market grows. Because of their well-established sales
and distribution channels, marketing expertise and significant financial and marketing resources, “big tobacco” is
better positioned than small competitors like us to capture a larger share of the electronic cigarette market. We also compete
against numerous other smaller manufacturers or importers of cigarettes. There can be no assurance that we will be able to compete
successfully against any of our competitors, some of whom have far greater resources, capital, experience, market penetration,
sales and distribution channels than us. If our major competitors were, for example, to significantly increase the level of price
discounts offered to consumers, we could respond by offering price discounts, which could have a materially adverse effect on
our business, results of operations and financial condition.
Sales
of conventional tobacco cigarettes have been declining, which could have a material adverse effect on our business.
The
overall U.S. market for conventional tobacco cigarettes has generally been declining in terms of volume of sales, as a result
of restrictions on advertising and promotions, funding of smoking prevention campaigns, increases in regulation and excise taxes,
a decline in the social acceptability of smoking, and other factors, and such sales are expected to continue to decline. In September
2014, CVS, a leading national drug store chain ceased selling tobacco products. If other national drug store chains also decide
to cease selling tobacco products, cigarette sales could decline further. While the sales of vaporizers have been increasing over
the last several years, the vaporizer and electronic cigarettes market is only developing and is a fraction of the size of the
conventional tobacco cigarette market. A continual decline in cigarette sales may adversely affect the growth of the vaporizer
and electronic cigarette market, which could have a material adverse effect on our business, results of operations and financial
condition.
If
we are subject to further intellectual property litigation or if the present suit becomes actively litigated, we may incur substantial
additional costs which will adversely affect our results of operations.
The
cost to prosecute infringements of our intellectual property or the cost to defend our products against patent infringement or
other intellectual property litigation by others could be substantial. We cannot assure you that:
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pending
and future patent applications will result in issued patents; |
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patents
we own or which are licensed by us will not be challenged by competitors; |
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the
patents will be found to be valid or sufficiently broad to protect our technology or provide us with a competitive advantage;
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we
will be successful in defending against current and future patent infringement claims asserted against our products as described
in the next risk factor. |
Both
the patent application process and the process of managing patent disputes can be time consuming and expensive. In addition, changes
in the U.S. patent laws could prevent or limit us from filing patent applications or patent claims to protect our products and/or
technologies or limit the exclusivity periods that are available to patent holders. In September 2011, the Leahy-Smith America
Invents Act, or the Leahy-Smith Act, was signed into law and includes a number of significant changes to U.S. patent law, including
the transaction from a “first-to-invent’ system to a “first-to-file” system and changes to the way issued
patents are challenged. These changes may favor larger and more established companies that have more resources than we do to devote
to patent application filing and prosecution. The U.S. Patent and Trademark Office issued new Regulations effective March 16,
2013 to administer the Leahy-Smith Act. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will ultimately
have on the cost of prosecuting our patent applications, our ability to obtain patents based on our discoveries and our ability
to enforce or defend our issued patents. However, it is possible that in order to adequately protect our patents under the “first-to-file”
system, we will have to allocate significant additional resources to the establishment and maintenance of a new patent application
process designed to be more streamlined and competitive in the context of the new “first-to-file” system, which would
divert valuable resources from other areas of our business. In addition to pursuing patents on our technology, we have taken steps
to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property
assignment agreements with our employees, consultants, and corporate partners. Such agreements may not be enforceable or may not
provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure
or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Monitoring unauthorized disclosure
is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate.
If
a third party asserts that we are infringing on its intellectual property, whether successful or not, it could subject us to costly
and time-consuming litigation or require us to obtain expensive licenses, and our business may be adversely affected.
Although
we have filed patent applications, we do not own any patents relating to our vaporizers and electronic cigarettes. The vaporizer
and electronic cigarette industry is nascent and third parties may claim patent rights over one or more types of vaporizers and
electronic cigarettes. For example, Ruyan Investment (Holdings) Limited, which we refer to as “Ruyan”, a Chinese company,
has made certain public claims as to their ownership of patents relating to our products and has filed a number of separate lawsuits
against us. We and Ruyan settled the first lawsuit, and another lawsuit has been stayed along with other patent infringement lawsuits
filed by Ruyan against other defendants pending the results of an inter parties reexamination requested by one of the defendants
in the other lawsuits. Additionally, in 2014, Ruyan filed three separate lawsuits against the Company alleging that we infringed
on their patents. These three complaints were consolidated and the trial is currently scheduled for November 2015. For a description
of Ruyan’s lawsuits against us, please see the section titled “Legal Proceedings” contained in this prospectus.
We currently purchase our products from Chinese manufacturers other than Ruyan.
Ruyan’s
lawsuits as well as any other third party lawsuits alleging our infringement of patents, trade secrets or other intellectual property
rights could cause us to do one or more of the following:
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stop
selling products or using technology that contains the allegedly infringing intellectual property; |
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significant legal expenses; |
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cause
our management to divert substantial time to our defenses; |
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pay
substantial damages to the party whose intellectual property rights we may be found to be infringing; |
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indemnify distributors and customers; |
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redesign
those products that contain the allegedly infringing intellectual property; or |
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attempt
to obtain a license to the relevant intellectual property from third parties, which may not be available to us on reasonable
terms or at all. |
Third
party lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights could have a material
adverse effect on our business, results of operations and financial condition.
If
we cannot protect our intellectual property rights, we may be unable to compete with competitors developing similar technologies.
We
believe that patents, trademarks, trade secrets and other intellectual property we use and are developing are important to sustaining
and growing our business. We utilize third party manufacturers to manufacture our products in China, where the validity, enforceability
and scope of protection available under intellectual property laws are uncertain and still evolving. Implementation and enforcement
of Chinese intellectual property-related laws have historically been deficient, ineffective and hampered by corruption and local
protectionism. Accordingly, we may not be able to adequately protect our intellectual property in China, which could have a material
adverse effect on our business, results of operations and financial condition. Furthermore, policing unauthorized use of our intellectual
property in China and elsewhere is difficult and expensive, and we may need to resort to litigation to enforce or defend our intellectual
property or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation
and an adverse determination in any such litigation, if any, could result in substantial costs and diversion of resources and
management attention, which could harm our business and competitive position.
If
vaporizers continue to face intense media attention and public pressure, our operations may be adversely affected.
Since
the introduction of electronic cigarettes and vaporizers, certain members of the media, politicians, government regulators and
advocate groups, including independent medical physicians, have called for an outright ban of all electronic cigarettes and vaporizers,
pending regulatory review and a demonstration of safety. A partial or outright ban would have a material adverse effect on our
business, results of operations and financial condition and we may have to shut down our operations in the locations implemented
any such ban.
If
we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.
Our
future depends, in part, on our ability to attract and retain key personnel and the continued contributions of our executive officers,
each of whom may be difficult to replace. In particular, Jeffrey Holman, our Chief Executive Officer, Gregory Brauser, our President,
and James Martin, our Chief Financial Officer, are important to the management of our business and operations and the development
of our strategic direction. The loss of the services of any of these officers and the process to replace any key personnel would
involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.
We
may experience product liability claims in our business, which could adversely affect our business.
The
tobacco industry in general has historically been subject to frequent product liability claims. As a result, we may experience
product liability claims from the marketing and sale of electronic cigarettes. Any product liability claim brought against us,
with or without merit, could result in:
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liabilities
that substantially exceed our product liability insurance, which we would then be required to pay from other sources, if available;
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an
increase of our product liability insurance rates or the inability to maintain insurance coverage in the future on acceptable
terms, or at all; |
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damage
to our reputation and the reputation of our products, resulting in lower sales; |
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regulatory
investigations that could require costly recalls or product modifications; |
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costs; and |
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diversion of management’s attention from managing our business. |
Any
one or more of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
If
we experience product recalls, we may incur significant and unexpected costs and our business reputation could be adversely affected.
We
may be exposed to product recalls and adverse public relations if our products are alleged to cause illness or injury, or if we
are alleged to have violated governmental regulations. A product recall could result in substantial and unexpected expenditures
and could harm our reputation, which could have a material adverse effect on our business, results of operations and financial
condition. In addition, a product recall may require significant management time and attention and may adversely impact on the
value of our brands. Product recalls may lead to greater scrutiny by federal or state regulatory agencies and increased litigation,
which could have a material adverse effect on our business, results of operations and financial condition.
If
we experience a high amount of product exchanges, returns and warranty claims, our business will be adversely affected.
If
we are unable to maintain an acceptable degree of quality control of our products, we will incur costs associated with the exchange
and return of our products as well as servicing our customers for warranty claims. In addition, customers may require us to take
back unsold products which we may be unable to resell. Any of the foregoing on a significant scale may have a material adverse
effect on our business, results of operations and financial condition.
If
the economy declines, such decline may adversely affect the demand for our products.
Vaporizers
and electronic cigarettes may be regarded by users as a novelty item and expendable as such demand for our products may be extra
sensitive to economic conditions. When economic conditions are prosperous, discretionary spending typically increases; conversely,
when economic conditions are unfavorable, discretionary spending often declines. Any significant decline in economic conditions
that affects consumer spending could have a material adverse effect on our business, results of operations and financial condition.
Generating
foreign sales will result in additional costs and expenses and may expose us to a variety of risks.
Generating
sales of our products foreign jurisdictions will require us to incur additional costs and expenses. Furthermore, our entry into
foreign jurisdictions may expose us to various risks, which differ in each jurisdiction, and any of such risks may have a material
adverse effect on our business, financial condition and results of operations. Such risks include the degree of competition, fluctuations
in currency exchange rates, difficulty and costs relating to compliance with different commercial, legal, regulatory and tax regimes
and political and economic instability.
Our
future growth and profitability will depend in large part upon the effectiveness of our marketing and advertising expenditures.
Our
future growth and profitability will depend in large part upon our media performance, including our ability to:
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create
greater awareness of our products and stores; |
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identify
the most effective and efficient level of spending in each market and specific media vehicle; |
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determine
the appropriate creative message and media mix for advertising, marketing, and promotional expenditures; and |
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manage marketing costs (including creative and media). |
Our
planned marketing expenditures may not result in increased revenue. If our media performance is not effective, our future results
of operations and financial condition will be adversely affected.
If
we are unable to promote and maintain our brands, our results of operations will be adversely affected.
We
believe that establishing and maintaining the brand identities of our products is a critical aspect of attracting and expanding
a large customer base. Promotion and enhancement of our brands will depend largely on our success in continuing to provide high
quality products. If our customers and end users do not perceive our products to be of high quality, or if we introduce new products
or enter into new business ventures that are not favorably received by our customers and end users, we will risk diluting our
brand identities and decreasing their attractiveness to existing and potential customers.
Moreover,
in order to attract and retain customers and to promote and maintain our brand equity in response to competitive pressures, we
may have to increase substantially our financial commitment to creating and maintaining a distinct brand loyalty among our customers.
If we incur significant expenses in an attempt to promote and maintain our brands, our business, results of operations and financial
condition could be adversely affected.
If
we cannot manage our vape stores as we grow, we may incur substantial operating losses and adversely affect our financial
condition.
Our
business model is focusing on expanding the number of vape stores beyond the 10 we presently operate. As we expand the
number of vape stores and their location, it will be more difficult to manage them and our promotional costs will increase.
None of our senior managers has experience in operating a significant number of retail stores in different locations. If we expand
our vape stores beyond our capabilities, we may be materially and adversely affected.
We
rely on the efforts of third party agents to generate sales of our products, and loss of any such agents may be time consuming
to replace.
We
rely on the efforts of independent distributors to purchase and distribute our products to wholesalers and retailers. No single
distributor currently accounts for a material percentage of our sales and we believe that should any of these relationships terminate
we would be able to find suitable replacements and do so on a timely basis. However, any loss of distributors or our ability to
timely replace any given distributor could have a material adverse effect on our business, financial condition and results of
operations.
We
rely, in part, on the efforts of independent salespersons who sell our products to distributors and major retailers and Internet
sales affiliates to generate sales of products. No single independent salesperson or Internet affiliate currently accounts for
a material percentage of our sales and we believe that should any of these relationships terminate we would be able to find suitable
replacements and do so on a timely basis. However, any loss of independent sales persons or Internet sales affiliates or our ability
to timely replace any one of them could have a material adverse effect on our business, financial condition and results of operations.
We
may not be able to establish sustainable relationships with large retailers or national chains.
We
believe the best way to develop brand and product recognition and increase sales volume is to establish relationships with large
retailers and national chains. We currently have established relationships with several large retailers and national chains
and in connection therewith we have agreed to pay such retailers and chains fees, known as “slotting fees”, to carry
and offer our products for sale based on the number of stores our products will be carried in. These existing relationships are
“at-will” meaning that either party may terminate the relationship for any reason or no reason at all. We may not
be able to sustain these relationships or establish other relationships with large retailers or national chains or, even if we
do so, sustain such other relationships. Our inability to develop and sustain relationships with large retailers and national
chains will impede our ability to develop brand and product recognition and increase sales volume and, ultimately, require us
to pursue and rely on local and more fragmented sales channels, which will have a material adverse effect on our business, results
of operations and financial condition.
If
we are unable to adapt to trends in our industry, our results of operations will be adversely affected.
We
may not be able to adapt as the vaporizer and electronic cigarette industry and customer demand evolve , whether attributable
to regulatory constraints or requirements, a lack of financial resources or our failure to respond in a timely and/or effective
manner to new technologies, customer preferences, changing market conditions or new developments in our industry. Any of the failures
to adapt for the reasons cited herein or otherwise could make our products obsolete and would have a material adverse effect on
our business, financial condition and results of operations.
If
our third party manufacturers produce unacceptable or defective products or do not provide products in a timely manner, our business
will be adversely affected.
We
depend on third party manufacturers for our electronic cigarettes, vaporizers and accessories. Our customers associate certain
characteristics of our products including the weight, feel, draw, unique flavor, packaging and other attributes of our products
to the brands we market, distribute and sell. Any interruption in supply, consistency of our products may adversely impact our
ability to deliver our products to our wholesalers, distributors and customers and otherwise harm our relationships and reputation
with customers, and have a materially adverse effect on our business, results of operations and financial condition.
Although
we believe that several alternative sources for the components, chemical constituents and manufacturing services necessary for
the production of our products are available, any failure to obtain any of the foregoing would have a material adverse effect
on our business, results of operations and financial condition.
Because
we rely on Chinese manufacturers to produce our products, we are subject to potential adverse safety and other issues.
The
majority of our manufacturers are based in China. Certain Chinese factories and the products they export have recently been the
source of safety concerns and recalls, which is generally attributed to lax regulatory, quality control and safety standards.
Should Chinese factories continue to draw public criticism for exporting unsafe products, whether those products relate to our
products or not we may be adversely affected by the stigma associated with Chinese production, which could have a material adverse
effect on our business, results of operations and financial condition.
We
expect that new products and/or brands we develop will expose us to risks that may be difficult to identify until such products
and/or brands are commercially available.
We
are currently developing, and in the future will continue to develop, new products and brands, the risks of which will be difficult
to ascertain until these products and/or brands are commercially available. For example, we are developing new formulations, packaging
and distribution channels. Any negative events or results that may arise as we develop new products or brands may adversely affect
our business, financial condition and results of operations.
If
we are unable to manage our anticipated future growth, our business and results of operations could suffer materially.
Our
business has grown rapidly during our limited operating history. Our future operating results depend to a large extent on our
ability to successfully manage our anticipated growth. To manage our anticipated growth, including that arising from our recent
merger with Vaporin, we believe we must effectively, among other things:
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hire,
train, and manage additional employees; |
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expand
our marketing and distribution capabilities; |
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increase
our product development activities; |
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add
additional qualified finance and accounting personnel; and |
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implement
and improve our administrative, financial and operational systems, procedures and controls. |
We
are increasing our investment in marketing and distribution channels and other functions to grow our business. We are likely to
incur the costs associated with these increased investments earlier than some of the anticipated benefits and the return on these
investments, if any, may be lower, may develop more slowly than we expect or may not materialize.
If
we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new products,
and we may fail to satisfy product requirements, maintain product quality, execute our business plan or respond to competitive
pressures, any of which could have a material adverse effect on our business, results of operations and financial condition.
We
face competition from foreign importers who do not comply with government regulation which may result in the loss of customers
and result in adverse affect to our results of operations.
We
face competition from foreign sellers of electronic cigarettes and vaporizers that may illegally ship their products into the
United States for direct delivery to customers. These market participants will not have the added cost and expense of complying
with U.S. regulations and taxes and as a result will be able to offer their product at a more competitive price than us and potentially
capture market share. Moreover, should we be unable to sell certain of our products during any regulatory approval process we
have no assurances that we will be able to recapture those customers that we lost to our foreign domiciled competitors during
any “blackout” periods, during which we are not permitted to sell our products. This competitive disadvantage may
have a material adverse effect on our business, results of operations and our financial condition.
Information
technology system failures or interruptions or breaches of our network security may interrupt our operations, subject us to increased
operating costs and expose us to litigation.
At
present we generate a portion of our sales through e-commerce sales on our websites. We manage our websites and e-commerce platform
internally and as a result any compromise of our security or misappropriation of proprietary information could have a material
adverse effect on our business, financial condition and results of operations. We rely on encryption and authentication technology
licensed from third parties to provide the security and authentication necessary to effect secure Internet transmission of confidential
information, such as credit and other proprietary information. Despite our implementation of security measures, all of our technology
systems are vulnerable to damage, disability or failures due to hacking or physical theft, fire, power loss, telecommunications
failure or other catastrophic events, as well as from internal and external security breaches, denial of service attacks, viruses,
worms and other disruptive problems caused by hackers. If our technology systems were to fail, and we were unable to recover in
a timely way, we could experience an interruption in our operations. Furthermore, if unauthorized access to or use of our systems
were to occur, data related to our proprietary information and personal information of customers could be compromised. The occurrence
of any of these incidents could have a material adverse effect on our business, financial condition and results of operations.
To the extent that some of our reporting systems require or rely on manual processes, it could increase the risk of a breach.
We may be required to expend significant capital and other resources to protect against security breaches or to minimize problems
caused by security breaches. To the extent that our activities or the activities of others involve the storage and transmission
of proprietary information, security breaches could damage our reputation and expose us to a risk of loss and/or litigation. Our
security measures may not prevent security breaches. Our failure to prevent these security breaches may result in consumer distrust,
expose us to litigation either of which would adversely affect our business, results of operations and financial condition.
Our
results of operations could be adversely affected by currency exchange rates and currency devaluations.
Our
functional currency is the U.S. dollar; substantially all of our purchases and sales are currently generated in U.S. dollars.
However, our manufacturers and suppliers are located in China. The Chinese currency, the renminbi, has appreciated significantly
against the U.S. dollar in recent years. Fluctuations in exchange rates between our respective currencies could result in higher
production and supply costs to us which would have a material adverse effect on our results of operations if we are not willing
or able to pass those costs on to our customers.
Risks
Related to Government Regulation
Changes
in laws, regulations and other requirements could adversely affect our business, results of operations or financial condition.
In
addition to the anticipated regulation of our business by the FDA, our business, results of operations or financial condition
could be adversely affected by new or future legal requirements imposed by legislative or regulatory initiatives, including, but
not limited to, those relating to health care, public health and welfare and environmental matters. For example, in recent years,
states and many local and municipal governments and agencies, as well as private businesses, have adopted legislation, regulations
or policies which prohibit, restrict, or discourage smoking; smoking in public buildings and facilities, stores, restaurants and
bars; and smoking on airline flights and in the workplace. At present, it is not clear if electronic cigarettes, which omit no
smoke or noxious odors, are subject to such restrictions. Furthermore, some states and localities prohibit and others are prohibiting
the sales of electronic cigarettes and vaporizers to minors. Other similar laws and regulations are currently under consideration
and may be enacted by state and local governments in the future. If electronic cigarettes and vaporizers are subject to restrictions
on smoking in public and other places, our business, operating results and financial condition could be materially and adversely
affected. New legislation or regulations may result in increased costs directly for our compliance or indirectly to the extent
such requirements increase the prices of goods and services because of increased costs or reduced availability. We cannot predict
whether such legislative or regulatory initiatives will result in significant changes to existing laws and regulations and/or
whether any changes in such laws or regulations will have a material adverse effect on our business and localities, results of
operations or financial condition.
Restrictions
on the public use of vaporizers and electronic cigarettes may reduce the attractiveness and demand for our products.
Certain
states, cities, businesses, providers of transportation and public venues in the U.S. have already banned the use of vaporizers
and electronic cigarettes, while others are considering banning their use. If the use of vaporizers and electronic cigarettes
are banned anywhere the use of traditional tobacco burning cigarettes is banned, our products may lose their appeal as an alternative
to traditional tobacco burning cigarettes, which may reduce the demand for our products and, thus, have a material adverse effect
on our business, results of operations and financial condition.
Limitation
by states on sales of vaporizers and electronic cigarettes may have a material adverse effect on our ability to sell our products.
On
February 15, 2010, in response to a civil investigative demand from the Office of the Attorney General of the State of Maine,
we voluntarily executed an assurance of discontinuance with the State of Maine, which prohibits us from selling electronic cigarettes
in the State of Maine until such time as we obtain a retail tobacco license in the state. While suspending sales to residents
of Maine is not material to our operations, other electronic cigarette companies have entered into similar agreements with other
states, such as the State of Oregon. If one or more states from which we generate or anticipate generating significant sales bring
actions to prevent us from selling our products unless we obtain certain licenses, approvals or permits and if we are not able
to obtain the necessary licenses, approvals or permits for financial reasons or otherwise and/or any such license, approval or
permit is determined to be overly burdensome to us then we may be required to cease sales and distribution of our products to
those states, which would have a material adverse effect on our business, results of operations and financial condition.
The
FDA has issued an import alert which has limited our ability to import certain of our products.
As
a result of FDA import alert 66-41 (which allows the detention of unapproved drugs promoted in the U.S.), the U.S. Customs has
from time to time temporarily and in some instances indefinitely detained products sent to us by our Chinese suppliers. If the
FDA modifies the import alert from its current form which allows U.S. Customs discretion to release our products to us, to a mandatory
and definitive hold we will no longer be able to ensure a supply of saleable product, which will have a material adverse effect
on our business, results of operations and financial condition. We believe this FDA import alert will become less relevant to
us as and when the FDA regulates electronic cigarettes and vaporizers under the Tobacco Control Act.
The
application of the Prevent All Cigarette Trafficking Act and/or the Federal Cigarette Labeling and Advertising Act to vaporizers
and/or electronic cigarettes would have a material adverse affect on our business.
At
present, neither the Prevent All Cigarette Trafficking Act (which prohibits the use of the U.S. Postal Service to mail most tobacco
products and which amends the Jenkins Act, which would require individuals and businesses that make interstate sales of cigarettes
or smokeless tobacco to comply with state tax laws) nor the Federal Cigarette Labeling and Advertising Act (which governs how
cigarettes can be advertised and marketed) apply to vaporizers and/or electronic cigarettes. The application of either or both
of these federal laws to either vaporizers and/or electronic cigarettes could result in additional expenses, could prohibit us
from selling products through the Internet and require us to change our advertising and labeling and method of marketing our products,
any of which would have a material adverse effect on our business, results of operations and financial condition.
We
have been named as defendants in litigation brought under California Proposition 65 which, if resolved adversely to us, could
have a material adverse impact on our financial condition.
On
June 22, 2015, the Center for Environment Health, as plaintiff, filed suit against a number of defendants including us, our wholly-owned
subsidiary, the Vape Store, Inc., Vaporin and another wholly-owned subsidiary, Vaporin Florida, Inc. The lawsuit was filed in
the Superior Court of the State of California, County of Alameda. The suit seeks relief under California Proposition 65 which
makes it unlawful for businesses to knowingly and intentionally expose individuals in California to chemicals known to cause birth
defects or other harm without providing clear and reasonable warnings. All of the defendants are alleged to have sold products
containing significant quantities of nicotine in violation of Proposition 65. The plaintiff is seeking a civil penalty against
these defendants in the amount of $2,500 per day for each violation of Proposition 65, together with attorneys’ fees and
costs.
The Company
and its subsidiaries are in the process of hiring counsel and intend to defend the allegations. We believe that all of the
e-liquid products derived from nicotine sold by Vapor Corp. have always contained an appropriate warning. We are gathering
information on sales by Vaporin and its former subsidiaries. We cannot assure you that we will prevail in this litigation. If
the case is resolved adversely to us and we are the subject of substantial civil penalties, it could have a material adverse
impact on our financial condition. Even if the litigation is dismissed or ultimately resolved in our favor, the cost of
litigating could be substantial and adversely affect our financial condition.
We
may face the same governmental actions aimed at conventional cigarettes and other tobacco products.
The
tobacco industry expects significant regulatory developments to take place over the next few years, driven principally by the
World Health Organization’s Framework Convention on Tobacco Control, or the FCTC. The FCTC is the first international public
health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing
initiation of tobacco use and encouraging cessation. Regulatory initiatives that have been proposed, introduced or enacted include:
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or bans on advertising, marketing and sponsorship; |
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the
display of larger health warnings, graphic health warnings and other labeling requirements; |
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restrictions
on packaging design, including the use of colors and generic packaging; |
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restrictions
or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;
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requirements
regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels;
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requirements
regarding testing, disclosure and use of tobacco product ingredients; |
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increased
restrictions on smoking in public and work places and, in some instances, in private places and outdoors; |
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elimination
of duty free allowances for travelers; and |
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encouraging
litigation against tobacco companies. |
If
vaporizers and/or electronic cigarettes are subject to one or more significant regulatory initiates enacted under the FCTC, our
business, results of operations and financial condition could be materially and adversely affected.
Risks
Related to Our Securities
The
market price of our common stock has been and may continue to be volatile.
The
market price of our common stock has been volatile, and fluctuates widely in price in response to various factors, which are beyond
our control. The price of our common stock is not necessarily indicative of our operating performance or long-term business prospects.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our common stock. Factors such as the following could cause the market price of our common stock to fluctuate substantially:
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our
quarterly operating and financial results; |
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government
regulation of our industry; |
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introduction of new products by our competitors; |
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conditions
in the electronic cigarette and tobacco industries; |
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developments
concerning proprietary rights; or |
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litigation
or public concern about the safety of our products. |
The
stock market in general experiences from time to time extreme price and volume fluctuations. Periodic and/or continuous market
fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of
our common stock. Price volatility may be worse if the trading volume of our common stock is low.
The
volatility in our common stock price may subject us to securities litigation.
The
market for our common stock is characterized by significant price volatility when compared to seasoned issuers, and we expect
that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs
have often initiated securities class action litigation against a company following periods of volatility in the market price
of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial
costs and liabilities to us and could divert our management’s attention and resources from managing our operations and business.
Future
sales of our common stock may depress our stock price.
As of July 9, 2015,
we had approximately 7.6 million shares of our common stock outstanding and restricted stock units, and warrants, and options that are exercisable
into approximately 2 million shares of our common stock. Approximately 7.3 million of our outstanding shares are eligible for resale without
restrictions. If any significant number of these shares are sold, such sales could have a depressive effect on the market price
of our stock. The remaining shares are eligible, and some of the shares underlying the restricted stock units, and warrants and
options upon issuance, will be eligible to be offered from time to time in the public market pursuant to registration statements
we have filed and Rule 144 of the Securities Act of 1933, which we refer to as the “Securities Act”, and any such
sale of these shares may have a depressive effect as well. We are unable to predict the effect, if any, that the sale of shares,
or the availability of shares for future sale, will have on the market price of the shares prevailing from time to time. Sales
of substantial amounts of shares in the public market, or the perception that such sales could occur, could depress prevailing
market prices for the shares. Such sales may also make it more difficult for us to sell equity securities or equity-related securities
in the future at a time and price, which we deem appropriate.
If
our stock price materially declines, the Series A Warrant holders will have the right to a large number of shares of common stock
upon cashless exercise which may result in significant dilution.
The
Series A Warrants contained in the Units have a feature which is designed to compensate the Series A Warrant holders regardless
if the price of our common stock rises or falls. Similar to a typical warrant, the holder benefits when the price of the underlying
common stock rises; however, even if our common stock falls below the exercise price, the Series A Warrant holders are provided
with value. If our common stock price materially falls following the separation of the Units, unless we elect to pay the Series
A Holder a cash payment equal to the Black Scholes Value (see page 57), we may be obligated to issue a large number of shares
to holders who cashlessly exercise their Series A Warrants even though the exercise price is more than current fair market value
of our common stock. This in turn may materially dilute existing shareholders. The potential for such dilutive exercise of
the Series A Warrants may depress the price of common stock regardless of our business performance, and could encourage short
selling by market participants, especially if the trading price of our common stock begins to decrease.
If
our common stock continues to trade at prices below $1.00, we may not be able to maintain our Nasdaq listing.
On May 19, 2015, Nasdaq
notified us that based on the failure to meet a $1 minimum bid price for 30 consecutive business days, we no longer meet the continued
listing requirements. Accordingly, we have until November 16, 2015 to have our closing bid price be at least $1 for a minimum
of 10 consecutive business days. On July 7, 2015, we filed an amendment to our Certificate of Incorporation to effectuate
a one-for-five reverse stock split , effective July 8, 2015. Nasdaq will require us to meet the minimum bid price for
at least 10 business days prior to November 16th. However, if our common stock is delisted from Nasdaq, trading
in our common stock could be conducted on the OTCQB or in what is commonly referred to as the “pink sheets.” If this
occurs, a shareholder will find it more difficult to dispose of our common stock or to obtain accurate quotations as to the price
of our common stock. Lack of any active trading market would have an adverse effect on a shareholder’s ability to liquidate
an investment in our common stock easily and quickly at a price acceptable to the shareholder. It might also contribute to volatility
in the market price of our common stock and could adversely affect our ability to raise additional equity or debt financing on
acceptable terms or at all.
If
Nasdaq were to delist our common stock from its exchange, your ability to make transactions in our common stock would be limited and may subject us to additional trading restrictions.
Should we fail to satisfy the continued
listing requirements of Nasdaq, such as the minimum closing bid price requirement, our common stock may be delisted from Nasdaq.
If Nasdaq delists our common stock, it is probable it will delist our Units (assuming that when our listing application is submitted
to Nasdaq, such listing application is accepted), which will cause the Units to separate. Such a delisting would likely have a
negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish
to do so. In the event of a delisting, we would take actions to restore our compliance with Nasdaq’s listing requirements,
but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize
the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum
bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.
If
the Nasdaq Capital Market does not maintain the listing of our securities for trading on its exchange, we could face significant
material adverse consequences, including:
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limited availability of market quotations for our securities; |
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reduced
liquidity with respect to our securities; |
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our
shares of common stock will be a “penny stock”, which will require brokers trading in our shares of common stock
to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market
for our shares of common stock; |
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limited amount of news and analyst coverage for our company; and |
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decreased
ability to issue additional securities or obtain additional financing in the future. |
Therefore,
it may be difficult for investor to sell any shares if they desire or need to sell them.
If
we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report
our financial results. As a result, we could become subject to sanctions or investigations by regulatory authorities and/or stockholder
litigation, which could harm our business and have an adverse effect on our stock price.
As
a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations
of the SEC, including periodic reports, disclosures and more complex accounting rules. As directed by Section 404 of Sarbanes-Oxley,
the SEC adopted rules requiring public companies to include a report of management on a company’s internal control over
financial reporting in their Annual Report on Form 10-K. Based on current rules, we are required to report under Section 404(a)
of Sarbanes-Oxley regarding the effectiveness of our internal control over financial reporting. If we determine that we have material
weaknesses, it may be necessary to make 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.
Risks
Related to the Merger
If
we are unable to successfully integrate Vaporin, our future results of operations and financial condition may be materially and
adversely affected.
We
face a number of risks from our recently completed merger with Vaporin. The success of the merger will depend, in large part,
on Vapor’s ability to realize the anticipated benefits from combining the businesses of Vapor and Vaporin by reducing duplicative
costs and maintaining customer relationships and not losing sales. To realize the anticipated benefits of the merger, we must
successfully integrate the businesses of Vapor and Vaporin and integrate their management teams and employees. This integration
will be complex and time-consuming.
Potential
difficulties we may encounter include, among others:
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unanticipated
issues in integrating logistics, information, communications and other systems; |
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integrating
personnel from the two companies while maintaining focus on providing a consistent, high quality level of service; |
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integrating
the systems in a seamless manner that minimizes any adverse impact on, suppliers, customers, employees and others; |
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performance
shortfalls as a result of the diversion of management’s attention from day-to-day operations caused by activities surrounding
the completion of the merger and integration of the companies’ operations; |
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potential
unknown liabilities, liabilities that are significantly larger than anticipated, unforeseen expenses or delays associated
with the merger and the integration process; |
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unanticipated
changes in applicable laws and regulations; |
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dealing
with different corporate cultures; and |
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complexities
associated with managing the larger, combined business. |
Some
of these factors are outside of our control.
Vapor
has not completed a merger or acquisition comparable in size or scope to the Vaporin merger. Our failure to successfully integrate
the operations of Vapor and Vaporin or otherwise to realize any of the anticipated benefits of the merger could cause an interruption
of, or a loss of momentum in, the activities of Vapor and could adversely affect its results of operations. The integration process
maybe more difficult, costly or time-consuming than anticipated, which could cause Vapor’s stock price to decline.
If
we are unable to retain Vaporin’s key employees, our results of operations may be adversely affected.
The
merger involves the integration of two companies that have previously operated independently. The difficulties of combining the
operations of the two companies include integrating personnel with diverse business backgrounds, combining different corporate
cultures and retaining key employees. However, Vapor may not be successful in retaining those employees who have not agreed to
work for Vapor for the time period necessary to successfully integrate Vaporin’s operations with those of Vapor. The loss
of Vaporin employees could have an adverse effect on the business and results of operation of Vapor following the merger.
Because
Vaporin had no working capital and our expenses are higher following the merger, our future results of operations may be adversely
affected.
At
the time we completed the merger, Vaporin had no working capital and material liabilities. Following the merger, our expenses
are higher as a result of the new Vaporin employees who joined Vapor. If our cash resources are inadequate to pay expenses as
they become due in the normal course of operations, our ability to continue operating as a going concern could be jeopardized.
Furthermore, if we are not able to substantially increase our revenues following the merger, we may report increased operating
losses, which would have a material adverse effect on our common stock price.
As
a result of the merger, we have recorded a significant amount of goodwill on our balance sheet, which could result in significant
future impairment charges and negatively affect Vapor’s future financial condition, results of operations and stock price.
Applicable
acquisition accounting rules require that to the extent that the purchase price paid by Vapor in the merger exceeds the net fair
value of the Vaporin tangible and intangible assets and liabilities, Vapor will record such assets as goodwill on its consolidated
balance sheet. Goodwill is not amortized, but is tested for impairment at least annually. In testing goodwill for impairment,
Vapor’s management will be required to analyze its future estimated operating results and cash flows. If the future operating
results and cash flows of Vapor do not improve in comparison to its performance in 2014, Vapor may incur significant impairment
charges in the future. Any impairment charges will directly be treated as an expense and negatively affect Vapor’s future
financial results. Announcement of such impairment charges may also significantly reduce the price of Vapor’s common stock.
Other
Risks Related to this Offering
Our
management team will have immediate and broad discretion over the use of the net proceeds from this offering and we may use the
net proceeds in ways with which you disagree.
The
net proceeds from this offering will be immediately available to our management to use at their discretion. We currently intend
to use the net proceeds from this offering for acquiring and/or developing new vape stores , marketing and, general corporate
purposes and working capital. See “Use of Proceeds.” You will be relying on the judgment of our management with regard
to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether
the proceeds are being used appropriately. It is possible that the net proceeds will be invested in a way that does not yield
a favorable, or any, return for us or our shareholders. The failure of our management to use such funds effectively could have
a material adverse effect on our business, prospects, financial condition, and results of operation.
You
will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the
future.
You
will incur immediate and substantial dilution as a result of this offering. After giving effect to the sale by us of up to 19,000,000
shares of common stock contained in the Units (upon conversion of the Series A Preferred Stock), at a public offering
price of $[_______] per Unit and after deducting discounts and estimated offering expenses payable by us, investors in this offering
can expect an immediate dilution of $[______] per share, at the public offering price, assuming no exercise of the warrants contained
in the Units or issued to the underwriter. To the extent these warrants are ultimately exercised for common stock, you will sustain
future dilution.
Holders
of our Series A Convertible Preferred Stock and Series A Warrants will have no rights as common shareholders until such holders
convert their preferred stock or exercise their warrants and acquire our common stock.
Until
holders of our Series A Convertible Preferred Stock or Series A warrants acquire shares of our common stock upon conversion of
the preferred stock or exercise of the warrants, holders of preferred stock and warrants will have no rights with respect to the
shares of our common stock underlying such preferred stock and warrants. Upon conversion of the preferred stock or exercise of
the warrants, the holders will be entitled to exercise the rights of a common shareholder only as to matters for which the record
date occurs after the conversion or exercise date.
There
is no public market for the Series A Convertible Preferred Stock or the Series A Warrants to purchase common stock in this offering.
There
is no public trading market for the Series A Convertible Preferred Stock or the Series A Warrants being offered in this
offering, and we do not expect a market to develop. In addition, we do not intend to apply for listing of the Series A
Convertible Preferred Stock or the Series A Warrants on any securities exchange. Unit holders who exercise their warrants
for cash (and receives common stock) prior to the six-month separation date will be required to hold the Series A Preferred
Stock until the six month period expires, an earlier Trading Separation Trigger or a Delisting Trigger. Without an active
market, the liquidity of the Series A Convertible Preferred Stock and the Series A Warrants will be extremely
limited.
CAUTIONARY
NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This
prospectus includes forward-looking statements including market opportunities for our products, intended listing of the Units
on Nasdaq, anticipated expansion of vape stores , liquidity and capital expenditures. All statements other than statements
of historical facts contained in this prospectus, including statements regarding our future financial position, liquidity, business
strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,”
“may,” “estimate,” “continue,” “anticipate,” “intend,” “should,”
“plan,” “could,” “target,” “potential,” “is likely,” “will,”
“expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have
based these forward-looking statements largely on our current expectations and projections about future events and financial trends
that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking
statements are subject to a number of risks, uncertainties and assumptions described in in the section titled “Risk Factors”
and elsewhere in this prospectus.
Other
sections of this prospectus may include additional factors which could adversely affect our business and financial performance.
Moreover, our business is competitive and our business model is expected to change. New risk factors emerge from time to time
and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business
or the extent to which any risk factor, or combination of risk factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
Except
as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements
or the risk factors described in this prospectus, whether as a result of new information, future events, changed circumstances
or any other reason after the date of this prospectus.
PRIVATE
PLACEMENT
On June 25, 2015, the
Company closed on a Securities Purchase Agreement, dated as of June 22, 2015, with certain purchasers pursuant to which the Company
sold, at a 5% original issue discount, a total of $1,750,000 convertible debentures, which we refer to as the “Debentures”.
Net proceeds to the Company from sale of the Debentures, after payment of commissions and legal fees of the lead investor, were
$1,466,250. The placement agent for this June 2015 offering elected to use $47,500 of the commissions payable to it and acquire
a $50,000 Debenture; the placement agent also received a warrant to purchase 70,000 shares of our common stock at $2.525 per share
over a five-year period beginning on December 24, 2015. The Debentures mature December 22, 2015, and accrue interest at 10% per
year. Amounts of principal and accrued interest under the Debentures are convertible into common stock of the Company at a price
per share of $2.50. Principal and accrued interest on the Debentures are payable in three approximately equal installments on
September 22, 2015, October 22, 2015 and December 22, 2015, at the election of the holders of the Debentures, (i) in cash for
an additional 25% premium, or (ii) in common stock of the Company at a price per share of $2.50. As lead investor under the Securities
Purchase Agreement, Redwood Management, LLC received a right of first refusal to purchase up to 100% of the securities offered
by the Company in future private placement offerings through December 22, 2015. The Company’s obligations under the Debentures
can be accelerated in the event the Company undergoes a change in control and other customary events of default. In the event
of default and acceleration of the Company’s obligations, the Company would be required to pay 130% of amounts of principal
and interest then outstanding under the Debentures. The Company’s obligations under the Debentures are secured under a Security
Agreement, under which Redwood Management, LLC acts as Collateral Agent, by a second lien on substantially all of the Company’s
assets, including all of the Company’s interests in its consolidated subsidiaries.
In
November 2014 and March 2015, the Company had engaged in two private placements each of which precluded the Company from using
capital or otherwise issuing shares of common stock or common stock equivalents below $10.00 and $5.10, respectively. In order
to raise further capital in the June 25 private placement, the Company was required to enter into agreements with prior investors
modifying these covenants. In consideration for modifying these covenants, the Company issued these prior investors, 647,901 shares
of common stock and 595,685 five-year warrants exercisable at $2.525 per share beginning December 20, 2015. Additionally, the
Company agreed to issue additional shares of common stock to these investors ranging from 27,959 total shares if effective price
per share of common stock in this offering (or a future offering) is $2.65 up to 2,328,598 shares if the effective price per share
of common stock is $1.05 per share. Assuming the effective price per share of this offering was the closing price on the date
prior to the date of this prospectus, we would be obligated to issue approximately 1.4 million shares of common stock to these
investors. Any of these future issuances are subject to approval of our shareholders in order to comply with Nasdaq rules.
USE
OF PROCEEDS
Assuming
the maximum offering is completed, the net proceeds from our issuance and sale of 3,800,000 Units in this offering will
be approximately $[________] million, based on a public offering price of $[________] per Unit, after deducting underwriting commissions
and estimated offering expenses payable by us. There can be no assurance that all of the Units or any of the Units will be sold,
and therefore there is no assurance that any net proceeds will be received by the Company.
Assuming
that we receive net proceeds of at least $11 million, we expect the net proceeds from this offering will allow us to fund
our operations for up to 12 months following the closing of the offering. We intend to use the net proceeds from this offering
as follows:
|
(1) |
to
repay $4.97 million of indebtedness; |
|
|
|
|
(2) |
the acquisition
and/or development of vape stores; |
|
|
|
|
(3) |
marketing; and |
|
|
|
|
(4) |
the remaining proceeds,
if any, will be used for general corporate purposes, including working capital. |
This
expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions.
The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including industry and
general economic conditions and future revenues. As a result, our management will retain broad discretion over the allocation
of the net proceeds from this offering. We may find it necessary or advisable to use the net proceeds from this offering for other
purposes, and we will have broad discretion in the application of net proceeds from this offering. Furthermore, we anticipate
that we will need to secure additional funding before we reach profitability.
MARKET
PRICE HISTORY
We
will be applying for the listing of the Units on the Nasdaq Capital Market under the symbol “VPCOU”. No assurance
can be given that such listing will be approved or that a trading market will develop.
Our
shares of common stock are currently quoted on the Nasdaq Capital Market under the symbol “VPCO”. The following table
sets forth the high and low prices of our common stock, as reported by the Nasdaq Capital Market, for the periods indicated (as
adjusted for the one-for-five reverse split effectuated on July 9, 2015):
Year | | |
Quarter
Ended | | |
Stock
Price | |
| | |
| | |
High | | |
Low | |
| | |
| | |
($) | | |
($) | |
| | |
| | |
| | |
| |
2015 | | |
March 31 | | |
| 7.80 | | |
| 5.00 | |
| | |
| | |
| | | |
| | |
2014 | | |
December 31 | | |
| 14.05 | | |
| 5.10 | |
| | |
September 30 | | |
| 25.45 | | |
| 6.65 | |
| | |
June 30 | | |
| 33.75 | | |
| 19.50 | |
| | |
March 31 | | |
| 45.25 | | |
| 28.15 | |
| | |
| | |
| | | |
| | |
2013 | | |
December 31 | | |
| 49.00 | | |
| 20.00 | |
| | |
September 30 | | |
| 29.25 | | |
| 19.00 | |
| | |
June 30 | | |
| 33.00 | | |
| 9.75 | |
As
of July 9, 2015, there were approximately 1,370 record shareholders. As of July 9, 2015, the closing price of our common
stock was $1.39 per share.
DIVIDEND
POLICY
We
have never paid or declared any cash dividends on our common stock, and we do not anticipate paying any cash dividends on our
common stock in the foreseeable future. We intend to retain all available funds and any future earnings to fund the development
and expansion of our business. Any future determination to pay dividends will be at the discretion of our Board of Directors,
which we refer to as the “Board”, and will depend upon a number of factors, including our results of operations, financial
condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors our Board deems
relevant. Our future ability to pay cash dividends on our stock may also be limited by the terms of any future debt or preferred
securities or future credit facility. Additionally, dividends under the Delaware General
Corporation Law, may only be paid from our net profits or surplus neither of which we currently have.
CAPITALIZATION
The
following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2015:
|
● | on
an actual basis; and |
|
| |
|
● | on
an adjusted basis, based upon an assumed offering price of $[_____] per Unit, to give
effect to the sale of the Units being offered hereunder, after deducting the estimated
underwriting fees and commissions and estimated offering expenses payable by us. |
Based
on the assumed offering price of $[____] per Unit, we allocated all of the consideration to common stock and additional paid-in
capital. You should read this table in conjunction with “Use of Proceeds” above as well as our “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and financial statements and the related notes
appearing elsewhere in this prospectus.
| |
March 31, 2015 | |
| |
Actual | | |
As Adjusted | |
| |
(2) | | |
(2) | |
Shareholders’ Equity: | |
| | | |
| | |
| |
| | | |
| | |
Preferred stock, $0.001 par value, 1,000,000 shares authorized, none issued
and outstanding.
| |
$ | - | | |
$ | | |
| |
| | | |
| | |
Common stock, $0.001 par
value, 150 ,000,000 shares authorized, 6,727,152 shares issued and outstanding (1) | |
| 6,727 | | |
| | |
| |
| | | |
| | |
Additional paid-in capital | |
| 36, 725,950 | | |
| | |
| |
| | | |
| | |
Accumulated deficit | |
| (19,213,099 | ) | |
| | |
| |
| | | |
| | |
Total stockholders’
equity | |
$ | 17,519,578 | | |
$ | | |
| |
| | | |
| | |
Total capitalization | |
$ | 24,052,575 | | |
$ | | |
|
(1) |
As
of July 8, 2015, the Company filed an amendment to its Certificate of Incorporation to
increase its authorized capital to 150 million shares of common stock and effectuate
a one-for-five reverse stock split.
|
|
|
|
|
(2) |
The
Adjusted amounts give effect to the sale of the Units being sold in this offering. The table above excludes, as of March 31,
2015: |
|
● |
a
total of 248,567 shares of common stock issuable upon the exercise of outstanding stock options; |
|
|
|
|
● |
a
total of 378,047 shares of common stock issuable upon the delivery of fully vested restricted stock units; |
|
|
|
|
● |
a
total of 841,981 shares of common stock issuable upon the exercise of warrants; |
|
|
|
|
● |
total
of 358,682 shares of common stock issuable upon the conversion of outstanding convertible notes; |
|
|
|
|
● |
up
to 19,000,000 shares of common stock issuable upon the full conversion of the Series A Convertible Preferred Stock offered
hereby and up to 38,000,000 shares of common stock upon the full exercise of the Series A Warrants assuming the warrants are
exercised for cash (if the warrants are exercised on a cashless basis as described in “Description of Capital Stock
– Warrant Included in the Units Offered Hereby” the number of shares of common stock issuable is indeterminate);
and |
|
|
|
|
● |
up
to 950,000 shares of common stock issuable upon the full conversion of the Series A Convertible
Preferred Stock offered hereby and up to 1,900,000 shares of common stock upon the full
exercise of the Series A Warrants assuming the warrants are exercised for cash included
in the unit purchase option to be issued to the representative of the underwriters in
connection with this offering (if the warrants are exercised on a cashless basis as described
in “Description of Capital Stock – Warrant Included in the Units Offered
Hereby” the number of shares of common stock issuable is indeterminate).
|
You
should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and our financial statements and the related notes appearing elsewhere in this prospectus.
DILUTION
The net tangible book
value of our common stock on March 31, 2015 was approximately $(193,329), or approximately $(0. 029 ) per share, based on
6,727,152 shares of our common stock outstanding as of March 31, 2015. Net tangible book value per share represents the
amount of our total tangible assets, less our total liabilities, divided by the total number of shares of our common stock outstanding.
Dilution in net tangible book value per share to new investors represents the difference between the amount per share paid by
purchasers for Units in this offering and the net tangible book value per share of our common stock immediately afterwards.
After
giving effect to the sale of 3,800,000 Units by us at a public offering price of $[ _______ ] per Unit (with each Unit
containing one-fourth of a share of Series A Convertible Preferred Stock convertible into five shares of common stock
and 10 Series A Warrants each exercisable for one share of common stock ), less the underwriting commissions
and our estimated offering expenses, our pro forma as adjusted net tangible book value at March 31, 2015 would be $ [____] million,
or $ [____] per share. This amount represents an immediate increase in the as adjusted net tangible book value of $ [____] per
share to existing shareholders and an immediate dilution of $[____] per share to new investors purchasing shares at an assumed
public offering price of $[____] per share.
The following
table illustrates this dilution on a per share basis:
Public offering price per Unit | |
| | | |
$ | | |
Conversion price per share of Series A Convertible Preferred Stock
contained in a Unit | |
| | | |
$ | | |
Net tangible book value per share as of March 31, 2015 | |
$ | (0.0 29 | ) | |
| | |
Increase in net
tangible book value per share attributable to new investors in this offering | |
$ | | | |
| | |
Pro forma net tangible
book value per share as of March 31, 2015, after giving effect to this offering | |
| | | |
| | |
Dilution per share
to new investors in this offering | |
| | | |
| | |
The
foregoing illustration does not reflect potential dilution from the conversion of our outstanding convertible preferred stock
or the exercise of outstanding stock options or warrants.
The
above table is based on 6,727,152 shares outstanding as of March 31, 2015 and excludes, as of that date:
|
● |
248,567
shares of common stock issuable upon the exercise of options with an average exercise price of approximately $30.85
per share; |
|
|
|
|
● |
378,047
shares underlying restricted stock units; and |
|
|
|
|
● |
841,981
shares of common stock issuable upon the exercise of warrants with an average exercise price of $ 8 .75 per share. |
To the extent
that any of these securities are exercised, there will be further dilution to new investors.
The
following table shows on an adjusted basis at March 31, 2015, assuming [_______] shares of our common stock outstanding after
giving effect to the sale of all of the Units in this offering:
| |
Shares
Purchased | | |
Total
Consideration | | |
Average
Price
Per Share | |
| |
Number | | |
Percent
| | |
Amount
| | |
Percent
| | |
| |
Existing shareholders | |
| | | |
| | % | |
$ | | | |
$ | | % | |
$ | | |
New investors participating
in this offering | |
| | | |
|
| % | |
$ | | | |
$ | | | |
$ | | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
| | | |
| 100 | % | |
$ | | | |
$ | 100 | % | |
$ | | |
The
table above does not include:
|
● |
248,567
shares of common stock issuable upon the exercise of outstanding options to purchase common stock as of March 31, 2015
under our equity compensation plans, at a weighted-average exercise price of $30.85 per share; |
|
|
|
|
● |
841,981
shares of common stock issuable upon the exercise of outstanding warrants with an average exercise price of $ 8 .75
per share ; |
|
|
|
|
● |
up
to 19,000,000 shares of common stock issuable upon the full conversion of the Series
A Convertible Preferred Stock offered hereby and up to 38,000,000 shares of common stock
upon the full exercise of the Series A Warrants assuming the warrants are exercised for
cash (if the warrants are exercised on a cashless basis as described in “Description
of Capital Stock – Warrant Included in the Units Offered Hereby” the number
of shares of common stock issuable is indeterminate); and
|
|
|
|
|
● |
up
to 950,000 shares of common stock issuable upon the full conversion of the Series A Convertible
Preferred Stock offered hereby and up to 1,900,000 shares of common stock upon the full
exercise of the Series A Warrants assuming the warrants are exercised for cash included
in the unit purchase option to be issued to the representative of the underwriters in
connection with this offering (if the warrants are exercised on a cashless basis as described
in “Description of Capital Stock – Warrant Included in the Units Offered
Hereby” the number of shares of common stock issuable is indeterminate).
|
To
the extent these outstanding options or warrants (and warrants issued subsequent to March 31, 2015) are exercised there
will be further dilution to the new investors.
In
addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we
have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale
of equity or convertible debt securities, the issuance of these securities may result in further dilution to our shareholders.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You
should read the following discussion and analysis of our financial condition and results of operations and our financial statements
and the related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis
contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially
from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those
identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this prospectus.
Company
Overview
The
Company operates nine Florida-based vape stores (and expects to open two more in the next three weeks) and online
where it sells vaporizers, liquids for vaporizers and e-cigarettes. The Company is focusing on expanding its Company-owned
vape stores and beginning a franchise program. The Company also designs, markets and distributes electronic cigarettes, vaporizers,
e-liquids and accessories under the Krave®, Vapor X ®, Hookah Stix®, Alternacig®, Fifty-One® (also known
as Smoke 51), EZSMOKER ®, Green Puffer®, Americig®, Vaporin, FumaréTM, and Smoke Star®
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. We also design and develop private label brands for our distribution
customers. Third party manufacturers manufacture our products to meet our design specifications. We market our products as alternatives
to traditional tobacco cigarettes and cigars. In 2014, as a response to market product demand changes, Vapor began to shift its
primary focus from electronic cigarettes to vaporizers. “Vaporizers” and “electronic cigarettes,” or “e-cigarettes,”
are battery-powered products that enable users to inhale nicotine vapor without smoke, tar, ash, or carbon monoxide.
We
offer our vaporizers and e-cigarettes and related products through our vape stores , online , customer direct phone
center, online stores, to retail channels through our direct sales force, and through third party wholesalers, retailers and value-added
resellers. Retailers of our products include small-box discount retailers, big-box retailers, gas stations, drug stores, convenience
stores, tobacco shops and kiosk locations in shopping malls throughout the United States. We previously offered our vaporizers
and electronic cigarettes and related products through our direct response television marketing efforts.
The
Company’s business strategy is currently focused on a multi-pronged approach to diversify our revenue streams to include
the Vape Store brick-and-mortar retail locations which Vaporin had successfully deployed. We are seeing that there is a large
consumer demand centered on the vaporizer products and the retention “atmosphere” created by the stores. We are also
expanding our web presence and customer direct phone center operations that work closely to drive consumer sales. Our distribution
sales continue to be a significant part of our operations and we anticipate regrowth as we have adjusted towards vaporizers in
addition to our e-cigarette brands.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations set forth below under the headings “Results
of Operations” and “Liquidity and Capital Resources” have been prepared in accordance with U.S. GAAP and should
be read in conjunction with our consolidated financial statements and notes thereto contained herein. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses,
and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our critical accounting policies
and estimates, including identifiable intangible assets and goodwill, stock-based compensation, derivative liabilities and long-lived
assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. A more detailed discussion on the application of these and other accounting
policies can be found in Note 3 to the consolidated financial statements contained herein. If the Company’s current business
strategy is not successful and the expected synergies resulting from the Company’s acquisition of Vaporin are not achieved,
the Company may be required to take a partial or full impairment charge against its goodwill or other long-lived assets which
arose from our recent merger transaction. Actual results may differ from these estimates under different assumptions and conditions.
While
all accounting policies impact the financial statements, certain policies may be viewed as critical. Critical accounting policies
are those that are both most important to the portrayal of financial condition and results of operations and that require management’s
most subjective or complex judgments and estimates. Our management believes the policies that fall within this category are the
policies on accounting for identifiable intangible assets and goodwill, stock-based compensation, derivative liabilities and long-lived
assets.
Warrant
Derivative Liability
The
Series A Warrants contain a cashless exercise provision using a predetermined Black Scholes Value. See page 58 below for a further
description. Such provision, if exercised by the holder, would require the Company to settle these warrants, at its option (subject
to certain conditions), either by a cash payment or the granting of a variable number of shares of common stock. This provision
results in the potential for the Company to either have to net cash settle the warrant or potentially issue an indeterminate number
of shares. Accordingly, the warrants are accounted for as a derivative liability and are recorded at fair value at inception and
subject to re-measurement on each balance sheet date, with any change in fair value recognized as a component of other income
(expense) in the statements of operations. The fair value of these warrants will be based on, amongst various factors, at the
valuation measurement date of which the estimated market value of the underlying common stock is one of them. Therefore, normally
any increase in our stock price will result in an increase of our warrant liability resulting in a non-cash expense and, conversely,
normally any decrease in our stock price will result in a decrease of our warrant liability resulting in a non-cash gain.
Results
of Operations for the Three Months Ended March 31, 2015 Compared to the Three Months Ended March 31, 2014
Sales,
net for the three months ended March 31, 2015 and 2014 were $1,468,621 and $4,792,544, respectively, a decrease of $3,323,923
or approximately 69.4%. The decrease in sales is primarily attributable to decreased sales of our television direct marketing
campaign for our Alternacig® brand, a decrease in sales from our on-line stores, distributor inventory build leveling off
and continued pipeline load in the e-cigarette category in 2014, and the increasing prevalence of vaporizers, tanks and open system
vapor products that are marginalizing the e-cigarette category and increased returns of e-cigarette products. Sales were also
negatively impacted by new national competitors’ launches of their own branded products during 2014. Due to low conversion
rates of our Alternacig® and Vapor X ® branded direct marketing campaign, we limited the direct marketing campaign,
resulting in lower sales of direct marketing products. In addition, sales decreased due to certain wholesale and distribution
customers selling off their current inventory of electronic cigarette products so they can switch to e-vapor products. We anticipate
that the demand for vaporizer products will continue to increase, as users want products that have more advanced technology with
higher performance and longer battery life. As a result, we are in the process of altering our product mix to include more vaporizer
products, including premium USA made e-liquids.
Cost
of goods sold for the three months ended March 31, 2015 and 2014 were $1,651,110 and $3,831,928, respectively, a decrease of $2,180,818,
or approximately 56.9%. The decrease is primarily due to the decrease in sales. During the three months ended March 31, 2015,
as compared to the three months ended March 31, 2014, cost of goods sold was higher as a percentage of sales primarily due to
consignment inventory write off of $70,657 and from customer returns of e-cigarettes that were resold below cost at liquidation
prices.
Selling,
general and administrative expenses for the three months ended March 31, 2015 and 2014 were $3,243,189 and $2,769,726, respectively,
an increase of $473,463 or approximately 17.0%. Non-cash stock compensation expense was $364,576 and $610,414 for the three months
ended March 31, 2015 and 2014, respectively, a decrease of $245,838 relating to the cancellation of a consulting agreement with
a former director. Professional fees increased to $394,145 from $385,435 in the three months ended March 31, 2015 and 2014, respectively.
In addition, depreciation and amortization expense increased to $85,013 from $3,888 in the three months ended March 31, 2015 and
2014, respectively, an increase of $81,125 primarily due to the increase in depreciable assets as a result of leasehold improvements
and the purchase of kiosks. There was also a loss on the disposal of assets from the write off of kiosks that were closed during
March and April 2015 in the amount of $289,638 that was recorded at March 31, 2015. Payroll expenses during the three months ended
March 31, 2015 and 2014 were $1,242,981 and $822,695, respectively, an increase of $419,820 due primarily to increased headcount
for retail store employees and employees transitioned to the Company post-merger.
Advertising
expense was approximately $105,177 and $367,615 for the three months ended March 31, 2015 and 2014, respectively, a decrease of
$262,438 or approximately 71.4%. The decrease was due to decreases in Internet advertising and television direct marketing campaign
for our Alternacig® brand, print advertising programs, and participation at trade shows and other advertising campaigns.
Interest
expense was approximately $378,775 and $28,434 for the three months ended March 31, 2015 and 2014, respectively. The interest
expense was attributable to the term loan, the $1,250,000 Senior Convertible note, the $567,000 convertible notes to various lenders
and other outstanding debts in 2015. The Company recorded an aggregate of $317,702 in non-cash interest expense which is included
in interest expense for the three months ended March 31, 2015.
Income
tax (benefit) expense for the three months ended March 31, 2015 and 2014 was $2,791 and ($752,400), respectively.
Net
(loss) income for the three months ended March 31, 2015 and 2014 was ($3,981,196) and ($1,452,759), respectively, as a result
of the items discussed above.
Results
of Operations for the Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
Net
sales for the year ended December 31, 2014 and 2013 were $15,279,860 and $25,990,227, respectively, a decrease of $10,710,367
or approximately 41.2%. The decrease in sales is primarily attributable to decreased sales of our television direct marketing
campaign for our Alternacig® brand, a decrease in sales of our on-line stores and distributor inventory buildup in the e-cigarette
category that existed in 2013 and continued during 2014. This is a result of the increasing prevalence of vaporizers, tanks and
open system vapor products that are dramatically marginalizing the e-cigarette category and increased our customer returns of
e-cigarette products. We have increased our purchases of vaporizers, tanks and open system vapor products as we shift our inventory
mix to align with products in high customer demand. Sales were also negatively impacted by new national competitors’ launches
of their own branded products during the second quarter of 2014. Due to low conversion rates of our Alternacig® and Vapor
X ® branded direct marketing campaign, we limited the direct marketing campaign, resulting in lower sales of direct marketing
products. In addition, sales decreased due to certain wholesale and distribution customers selling off their current inventory
of electronic cigarette products so they can switch to e-vapor products. During the second half of 2014 we introduced several
new e-vapor products under the Vapor X brand, including premium USA manufactured e-liquids. We anticipate that the demand for
e-vapor products will continue to increase, as users want products that have more advanced technology with higher performance
and longer battery life. During the fourth quarter of 2014 we opened eight new emagine vaporTM retail kiosks to expand
our distribution channels for vaporizer and e-cigarette products. In 2015, we have closed eight of our nine retail kiosks. In
addition we are altering our product mix to include more e-vapor products e-liquids and vaporizer accessories and transitioning
our customer base to these favorable demand products.
Cost
of goods sold for the year ended December 31, 2014 and 2013 was $14,497,254 and $16,300,333, respectively, a decrease of $1,803,077,
or approximately 11.1%. The decrease is primarily due to the overall decrease in sales, offset by write downs of $1,834,619 for
obsolete and slow moving inventory that primarily consisted of e-cigarettes. As customers complete the migration to vaporizers,
tanks and open vaporizer systems, our sales incentives should decrease.
Our
gross margins decreased to 5.1% from 37.3% primarily due to write downs of $1,834,619 for obsolete and slow moving inventory,
increase in sales returns, discounts, incentives and allowances that primarily resulted from the customer demand shift from e-cigarettes
to e-vapor products.
Selling,
general and administrative expenses for the year ended December 31, 2014 and 2013 were $11,126,759 and $6,464,969, respectively,
an increase of $4,661,790 or approximately 72.1%. The increase is primarily attributable to increases in non-cash stock compensation
expense of $1,631,340 primarily attributable to the consulting agreement with Knight Global Services, professional fees of $3,281,388
due to implementing the corporate actions we agreed to take in connection with the private placement of common stock we completed
in October 2013, including registering the shares for resale with the SEC, reincorporating in the State of Delaware from the State
of Nevada, effecting the 1-for-5 reverse stock split of our common stock and uplisting to the Nasdaq Capital Market, costs of
$576,138 incurred in connection with the initiation and termination of the previously contemplated acquisition of International
Vapor Group, Inc.’s online, wholesale and retail operations, consulting and recruiting fees of $882,590 related to the development
of the emagine vaporTM retail kiosk and store distribution channel, and costs incurred in connection with the merger
of Vaporin, Inc. We also incurred additional filing and listing fees related to our uplisting to the Nasdaq Capital Market, business
insurance due to the increases in coverage limits and increases in travel due to increased presence at trade shows and conferences,
net of decreased personnel costs attributable to decreased payroll net of the accrued severance related to the resignation of
our former Chief Executive Officer, merchant card processing fees due to lower transaction volumes.
Advertising
expense for the years ended December 31, 2014 and 2013 was $2,374,329 and $2,264,807, respectively, an increase of $109,522 or
4.8%. As a percentage of sales advertising expense increased to 15.5% for the year ended December 31, 2014 from 8.7% for the year
ended December 31, 2013. During the year ended December 31, 2014, we decreased our Internet advertising and television direct
marketing campaign for our Alternacig brand, increased our print advertising programs, participation at trade shows, initiated
several new marketing campaigns in which we sponsored several music concerts and we continued various other advertising campaigns.
Other
expense for the years ended December 31, 2014 and 2013 was $366,433 and $683,558, respectively, a decrease of $317,125. Included
in other expense is interest expense which was $348,975 and $383,981, for the years ended December 31, 2014 and 2013 respectively,
a decrease of $35,006 or 9.1%. The decrease was attributable to lower amounts of outstanding debt throughout 2014 compared to
2013. In addition, the Company incurred an induced conversion expense during the year ended December 31, 2013 of $299,577 related
to the reduction in the conversion price for the $350,000 Senior Convertible Notes and $75,000 Senior Convertible Notes in order
to induce the holders to convert the notes. Such inducement did not reoccur in 2014.
Income
tax expense (benefit) for the years ended December 31, 2014 and 2013 was $767,333 and $(524,791), respectively, an increase of
$1,292,124 or 246.2%. The Company determined, based on the weight of the available evidence, that a valuation allowance of $5,695,446
(or 100% of the Company’s net deferred tax assets) is required at December 31, 2014, which is the cause of the significant
increase in income tax expense compared to the year ended December 31, 2013. At December 31, 2013, the Company had determined
that a valuation allowance against its net deferred tax assets was not necessary and recorded an income tax benefit.
Net
(loss) income for the years ended December 31, 2014 and 2013 was $(13,852,249) and $801,352, respectively, a decrease of $14,653,601
as a result of the items discussed above.
Liquidity
and Capital Resources
The
Company had net losses of approximately $3.98 million and $1.45 million for the three month periods ending March 31, 2015 and
2014, respectively, and has experienced cash outflows from operating activities. The Company also has an accumulated deficit of
$19.2 million as of March 31, 2015. The Company had $1.91 million of cash at March 31, 2015 and negative working capital of approximately
$812,000. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
Our
net cash used in operating activities was $2,149,505 and $2,165,114 for the three months ended March 31, 2015 and 2014, respectively,
a decrease of $15,609. Our net cash used in operating activities for the three months ended March 31, 2015 resulted from our net
loss of $3,981,196 offset by non-cash charges of $1,200,468 and changes in operating assets and liabilities of $631,223.
Our
net cash provided by (used in) investing activities was $536,071 and ($4,795) for the three months ended March 31, 2015 and 2014,
respectively. The increase of proceeds from investing activities of $540,866 over the three months ended March 31, 2015 and 2014
is primarily due to increases in cash collected from repayment of loans receivable’s and cash acquired from the March 2015
Vaporin merger, partially offset with an increase in purchases of property and equipment.
Our
net cash provided by (used in) financing activities was $3,043,439 and ($290,835) for the three months ended March 31, 2015 and
2014, respectively. The increase in cash provided by financing activities over the three months ended March 31, 2015 and 2014
was primarily related to proceeds from the Securities Purchase Agreement, entered into in connection with the March 2015 Vaporin
merger, with certain accredited investors providing for the sale of $3,500,960 in shares of the Company’s common stock at
a price of $1.02 per share, offset by offering costs of $559,000. The increase was partially offset with payments to the term
loan and capital lease obligations.
Our
net cash used in operating activities was $6,291,027 and $4,120,152 for the years ended December 31, 2014 and 2013, respectively,
an increase of $2,170,875. Our net cash used in operating activities for the year ended December 31, 2014 resulted primarily from
our net losses, purchases of new inventories to meet future customer demand, and changes in accounts receivable, prepaid expenses,
accounts payable, accrued expenses and due from merchant credit card processor, which are attributable to our efforts to accommodate
anticipated future sales growth.
Our
net cash used in investing activities was $1,987,505 and $14,779 for the years ended December 31, 2014 and 2013, respectively.
Our net cash used in investing activities for the year ended December 31, 2014 resulted primarily from entering into loans receivable
with International Vapor Group, Inc. and Vaporin and for purchases of property and equipment utilized in connection with the opening
of eight retail kiosks.
Our
net cash provided by financing activities was $2,269,481 and $10,528,738 for the years ended December 31, 2014 and 2013, respectively,
a decrease of $8,259,256. These financing activities relate to the Company’s sale of $1,250,000 Senior Convertible Notes
entered into in November 2014, $1,000,000 Loan Payable to Related Party entered into in December 2014, and the $1,000,000 Term
Loan entered into in September 2014 and proceeds from the exercise of stock options net of principal repayments under the $750,000
and $1,000,000 Term Loans and principle repayments of capital lease obligations.
In
the ordinary course of our business, we enter into purchase orders for components and finished goods, which may or may not require
vendor deposits and may or may not be cancellable by either party. At March 31, 2015 and December 31, 2014, we had $298,320 and
$319,563 in vendor deposits, respectively, which are included in prepaid expenses and vendor deposits on the condensed consolidated
balance sheets included elsewhere in this prospectus . At March 31, 2015 and December 31, 2014, we do not have any material
financial guarantees or other contractual commitments with these vendors that are reasonably likely to have an adverse effect
on liquidity.
Our
existing liquidity is not sufficient to fund our operations, anticipated capital expenditures, working capital and other
financing requirements for the foreseeable future. As of June 22, 2015, we sold, at a 5% original issue discount, a total
of $1,750,000 of Debentures and received net proceeds of approximately $1,466,000. The Debentures mature on December 22,
2015, and accrue interest at 10% per year. See the section titled “Private Placement” above. Subsequent to the
Debenture offering, we still do not have sufficient working capital to sustain our current operations for 12 months and are
relying upon this offering or another material financing.
BUSINESS
We
operate nine Florida-based vape stores (and expect to open two more in the next three weeks) and are focusing
on expanding the number of Company operated stores as well as launching a franchise program. We design, market, and
distribute vaporizers, e-liquids, electronic cigarettes and accessories under the emagine vaporTM, Krave®,
Fifty-One® (also known as Smoke 51), Vapor X ®, Hookah Stix® and Alternacig® brands. Third party
manufacturers manufacture our products to meet our design specifications. We market our products as alternatives to
traditional tobacco cigarettes and cigars. In 2014, as a response to market product demand changes, Vapor began to shift its
primary focus from electronic cigarettes to vaporizers.
The
Company’s business strategy is currently focused on the vape store concept which Vaporin had successfully deployed.
We are seeing that there is a large consumer demand centered on the vaporizer products and the “atmosphere” created
by the stores. Vapor leverages its ability to design, market and develop multiple vaporizer and e-cigarette brands and to bring
those brands to market through its multiple distribution channels including the vape stores, online and through retail operations
operated by their parties.
Vaporizers
and Electronic Cigarettes
“Vaporizers”
and “electronic cigarettes,” or “e-cigarettes,” are battery-powered products that enable users to inhale
nicotine vapor without smoke, tar, ash, or carbon monoxide. Electronic cigarettes look like traditional cigarettes and, regardless
of their construction are comprised of three functional components:
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a
mouthpiece, which is a small plastic cartridge that contains a liquid nicotine solution; |
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the
heating element that vaporizes the liquid nicotine so that it can be inhaled; and |
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the
electronics, which include: a lithium-ion battery, an airflow sensor, a microchip controller and an LED, which illuminates
to indicate use. |
When
a user draws air through the electronic cigarette and/or vaporizer, the air flow is detected by a sensor, which activates a heating
element that vaporizes the solution stored in the mouthpiece/cartridge, the solution is then vaporized and it is this vapor that
is inhaled by the user. The cartridge contains either a nicotine solution or a nicotine free solution, either of which may be
flavored.
Our
Vaporizers and Electronic Cigarettes
Vaporizers
feature a tank or chamber, a heating element and a battery. The vaporizer user fills the tank with e-liquid or the chamber with
dry herb or leaf. The vaporizer battery can be recharged and the tank and chamber can be refilled.
We
also offer disposable electronic cigarettes in multiple sizes, puff counts, styles, flavors and nicotine strengths; rechargeable
electronic cigarettes that use replaceable cartridges (also known as “atomizers or cartomizers”), and rechargeable
vaporizers for use with either electronic cigarette solution (“e-liquid”) or dry herbs or leaf. Disposable electronic
cigarettes feature a one-piece construction that houses all the components and is utilized until the nicotine or nicotine free
solution is depleted. Rechargeable electronic cigarettes feature a rechargeable battery and replaceable cartridge (also known
as an “atomizer or cartomizer”). The atomizers or cartomizers are changed when the solution is depleted from use.
Our
Brands
We
sell our vaporizers, electronic cigarettes and e-liquids under several different brands, including emagine vaporTM,
Krave®, Fifty-One® (also known as Smoke 51), Vapor X ®, Stix® and Alternacig® brands. We also design
and develop private label brands for our distribution customers. Our in-house engineering and graphic design team’s work
to provide aesthetically pleasing, technologically advanced affordable vaporizers and e-cigarette options. We are in the process
of preparing to commercialize additional brands which we intend to market to new customers and demographics.
Our
Improvements and Product Development
We
have developed and trademarked or are preparing to commercialize additional products. We include product development expenses
as part of our operating expenses. We currently own no patents which are material to our business. We have a number
of patent applications pending in the United States including those described below. There is no assurance that we will be awarded
patents for of any of these pending patent applications.
Flavor
Profiles
We
are developing new flavor profiles that are distinct to our brands. We believe that as the vaporizer and electronic cigarette
industry matures, users of vaporizers and electronic cigarettes will develop, if they have not already, preferences for the product
based not only on their quality, ability to successfully deliver nicotine, battery capacity, and smoke volume they generate,
but on taste and flavor, like smokers do with their preferred brand of conventional tobacco cigarettes.
Soft
Tip Filters
We have a patent pending
for a soft-tip electronic cigarette filter, which more closely resembles the tactile experience of a conventional tobacco cigarette
in a user’s mouth. To date electronic cigarettes have been made of metal and hard plastic and do not offer users the same
malleable feel as the cellulose filters of conventional tobacco cigarettes.
Electronic
Cigarette Air Flow Sensor Patent
We
have a patent pending on a new configuration for the airflow sensors currently used in electronic cigarettes. The new configuration
will allow the battery to be sealed to enhance the reliability and performance of the electronic cigarette. There is no assurance
that we will be awarded a patent for this configuration.
Vaporizer
Biometric Fingerprint Lock Sensor Patent
We
have a patent pending for a biometric fingerprint lock sensor that can be used in vaporizers. The biometric fingerprint lock sensor
will allow the owner of the vaporizer to keep the device locked and turned off unless the authorized user unlocks the device via
fingerprint scan, protecting the device from use by another individual. This technology may be used to protect against minors
being able to turn on the device and will also deem the devices unusable in the event the device is lost or stolen. There is no
assurance that we will be awarded a patent for this technology.
Our
Kits and Accessories
Our
vaporizer and electronic cigarettes are available in kits that contain everything a user needs to begin enjoying their “vaping”
experience. In addition to kits we sell replacement parts including batteries, refill cartridges or cartomizers that contain the
liquid solution, atomizers, tanks and e-liquids. Our refill cartridges and e-liquids are available in various assorted flavors
and nicotine levels (including 0.0% nicotine). In addition to our electronic cigarette and vaporizer products we sell an assortment
of accessories, including various types of chargers (including USB chargers), carrying cases and lanyards.
The
Market for Vaporizers and Electronic Cigarettes
We
market our vaporizers and electronic cigarettes as an alternative to traditional tobacco cigarettes and cigars. We offer our products
in multiple nicotine strengths, flavors and puff counts. Because vaporizers and electronic cigarettes offer a “smoking”
experience without the burning of tobacco leaf, vaporizers and electronic cigarettes offer users the ability to satisfy their
nicotine cravings without smoke, tar, ash or carbon monoxide. In many cases vaporizers and electronic cigarettes may be used where
tobacco-burning cigarettes may not. Vaporizers and electronic cigarettes may be used in some instances where for regulatory or
safety reasons tobacco burning cigarettes may not be used. However, certain states, cities, businesses, providers of transportation
and public venues in the U.S. have already banned the use of vaporizers and electronic cigarettes, while others are considering
banning the use of vaporizers and electronic cigarettes. We cannot provide any assurances that the use of vaporizers and electronic
cigarettes will be permitted in places where traditional tobacco burning cigarette use is banned. See the Risk Factor on page
16.
According
to the U.S. Centers for Disease Control and Prevention, in 2012, an estimated 42.1 million people, or 17.4% of adults,
in the United States smoke cigarettes. In 2011, about 21% of adults who smoke traditional tobacco cigarettes had used electronic
cigarettes, up from about 10% in 2010, according to the U.S. Centers for Disease Control and Prevention. Annual sales of electronic
cigarettes in the United States were estimated to increase to $1.7 billion in 2014 from $1 billion in 2013. Annual sales of traditional
tobacco cigarettes, according to industry estimates, were $80 billion in 2012.
Advertising
Currently,
we advertise our products primarily on the Internet, through trade magazine ads and through point of sale materials and displays
at retail locations. We also attempt to build brand awareness through innovative social media marketing activities, price promotions,
in-store and on-premise promotions, slotting fees (i.e., fees payable based on the number of stores at which our products
are carried and sold), public relations and trade show participation. Our advertising expense as a percentage of sales for the
year ended December 31, 2014 and 2013 has been approximately 15.5% and 8.8%, respectively; for the three months ended March 31,
2015, this decreased to 7.2%. Assuming we are successful in this offering, we intend to continue to strategically expand our advertising
activities in 2015 and also increase our public relations campaigns to gain editorial coverage for our brands. Some of our competitors
promote their brands through print media and television commercials, and through celebrity endorsements, and have substantial
resources to devote to such efforts. We believe that our and our competitors’ efforts have helped increase our sales, our
product acceptance and general industry awareness.
Distribution
and Sales
We
offer our vaporizers and electronic cigarettes and related products through our vape stores , our websites, a retail kiosk,
retail channels through our direct sales force, and through third party wholesalers, retailers and value-added resellers. Retailers
of our products include small-box discount retailers, big-box retailers, gas stations, drug stores, convenience stores, tobacco
shops and kiosk locations in shopping malls throughout the United States. We previously offered our vaporizers and electronic
cigarettes and related products through our direct response television marketing efforts.
Vapor
sells directly to consumers through nine company owned retail vape stores . Vapor acquired eight of these retail
vape stores in the March 2015 merger with Vaporin. The Company expects to open two additional stores in the next three
weeks. Our management believes that consumers are shifting towards vape shops for an enhanced experience. This enhanced experienced
is derived from the greater variety of products at the stores, the knowledgeable staff and the social atmosphere. Vapor anticipates
a significant portion of future revenue will come from the retail stores.
We
also offer our products online through our websites including www.vapor-corp.com. The contents of this website are not
incorporated by reference into this prospectus. Our strategy is to increase our online sales by expanding our presence through
additional Vapor websites and enhancing the overall online experience for consumers.
When
first introduced to the U.S. market, electronic cigarettes were predominantly sold online. In the past year brick and mortar sales
of electronic cigarettes and vaporizers have eclipsed the on-line sales volumes in the U.S. market. Tobacco products, most notably
cigarettes are currently sold in approximately 400,000 retail locations. We believe that future growth of vaporizers and electronic
cigarettes is dependent on either higher volume, lower margin sales channels, like the broad based distribution network through
which cigarettes are sold or through Company- owned stores. Thus, we are focusing on growing our retail distribution reach
by opening retail stores and entering into distribution agreements with large and established value added resellers. We currently
have established relationships with several large retailers and national chains and in connection therewith we have agreed to
pay slotting fees based on the number of stores our products will be carried in. These existing relationships are “at-will”
meaning that either party may terminate the relationship for any reason or no reason at all. We believe that these higher volume
lower margin opportunities are critical towards broadening the reach and appeal of vaporizers and electronic cigarettes and we
believe that as vaporizers and electronic cigarettes become more widely known and available, the market for our products will
grow. In 2015, we have closed eight of our nine kiosks and are focusing on acquiring and developing the vape stores in
Florida. In addition, we are in the process of launching a franchise program, although we cannot assure you this program will
be successful.
Distribution
of our Products in Canada
Under
our private label production and supply agreement with Spike Marks Inc./Casa Cubana, or “Spikes”, we agreed to produce
and supply Spikes with such quantities of our electronic cigarettes bearing their trademark and other brand attributes for resale
within Canada. For the years ended December 31, 2014 and 2013, we had sales for distribution in Canada of $2,912,525 and $3,847,310,
respectively. The last sales order received from Spikes was in February 2015. In April 2015, we received a notice from Spikes
that we had breached the agreement and a subsequent notice of termination. Although we refute Spike’s allegations and believe
we are owed money by them, there is no assurance that we will not be required to pay them money nor recover any of the amounts
we believe we are due in accordance with the agreement. We are currently selling our products to another distributor in Canada
under an oral agreement.
Business
Strategy
We
believe and are seeing in our current stores that there is a large consumer demand centered on the vaporizer products and the
“atmosphere” created by the vape stores . Additionally, our business strategy leverages our ability to design
market and develop multiple vaporizer and e-cigarette brands and to bring those brands to market through our multiple distribution
channels.
We
believe we were among the first distributors of vaporizers and electronic cigarettes in the U.S. Thus, we believe that our reputation
and our experience in the electronic cigarette industry, both from a development, customer service and production perspective
give us an advantage in attracting customers, specifically re-sellers who require ongoing support, reliable and consistent supply
chains and mechanisms in place for supporting broad based distributors and big box retailers.
Moreover,
we believe that our history with our suppliers, including the volume of products we source, gives us an advantage over other market
participants as it relates to favorable pricing, priority as to inventory supply and delivery and first access to new products,
including first access to next generation electronic cigarette products and technology.
Our
goal is to achieve a position of sustainable leadership in the vaporizer industry. Our strategy consists of the following key
elements:
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continue
to expand the footprint of the vape stores ; |
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develop
new brands and engineer product offerings; |
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continue
to shift our product focus from e-cigarettes to vaporizers; |
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seek
potential franchisees for the vape stores ; |
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invest
in and leverage our new and existing brands through marketing and advertising; |
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increase
our presence in national and regional retailers; |
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expand
our brand awareness and online web presence; |
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introduce
our products to the consumer through increased infomercial broadcasts; |
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develop
continuity programs for our end user customers; |
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expanding
into new potential markets; |
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scale
our distribution through strategic resale partnerships; and |
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align
our product offerings and cost with market demand. |
Competition
Competition
in the electronic cigarette industry, including the vaporizer and e-liquid segments, is intense. We compete with other sellers
of electronic cigarettes, most notably Lorillard, Inc., Altria Group, Inc. and Reynolds American, Inc., which are big tobacco
companies that have electronic cigarette business segments. The nature of our competitors is varied as the market is highly fragmented
and the barriers to entry into the business are low. Our direct competitors sell products that are substantially similar to ours
and through the same channels through which we sell our electronic cigarette products. We compete with these direct competitors
for sales through distributors, wholesalers and retailers, including but not limited to national chain stores, tobacco shops,
gas stations, travel stores, shopping mall kiosks, in addition to direct to public sales through the Internet, mail order and
telesales.
As
a general matter, we have access to market and sell the similar vaporizers and electronic cigarettes as our competitors and we
sell our products at substantially similar prices as our competitors; accordingly, the key competitive factors for our success
is the quality of service we offer our customers, the scope and effectiveness of our marketing efforts, including media advertising
campaigns and, increasingly, the ability to identify and develop new sources of customers.
Part
of our business strategy focuses on the establishment of contractual relationships with distributors. We are aware that e-cigarette
competitors in the industry are also seeking to enter into such contractual relationships. In many cases, competitors for such
contracts may have greater management, human, and financial resources than we do for entering into such contracts and for attracting
distributor relationships. Furthermore, certain of our electronic cigarette and vaporizer competitors may have better control
of their supply and distribution, be better established, larger and better financed than our Company.
As
discussed above, we compete against “big tobacco”, U.S. cigarette manufacturers of both conventional tobacco cigarettes
and electronic cigarettes like Altria Group, Inc., Lorillard, Inc. and Reynolds American, Inc. We compete against “big tobacco”
who offers not only conventional tobacco cigarettes and electronic cigarettes but also smokeless tobacco products such as “snus”
(a form of moist ground smokeless tobacco that is usually sold in sachet form that resembles small tea bags), chewing tobacco
and snuff. “Big tobacco” has nearly limitless resources, global distribution networks in place and a customer base
that is fiercely loyal to their brands. Furthermore, we believe that “big tobacco” will devote more attention and
resources to developing and offering electronic cigarettes as the market for electronic cigarettes grows. Because of their well-established
sales and distribution channels, marketing expertise and significant resources, “big tobacco” is better positioned
than small competitors like us to capture a larger share of the electronic cigarette market.
Manufacturing
We
have no manufacturing capabilities and do not intend to develop any manufacturing capabilities. Third party manufacturers manufacture
our products to meet our design specifications. We depend on third party manufacturers for our vaporizers, electronic cigarettes
and accessories. Our customers associate certain characteristics of our products including the weight, feel, draw, unique flavor,
packaging and other attributes of our products to the brands we market, distribute and sell. Any interruption in supply and or
consistency of our products may harm our relationships and reputation with customers, and have a material adverse effect on our
business, results of operations and financial condition. In order to minimize the risk of supply interruption, we currently utilize
several third party manufacturers to manufacture our products to our specifications.
We
currently utilize approximately 13 different manufacturers, all of which are based in China. We contract with our manufacturers
on a purchase order basis. We do not have any output or requirements contracts with any of our manufacturers. Our manufacturers
provide us with finished products, which we hold in inventory for distribution, sale and use. Certain Chinese factories and the
products they export have recently been the source of safety concerns and recalls, which is generally attributed to lax regulatory,
quality control and safety standards. Should Chinese factories continue to draw public criticism for exporting unsafe products,
whether those products relate to our products or not, we may be adversely affected by the stigma associated with Chinese production,
which could have a material adverse effect on our business, results of operations and financial condition.
Although
we believe that several alternative sources for our products are available, any failure to obtain the components, chemical constituents
and manufacturing services necessary for the production of our products would have a material adverse effect on our business,
results of operations and financial condition.
Source
and Availability of Raw Materials
We
believe that an adequate supply of product and raw materials will be available to us as needed and from multiple sources and suppliers.
Intellectual
Property
We
have developed and trademarked or are preparing to commercialize additional products. We include product development expenses
as part of our operating expenses. We currently own no patents which are material to our business. We have a number of patent
applications pending in the United States including those described below. There is no assurance that we will be awarded patents
for of any of these pending patent applications.
Soft
Tip Filters
We
have a patent pending for a soft-tip electronic cigarette filter, which more closely resembles the tactile experience of a conventional
tobacco cigarette in a user’s mouth. To date electronic cigarettes have been made of metal and hard plastic and do not offer
users the same malleable feel as the cellulose filters of conventional tobacco cigarettes.
Electronic
Cigarette Air Flow Sensor Patent
We
have a patent pending on a new configuration for the air flow sensors currently used in electronic cigarettes. The new configuration
will allow the battery to be sealed to enhance the reliability and performance of the electronic cigarette.
Vaporizer
Biometric Fingerprint Lock Sensor Patent
We
have a patent pending for a biometric fingerprint lock sensor that can be used in vaporizers. The biometric fingerprint lock sensor
will allow the owner of the vaporizer to keep the device locked and turned off unless the authorized user unlocks the device via
fingerprint scan, protecting the device from use by another individual. This technology may be used to protect against minors
being able to turn on the device and will also deem the devices unusable in the event the device is lost or stolen.
Trademarks
We
own trademarks on certain of our brands, including: Fifty-One®, Krave®, Vapor X ®,
Alternacig®, EZSMOKER ®, Green Puffer®, Americig®, Hookah Stix®
and Smoke Star® brands. We have also filed additional trademarks, which have yet to be awarded.
Patent
Litigation
We
are a defendant in a certain patent lawsuit described in the section titled “Legal Proceedings” in this prospectus.
Such
patent lawsuit as well as any other third party lawsuits alleging our infringement of patents, trade secrets or other intellectual
property rights could force us to do one or more of the following:
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stop
selling products or using technology that contains the allegedly infringing intellectual property; |
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incur
significant legal expenses; |
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pay
substantial damages to the party whose intellectual property rights we may be found to be infringing; |
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redesign
those products that contain the allegedly infringing intellectual property; or |
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attempt
to obtain a license to the relevant intellectual property from third parties, which may not be available to us on reasonable
terms or at all. |
Third
party lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights could have a material
adverse effect on our business, results of operations and financial condition.
We
may be required to obtain licenses to patents or proprietary rights of others. We cannot assure you that any licenses required
under any such patents or proprietary rights would be made available on terms acceptable to us or at all. If we do not obtain
such licenses, we could encounter delays in product market introductions while we attempt to design around such patents, or could
find that the development, manufacture, or sale of products requiring such licenses could be foreclosed. Litigation may be necessary
to defend against claims of infringement asserted against us by others, or assert claims of infringement to enforce patents issued
to us or exclusively licensed to us, to protect trade secrets or know-how possessed by us, or to determine the scope and validity
of the proprietary rights of others. In addition, we may become involved in oppositions in foreign jurisdictions, reexaminations
declared by the United States Patent and Trademark Office, or interference proceedings declared by the United States Patent and
Trademark Office to determine the priority of inventions with respect to our patent applications or those of our licensors. Litigation,
opposition, reexamination or interference proceedings could result in substantial costs to and diversion of effort by us, and
may have a material adverse impact on us. In addition, we cannot assure you that our efforts to maintain or defend our patents
will be successful.
Government
Regulation
Since
a 2010 U.S. Court of Appeals decision, the FDA is permitted to regulate electronic cigarettes as “tobacco products”
under the Family Smoking Prevention and the Tobacco Control Act. Under this 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. This is contrary to anti-smoking devices like nicotine patches,
which undergo more extensive FDA regulation. Because Vapor does not market Vapor’s electronic cigarettes for therapeutic
purposes, Vapor’s electronic cigarettes are subject to being classified as “tobacco products” under the Tobacco
Control Act. 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.
On
April 24, 2014, the FDA released proposed rules that would extend its regulatory authority to electronic cigarettes and certain
other tobacco products under the Tobacco Control Act. The proposed rules would require that electronic cigarette manufacturers
(i) register with the FDA and report electronic cigarette product and ingredient listings; (ii) market new electronic cigarette
products only after FDA review; (iii) only make direct and implied claims of reduced risk if the FDA confirms that scientific
evidence supports the claim and that marketing the electronic cigarette product will benefit public health as a whole; (iv) not
distribute free samples; (v) implement minimum age and identification restrictions to prevent sales to individuals under age 18;
(vi) include a health warning; and (vii) not sell electronic cigarettes in vending machines, unless in a facility that never admits
youth. The proposed rules were subject to a 75-day public comment period, following which the FDA will finalize the proposed rules.
It is not known how long this regulatory process to finalize and implement the rules may take. Accordingly, Vapor cannot predict
the content of any final rules from the proposed rules or the impact they may have. See the risk factor on page 6 which also
discusses possible additional FDA rulemaking.
In
this regard, total compliance and related costs are not possible to predict and depend substantially on the future requirements
imposed by the FDA under the Tobacco Control Act. Costs, however, could be substantial and could have a material adverse effect
on Vapor’s business, results of operations and financial condition. In addition, failure to comply with the Tobacco Control
Act and with FDA regulatory requirements could result in significant financial penalties and could have a material adverse effect
on Vapor’s business, financial condition and results of operations and ability to market and sell Vapor’s products.
At present, it is difficult to predict whether the Tobacco Control Act will impact Vapor to a greater degree than competitors
in the industry, thus affecting Vapor’s competitive position.
State
and local governments currently legislate and regulate tobacco products, including what is considered a tobacco product, how tobacco
taxes are calculated and collected, to whom and by whom tobacco products can be sold and where tobacco products may or may not
be smoked. State and local regulation of the e-cigarette market and the usage of e-cigarettes is beginning to accelerate.
As
local regulations expand, vaporizers and electronic cigarettes may lose their appeal as an alternative to cigarettes, which may
have the effect of reducing the demand for Vapor’s products and as a result have a material adverse effect on Vapor’s
business, results of operations and financial condition.
At
present, neither the Prevent All Cigarette Trafficking Act (which prohibits the use of the U.S. Postal Service to mail most tobacco
products, which would require individuals and businesses that make interstate sales of cigarettes or smokeless tobacco to comply
with state tax laws) nor the Federal Cigarette Labeling and Advertising Act (which governs how cigarettes can be advertised and
marketed) apply to electronic cigarettes. The application of either or both of these federal laws to vaporizers and electronic
cigarettes would have a material adverse effect on Vapor’s business, results of operations and financial condition.
On July 1, 2015, the
FDA published a document entitled “Advanced notice of proposed rulemaking” or the Advance. Through the Advance, the
FDA solicited public comments on whether it should issue rules with respect to nicotine exposure warning and child-resistant packaging
for e-liquids containing nicotine. Following public comment, the FDA may issue proposed rules in furtherance of the purposes outlined
in the Advance and ultimately pass the rules as proposed or in modified form. We cannot predict whether if rules are passed it
will have a material adverse effect on our future results of operations and financial conditions.
Vapor
expects that the tobacco industry will experience significant regulatory developments over the next few years, driven principally
by the World Health Organization’s FCTC. The FCTC is the first international public health treaty on tobacco, and its objective
is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging
cessation. Regulatory initiatives that have been proposed, introduced or enacted include:
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the
levying of substantial and increasing tax and duty charges; |
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restrictions
or bans on advertising, marketing and sponsorship; |
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the
display of larger health warnings, graphic health warnings and other labelling requirements; |
|
|
|
|
● |
restrictions
on packaging design, including the use of colors and generic packaging; |
|
|
|
|
● |
restrictions
or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines; |
|
|
|
|
● |
requirements
regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels; |
|
|
|
|
● |
requirements
regarding testing, disclosure and use of tobacco product ingredients; |
|
|
|
|
● |
increased
restrictions on smoking in public and work places and, in some instances, in private places and outdoors; |
|
|
|
|
● |
elimination
of duty free allowances for travelers; and |
|
|
|
|
● |
encouraging
litigation against tobacco companies. |
If
Vaporizers, electronic cigarettes, or e-liquids, are subject to one or more significant regulatory initiates enacted under the
FCTC, Vapor’s business, results of operations and financial condition could be materially and adversely affected.
Employees
As
of June 29 , 2015, we had 93 full-time employees and three part-time employees, none of which are represented by
a collective bargaining agreement. We believe that our employee relations are good.
Legal
Proceedings
On
June 22, 2012, Ruyan filed a lawsuit against the Company alleging infringement of U.S. Patent No. 8,156,944, entitled “Aerosol
Electronic Cigarette” (the “944 Patent”). Ruyan also filed separate cases for patent infringement against nine
other defendants also asserting infringement of the ’944 Patent. Ruyan’s lawsuit against the Company captioned as
Ruyan Investment (Holdings) Limited v. Vapor Corp., No. 12-cv-5466, is pending in the United States District Court for the Central
District of California. All of these lawsuits have been consolidated for discovery and pre-trial purposes. On February 25, 2013,
Ruyan’s patent infringement lawsuit against the Company as well as all of the other consolidated lawsuits were stayed as
a result of the Court granting a stay in one of the consolidated lawsuits. The Court granted the motion to stay Ruyan’s
lawsuit against the Company and the other defendants based on the filing of a request for inter partes reexamination of the ’944
Patent at the U.S. Patent and Trademark Office. As a result of the stay, all of the consolidated lawsuits involving the ’944
Patent were stayed until the reexamination is completed. As a condition to granting the stay of all the lawsuits, the Court required
any other defendant who desires to seek reexamination of the ’944 Patent and potentially seek another stay (or an extension
of the existing stay) based on any such reexamination to seek such reexamination no later than July 1, 2013. Two other defendants
sought reexamination of the ’944 Patent before expiration of such Court-imposed deadline of July 1, 2013. All reexamination
proceedings of the ’944 Patent were stayed by the United States Patent and Trademark Office Patent Trial and Appeal Board
pending its approval of one or more of them. On December 24, 2014, the Patent Trial and Appeal Board issued its ruling that all
of the challenged claims in the reexamination proceedings of the ’944 patent were invalid except for one claim. To the extent
this claim is asserted against the Company, the Company will vigorously defend itself against such allegations. Currently, the
case remains stayed.
On
March 5, 2014, Fontem Ventures, B.V. and Fontem Holdings 1 B.V. (the successors to Ruyan) filed a complaint against the Company
in the U.S. District Court for the Central District of California, captioned Fontem Ventures B.V., et al. v. Vapor Corp., No.
14-cv-1650. The complaint alleges infringement of U.S. Patent No. 8,365,742, entitled “Aerosol Electronic Cigarette”,
U.S. Patent No. 8,375,957, entitled “Electronic Cigarette” (the “957 Patent”), U.S. Patent No. 8,393,331,
entitled “Aerosol Electronic Cigarette” (the “331 Patent”) and U.S. Patent No. 8,490,628, entitled “Electronic
Atomization Cigarette” (the “628 Patent”). On April 8, 2014, plaintiffs amended their complaint to add U.S.
Patent No. 8,689,805, entitled “Electronic Cigarette” (the “805 Patent”). The products accused of infringement
by plaintiffs are various Krave, Fifty-One and Hookah Stix products and parts. Nine other companies were also sued in separate
lawsuits alleging infringement of one or more of the patents listed above. The Company filed its Answer and Counterclaims on May
1, 2014 and believes the claims are without merit. Other defendants have filed petitions for inter partes review of the ’742,
’957, ’331, ’628 and ’805 Patents at the U.S. Patent and Trademark Office. The U.S. Patent and Trademark
Office has already instituted the majority of the petitions, with decisions on whether to institute additional petitions expected
soon.
On
October 21, 2014, Fontem Ventures B.V. and Fontem Holdings 1 B.V. filed a complaint against the Company in the U.S. District Court
for the Central District of California, captioned Fontem Ventures B.V., et al. v. Vapor Corp., No. 14-cv-8155. The complaint alleges
infringement of United States Patent No. 8,863,752, entitled “Electronic Cigarette” and U.S. Patent No. 8,893,726,
entitled “Electronic Cigarette”. The products accused of infringement by plaintiffs are various Krave, Fifty-One,
Vapor X and Hookah Stix products and parts. On January 15, 2015, the Company filed its Answer and Counterclaims. The Company
will vigorously defend itself against such allegations.
On
December 2, 2014, Fontem Ventures B.V. and Fontem Holdings 1 B.V. filed a complaint against the Company in the U.S. District Court
for the Central District of California, captioned Fontem Ventures B.V., et al. v. Vapor Corp., No. 14-cv-09267. The complaint
alleges infringement of United States Patent No. 8,899,239, entitled “Electronic Cigarette”. The products accused
of infringement by plaintiffs are various Krave, Vapor X, Hookah Stix and Fifty-One products and parts. Fontem amended its complaint
on December 16, 2014, to allege infringement of United States Patent No. 8,910,641, entitled “Electronic Cigarette”
against the same products. On January 15, 2015, the Company filed its Answer and Counterclaims. The Company will vigorously defend
itself against such allegations.
All
of the above referenced cases filed by Fontem in 2014 have been consolidated and are currently scheduled for trial in November
2015.
On
June 22, 2015, the Center for Environment Health, as plaintiff, filed suit against a number of defendants including Vapor Corp.,
its wholly-owned subsidiary, the Vape Store, Inc., Vaporin and another wholly-owned subsidiary, Vaporin Florida, Inc. The lawsuit
was filed in the Superior Court of the State of California, County of Alameda. The suit seeks relief under California Proposition
65 which makes it unlawful for businesses to knowingly and intentionally expose individuals in California to chemicals known to
cause birth defects or other harm without providing clear and reasonable warnings. All of the defendants are alleged to have sold
products containing significant quantities of nicotine in violation of Proposition 65. The plaintiff is seeking a civil penalty
against these defendants in the amount of $2,500 per day for each violation of Proposition 65, together with attorneys’
fees and costs. The Company and its subsidiaries are in the process of hiring counsel and intend to defend the allegations. The
Company believes that all of the products sold by Vapor Corp. have always contained an appropriate warning. The Vape Store, Inc.,
operates vape stores located only in the State of Florida and has not, to the best of its knowledge, sold any products into the
State of California.
Properties
We
lease approximately 13,323 square feet of office and warehouse facilities located at 3001 and 3091 Griffin Road, Dania Beach Florida,
under a 24 month lease agreement terminating in March 2016. In October 2013, we amended this lease to include an additional approximately
2,200 square feet.
The
Company has leases on 1 1 vape stores and one kiosk. In April 2015, the Company shut down seven of the eight kiosks
that it opened in the fourth quarter of 2014 and is negotiating terminations of these leases. Under these leases, the initial
lease terms range from one to five years.
Additionally,
we have one lease for a warehouse all located in Cape Coral, Florida.
MANAGEMENT
The following
table represents our Board:
Name |
|
Age |
|
Position |
Jeffrey
Holman |
|
46 |
|
Chairman
of the Board |
Gregory
Brauser |
|
30 |
|
Director |
William Conway III
|
|
31 |
|
Director |
Daniel
MacLachlan |
|
36 |
|
Director |
Nikhil Raman |
|
31 |
|
Director |
Board
of Director Biographies
Jeffrey
Holman has been our Chairman of the Board and Chief Executive Officer since April 2014. From February 2013 until March
4, 2015, Mr. Holman serviced as our President. Mr. Holman has been a member of our Board since May 2013 and has served as a member
of the Board of Directors of our subsidiary Smoke Anywhere since its inception on March 24, 2008. Since 1998, Mr. Holman has been
the President of Jeffrey E. Holman & Associates, P.A., a South Florida based law firm. He has also been a Partner in Holman,
Cohen & Valencia since 2000. Mr. Holman was selected as a director for his business and legal experience. In addition, as
the founder of Smoke Anywhere, Mr. Holman possesses an in-depth understanding of the challenges, risks and characteristics unique
to our industry.
Gregory
Brauser has served as a director since March 4, 2015. Prior to that, Mr. Brauser served as Chief Operating Officer of
Vaporin beginning in January 2014. Mr. Brauser founded Direct Source China in 2009, a sourcing company headquartered in Shanghai,
China, that assists mid-size U.S. businesses with their direct manufacturing overseas. Since 2010, Mr. Brauser has served as Vice
Chairman and director of Dog-E-Glow, Inc., a manufacturer and distributer of LED lighted dog collars and leashes, which he formed.
Mr. Brauser was appointed as a Vaporin designee in connection with the merger with Vaporin, Inc.
William Conway III has
been a director since June 2015. Since 2008, Mr. Conway has served in management positions with City Furniture, with the latest
being Director of Operations and Customer Service. Mr. Conway was appointed as a director for his business and operating
expertise.
Daniel
MacLachlan has been a director since April 18, 2015. Mr. MacLachlan served as the Chief Financial Officer of The Best
One, Inc., from October 2014 through early February 2015, facilitating its merger with IDI, Inc. (FKA, Tiger Media, Inc.) (NYSE
MKT: IDI). Mr. MacLachlan served as Director of Finance and Chief Financial Officer for TransUnion Risk and Alternative Data Solutions,
Inc., after it acquired substantially all the assets of TLO, LLC (“TLO”), a leading provider of data fusion technology-driven
investigative products and solutions, in December 2013. Mr. MacLachlan was Chief Financial Officer of TLO since its inception
in 2009. Mr. MacLachlan was appointed a director for his financial and accounting expertise.
Nikhil
Raman was appointed as a director on July 7, 2015. Since November 6, 2014, Mr. Raman has been the Chief Executive
Officer of usell.com, Inc. (OTCQB: USEL), a technology based company focused on creating an online marketplace for used cell phones.
Mr. Raman has served as a director of usell.com since April 24, 2012. From January 27, 2012 until November 6, 2014, Mr. Raman
served as the Chief Operating Officer of usell.com. After graduating from Harvard Business School, Mr. Raman founded and served
as Manager of Ft. Knox Recycling, LLC doing business as EcoSquid. Mr. Raman also served as Chief Executive Officer of EcoSquid
from its founding through its acquisition by usell.com in April 2012. From 2008 until 2010, Mr. Raman attended Harvard Business
School. Mr. Raman was appointed as a director for his management and operations expertise.
Executive
Officers
Name |
|
Age |
|
Position |
Jeffrey
Holman |
|
46 |
|
Chief
Executive Officer |
Gregory
Brauser |
|
30 |
|
President
|
James
Martin |
|
48 |
|
Chief
Financial Officer |
Christopher
Santi |
|
43 |
|
Chief
Operating Officer |
Executive
Officer Biographies
See
above for Mr. Jeffrey Holman’s and Mr. Gregory Brauser’s biographies.
James
Martin has served as Chief Financial Officer since March 4, 2015. Prior to that, Mr. Martin served as Chief Financial
Officer of Vaporin, Inc. beginning in April 2014. Prior to his appointment as Chief Financial Officer of Vaporin, Mr. Martin was
Chief Financial Officer of Non-Invasive Monitoring Systems, Inc., or “NIMS”, a publicly held medical device company
since January 2011. Mr. Martin previously had served as Chief Financial Officer of SafeStitch Medical, Inc., a publicly-held medical
device company from January 2011 through October 2013. From January 2011 through December 2011 Mr. Martin also served as Vice
President of Finance of Aero Pharmaceuticals, Inc., a privately held pharmaceutical distributor that voluntarily dissolved in
December 2011. From July 2010 through January 2011, Mr. Martin served as Controller of each of NIMS, SafeStitch and Aero. Also
from May 2008 through July 2010, Mr. Martin served as Controller of AAR Aircraft Services-Miami, a subsidiary of AAR Corp, an
aerospace and defense company in which he was responsible for all financial reporting and inventory logistics.
Christopher
Santi has been our Chief Operating Officer since December 12, 2012. Prior to that Mr. Santi served as Director of Operations
of Vapor beginning in October 2011. Mr. Santi served as the National Sales Manager of Collages.net from November 2007 to October
2011.
There
are no family relationships among our directors and executive officers.
Corporate
Governance
Board
Responsibilities
The
Board oversees, counsels, and directs management in the long-term interest of Vapor and its shareholders. The Board’s responsibilities
include establishing broad corporate policies and reviewing the overall performance of Vapor. The Board is not, however, involved
in the operating details on a day-to-day basis.
Board
Committees and Charters
The
Board and its Committees meet throughout the year and act by written consent from time-to-time as appropriate. The Board delegates
various responsibilities and authority to different Board Committees. Committees regularly report on their activities and actions
to the Board.
The
Board currently has and appoints the members of: the Audit Committee, the Compensation Committee and the Nominating and Corporate
Governance Committee. Each of these committees have a written charter which can be found on our corporate website at ir.vapor-corp.com/committee-charters.
The
following table identifies the independent and non-independent current Board and committee members:
Name |
|
Independent
|
|
Audit
|
|
Compensation |
|
Nominating
and Corporate
Governance |
Jeffrey Holman |
|
|
|
|
|
|
|
|
Gregory Brauser |
|
|
|
|
|
|
|
|
William Conway III
|
|
x |
|
x |
|
x |
|
x |
Daniel MacLachlan |
|
x |
|
x |
|
x |
|
x |
Nikhil Raman |
|
x |
|
x |
|
x |
|
x |
Director
Independence
Our
Board has determined that William Conway III, Nikhil Raman and Daniel MacLachlan are independent in accordance with
standards under the Nasdaq Listing Rules. Our Board determined that as a result of being executive officers, Messrs. Jeffrey Holman
and Gregory Brauser were not independent under the Nasdaq Listing Rules. Our Board has also determined that William Conway
III, Nikhil Raman and Daniel MacLachlan are independent under the Nasdaq Listing Rules independence standards for
Audit Committee members.
Committees
of the Board
Audit
Committee
The
Audit Committee, which currently consists of William Conway III, Nikhil Raman and Daniel MacLachlan, reviews Vapor’s
financial reporting process on behalf of the Board and administers our engagement of the independent registered public accounting
firm. The Audit Committee approves all audit and non-audit services, and reviews the independence of our independent registered
public accounting firm.
Audit
Committee Financial Expert
Our
Board has determined that Daniel MacLachlan and Nikhil Raman both qualified as Audit Committee Financial Experts ,
as that term is defined by the rules of the SEC and in compliance with the Sarbanes-Oxley Act of 2002.
Compensation
Committee
The
function of the Compensation Committee is to determine the compensation of our executive officers. The Compensation Committee
has the power to set performance targets for determining periodic bonuses payable to executive officers and may review and make
recommendations with respect to shareholder proposals related to compensation matters. Additionally, the Compensation Committee
is responsible for administering Vapor’s equity compensation plans including the Plan.
The
members of the Compensation Committee are all independent directors within the meaning of applicable Nasdaq Listing Rules and
all of the members are “non-employee directors” within the meaning of Rule 16b-3 under the Securities Exchange Act
of 1934, or the Exchange Act.
Nominating
and Corporate Governance Committee
The
responsibilities of the Nominating and Corporate Governance Committee include the identification of individuals qualified to become
Board members, the selection of nominees to stand for election as directors, the oversight of the selection and composition of
committees of the Board, establish procedures for the nomination process including procedures and the oversight of the evaluations
of the Board and management. The Nominating and Corporate Governance Committee has not established a policy with regard to the
consideration of any candidates recommended by shareholders since no shareholders have made any recommendations. If we receive
any shareholder recommended nominations, the Nominating Committee will carefully review the recommendation(s) and consider such
recommendation(s) in good faith.
EXECUTIVE
AND DIRECTOR COMPENSATION
Non-employee
directors are paid a monthly fee of $1,000 per month and $1,000 for each meeting attended. Because we do not pay any compensation
to employee directors, Messrs. Holman and Frija are omitted from the following table.
Fiscal
2014 Director Compensation
Name
(a) | |
Fees
Earned or
Paid in Cash
($)(b) | | |
Option
Awards
($)(d)(1) | | |
All
Other
Compensation
($)(g) | | |
Total
($)(j) | |
Robert J Barrett III (2) | |
| 27,000 | | |
| 388,800 | | |
| 0 | | |
| 415,800 | |
| |
| | | |
| | | |
| | | |
| | |
Angela Courtin | |
| 21,000 | | |
| 388,800 | | |
| 0 | | |
| 409,800 | |
| |
| | | |
| | | |
| | | |
| | |
Frank E. Jaumot (3) | |
| 27,000 | | |
| 388,800 | | |
| 0 | | |
| 415,800 | |
| |
| | | |
| | | |
| | | |
| | |
Ryan Kavanaugh (2) | |
| 13,000 | | |
| 498,000 | | |
| 1,540,000
| (4) | |
| 2,051,000 | |
(1)
|
This
represents the fair value of the award as of the grant date in accordance with FASB ASC Topic 718. These amounts represent
awards that are paid in shares of common stock or options to purchase shares of our common stock and do not reflect the actual
amounts that may be realized by the directors. In April 2014, these directors were granted 12 ,000 stock options exercisable
at $32.40 and vesting in three equal annual increments beginning April 25, 2015. |
|
|
(2) |
Messrs. Barrett and Kavanaugh
and Ms. Courtin resigned prior to the date of this prospectus.
|
|
|
(3) |
Did not stand for re-election in connection with the 2015 Annual Meeting. |
|
|
(4) |
Represents
40 ,000 shares of common stock issued in connection with consulting services. See footnote (1) above. |
Summary
Compensation Table
The
following table sets forth information regarding the compensation for services performed during fiscal years 2014 and 2013, awarded
to, paid to or earned by our Named Executive Officers, which include all Chief Executive Officers serving during fiscal 2014 and
(iii) our two other most highly compensated executive officers, as determined by reference to total compensation for fiscal year
2014, who were serving as executive officers at the end of fiscal year 2014.
Name
and
Principal
Position
(a) | |
Year
(b) | | |
Salary
($)(c) | | |
Bonus
($)(d)(1) | | |
All
Other
Compensation
($)(i) | | |
Total
($)(j) | |
| |
| | |
| | |
| | |
| | |
| |
Jeffrey Holman(2) | |
| 2014 | | |
| 182,000 | | |
| 0 | | |
| 0 | | |
| 182,000 | |
Chief Executive Officer | |
| 2013 | | |
| 169,400 | | |
| 20,000 | | |
| 0 | | |
| 189,400 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Kevin Frija(2) | |
| 2014 | | |
| 53,203 | | |
| 0 | | |
| 85,615
| (3) | |
| 138, 818 | |
Former Chief Executive Officer | |
| 2013 | | |
| 150,404 | | |
| 20,000 | | |
| 0 | | |
| 170,404 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Harlan Press | |
| 2014 | | |
| 188,339 | | |
| 0 | | |
| 0 | | |
| 188,389 | |
Former Chief Financial Officer | |
| 2013 | | |
| 179,939 | | |
| 20,000 | | |
| 10,442
| (4) | |
| 210,381 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Christopher Santi | |
| 2014 | | |
| 162,246 | | |
| 0 | | |
| 0 | | |
| 162,246 | |
Chief Operating Officer | |
| 2013 | | |
| 156,231 | | |
| 20,000 | | |
| 0 | | |
| 176,231 | |
(1) |
Represent
cash bonuses for 2013 which were paid on February 28, 2014. |
|
|
(2) |
In April 2014, Mr. Holman replaced
Mr. Frija as Chief Executive Officer.
|
|
|
(3) |
Represents severance payments.
|
|
|
(4) |
Represents
a cash payment for unused accrued vacation for 2013 that was paid on November 15, 2013. |
Named
Executive Officer Employment Agreements
The
chart below summarizes the terms and conditions of employment agreements with our Named Executive Officers.
Executive
(1) | |
Term
| |
Base
Salary |
| |
| |
|
Jeffrey
Holman | |
February 11, 2013 through
December 31, 2015 which shall automatically be renewed unless either party is given six months’ notice of non-renewal | |
$182,000 |
| |
| |
|
Christopher Santi
(2) | |
December 12, 2012 through December 11,
2015 which shall automatically be renewed unless either party is given six months’ notice of non-renewal | |
$156,000 in first year, increasing to
$162,000 in second year and $170,000 thereafter. Currently, $170,000 |
(1) |
Mr.
Harlan Press, a Named Executive Officer, resigned effective April 10, 2015. He will receive
nine-months’ severance and accrued vacation in the amount of approximately $159,000.
|
|
|
(2) |
In
accordance with his Employment Agreement, Mr. Santi received a 10-year option to purchase up to 4,000 shares of the
Company’s common stock at an exercise price of $6.25 , vesting monthly at the rate of approximately 111
per month. |
The
Compensation Committee will have the discretion to award each of the Named Executive Officers a bonus based upon job performance
or any other factors determined by the Compensation Committee.
Termination
Provisions
The
table below describes the severance payments that our Named Executive Officers are entitled to in connection with a termination
of their employment upon death, disability, dismissal without cause, Change of Control or for Good Reason. All of the termination
provisions are intended to comply with Section 409A of the Internal Revenue Code of 1986 and the Regulations thereunder.
|
|
Holman |
|
Press |
|
Santi |
|
|
|
|
|
|
|
Death
or Total Disability |
|
Any
amounts due at time of termination |
|
Any
amounts due at time of termination |
|
Any
amounts due at time of termination |
|
|
|
|
|
|
|
Dismissal Without
Cause or Termination by Executive for Good Reason or upon a Change of Control (1) |
|
Three
months of Base Salary for each year of service, up to 18 months maximum |
|
Three
months of Base Salary for each year of service, up to 18 months maximum |
|
Two
months of Base Salary for each year of service, up to 12 months maximum |
(1)
|
Good
Reason is generally (with certain exceptions) defined as (i) a relocation of principal place of employment outside a stated
area, (ii) a material reduction in Base Salary, (iii) the diminution of the Named Executive Officers’ duties, or (iv)
any other action or inaction that constitutes a material failure by Vapor to fulfill its obligations under the Employment
Agreements. All of these events are subject to a 30-day cure period. |
|
|
(2) |
Change
of Control is generally defined as (i) a sale of substantially all of the Company, (ii) any “person” (as such
term is defined under the Exchange Act) becomes the beneficial owners of over 50% of the Company’s voting power, (iii)
a change in the majority of the composition of the Board or (iv) a transaction that results in over 50% of the Company’s
voting power ceasing to hold a majority of the voting power post-transaction. |
Risk
Assessment Regarding Compensation Policies and Practices as they Relate to Risk Management
Our
compensation program for employees does not create incentives for excessive risk taking by our employees or involve risks that
are reasonably likely to have a material adverse effect on us. Our compensation has the following risk-limiting characteristics:
|
● |
Our
base pay programs consist of competitive salary rates that represent a reasonable portion of total compensation and provide
a reliable level of income on a regular basis, which decreases incentive on the part of our executives to take unnecessary
or imprudent risks; |
|
|
|
|
● |
A
portion of executive incentive compensation opportunity is tied to long-term incentive compensation that emphasizes sustained
performance over time. This reduces any incentive to take risks that might increase short-term compensation at the expense
of longer term company results; |
|
|
|
|
● |
Awards
are not tied to formulas that could focus executives on specific short-term outcomes; |
|
|
|
|
● |
Equity
awards may be recovered by us should a restatement of earnings occur upon which incentive compensation awards were based,
or in the event of other wrongdoing by the recipient; and |
|
|
|
|
● |
Equity
awards, generally, have multi-year vesting which aligns the long-term interests of our executives with those of our shareholders
and, again, discourages the taking of short-term risk at the expense of long-term performance. |
Outstanding
Equity Awards
Listed
below is information with respect to unexercised options, stock that has not vested and equity incentive awards for each Named
Executive Officer as of December 31, 2014:
Outstanding
Equity Awards At Fiscal Year-End
Name
(a) | | |
Number
of
Securities Underlying Unexercised Options (#) Exercisable (b) | | |
Number
of
Securities Underlying Unexercised Options (#) Unexercisable (c) | |
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
or Unearned Options (#) (d) | | |
Option
Exercise Price ($) (e) | | |
Option
Expiration Date (f) | |
| | |
| | |
|
| |
| | |
| | |
| |
Jeffrey Holman | | |
| | | |
|
| |
| | | |
| | | |
| | |
| | |
| 24,000 | | |
0 |
(1) | |
| | | |
| 11 .25 | | |
| 10/1/15 | |
| | |
| | | |
|
| |
| | | |
| | | |
| | |
Kevin Frija | | |
| | | |
|
| |
| | | |
| | | |
| | |
| | |
| 36,000 | | |
0 |
(1) | |
| | | |
| 11 .25 | | |
| 10/1/15 | |
| | |
| | | |
|
| |
| | | |
| | | |
| | |
Harlan Press | | |
| | | |
|
| |
| | | |
| | | |
| | |
| | |
| 7,556 | | |
445 |
(2) | |
| | | |
| 5 .00 | | |
| 2/28/22 | |
| | |
| | | |
|
| |
| | | |
| | | |
| | |
Christopher Santi | | |
| | | |
|
| |
| | | |
| | | |
| | |
| | |
| 4,000 | | |
2,000 |
(3) | |
| | | |
| 5.75 | | |
| 3/29/22 | |
| | |
| 2,778 | | |
1,223 |
(4) | |
| | | |
| 6 .25 | | |
| 12/11/22 | |
(1) |
This
option is fully vested. |
|
|
(2) |
These
unvested options, at December 31, 2014, were fully vested as of the date of this prospectus. |
|
|
(3) |
Of
the unvested options, ½ vested on March 30, 2015 and ½ will vest on March 30, 2016. |
|
|
(4) |
The
unvested options vested, or will vest, in 11 equal monthly increments beginning January 11, 2015. |
CERTAIN
RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
In
connection with the issuance of $300,000 18% senior convertible notes, which we refer to as the “$300,000 Senior Convertible
Notes”, in 2012 to Kevin Frija, Vapor’s then Chief Executive Officer, Harlan Press, Vapor’s then Chief Financial
Officer, and Doron Ziv, a greater than 10% shareholder of Vapor, Vapor paid $48,674 of interest to these noteholders in 2013 until
these notes were converted in full into shares of the Company’s common stock on October 29, 2013. The Company did not pay
any principal on the $300,000 Senior Convertible Notes in 2013 prior to or in connection with their conversion.
In
connection with the issuance of a $500,000 24% senior note, which we refer to as the “Senior Note”, in 2012 to Ralph
Frija, the father of the Company’s then Chief Executive Officer, Vapor paid approximately $106,800 of interest to this noteholder
in 2013 until it was converted in full into shares of the Company’s common stock on October 29, 2013. The Senior Note was
not convertible until Vapor and Ralph Frija amended the Note to provide for (i) cash principal and interest payments on a weekly
basis, (ii) an extended maturity date for payment to April 22, 2016 and (iii) to make the Senior Note convertible into shares
of Vapor’s common stock at a conversion price of $12.85 per share. The Company paid principal of $70,513 on the Senior
Note in 2013 prior to its conversion.
On July 9, 2013, the
Company entered into Securities Purchase Agreements with, among others, Ralph Frija, and Philip Holman, the father of Jeffrey
Holman, Vapor’s then President, pursuant to which (x) Mr. Frija purchased a senior convertible note from Vapor in the
principal amount of $200,000 and warrants to purchase 1,927 shares of the Company’s common stock at $28.55 per
share and (y) Mr. Holman purchased a senior convertible note from Vapor in the principal amount of $100,000 and warrants to purchase
192 shares of the Company’s common stock with an exercise price of $28.55 per share. These senior
convertible notes paid interest at 18% per annum, a maturity date of July 8, 2016, and were convertible into shares of the
Company’s common stock at $28.55 per share. The Company paid interest of $16,126 to these noteholders during
2013 until they were converted extinguished on October 29, 2013. The Company did not pay any principal on these senior
convertible notes prior to or in connection with their conversion.
On October 29, 2013, Kevin
Frija, our then Chief Executive Officer, Jeffrey Holman, our then President and current Chairman of the Board and Chief Executive
Officer, Harlan Press, our former Chief Financial Officer, Doron Ziv, a former director, and Isaac Galazan, a former director
of Smoke Anywhere, purchased 4 ,000, 8 ,000, 4 ,000, 4 ,000 and 3,433 shares of our common stock,
respectively, at $ 15 .00 per share in a private placement on terms identical with other investors.
In
March 2014, Mr. Kavanaugh, a former director, was elected to our Board in accordance with a Consulting Agreement between the Company
and Knight Global Services, LLC (“Knight Global”), of which Mr. Kavanaugh was the principal, pursuant to which Knight
Global was retained to assist the Company with increasing awareness of its electronic cigarette brands as well as assisting the
Company to expand and diversify its relationships with large retailers and national chains. In connection with the Consulting
Agreement, Mr. Kavanaugh was issued 40 ,000 shares of common stock. The Consulting Agreement with Knight Global has been
terminated.
On
September 23, 2014, the Company and Smoke entered into a $1,000,000 term loan (the “Term Loan”) with Entrepreneur
Growth Capital, LLC (the “Lender”) and the Lender was issued a secured promissory note (the “Secured Note”).
The Secured Note bears interest at 14% per annum and is secured by a security interest in substantially all of the Company’s
assets. The principal amount of the Term Loan is payable in 12 successive monthly installments of $83,333 with the last payment
due in September 2015. As of the date of this prospectus, the Company had $211,268 of borrowings outstanding under the Term Loan.
In connection with the Term Loan, Jeffrey Holman, the Company’s Chief Executive Officer and Harlan Press, the Company’s
former Chief Financial Officer have personally guaranteed performance of certain of the Company’s obligations under the
Term Loan.
As of June 22, 2015,
Mr. Michael Brauser, the father of our President, loaned the Company $380,000, through a company he jointly manages, on identical
terms as other investors in the offering. The Debentures: (i) mature December 22, 2015, (ii) accrue interest at 10% per year,
(iii) are convertible into common stock at $2.50 per share and (iv) are secured by a second lien on substantially all of the Company’s
assets. The principal and accrued interest on the Debentures are payable in three approximately equal installments on September
22, 2015, October 22, 2015 and December 22, 2015, at the election of the holders of the Debentures, (i) in cash for an additional
25% premium, or (ii) in common stock at $2.50 per share.
In November 2014
and March 2015, the Company had engaged in two private placements each of which precluded the Company from using capital or
otherwise issuing shares of common stock or common stock equivalents below $10.00 and $5.10, respectively. In order to raise
further capital in the June 2015 private placement, the Company was required to enter into agreements with prior investors
(including Mr. Michael Brauser and Alpha Capital Anstalt, a 5% holder) modifying these covenants. In connection with these
modifications, Mr. Brauser received 62,582 of common stock and 73,689 warrants, a company which Mr. Brauser jointly manages
received 5,570 shares and 6,558 warrants and another Alpha Capital Anstalt, which acted as the lead investor in the November
2014 and March 2015 private placements, received 262,954 shares of common stock and 142,420 warrants. See the section titled
“Private Placement” on page 23.
PRINCIPAL
SHAREHOLDERS
The following table sets forth certain information
regarding the beneficial ownership of our common stock as of July 8 , 2015, on an actual basis and as adjusted to reflect
the sale of our common stock offered by this prospectus, by:
|
● |
our
Named Executive Officers ; |
|
|
|
|
● |
each
of our directors; |
|
|
|
|
● |
all
of our current directors and executive officers as a group; and |
|
|
|
|
● |
each
shareholder known by us to own beneficially more than five percent of our common stock. |
Except
as indicated in footnotes to this table, we believe that the shareholders named in this table have sole voting and investment
power with respect to all shares of common stock shown to be beneficially owned by them, based on information provided to us by
such shareholders. Unless otherwise indicated, the address for each director and executive officer listed is: c/o Vapor Corp.,
3001 Griffin Road, Dania Beach, Florida 33312.
| |
Number of Common Share
Equivalents | | |
Percentage
of Common Share Equivalents Beneficially Owned |
|
Name
of Beneficial Owner | |
Beneficially
Owned (1) | | |
Before
Offering |
| |
After
Offering |
|
Named Executive Officers and Directors: | |
| | | |
|
| |
|
|
| |
| | | |
|
| |
|
|
Jeffrey Holman (2) | |
| 256,222 | | |
3.4% |
| |
3.4 % |
|
| |
| | | |
|
| |
|
|
Kevin Frija (3) | |
| 266,672 | | |
3.6% |
| |
3.6 % |
|
| |
| | | |
|
| |
|
|
Harlan Press (4) | |
| 31,400 | | |
* |
| |
* |
|
| |
| | | |
|
| |
|
|
Christopher Santi (5) | |
| 6,556 | | |
* |
| |
* |
|
| |
| | | |
|
| |
|
|
Gregory Brauser (6) | |
| 162,057
| | |
2.2% |
| |
2.2% |
|
| |
| | | |
|
| |
|
|
William Conway III (7)
| |
| 0 | | |
0% |
| |
0 % |
|
| |
| | | |
|
| |
|
|
Daniel MacLachlan ( 8 ) | |
| 0 | | |
0 % |
| |
0 % |
|
| |
| | | |
|
| |
|
|
Nikhil Raman (9)
| |
| 0 | | |
0% |
| |
0% |
|
| |
| | | |
|
| |
|
|
All Executive Officers and Directors
as a Group ( 7 Persons) ( 10 ) | |
| 466,374
| | |
6.2% |
| |
6.2% |
|
| |
| | | |
|
| |
|
|
Other Five Percent Shareholder : | |
| | | |
|
| |
|
|
| |
| | | |
|
| |
|
|
Alpha Capital Anstalt ( 11 ) | |
| 468,174 | | |
6.3% |
| |
6.3% |
|
* |
Represents less than 1% of the outstanding
shares of common stock |
|
|
(1) |
Applicable
percentages are based on 7,600,657 shares outstanding as of July 9 , 2015,
adjusted as required by rules of the SEC. The percentage of beneficial ownership after
the completion of this offering is also based on 7,600,657 shares of common
stock outstanding immediately after the closing of this offering. Beneficial ownership
is determined under the rules of the SEC and generally includes voting or investment
power with respect to securities. Shares of common stock underlying options, warrants
and convertible notes currently exercisable or convertible, or exercisable or convertible
within 60 days are deemed outstanding for computing the percentage of the person holding
such securities but are not deemed outstanding for computing the percentage of any other
person.
|
|
|
(2) |
Jeffrey
Holman: A director and executive officer. Includes 24 ,000 vested options. |
|
|
(3) |
Kevin
Frija: Former chief executive officer. Because Mr. Frija served as a Chief Executive Officer during fiscal 2014, he is
a Named Executive Officer under the SEC’s rules and regulations. Includes 36 ,000 vested options and 895
shares underlying warrants. |
|
|
(4) |
Harlan
Press: A former executive officer. Includes 8 ,000 vested options and 620 shares underlying warrants. |
|
|
(5) |
Christopher Santi: An executive
officer. Represents vested options. |
|
|
(6) |
Gregory Brauser: A director
and executive officer. |
|
|
(7) |
William Conway III: A
director.
|
|
|
(8) |
Daniel MacLachlan :
A director.
|
|
|
(9)
|
Nikhil Raman :
A director.
|
|
|
( 10 ) |
Total D&O: Includes securities
beneficially owned by executives who are not a Named Executive Officer. |
|
|
( 11 ) |
Alpha Capital Anstalt: Does
not include additional shares underlying warrants and convertible notes that cannot be exercised within 60 days due
to a 4.99% blocker. Address is Lettstrasse 32, P.O. Box 1212, FL 9490, Vaduz Furstentum Liechtenstein c/o LH Financial
Services Corp., 510 Madison Avenue, Ste. 1400, New York, New York 10022. |
DESCRIPTION
OF CAPITAL STOCK
Authorized
Capital
We
are authorized to issue 150 ,000,000 shares of common stock, par value $0.001 per share, and 1,000,000 shares of preferred
stock, par value $0.001 per share.
Common
Stock
We
are authorized to issue 150 ,000,000 shares of common stock, par value $0.001 per share. The holders of common stock are
entitled to one vote per share on all matters submitted to a vote of shareholders, including the election of directors. There
is no cumulative voting in the election of directors. In the event of our liquidation or dissolution, holders of common stock
are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding
shares of preferred stock. Holders of common stock have no preemptive rights and have no right to convert their common stock into
any other securities and there are no redemption provisions applicable to our common stock.
The
holders of common stock are entitled to any dividends that may be declared by the Board out of funds legally available for payment
of dividends subject to the prior rights of holders of preferred stock and any contractual restrictions we have against the payment
of dividends on common stock. For so long as our Senior Convertible Notes, due November 14, 2015, remain outstanding, we are prohibited
from paying cash dividends on our common stock and other equity securities without the approval of holders of at least 51% in
principal amount of the then outstanding notes.
Preferred
Stock
We
are authorized to issue 1,000,000 shares of “blank check” preferred stock with designations, rights and preferences
as may be determined from time to time by our Board. We presently have no preferred stock issued and outstanding. The issuance
of our preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders
will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect
of delaying, deferring or preventing a change of control or other corporate action. We have no current plan to issue any shares
of preferred stock, except pursuant to this prospectus. For a description of how issuance of our preferred stock could affect
the rights of our shareholders, see “Certain Provisions of Delaware Law and of Our Charter and Bylaws - Issuance of “Blank
Check” Preferred Stock,” below.
Warrants
As of the date of
this prospectus, warrants for the issuance of 1,331,305 shares of our common stock were outstanding, exercisable at a weighted
average exercise price of $6.46 per share, exercisable through various dates expiring through December 20 20 .
Description
of Securities We Are Offering
Units
We
are offering Units, consisting of one-fourth of a share of Series A Convertible Preferred Stock and ten Series A Warrants. Each
one-fourth share of Series A Convertible Preferred Stock will be convertible into five shares of common stock as described in
the following section. Each Series A Warrant is exercisable for one share of common stock at an initial exercise price of $[_______]
per share. The Series A Warrants are exercisable upon separation of the Units, provided that upon a Cash Warrant Exercise Trigger
the Series A Convertible Preferred Stock will not be convertible until six-months after the date of this prospectus (unless an
Early Separation occurs due to a Trading Separation Trigger or Delisting Trigger). The Series A Warrants will expire on the fifth
anniversary of the date of this prospectus. This prospectus also covers the securities issuable upon exercise of the unit purchase
option to be issued to the underwriters.
Preferred
Stock Included in the Units Offered Hereby
In
connection with this offering, we will issue as part of the Units shares of Series A Convertible Preferred Stock pursuant to a
Certificate of Designation approved by our Board. Each one-fourth share of Series A Convertible Preferred Stock will separate from
the warrants and be convertible into five shares of common stock upon the separation of the Units, provided that upon a Cash
Warrant Exercise Trigger the Series A Convertible Preferred Stock will not be convertible until six-months after the date of this
prospectus (unless an Early Separation occurs due to a Trading Separation Trigger or Delisting Trigger). The shares of Series
A Convertible Preferred Stock and the Series A Warrants will automatically separate six months after the date of this prospectus.
However, the shares of Series A Convertible Preferred Stock and the Series A Warrants will separate prior to the expiration of
the six-month period at any time after 30 days from the date of this prospectus if (i) there is a Trading Separation Trigger,
(ii) there is a Cash Warrant Exercise Trigger, which means the Series A Warrants are exercised for cash (in which case the separation
will occur solely with respect to the Units that included the exercised Series A Warrants) or (iii) there is a Delisting Trigger.
The Units will become separable: (i) 15 days after the Trading Separation Trigger date, (ii) immediately after the Cash Warrant
Exercise Trigger (solely with respect to the Units that included the exercised Series A Warrants) or (iii) immediately upon a
Delisting Trigger. In the event of a Trading Separation Trigger or a Delisting Trigger, the Preferred Stock will be convertible
into common stock immediately upon Early Separation. In the event of a Cash Warrant Exercise Trigger, the Preferred Stock will
not be convertible until six-months after the date of this prospectus (unless an Early Separation occurs due to a Trading Separation
Trigger or Delisting Trigger).
The
Series A Convertible Preferred Stock will not be convertible by the holder of such preferred stock to the extent (and only to
the extent) that the holder or any of its Affiliates would beneficially own in excess of 4.99% of the common stock of the
Company. For purposes of the limitation described in this paragraph, beneficial ownership and all determinations and calculations
are determined in accordance with Section 13(d) of the Exchange Act and the rule and regulations promulgated thereunder.
Pursuant
to the Certificate of Designation for the Series A Convertible Preferred Stock, if the Company or any of its subsidiaries
enter into a “Fundamental Transaction”, each share of Series A Convertible Preferred Stock shall be automatically
converted into shares of common stock of the Company, subject to the beneficial ownership limitation discussed in the
previous paragraph. A “Fundamental Transaction” includes, but is not limited to, (1) a consolidation, merger
stock or share purchase or other business combination in which the shareholders of the Company immediately prior to such
consolidation or merger hold less than 50% of the outstanding voting stock after such consolidation or merger, (2) sale,
lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its respective
properties or assets, or (3) allowing any person to make a purchase, tender or exchange offer that is accepted by the holders
of more than 50% of the outstanding voting stock of the Company, or any person or group becomes a beneficial owner of 50% of
the aggregate ordinary voting power represented by the issued and outstanding voting stock of the corporation.
The
Series A Convertible Preferred Stock has no voting rights, except that the holders of 100% of the Series A Convertible Preferred
Stock will be able to effect or validate any amendment, alteration or repeal of any of the provisions of the Certificate of Designation
that materially and adversely affects the powers, preferences or special rights of the Series A Convertible Preferred Stock, whether
by merger or consolidation or otherwise; provided, however, that in the event of an amendment to the terms of
the Series A Convertible Preferred Stock, including by merger or consolidation, so long as the Series A Convertible Preferred
Stock remains outstanding with the terms thereof materially unchanged, or the Series A Convertible Preferred Stock is converted
into, preference securities of the surviving entity, or its ultimate parent, with such powers, preferences or special rights,
taken as a whole, not materially less favorable to the holders of the Series A Convertible Preferred Stock than the powers, preferences
or special rights of the Series A Convertible Preferred Stock, taken as a whole, the occurrence of such event will not be deemed
to materially and adversely affect such powers, preferences or special rights of the Series A Convertible Preferred Stock, and
in such case such holders shall not have any voting rights with respect to the occurrence of such events. An amendment to the
terms of the Series A Convertible Preferred Stock only requires the vote of the holders of Series A Convertible Preferred Stock.
With
respect to payment of dividends and distribution of assets upon liquidation or dissolution or winding up of the Company, the Series
A Preferred Stock shall rank equal to the common stock of the Company. No sinking fund has been established for the retirement
or redemption of the Convertible Preferred Stock. As such, the Series A Convertible Preferred Stock is not subject to any restriction
on the repurchase or redemption of shares by the Company due to an arrearage in the payment of dividends or sinking fund installments.
The
Series A Convertible Preferred Stock also has no liquidation rights or preemption rights, and there are no special classifications
of our Board related to the Series A Convertible Preferred Stock.
Warrants
Included in the Units Offered Hereby
In connection with this offering, we will
issue as part of the Units shares of Series A Warrants to purchase shares of our common stock. The Series A Warrants will
separate from the preferred stock and be exercisable upon the separation of the Units , provided that the Series A Warrants
may be exercised for cash at any time after 30 days from the date of this prospectus, which exercise shall cause a Cash Warrant
Exercise Trigger. The Series A Warrants will terminate on the fifth anniversary of the date of this prospectus and have an
exercise price of $[_______] per share. The exercise price and number of shares of common stock issuable upon exercise
is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting
our common stock and the exercise price.
There
is no established public trading market for our Series A Warrants, and we do not expect a market to develop. We do not intend
to apply to list Series A Warrants on any securities exchange. Without an active market, the liquidity of the Series A Warrants
will be limited.
Cashless Exercise Provision. Holders
may exercise Series A Warrants by paying the exercise price in cash or, in lieu of payment of the exercise price in cash by electing
to receive a cash payment from us (subject to certain conditions not being met by the Company) equal to the Black Scholes
Value (as defined below) of the number of shares the holder elects to exercise, which we refer to as the Black Scholes Payment;
provided, that we have discretion as to whether to deliver the Black Scholes Payment or, subject to meeting certain conditions,
to deliver a number of shares of our common stock determined according to the following formula, referred to as the Cashless Exercise.
Total
Shares = (A x B) / C
Where:
|
● |
Total
Shares is the number of shares of common stock to be issued upon a Cashless Exercise |
|
|
|
|
● |
A
is the total number of shares with respect to which the Series A Warrant is then being exercised. |
|
|
|
|
● |
B
is the Black Scholes Value (as defined below). |
|
|
|
|
● |
C
is the closing bid price of our common stock as of two trading days prior to the time of such exercise. |
As
defined in the Series A Warrants, “Black Scholes Value” means the Black Scholes value of an option for one share of
our common stock at the date of the applicable Black Scholes Payment or Cashless Exercise, as such Black Scholes value is determined,
calculated using the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg utilizing (i)
an underlying price per share equal to the closing bid price of the Common Stock as of the date of this prospectus, (ii) a risk-free
interest rate corresponding to the U.S. Treasury rate for a period equal to the remaining term of the Series A Warrant as of the
applicable Black Scholes Payment or Cashless Exercise, (iii) a strike price equal to the exercise price in effect at the time
of the applicable Black Scholes Payment or Cashless Exercise, (iv) an expected volatility equal to 135% and (v) a remaining term
of such option equal to five years (regardless of the actual remaining term of the Series A Warrant).
The
shares of common stock issuable on exercise or exchange of the Series A Warrants will be duly and validly authorized and
will be, when issued, delivered and paid for in accordance with the Series A Warrants, issued and fully paid and non-assessable.
We will authorize and reserve at least that number of shares of common stock equal to the number of shares of common stock issuable
upon exercise or exchange of all outstanding Series A Warrants.
The
Series A Warrants will not be exercisable or exchangeable by the holder of such warrants to the extent (and only to the extent)
that the holder or any of its Affiliates would beneficially own in excess of 4.99% of the common stock of the Company.
For purposes of the limitation described in this paragraph, beneficial ownership and all determinations and calculations are determined
in accordance with Section 13(d) of the Exchange Act and the rule and regulations promulgated thereunder.
If,
at any time a Series A Warrant is outstanding, we consummate any fundamental transaction, as described in the Series A Warrants
and generally including any consolidation or merger into another corporation, or the sale of all or substantially all of our assets,
or other transaction in which our common stock is converted into or exchanged for other securities or other consideration, the
holder of any Series A Warrants will thereafter receive, the securities or other consideration to which a holder of the number
of shares of common stock then deliverable upon the exercise or exchange of such Series A Warrants would have been entitled upon
such consolidation or merger or other transaction. Notwithstanding the foregoing, in connection with a fundamental transaction,
at the request of a holder of Series A Warrants we will be required to purchase the Series A Warrant from the holder by paying
to the holder cash in an amount equal to the Black Scholes Value of the Series A Warrant, as described in such Series A
Warrant.
The Series A Warrants will be issued in
book-entry form under a warrant agent agreement between Equity Stock Transfer as warrant agent, and us, and shall initially be
represented by one or more book-entry certificates deposited with Equity Stock Transfer.
THE
HOLDER OF A WARRANT WILL NOT POSSESS ANY RIGHTS AS A SHAREHOLDER UNDER THAT WARRANT UNTIL THE HOLDER EXERCISES THE WARRANT.
Representative’s
Unit Purchase Option
We
agreed to issue to the representative of the underwriters’ in this offering a Unit Purchase Option to purchase a number
of our Units equal to an aggregate of 5% of the Units sold in this offering. The representative’s Unit Purchase Option will
have an exercise price equal to 125% of the public offering price of the Units set forth on the cover of this prospectus (or $[_______]
per Unit) and may be exercised on a cashless basis. The representative’s Unit Purchase Option is not redeemable by us. This
prospectus also covers the sale of the representative’s Unit Purchase Option and the Units, Series A Convertible Preferred
Stock and Series A Warrants issuable upon the exercise of the representative’s Unit Purchase Option, as well as the common
stock underlying Series A Convertible Preferred Stock and Series A Warrants. The material terms and provisions of the representative’s
Unit Purchase Option are described under the heading “Underwriting—Representative’s Unit Purchase Option”.
Delaware
Anti-Takeover Law and Charter and Bylaws Provisions
We
are subject to the provisions of Section 203 of the Delaware General Corporation Law. Subject to exceptions, Section 203 prohibits
a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder”
for a period of three years from the date of the transaction in which the person became an interested stockholder, unless the
interested stockholder attained this status with the approval of the Board or unless the business combination is approved in a
prescribed manner. A “business combination” includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to exceptions, an “interested stockholder” is a person who, together
with affiliates and associates, owns, or within three years did own, 15% or more of the corporation’s outstanding voting
stock. This statute could prohibit or delay the accomplishment of mergers or other takeover or change in control attempts with
respect to us and, accordingly, may discourage attempts to acquire us. In addition, provisions of our Certificate of Incorporation
and Bylaws may make it more difficult to acquire control of us. These provisions could deprive shareholders of the opportunity
to realize a premium on the shares of common stock owned by them and may adversely affect the prevailing market price of our common
stock. These provisions are intended to:
|
● |
enhance
the likelihood of continuity and stability in the composition of the Board and in the policies formulated by the Board; |
|
|
|
|
● |
discourage
transactions that may involve an actual or threatened change in control of us; |
|
|
|
|
● |
discourage
tactics that may be used in proxy fights; |
|
|
|
|
● |
encourage
persons seeking to acquire control of us to consult first with our Board to negotiate the terms of any |
|
|
|
|
● |
proposed
business combination or offer; and |
|
|
|
|
● |
reduce
our vulnerability to an unsolicited proposal for a takeover that does not contemplate the acquisition of all of our outstanding
shares or that is otherwise unfair to our shareholders. |
Shareholder
Action by Written Consent. Our Bylaws provide for action by our shareholders without a meeting with the written consent
of shareholders holding the number of shares necessary to approve such action if it were taken at a meeting of shareholders.
Special
Shareholder Meetings. Under our Bylaws, the Chairperson of our Board, our Chief Executive Officer and a majority of the
number of total authorized directors (without regard to vacancies) may call a special meeting of shareholders. In addition, a
special meeting may be called by the shareholders of the Company holding at least one-fourth of all shares entitled to vote at
a meeting of shareholders. Our Bylaws establish that no business may be transacted at a special meeting otherwise than as specified
in the notice of meeting provided in advance to shareholders, which must be delivered to shareholders between 10 and 60 days prior
to the special meeting.
Any
aspect of the foregoing, alone or together, could delay or prevent unsolicited takeovers and changes in control or changes in
our management.
Transfer
Agent, Registrar, Warrant Agent and Preferred Stock Agent
We
have appointed Equity Stock Transfer, as our transfer and warrant agent. Their contact information is: 237 West 37th
Street, Suite 601, New York, New York 10018, phone number (917) 746-4595, facsimile (347) 584-3644.
Stock
Market Listing
Our common stock trades on the Nasdaq Capital
Market under the symbol “VPCO”. We have applied to list the Units on the Nasdaq Capital Market under the symbol
“VPCOU”. No assurance can be given that such listing will be approved.
SHARES
ELIGIBLE FOR FUTURE SALE
Future
sales of substantial amounts of our common stock in the public market, or the anticipation of these sales, could materially and
adversely affect market prices prevailing from time to time, and could impair our ability to raise capital through sales of equity
or equity-related securities.
A
certain number of shares of our common stock will not be available for sale in the public market for a period of 120 days after
completion of this offering due to contractual and legal restrictions on resale described below. Nevertheless, sales of a substantial
number of shares of our common stock in the public market after such restrictions lapse, or the perception that those sales may
occur, could materially and adversely affect the prevailing market price of our common stock.
Conversion
and Exercise Restrictions
Each
one-fourth share of Series A Convertible Preferred Stock will be convertible at the option of the holder into five shares of our
common stock upon the separation of the Units, provided that upon a Cash Warrant Exercise Trigger the Series A Convertible Preferred
Stock will not be convertible until six-months after the date of this prospectus (unless an Early Separation occurs due to a Trading
Separation Trigger or Delisting Trigger). Accordingly, the shares of our common stock issuable upon the conversion of the Series
A Convertible Preferred Stock will not be available for sale in the open market until the earlier of (i) six months after the
date of this prospectus, or (ii) 15 days after a Trading Separation Trigger or (iii) immediately upon a Delisting Trigger.
Each
Series A Warrant is exercisable for one share of common stock. The Series A Warrants are exercisable upon separation of the Units,
provided that the Series A Warrants may be exercised for cash at any time after 30 days from the date of this prospectus, which
exercise shall cause a Cash Warrant Exercise Trigger. Unless there is a Trading Separation Trigger or a Delisting Trigger, the
Series A Warrants are not exercisable until the earlier of (i) six months after the date of this prospectus, or (ii) if exercised
for cash.
The Series A Convertible Preferred Stock and
the Series A Warrants will not be convertible, or exercisable or exchangeable, as the case may be, by the holder of such securities
to the extent (and only to the extent) that the holder or any of its Affiliates would beneficially own in excess of 4. 99 %
of the common stock of the Company. For purposes of the limitation described in this paragraph, beneficial ownership
and all determinations and calculations are determined in accordance with Section 13(d) of the Exchange Act and the rule and regulations
promulgated thereunder.
UNDERWRITING
We
have entered into an underwriting agreement with Dawson James Securities, Inc., as representative of the underwriter(s), with
respect to the Units subject to this offering. Subject to certain conditions, we have agreed to sell, and the underwriter(s) have/has
severally agreed to offer and sell on a best efforts basis, the number of Units provided below.
Underwriters |
|
Number
of
Units |
Dawson James Securities,
Inc. |
|
|
|
|
|
Total |
|
|
This
offering is being completed on a “best efforts” basis and the underwriters have no obligation to buy any Units from
us or to arrange for the purchase or sale of any specific number or dollar amount of Units. The obligations of the underwriters
may be terminated upon the occurrence of certain events specified in the underwriting agreement. Furthermore, pursuant to the
underwriting agreement, the underwriters’ obligations are subject to customary conditions, representations and warranties
contained in the underwriting agreement, such as receipt by the underwriters of officers’ certificates and legal opinions.
Commissions
and Expenses
The
underwriters have advised us that they propose to offer the Units to the public at the public offering price set forth on the
cover page of this prospectus and to certain dealers at that price less a concession not in excess of $[_______] per Unit. The
commission or reallowance to dealers may be changed by the underwriters. No such change shall change the amount of proceeds to
be received by us as set forth on the cover page of this prospectus. The underwriters have informed us that they do not intend
to confirm sales to any accounts over which they exercise discretionary authority.
The
following table shows the underwriting commissions payable to the underwriters by us in connection with this offering.
|
|
Per
Unit |
Public offering
price |
|
|
Underwriting commissions |
|
|
Proceeds,
before expenses, to us |
|
|
We
estimate that expenses payable by us in connection with this offering, other than the underwriting commissions referred to above,
will be approximately $[_______]. We have advanced the underwriters
$25,000 against “blue sky” expenses to be incurred in the offering. Any portion of the advance payment will be returned
to us in the event the foregoing expenses actually incurred are less than such advance.
Underwriters’
Unit Purchase Option
We
have also agreed to issue to the representative of the underwriters’ a Unit Purchase Option to purchase a number of our
Units equal to an aggregate of 5% of the Units sold in this offering. The representative’s Unit Purchase Option will have
an exercise price equal to 125% of the public offering price of the Units set forth on the cover of this prospectus (or $[_______]
per Unit) and may be exercised on a cashless basis. The representative’s Unit Purchase Option is not redeemable by us. This
prospectus also covers the sale of the representative’s Unit Purchase Option and the shares of Series A Convertible Preferred
Stock and Series A Warrants issuable upon the exercise of the representative’s Unit Purchase Option, as well as the shares
underlying such Series A Convertible Preferred Stock and Series A Warrants. The representative’s Unit Purchase Option and
the underlying securities have been deemed compensation by FINRA, and are therefore subject to FINRA Rule 5110(g)(1). In accordance
with FINRA Rule 5110(g)(1), neither the representative’s Unit Purchase Option nor any securities issued upon exercise of
the representative’s Unit Purchase Option may be sold, transferred, assigned, pledged, or hypothecated, or be the subject
of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of such
securities by any person for a period of 180 days immediately following the date of effectiveness or commencement of sales of
the offering pursuant to which the representative’s Unit Purchase Option are being issued, except the transfer of any security:
|
● |
by
operation of law or by reason of reorganization of our company; |
|
|
|
|
● |
to
any FINRA member firm participating in this offering and the officers or partners thereof, if all securities so transferred
remain subject to the lock-up restriction described above for the remainder of the time period; |
|
|
|
|
● |
if
the aggregate amount of our securities held by either an underwriter or a related person do not exceed 1% of the securities
being offered; |
|
|
|
|
● |
that
is beneficially owned on a pro-rata basis by all equity owners of an investment fund, provided that no participating member
manages or otherwise directs investments by the fund, and participating members in the aggregate do not own more than 10%
of the equity in the fund; or |
|
|
|
|
● |
the
exercise or conversion of any security, if all securities received remain subject to
the lock-up restriction set forth above for the remainder of the time period.
|
In
addition, in accordance with FINRA Rule 5110(f)(2)(G), the representative’s Unit Purchase Option may not contain certain
anti-dilution terms.
Indemnification
We
have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933,
or the Securities Act, and liabilities arising from breaches of representations and warranties contained in the underwriting agreement,
or to contribute to payments that the underwriters may be required to make in respect of those liabilities.
Lock-Up
Agreements
We
and each of our directors and executive officers have agreed that, without the prior written consent of Dawson James Securities,
Inc. on behalf of the underwriters, we and they will not, subject to limited exceptions, during the period ending 120 days after
the date of this prospectus, subject to extension in specified circumstances:
|
● |
offer,
pledge, sell or contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of common
stock or any securities convertible into or exercisable or exchangeable for common stock whether such transaction is to be
settled by delivery of shares of our common stock or such other securities, in cash or otherwise; |
|
|
|
|
● |
enter
into any swap option, future, forward, or other agreement that transfers to another, in whole or in part, any of the economic
consequences of ownership of our common stock or any securities convertible into or exchangeable or exercisable for shares
of our common stock, whether such transaction is to be settled by delivery of shares of our common stock or such other securities,
in cash or otherwise; |
|
|
|
|
● |
make
any demand for or exercise any right with respect to the registration of any shares of our common stock or any securities
convertible into or exchangeable or exercisable for shares of our common stock; or |
|
|
|
|
● |
publicly
announce an intention to do any of the foregoing. |
Price
Stabilization, Short Positions and Penalty Bids
In
connection with the offering, the underwriters may engage in stabilizing transactions, syndicate covering transactions and penalty
bids in accordance with Regulation M under the Exchange Act:
|
● |
Stabilizing
transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.
|
|
|
|
|
● |
Syndicate
covering transactions involve purchases of securities in the open market after the distribution has been completed in order
to cover syndicate short positions. In determining the source of securities to close out the short position, the underwriters
will consider, among other things, the price of securities available for purchase in the open market. A naked short position,
the position can only be closed out by buying securities in the open market. A naked short position is more likely to be created
if the underwriters are concerned that there could be downward pressure on the price of the securities in the open market
after pricing that could adversely affect investors who purchase in the offering. |
These stabilizing transactions, syndicate
covering transactions and penalty bids may have the effect of raising or maintaining the market price of our Units or preventing
or retarding a decline in the market price of our Units. As a result, the price of our Units may be higher than the price that
might otherwise exist in the open market. Neither we nor the underwriters make any representation or prediction as to the direction
or magnitude of any effect that the transactions described above may have on the price of the Units. In addition, neither we nor
the underwriters make any representations that the underwriters will engage in these stabilizing transactions or that any transaction,
once commenced, will not be discontinued without notice.
Electronic
Distribution
This
prospectus in electronic format may be made available on websites or through other online services maintained by one or more of
the underwriters, or by their affiliates. Other than this prospectus in electronic format, the information on any underwriter’s
website and any information contained in any other website maintained by an underwriter is not part of this prospectus or the
registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter in
its capacity as underwriter, and should not be relied upon by investors.
Other
From
time to time, certain of the underwriters and/or their affiliates have provided, and may in the future provide, various investment
banking and other financial services for us for which services they have received and, may in the future receive, customary fees.
Except for services provided in connection with this offering, no underwriter has provided any investment banking or other financial
services during the 180-day period preceding the date of this prospectus and we do not expect to retain any underwriter to perform
any investment banking or other financial services for at least 90 days after the date of this prospectus.
NASDAQ
Listing
We have applied for listing of the
Units on the Nasdaq Capital Market under the trading symbol “VPCOU”.
Offer
Restrictions Outside of the United States
Other
than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities
offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus
may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in
connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances
that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this
prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution
of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered
by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
LEGAL
MATTERS
The
validity of the issuance of the securities offered by us in this offering will be passed upon for us by Nason Yeager Gerson White
& Lioce, P.A., West Palm Beach, Florida. Schiff Hardin LLP, Washington, DC, is acting as counsel for the underwriters in connection
with certain legal matters in connection with this offering.
EXPERTS
The
audited financial statements of Vapor as of and for the years ended December 31, 2014 and 2013 included in this prospectus have
been so included in reliance on the report, which includes an explanatory paragraph as to the Company’s ability to continue
as a going concern, of Marcum LLP, an independent registered public accounting firm, given on the authority of said firm as experts
in auditing and accounting.
The audited financial statements of Vaporin
as of and for the years ended December 31, 2014 and 2013 included in this prospectus have been so included in reliance on the
report, which includes an explanatory paragraph as to the Company’s ability to continue as a going concern, of RBSM, LLP,
an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We
have filed with the Securities and Exchange Commission, which we refer to as the “SEC”, a registration statement on
Form S-1 under the Securities Act with respect to the securities offered by this prospectus. This prospectus, which is part of
the registration statement, omits certain information, exhibits, schedules and undertakings set forth in the registration statement.
For further information pertaining to us and our securities, reference is made to the registration statement and the exhibits
and schedules to the registration statement. Statements contained in this prospectus as to the contents or provisions of any documents
referred to in this prospectus are not necessarily complete, and in each instance where a copy of the document has been filed
as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matters involved.
You
may read and copy all or any portion of the registration statement without charge at the public reference room of the SEC at 100
F Street, N.E., Washington, D.C. 20549. Copies of the registration statement may be obtained from the SEC at prescribed rates
from the public reference room of the SEC at such address. You may obtain information regarding the operation of the public reference
room by calling 1-800-SEC-0330. In addition, registration statements and certain other filings made with the SEC electronically
are publicly available through the SEC’s website at http://www.sec.gov. The registration statement, including all exhibits
and amendments to the registration statement, has been filed electronically with the SEC. You may also read all or any portion
of the registration statement on our website at www.vapor-corp.com.
We
are subject to the information and periodic reporting requirements of the Exchange Act and, accordingly, are required to file
annual reports containing financial statements audited by an independent public accounting firm, quarterly reports containing
unaudited financial data, current reports, proxy statements and other information with the SEC. You will be able to inspect and
copy such periodic reports, proxy statements and other information at the SEC’s public reference room, the website of the
SEC referred to above, and our website referred to above.
Index
to Consolidated Financial Statements
|
Page |
|
|
Condensed
Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014 |
F-2 |
|
|
Condensed
Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 (unaudited) |
F-3 |
|
|
Condensed
Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2015
(unaudited) |
F-4 |
|
|
Condensed
Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (unaudited) |
F-5 |
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited) |
F-6 |
|
|
Reports
of Independent Registered Public Accounting Firm |
F-21 |
|
|
Consolidated
Balance Sheets as of December 31, 2014 and 2013 |
F-22 |
|
|
Consolidated
Statements of Operations for the years ended December 31, 2014 and 2013 |
F-23 |
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014 and 2013 |
F-24 |
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2014 and 2013 |
F-25 |
|
|
Notes
to Consolidated Financial Statements |
F-26 |
|
|
Vaporin,
Inc. Financial Statements
|
F-53 |
|
|
Pro
Forma Financials
|
F-72 |
VAPOR
CORP.
CONDENSED
CONSOLIDATED BALANCE SHEETS
| |
March 31, 2015 | | |
December 31, 2014 | |
| |
(Unaudited) | | |
| |
ASSETS | |
| | | |
| | |
CURRENT ASSETS: | |
| | | |
| | |
Cash | |
$ | 1,911,199 | | |
$ | 471,194 | |
Due from merchant credit card processor, net of reserve for chargebacks of $41,355 and $2,500,
respectively | |
| 348,192 | | |
| 111,968 | |
Accounts receivable, net of allowance of $228,856 and $369,731, respectively | |
| 203,793 | | |
| 239,652 | |
Inventories | |
| 2,536,149 | | |
| 2,048,883 | |
Prepaid expenses and vendor deposits | |
| 527,207 | | |
| 664,103 | |
Loans receivable, net | |
| - | | |
| 467,095 | |
Deferred financing costs, net | |
| 87,292 | | |
| 122,209 | |
TOTAL CURRENT ASSETS | |
| 5,613,832 | | |
| 4,125,104 | |
| |
| | | |
| | |
Property and equipment, net of accumulated depreciation of $158,238 and $84,314, respectively | |
| 633,705 | | |
| 712,019 | |
Intangible assets, net of accumulated amortization of $22,177 and $0, respectively | |
| 2,058,423 | | |
| - | |
Goodwill | |
| 15,654,484 | | |
| - | |
Other assets | |
| 92,131 | | |
| 91,360 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 24,052,575 | | |
$ | 4,928,483 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’
EQUITY | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Accounts payable | |
$ | 2,303,051 | | |
$ | 1,920,135 | |
Accrued expenses | |
| 1,419,241 | | |
| 975,112 | |
Senior convertible notes payable – related parties, net of debt discount of $781,250 and
$1,093,750, respectively | |
| 468,750 | | |
| 156,250 | |
Convertible notes, net of debt discount of $49,421 and $0 , respectively | |
| 517,579 | | |
| - | |
Notes payable – related party | |
| 1,000,000 | | |
| - | |
Current portion of capital lease | |
| 52,015 | | |
| 52,015 | |
Term loan | |
| 523,727 | | |
| 750,000 | |
Customer deposits | |
| 50,744 | | |
| 140,626 | |
Income taxes payable | |
| 3,092 | | |
| 3,092 | |
Derivative liabilities | |
| 87,603 | | |
| - | |
TOTAL CURRENT LIABILITIES | |
| 6,425,802 | | |
| 3,997,230 | |
| |
| | | |
| | |
Capital Lease, net of current portion | |
| 107,195 | | |
| 119,443 | |
TOTAL LIABILITIES | |
| 6,532,997 | | |
| 4,116,673 | |
| |
| | | |
| | |
COMMITMENTS
AND CONTINGENCIES | |
| | | |
| | |
| |
| | | |
| | |
STOCKHOLDERS’ EQUITY: | |
| | | |
| | |
| |
| | | |
| | |
Preferred stock, $.001 par value, 1,000,000 shares authorized, none issued | |
| - | | |
| - | |
Common
stock, $.001 par value, 50,000,000 shares authorized, 6,727,152 and 3,352,382 shares issued and outstanding,
respectively | |
| 6,727 | | |
| 3,352 | |
Additional paid-in capital | |
| 36,725,950 | | |
| 16,040,361 | |
Accumulated deficit | |
| (19,213,099 | ) | |
| (15,231,903 | ) |
TOTAL STOCKHOLDERS’
EQUITY | |
| 17,519,578 | | |
| 811,810 | |
| |
| | | |
| | |
TOTAL LIABILITIES
AND STOCKHOLDERS’ EQUITY | |
$ | 24,052,575 | | |
$ | 4,928,483 | |
See
notes to unaudited condensed consolidated financial statements
VAPOR
CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| |
For The Three Months
Ended March 31, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
SALES, NET | |
$ | 1,468,621 | | |
$ | 4,792,544 | |
Cost of goods sold | |
| 1,651,110 | | |
| 3,831,928 | |
GROSS
(LOSS) PROFIT
| |
| (182,489 | ) | |
| 960,616 | |
| |
| | | |
| | |
EXPENSES: | |
| | | |
| | |
Selling, general and administrative | |
| 3,243,189 | | |
| 2,769,726 | |
Advertising | |
| 105,177 | | |
| 367,615 | |
Total operating expenses | |
| 3,348,366 | | |
| 3,137,341 | |
Operating loss | |
| (3,530,855 | ) | |
| (2,176,725 | ) |
Other (expense) income: | |
| | | |
| | |
Amortization of deferred financing costs | |
| (34,917 | ) | |
| - | |
Change in fair value of derivative liabilities | |
| (37,965 | ) | |
| - | |
Interest expense | |
| (378,775 | ) | |
| (28,434 | ) |
Interest income | |
| 1,316 | | |
| - | |
Total other expense | |
| (450,341 | ) | |
| (28,434 | ) |
LOSS BEFORE INCOME TAX (BENEFIT) EXPENSE | |
| (3,981,196 | ) | |
| (2,205,159 | ) |
Income
tax benefit
| |
| - | | |
| 752,400 | |
NET LOSS | |
$ | (3,981,196 | ) | |
$ | (1,452,759 | ) |
| |
| | | |
| | |
LOSS PER COMMON
SHARE – BASIC AND DILUTED | |
$ | (0. 89 | ) | |
$ | (0. 45 | ) |
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED | |
| 4,494,855
| | |
| 3,253,550
| |
See
notes to unaudited condensed consolidated financial statements
VAPOR
CORP.
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE THREE MONTHS ENDED MARCH 31, 2015
(UNAUDITED)
| |
Common Stock | | |
Additional Paid-In | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
Balance – January 1, 2015 | |
| 3,352,382 | | |
$ | 3,352 | | |
$ | 16,040,361 | | |
$ | (15,231,903 | ) | |
$ | 811,810 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock in connection with the Merger (See Note 4) | |
| 2,718,307 | | |
| 2,718 | | |
| 17,025,681 | | |
| — | | |
| 17,028,399 | |
Issuance of common stock and warrants in connection with private placement | |
| 686,463 | | |
| 687 | | |
| 2,941,273 | | |
| — | | |
| 2,941,960 | |
Contribution of note and interest payable to Vaporin to capital in connection with the Merger | |
| — | | |
| — | | |
| 354,029 | | |
| — | | |
| 354,029 | |
Cancellation of common stock as a result of early termination of consulting agreement | |
| ( 30,000 | ) | |
| ( 30 | ) | |
| 30 | | |
| — | | |
| — | |
Stock-based compensation expense | |
| — | | |
| — | | |
| 364,576 | | |
| — | | |
| 364,576 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| (3,981,196 | ) | |
| (3,981,196 | ) |
Balance – March 31, 2015 | |
| 6,727,152 | | |
$ | 6,727 | | |
$ | 36,725,950 | | |
$ | (19,213,099 | ) | |
$ | 17,519,578 | |
See
notes to condensed consolidated financial statements
VAPOR
CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| |
For The Three Months
Ended March 31, | |
| |
2015 | | |
2014 | |
OPERATING ACTIVITIES: | |
| | | |
| | |
Net loss | |
$ | (3,981,196 | ) | |
$ | (1,452,759 | ) |
Adjustments to
reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Change in allowances | |
| - | | |
| (86,314 | ) |
Depreciation and amortization | |
| 85,013 | | |
| 3,888 | |
Loss on disposal of assets | |
| 289,638 | | |
| - | |
Amortization of deferred debt discount | |
| 317,702 | | |
| - | |
Amortization of deferred financing cost | |
| 34,917 | | |
| - | |
Write-down of obsolete and slow moving inventory | |
| 70,657 | | |
| - | |
Stock-based compensation expense | |
| 364,576 | | |
| 610,414 | |
Deferred income tax benefit | |
| - | | |
| (754,249 | ) |
Change in fair value of derivative liabilities | |
| 37,965 | | |
| - | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Due from merchant credit card processors | |
| (35,083 | ) | |
| 85,694 | |
Accounts receivable | |
| 117,115 | | |
| 22,443 | |
Inventories | |
| 423,635 | | |
| (924,169 | ) |
Prepaid expenses and vendor deposits | |
| 164,917 | | |
| (40,945 | ) |
Other assets | |
| (771 | ) | |
| (25,000 | ) |
Accounts payable | |
| (140,092 | ) | |
| 293,700 | |
Accrued expenses | |
| 191,384 | | |
| 131,280 | |
Customer deposits | |
| (89,882 | ) | |
| (27,396 | ) |
Income taxes | |
| - | | |
| (1,701 | ) |
NET CASH USED IN OPERATING ACTIVITIES | |
| (2,149,505 | ) | |
| (2,165,114 | ) |
| |
| | | |
| | |
INVESTING ACTIVITIES: | |
| | | |
| | |
Cash received in connection with the Merger | |
| 136,468 | | |
| - | |
Collection of loans receivable | |
| 467,095 | | |
| - | |
Purchases of property and equipment | |
| (67,492 | ) | |
| (4,795 | ) |
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES: | |
| 536,071 | | |
| (4,795 | ) |
| |
| | | |
| | |
FINANCING ACTIVITIES | |
| | | |
| | |
Proceeds from private placement of common stock and warrants, net of offering costs | |
| 2,941,960 | | |
| (109,104 | ) |
Principal payments on term loan payable | |
| (226,273 | ) | |
| (181,731 | ) |
Principal payments of capital lease obligations | |
| (12,248 | ) | |
| - | |
Proceeds from loan payable to Vaporin, Inc. | |
| 350,000 | | |
| - | |
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | |
| 3,043,439 | | |
| (290,835 | ) |
| |
| | | |
| | |
NET INCREASE (DECREASE) IN CASH
| |
| 1,440,005 | | |
| (2,460,744 | ) |
| |
| | | |
| | |
CASH — BEGINNING OF PERIOD | |
| 471,194 | | |
| 6,570,215 | |
| |
| | | |
| | |
CASH — END OF PERIOD | |
$ | 1,911,199 | | |
$ | 4,109,471 | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION | |
| | | |
| | |
Cash paid for interest | |
$ | 30,351 | | |
$ | 29,077 | |
Cash paid for income taxes | |
$ | 2,791 | | |
$ | 3,550 | |
| |
| | | |
| | |
NON-CASH INVESTING AND FINANCING ACTIVITIES | |
| | | |
| | |
Purchase Price Allocation in connection
with the Merger: | |
| | | |
| | |
Cash | |
$ | 136,468 | | |
| - | |
Accounts receivable | |
| 81,256 | | |
| - | |
Merchant credit card processor receivable | |
| 201,141 | | |
| - | |
Prepaid expense and other current assets | |
| 28,021 | | |
| - | |
Inventory | |
| 981,558 | | |
| - | |
Property and equipment | |
| 206,668 | | |
| - | |
Accounts payable and accrued expenses | |
| (779,782 | ) | |
| - | |
Derivative liabilities | |
| (49,638 | ) | |
| - | |
Notes payable, net of debt discount of 54,623 | |
| (512,377 | ) | |
| - | |
Notes payable – related party | |
| (1,000,000 | ) | |
| - | |
Net assets acquired | |
$ | (706,685 | ) | |
| | |
| |
| | | |
| | |
Consideration: | |
| | | |
| | |
Value of common stock issued | |
| 17,028,399 | | |
| - | |
Excess liabilities over assets assumed | |
| 706,685 | | |
| | |
Total consideration | |
$ | 17,735,084 | | |
| | |
| |
| | | |
| | |
Total excess consideration over net assets acquired | |
$ | 17,735,084 | | |
| | |
Amount allocated to goodwill | |
| 15,654,484 | | |
| - | |
Amount allocated to identifiable intangible assets | |
| 2,080,600 | | |
| - | |
Remaining unallocated consideration | |
$ | - | | |
| - | |
See
notes to unaudited condensed consolidated financial statements
VAPOR
CORP.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
1. ORGANIZATION, GOING CONCERN AND MANAGEMENT PLANS, AND
BASIS OF PRESENTATION
Organization
Vapor
Corp. (the “Company” or “Vapor”) is the holding company for its wholly
owned subsidiaries The Vape Store, Inc. (“Vape Store”), Smoke Anywhere U.S.A., Inc. (“Smoke”), Emagine
the Vape Store, LLC (“Emagine”) and IVGI Acquisition, Inc. The company operates 10-Florida based vape stores and a
website where it sells vaporizers, liquids for vaporizers and electronic cigarettes. The Company designs, markets and distributes
vaporizers, e-liquids, electronic cigarettes and accessories under the Vaporin, emagine vapor™, Krave®, VaporX®,
Hookah Stix®, Fifty-One® (also known as Smoke 51) and Alternacig® EZ Smoker®, Green Puffer®, Americig®,
Vaporin, FumaréTM, and Smoke Star® brands. “Vaporizers”, “Electronic cigarettes” or “e-cigarettes,”
are battery-powered products that enable users to inhale nicotine vapor without smoke, tar, ash, or carbon monoxide.
Going
Concern and Management Plans
The
Company’s condensed consolidated financial statements for the quarter ended March 31, 2015 indicate there is substantial
doubt about its ability to continue as a going concern as the Company requires additional equity and/or debt financing to continue
its operations. The Company must ultimately generate sufficient cash flow to meet its obligations on a timely basis, attain profitability
in its business operations, and be able to fund its long term business development and growth plans. The Company’s business
will require significant amounts of capital to sustain operations and make the investments it needs to execute its longer-term
business plan. The Company’s liquidity and capital resources have decreased as a result of the $3.98 million net loss that
it incurred during the quarter ended March 31, 2015. At March 31, 2015, the Company’s accumulated deficit amounted to $19.21
million. At March 31, 2015, the Company had a working capital deficiency of $811,970 compared to a positive working capital of
$127,874 at December 31, 2014, a decrease of $939,844.
The
accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern
and realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and
liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The
Company’s existing liquidity is not sufficient to fund its operations, anticipated capital expenditures, working capital
deficiency and other financing requirements for the foreseeable future. The Company believes it will need to raise additional
debt or equity financing to maintain and expand the business. Any equity financing or the issuance of equity equivalents could
be dilutive to its shareholders. If either such additional capital is not available on terms acceptable to the Company or at all
then the Company may need to curtail its operations and/or take additional measures to conserve and manage its liquidity and capital
resources, any of which would have a material adverse effect on our business, results of operations and financial condition.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial
information and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly,
these condensed consolidated financial statements do not include all of the information and footnotes required for audited annual
financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary
to make the condensed consolidated financial statements not misleading have been included. The condensed consolidated balance
sheet at December 31, 2014 has been derived from the Company’s audited consolidated financial statements as of that date.
These
unaudited condensed consolidated financial statements for the three months ended March 31, 2015 and 2014 should be read in conjunction
with the audited consolidated financial statements and related notes thereto as of and for the year ended December 31, 2014 included
elsewhere herein this filing. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the
results that may be expected for the full year ending December 31, 2015.
Merger
with Vaporin, Inc.
As
fully-disclosed in Note 3 to these condensed consolidated financial statements, on December 17, 2014, the Company entered into
an Agreement and Plan of Merger (the “Merger Agreement”) with Vaporin, Inc., a Delaware corporation (“Vaporin”)
pursuant to which Vaporin was to merge with and into the Company with the Company being the surviving entity. On the same date,
the Company also entered into a joint venture with Vaporin (the “Joint Venture”) through the execution of an operating
agreement (the “Operating Agreement”) of Emagine, pursuant to which the Company and Vaporin were 50% members of Emagine.
On
March 4, 2015, the acquisition of Vaporin by the Company (the “Merger”) was completed pursuant to the terms of the
Merger Agreement. In connection with the Merger, Vape Store and Emagine became wholly-owned subsidiaries of the Company.
Note
2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES
Principles
of consolidation
The
accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
All significant intercompany transactions and balances have been eliminated.
Use
of estimates in the preparation of the financial statements
The
preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the condensed consolidated financial statements, and the reported amounts of net revenue and expenses during the reporting periods.
Actual results could differ from those estimates. These estimates and assumptions include allowances, reserves and write-downs
of receivables and inventory, valuing equity securities and hybrid instruments, share-based payment arrangements, deferred taxes
and related valuation allowances, and the preliminary valuation of the net assets acquired in the Merger. Certain of our estimates
could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible
that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates.
The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and records adjustments
when necessary.
Revenue
recognition
The
Company recognizes revenue from product sales or services rendered when the following four revenue recognition criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed
or determinable, and collectability is reasonably assured.
Product
sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded when the products are
shipped, title passes to customers and collection is reasonably assured. Retail sales to customers are made pursuant to a sales
contract that provides for transfer of both title and risk of loss upon the Company’s delivery to the carrier. Return allowances,
which reduce product revenue, are estimated using historical experience. Revenue from product sales and services rendered is recorded
net of sales and consumption taxes.
The
Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers,
such as percentage discounts off current purchases, inducement offers, such as offers for future discounts subject to a minimum
current purchase, and other similar offers. Current discount offers, when accepted by the Company’s customers, are treated
as a reduction to the purchase price of the related transaction, while inducement offers, when accepted by its customers, are
treated as a reduction to the purchase price of the related transaction based on estimated future redemption rates. Redemption
rates are estimated using the Company’s historical experience for similar inducement offers. The Company reports sales,
net of current discount offers and inducement offers on its condensed consolidated statements of operations.
Accounts
Receivable
Accounts
receivable, net is stated at the amount the Company expects to collect. The Company provides a provision for allowances that includes
returns, allowances and doubtful accounts equal to the estimated uncollectible amounts. The Company estimates its provision for
allowances based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably
possible that the Company’s estimate of the provision for allowances will change.
At
March 31, 2015 accounts receivable balances included a concentration from one customer of an amount
greater than 10% of the total net accounts receivable balance. The amount was $54,993. At December 31, 2014 accounts receivable
balances included concentrations from seven customers that had balances of an amount greater than 10%. The amounts ranged from
$27,729 to $177,200. As to revenues, no customers accounted for revenues in excess of 10% of the net sales for the three-month
periods ended March 31, 2015 and 2014.
Identifiable
Intangible Assets and Goodwill
Identifiable
intangible assets are recorded at cost, or when acquired as part of a business acquisition, at estimated fair value. Certain identifiable
intangible assets are amortized over 5 and 10 years. Similar to tangible personal property and equipment, the Company periodically
evaluates identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. No impairment existed at March 31, 2015.
Indefinite-lived
intangible assets, such as goodwill are not amortized. The Company tests the carrying amounts of goodwill for recoverability on
an annual basis at December 31st or when events or changes in circumstances indicate evidence of potential impairment exists,
using a fair value based test.
Inventories
Inventories
are stated at the lower of cost (determined by the first-in, first-out method) or market. If the cost of the inventories exceeds
their market value, provisions are recorded to write down excess inventory to its net realizable value. The Company’s inventories
consist primarily of merchandise available for resale.
Warranty
liability
The
Company’s limited lifetime warranty policy generally allows its end users and retailers to return defective purchased rechargeable
products in exchange for new products. The Company estimates a reserve for warranty liability and records that reserve amount
as a reduction of revenues and as an accrued expense on the accompanying condensed consolidated balance sheets. The warranty
claims and expense was not deemed material for the years ended December 31, 2014 and three months ended March 31, 2015.
Fair
value measurements
The
Company applies the provisions of Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements”
(“ASC 820”). The Company’s short term financial instruments include cash, due from merchant credit card processors,
accounts receivable, accounts payable and accrued expenses, each of which approximate their fair values based upon their short
term nature. The Company’s other financial instruments include notes payable obligations. The carrying value of these instruments
approximate fair value, as they bear terms and conditions comparable to market, for obligations with similar terms and maturities.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may
be used to measure fair value: Level 1 – quoted prices in active markets for identical assets or liabilities; Level 2 –
quoted prices for similar assets and liabilities in active market or inputs that are observable; and Level 3 – inputs that
are unobservable.
Stock-Based
Compensation
The
Company accounts for stock-based compensation under ASC Topic No. 718, “Compensation-Stock Compensation” (“ASC
718”). These standards define a fair value based method of accounting for stock-based compensation. In accordance with ASC
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 fair value of the award as determined by the valuation model at the grant date or other measurement date. 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. The Company considers many factors when estimating expected forfeitures, including types of awards,
employee class, and historical experience.
Derivative
Instruments
The
Company accounts for free-standing derivative instruments and hybrid instruments that contain embedded derivative features in
accordance with ASC Topic No. 815, “Derivative Instruments and Hedging Activities,” (“ASC 815”) as
well as related interpretations of this topic. In accordance with this topic, derivative instruments and hybrid instruments are
recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized
in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized
at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value
of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration
to all of the rights and obligations of each instrument.
The
Company estimates fair values of derivative instruments and hybrid instruments using various techniques (and combinations thereof)
that are considered to be consistent with the objective of measuring fair values. In selecting the appropriate technique, the
Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means
of settlement. For less complex instruments, such as free-standing warrants, the Company generally uses the Black-Scholes-Merton
valuation model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading
volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of
derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to,
change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based
techniques (such as the Black-Scholes-Merton valuation model) are highly volatile and sensitive to changes in the trading market
price of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair
values, the Company’s income (loss) going forward will reflect the volatility in these estimates and assumption changes.
Under ASC 815, increases in the trading price of the Company’s common stock and increases in fair value during a given financial
quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Company’s
common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative
income.
Convertible
Debt Instruments
The
Company accounts for convertible debt instruments when the Company has determined that the embedded conversion options should
not be bifurcated from their host instruments in accordance with ASC 470-20 “Debt with Conversion and Other Options”.
The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in
debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the
note transaction and the effective conversion price embedded in the note. The Company amortizes the respective debt discount over
the term of the notes, using the straight-line method, which approximates the effective interest method. The Company records,
when necessary, induced conversion expense, at the time of conversion for the difference between the reduced conversion price
per share and the original conversion price per share.
Lease
Accounting
The
Company evaluates each lease for classification as either a capital lease or an operating lease. If substantially all of the benefits
and risks of ownership have been transferred to the Company as lessee, the Company records the lease as a capital lease at its
inception. The Company performs this evaluation at the inception of the lease and when a modification is made to a lease. If the
lease agreement calls for a scheduled rent increase during the lease term, the Company recognizes the lease expense on a straight-line
basis over the lease term. The Company determines the straight-line rent impact of an operating lease upon inception of the lease.
Note
3. MERGER WITH VAPORIN, INC.
Merger
with Vaporin, Inc.
On
December 17, 2014, the Company entered into the Merger Agreement with Vaporin pursuant to which Vaporin was to merge with and
into the Company with Vapor being the surviving and controlling entity (as a result of the current stockholders of the Company
maintaining more than 50% ownership in the Company’s outstanding shares of common stock and the current Vapor directors
comprising the majority of the board). The Merger closed on March 4, 2015 and the purchase price consideration paid by the Company
consisted of the following:
|
1. |
100%
of the issued and outstanding shares of Vaporin common stock (including shares of common
stock issued upon conversion of Vaporin preferred stock immediately prior to the consummation
of the merger in accordance with the Merger Agreement) were converted into, and became
2,718,307 shares of the Company’s common stock such that the former Vaporin
stockholders collectively hold approximately 45% of the issued and outstanding shares
of the Company’s common stock following consummation of the Merger. The aggregate
value of these shares issued was $14,949,328, or approximately $5.50 per share,
and was based on the closing price of the Company’s common stock on March 4, 2015.
|
|
|
|
|
2. |
100%
of the issued shares of Vaporin restricted stock units were converted into the right
to receive 378,047 shares of the Company’s common stock. The restricted
stock units became fully-vested in connection with the Merger and as a result, were included
as a part of the Company’s purchase price as no further services from the holders
is required to be provided to the Company. The 378,047 restricted stock units
remain outstanding as of March 31, 2015. The aggregate value of these shares issued was
$2,079,071, or approximately $5.50 per share, and was based on the closing price
of the Company’s common stock on March 4, 2015. Based on the terms of the Merger
Agreement, the Company has agreed to issue these in twelve equal monthly installments,
with the first delivery date being the date of the closing of the Merger, however, all
shares of common stock to be delivered on March 15, 2016 to the extent they are not previously
delivered.
|
The
Merger Agreement contained customary conditions that were satisfied prior to the closing of the merger, including the requirement
for the Company to receive gross proceeds from a $3.5 million equity offering (See Note 5).
Additionally,
as required by the Merger Agreement the Company received non-binding commitments from certain third parties for financing of up
to $25 million to be used for the construction of retail stores and which is contingent on the achievement of certain performance
metrics by the Company.
The
fair value of the purchase consideration issued to the sellers of Vaporin was allocated to fair value of the net tangible assets
acquired, with the resulting excess allocated to separately identifiable intangibles, and the remainder recorded as goodwill. Goodwill
recognized from the transactions mainly represented the expected operational synergies upon acquisition of the combined entity
and intangibles not qualifying for separate recognition. Goodwill is not expected to be deductible for income tax purposes in
the tax jurisdiction of the acquired business. The purchase price allocation was based, in part, on management’s knowledge
of Vaporin’s business and the results of a preliminary third party appraisal commissioned by management. The fair value
was based on a preliminary valuation.
Purchase Consideration | |
| | |
Value of consideration paid: | |
$ | 17,735,084 | |
| |
| | |
Tangible assets acquired and liabilities
assumed at fair value | |
| | |
Cash | |
$ | 136,468 | |
Due from merchant credit card processor | |
| 201,141 | |
Accounts receivable | |
| 81,256 | |
Inventories | |
| 981,558 | |
Property and Equipment | |
| 206,668 | |
Other Assets | |
| 28,021 | |
Notes payable, net of debt discount of $54,623 | |
| (512,377 | ) |
Notes payable – related party | |
| (1,000,000 | ) |
Accounts Payable and accrued expenses | |
| (775,753 | ) |
Derivative Liabilities | |
| (49,638 | ) |
Excess liabilities over assets assumed | |
$ | (706,685 | ) |
| |
| | |
Consideration: | |
| | |
Value of common stock issued | |
| 17,028,399 | |
Excess liabilities over assets assumed | |
| 706,685 | |
Total purchase price | |
$ | 17,735,084 | |
| |
| | |
Identifiable intangible assets | |
| | |
Trade names and technology | |
| 1,500,000 | |
Customer relationships | |
| 488,274 | |
Assembled workforce | |
| 92,326 | |
Total Identifiable Intangible Assets | |
| 2,080,600 | |
Goodwill | |
| 15,654,484 | |
Total allocation
to identifiable intangible assets and goodwill | |
$ | 17,735,084 | |
In
addition, in connection with the Merger, an aggregate $354,029 of a note and interest payable by the Company to Vaporin was forgiven.
In connection with the Merger Agreement, the
Company also issued 49,592 warrants to purchase the Company’s common stock to certain warrant holders of Vaporin
as replacement for warrants issued in connection with previous Vaporin note payable issuances. In addition, the Company also issued
3,947 options to purchase common stock to certain holders of Vaporin as replacement for options issued for services. The
Company determined that based on the remaining term of the warrants and options as well as the nature of the remaining services
to be provided by the holders that the value of the warrants and options at the date of the Merger was not material.
The
Company was unable to report the financial results of Vaporin for the period from the date the Merger closed on March 4, 2015
through March 31, 2015. The accounting and reporting operations of Vaporin were fully integrated into the Company at Merger and
it is impracticable to separate. The following presents the unaudited pro-forma combined results of operations of the Company
with Vaporin as if the acquisition occurred on January 1, 2014.
| |
For the three months
Ended | |
| |
March
31, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Revenues | |
$ | 2,584,884 | | |
$ | 4,975,337 | |
Net Loss | |
$ | (5,378,927 | ) | |
$ | (2,590,724 | ) |
Net Loss per share | |
$ | (0. 86 | ) | |
$ | (0. 42 | ) |
Weighted Average number of shares outstanding | |
| 6,252,037 | | |
| 6,153,204 | |
The
unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations
are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2014
or to project potential operating results as of any future date or for any future periods.
In
connection with the acquisition of Vaporin, the Company acquired net deferred tax assets consisting of net operating loss carryforwards
offset by the difference between the book and tax basis of intangible assets acquired. At the acquisition date, this net deferred
tax asset has been completely offset by a valuation allowance.
The
Joint Venture
On
December 17, 2014, the Company and Vaporin agreed to enter into the Joint Venture through Emagine, a Delaware limited liability
company of which the Company and Vaporin are 50% members. The Operating Agreement provides that Vaporin will serve as the initial
manager of Emagine and will manage the day-to-day operations of Emagine, subject to certain customary limitations on managerial
actions that require the unanimous consent of the Company and Vaporin, including but not limited to making or guaranteeing loans,
distributing cash or other property to the members of Emagine, entering into affiliate transactions, amending or modifying limited
liability company organizational documents, and redeeming or repurchasing membership interests from any of the members. The results
of operations of Emagine from January 1, 2015 through the date of the Merger were not material.
In
connection with the completion of the Merger on March 4, 2015, Emagine became a wholly-owned subsidiary of the Company.
Note
4. Accrued Expenses
Accrued
expenses are comprised of the following:
| |
March
31, 2015 | | |
December
31, 2014 | |
| |
| | |
| |
Commissions
payable | |
$ | 179,000 | | |
$ | 179,000 | |
Retirement
plan contributions | |
| 101,000 | | |
| 80,000 | |
Accrued
severance | |
| 160,000 | | |
| 82,000 | |
Accrued
customer returns | |
| 648,000 | | |
| 360,000 | |
Other
accrued liabilities | |
| 331,241 | | |
| 274,112 | |
Total | |
$ | 1,419,241 | | |
$ | 975,112 | |
Note
5. Notes Payable and Receivable
$567,000
Convertible Notes Payable
Between
January 20, 2015 and January 23, 2015, Vaporin entered into a Securities Purchase Agreement with certain accredited investors
providing for the sale of $567,000 of Vaporin’s Convertible Notes (the “Vaporin Notes”) and calculated a debt
discount on the date of the Merger at $54,623. The Vaporin Notes accrue interest on the outstanding principal at an
annual rate of 10%. The principal and accrued interest on the Notes is due and payable between January 20, 2016 and January 23,
2016. The Notes are convertible into the Company common stock at the lower of (i) $ 5.40 or (ii) a 15% discount
to a 20-trading day VWAP following the closing of the merger, which was calculated at $ 4.75 . Investors were provided with
standard piggyback registration rights which were conditioned on the March 4, 2015 merger closing.
$350,000
Convertible Notes Payable
On
January 29, 2015, the Company issued a $350,000 convertible promissory note (the “Note”) to Vaporin in consideration
for a loan of $350,000 made by Vaporin to the Company. The Note accrued interest on the outstanding principal at an annual rate
of 12%. In connection with the completion of the Merger on March 4, 2015, the $350,000 Note along with accrued interest of $4,029
was extinguished.
$1,000,000
Notes Payable Related Party
On
December 8, 2014, Emagine entered into a Secured Line of Credit Agreement (the “Agreement”), effective as of December
1, 2014, with one affiliated shareholder of the Company and two unaffiliated investors (the “Lenders”). Under the
Agreement, the Lenders agreed to advance up to $3,000,000 in three equal tranches in exchange for secured promissory notes which
mature on March 31, 2016, bear interest at 12% per annum, and are secured by a first lien on the assets of Emagine. The Company
drew on a first tranche of funding under the Agreement was on December 1, 2014.
The
funds were used to purchase and/or open vape stores similar to those operated by the Company. In connection with the completion
of the Merger on March 4, 2015, Emagine became a wholly-owned subsidiary of the Company, and the debt was assumed by the Company.
$467,095
Notes Receivable
On
January 12, 2015, the Company entered into an agreement with International Vapor Group, Inc. (“IVG”) whereby the Company
agreed to reduce the $500,000 principal amount of the loan receivable by $50,000 if IVG were to remit payment of all principal
and interest accrued on the loan receivable within one day. The Company included the write-down of the loan receivable in selling,
general and administrative expenses on the consolidated statement of operations for the year ended December 31, 2014. On January
13, 2015, IVG paid the Company in full.
Note
6. STOCKHOLDERS’ EQUITY
Issuance
of Common Stock
On
February 3, 2014, the Company entered into a consulting agreement (the “Consulting Agreement”) with Knight Global
Services, LLC (“Knight Global”) pursuant to which the Company retained Knight Global to assist the Company with increasing
awareness of its electronic cigarette brands as well as assisting the Company to expand and diversify its relationships with large
retailers and national chains. Knight Global is a wholly owned subsidiary of Knight Global, LLC of which Ryan Kavanaugh is an
investor and principal. Effective March 5, 2014, the Board of Directors of the Company elected Mr. Kavanaugh as a member of the
Board of Directors in accordance with the Consulting Agreement. Knight Global serves as the family office for Mr. Kavanaugh.
Under
the terms of the Consulting Agreement, the Company issued to Mr. Kavanaugh 80 ,000 shares of its common stock, of which
10 ,000 shares vested immediately while the remaining 70 ,000 shares vest in installments of 10 ,000 shares
per quarterly period beginning on the 90th day following February 3, 2014 and each ensuing quarterly period thereafter so long
as the Consulting Agreement has not been terminated and during each quarterly period Knight Global has presented the Company with
a minimum of six (6) bona fide opportunities for activities specified in the Consulting Agreement that are intended to increase
awareness of the Company’s electronic cigarettes. In addition, during the term of the Consulting Agreement, which is 2 years,
and during an 18-month post-termination period, the Company has agreed to pay Knight Global commissions payable in cash equal
to 6% of “net sales” (as defined in the Consulting Agreement) of its products to retailers introduced by Knight Global
and to retailers with which the Company has existing relationships and with which Knight Global is able, based on its verifiable
efforts, to increase net sales of the Company’s products.
The
grant date fair value of the common shares issued on February 3, 2014 was $3,080,000 based on closing price per share of the Company’s
common stock, as reported on the OTC Bulletin Board, on February 3, 2014. On January 24, 2015, the Company and Knight Global mutually
agreed to terminate the Consulting Agreement as it was in the best interests of both parties to do so. As a result of such termination,
the Company issued 10 ,000 shares of its common stock to Knight Global pursuant to the early termination provisions of the
Consulting Agreement. The Company cancelled 30 ,000 shares that were not vested that had been previously issued to Mr. Kavanaugh.
In addition, on January 24, 2015, the Company received notice from Ryan Kavanaugh, a director of the Company that he had resigned
from the Company’s board of directors, effective immediately.
During
the three months ended March 31, 2015 and 2014, the Company recognized stock-based compensation expense, for the Consulting
Agreement, in the amount of $322,067 and $592,300, which is included as part of selling, general and administrative expense in
the accompanying condensed consolidated statements of operations.
Private
Placement of Common Stock
In
connection with the Merger, on March 3, 2015, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”)
with certain accredited investors providing for the sale of $3,500,960 in shares of the Company’s Common Stock, par value
$0.001 per share, at a price of $ 5.10 per share. The Company also issued Warrants to purchasers of the shares to acquire
an aggregate of 547,026 shares of the Company’s Common Stock with an exercise price of $ 6.40 per share. The
shares and Warrants were issued and sold through an exempt private securities offering to certain accredited investors. The Company
incurred aggregate offering costs of $559,000 in connection with the private placement, of which $350,000 was paid to Palladium
Capital Advisors, the Company’s placement agent.
Under
the Purchase Agreement, the Company made certain customary representations and warranties to the purchasers concerning the Company
and its operations. The Company has also agreed to register the Common Stock and the Warrants for resale pursuant to an effective
registration statement which must be filed within 45 days of March 3, 2015 and must be effective by the later of (i) the 90th
day following March 3, 2015 (if no SEC review) or (ii) the 120th day following March 3, 2015 (if subject to SEC
review). If the Form S-3 Registration Statement is not effective for resales for more than 10 consecutive days or more than 15
days in any 12 month period during the registration period (i.e., the earlier of the date on which the shares have been sold or
are eligible for sale under SEC Rule 144 without restriction), the Company is required to pay the investors (other than its participating
officers and directors) liquidated damages in cash equal to 1.5% of the aggregate purchase price paid by the investors for the
shares for every 30 days or portion thereof until the default is cured. Such cash payments could be as much as $52,500 for every
30 days. The initial Form S-3 was filed on April 17, 2015.
Warrants
A
summary of warrant activity for the three months ended March 31, 2015 is presented below:
| |
Number of Warrants | | |
Weighted- Average Exercise Price | | |
Weighted- Average Contractual Term | | |
Aggregate Intrinsic Value | |
Outstanding at January 1, 2015 | |
| 243,218 | | |
$ | 10.05 | | |
| | | |
| | |
Warrants granted | |
| 598,763 | | |
| 8.20 | | |
| | | |
| | |
Warrants exercised | |
| — | | |
| — | | |
| | | |
| | |
Warrants forfeited or expired | |
| — | | |
| — | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Outstanding at March 31, 2015 | |
| 841,981 | | |
$ | 8.75 | | |
| 5.0 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at March 31, 2015 | |
| 603,345 | | |
$ | 8.25 | | |
| 5.0 | | |
$ | - | |
Stock-based
Compensation
During
the three months ended March 31, 2015 and 2014, the Company recognized stock-based compensation expense in connection with the
amortization of stock option expense of $364,576 and $18,106, respectively, which is included as part of selling, general and
administrative expense in the accompanying condensed consolidated statements of operations. No employee stock options were granted
during the first quarter of 2015, with the exception of the 19,734 options granted in connection with the Merger, for which the
grant date fair value was determined to be immaterial.
Stock
option activity
Options
outstanding at March 31, 2015 under the various plans are as follows:
Plan | |
Total
Number of Options Outstanding
under Plans | |
Equity compensation plans not approved by security holders | |
| 180,000 | |
Equity Incentive Plan | |
| 68,567 | |
| |
| 248,567 | |
A
summary of activity under all option Plans at March 31, 2015 and changes during the three months ended March 31, 2015:
| |
Number
of Shares | | |
Weighted-
Average Exercise Price | | |
Weighted-
Average Contractual Term | | |
Aggregate
Intrinsic Value | |
Outstanding at January 1, 2015 | |
| 268,860 | | |
$ | 15.4 | | |
| 6.53 | | |
$ | - | |
Options granted | |
| 3,947 | | |
| 28.05 | | |
| - | | |
| - | |
Options exercised | |
| - | | |
| - | | |
| - | | |
| - | |
Options forfeited or expired | |
| ( 24,240 | ) | |
| 36.60 | | |
| - | | |
| - | |
Outstanding at March 31, 2015 | |
| 248,567 | | |
$ | 13.55 | | |
| 6.17 | | |
$ | - | |
Exercisable at March 31, 2015 | |
| 209,847 | | |
$ | 11.30 | | |
| 6.52 | | |
$ | - | |
Options available for grant at March 31,
2015 | |
| 281,773 | | |
| | | |
| | | |
| | |
At
March 31, 2015 the amount of unamortized stock-based compensation expense on unvested stock options granted to employees and consultants
was $338,105 and will vest over 1.6 years.
Loss
per share
Basic
loss per share is computed by dividing the net loss available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted loss per share is computed using the weighted average number of common shares and,
if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common
shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion of the Company’s
convertible debt and warrants (using the if-converted method). Diluted loss per share excludes the shares issuable upon the exercise
of stock options from the calculation of net loss per share, as their effect is antidilutive. The following table summarizes the
Company’s securities that have been excluded from the calculation of basic and dilutive loss per share as their effect would
be anti-dilutive:
| |
March
31, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Convertible debt | |
| 358,862 | | |
| - | |
Stock options | |
| 244,620 | | |
| 234,900 | |
Warrants | |
| 841,981 | | |
| 43,176 | |
Total | |
| 1,445,463 | | |
| 278,076 | |
Note
7. FAIR VALUE MEASUREMENTS
The
fair value framework under the Financial Accounting Standards Board’s guidance requires the categorization of assets and
liabilities into three levels based upon the assumptions used to measure the assets or liabilities. Level 1 provides
the most reliable measure of fair value, whereas Level 3, if applicable, would generally require significant management judgment. The
three levels for categorizing assets and liabilities under the fair value measurement requirements are as follows:
|
● |
Level
1: Fair value measurement of the asset or liability using observable inputs such
as quoted prices in active markets for identical assets or liabilities; |
|
|
|
|
● |
Level
2: Fair value measurement of the asset or liability using inputs other than quoted
prices that are observable for the applicable asset or liability, either directly or indirectly,
such as quoted prices for similar (as opposed to identical) assets or liabilities in active
markets and quoted prices for identical or similar assets or liabilities in markets that are
not active; and |
|
|
|
|
● |
Level
3: Fair value measurement of the asset or liability using unobservable inputs that reflect the Company’s
own assumptions regarding the applicable asset or liability. |
The
following table summarizes the liabilities measured at fair value on a recurring basis as of March 31, 2015:
| |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
LIABILITIES: | |
| | | |
| | | |
| | | |
| | |
Warrant
liability | |
| - | | |
| - | | |
$ | 87,603 | | |
$ | 87,603 | |
Total
derivative liabilities | |
$ | - | | |
$ | - | | |
$ | 87,603 | | |
$ | 87,603 | |
The
following table summarizes the liabilities measured at fair value on a recurring basis as of December 31, 2014:
| |
| Level
1 | | |
| Level
2 | | |
| Level
3 | | |
| Total | |
LIABILITIES: | |
| | | |
| | | |
| | | |
| | |
Warrant liability | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Total derivative liability | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Level
3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the
fair value of the liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s
accounting and finance department, who report to the Chief Financial Officer, determine its valuation policies and procedures.
The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are
the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer.
Level
3 Valuation Techniques
Level
3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that
the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within
Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.
The
Company deems financial instruments which do not have fixed settlement provisions to be derivative instruments. The common stock
purchase warrants reissued by the Company in connection with the Merger do not have fixed settlement provisions because their
exercise prices may be lowered if the Company issues securities at lower prices in the future. In accordance with Accounting Standards
Codification (“ASC”) Topic 480, Distinguishing Liabilities from Equity, the fair value of these warrants is
classified as a liability on the Company’s Condensed Consolidated Balance Sheets because, according to the terms of the
warrants, a fundamental transaction could give rise to an obligation of the Company to pay cash to its warrant holders. Corresponding
changes in the fair value of the derivative liabilities are recognized in earnings on the Company’s Condensed Consolidated
Statement of Operations in each subsequent period.
The
Company’s warrant liabilities are carried at fair value and were classified as Level 3 in the fair value hierarchy due to
the use of significant unobservable inputs. Although the Company determined the warrants include an implied downside protection
feature, it performed a Monte-Carlo simulation and concluded that the value of the feature is de minimus and the use of the Black-Scholes
valuation model is considered to be a reasonable method to value the warrants.
The following table summarizes
the values of certain assumptions used by the Company’s custom model to estimate the fair value of the warrant liabilities
as of March 31, 2015:
| |
March
31, 2015 | |
| |
(Unaudited) | |
Stock
price | |
$ | 5.20
| |
Weighted average
strike price | |
$ | 1.20 | |
Remaining
contractual term (years) | |
| 3.70 | |
Volatility | |
| 124.0 | % |
Risk-free rate | |
| 1.37 | % |
Dividend
yield | |
| 0.0 | % |
The
following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities that are measured at
fair value on a recurring basis:
| |
For
the three
months ended
March 31, 2015 | |
Beginning balance | |
$ | — | |
Fair value of warrant liabilities reissued
in connection with the Merger | |
| 49,638 | |
Change in fair value of derivative liabilities | |
| 37,965 | |
Ending balance | |
$ | 87,603 | |
Note
8. COMMITMENTS AND CONTINGENCIES
Lease
Commitments
The
Company leases its Florida office and warehouse facilities under a twenty-four month lease agreement with an initial term through
April 30, 2013 that the Company extended in March 2015 when it exercised the second of three successive one-year renewal options.
The lease provides for annual rental payments of $144,000 per annum (including 45 days of total rent abatement) during the initial
twenty-four month term and annual rental payments of $151,200, $158,760 and $174,636 during each of the three one-year renewal
options. In October 2013, the Company amended the master lease to include an additional approximately 2,200 square feet for an
additional annual rental payment of $18,000 subject to the same renewal options and other terms and conditions set forth in the
master lease. During the year ended December 31, 2014, the Company entered into nine (9) real estate leases for eight (8) new
retail kiosks and one (1) new retail store. The kiosks opened during the fourth quarter of 2014 and the store is scheduled to
open during 2015. The kiosks are located in malls in Florida, Maryland, New Jersey and Texas. The retail store is located in Ft.
Lauderdale, FL. Under these leases, the initial lease terms range from one to five years, the Company is required to pay base
and percentage rents and the Company is required to pay for common area and maintenance charges and utilities. In addition through
the merger which occurred on March 4, 2015 the Company acquired additional lease commitments which included one (1) Florida office
space and ten (10) new retail stores. Future minimum lease payments under non-cancelable operating that have initial or remaining
terms in excess of one year at March 31, 2015 are due as follows:
The
remaining minimum annual rents for the years ending December 31 are:
2015 | | |
$ | 630,256 | |
2016 | | |
| 539,990 | |
2017 | | |
| 429,628 | |
2018 | | |
| 201,853 | |
2019 | | |
| 153,386 | |
2020 | | |
| 18,961 | |
Total | | |
$ | 1,974,074 | |
Rent
expense for the three months ended March 31, 2015 and 2014 was $215,087 and $44,838, respectively, and is included in selling,
general and administrative expenses in the accompanying condensed consolidated statement of operations.
Resignation
of Chief Financial Officer
On
March 27, 2015, Harlan Press notified the Company of his intention to resign from the Company, effective April 10, 2015. Mr. Press
previously served as Chief Financial Officer of the Company. In connection with the Company’s previously disclosed merger
with Vaporin, Inc. in March 2015, Mr. Press was appointed Vice-President of Finance of the Company. Mr. Press received severance
compensation and accrued vacation in accordance with his employment agreement in the total amount of $159,810, which is divided
into equal weekly payments that end on January 29, 2016 and has been included in accrued liabilities as of March 31, 2015.
Legal
Proceedings
From
time to time the Company may be involved in various claims and legal actions arising in the ordinary course of our business. There
were no pending material claims or legal matters as of the date of this report other than two of the three following matters.
On
June 22, 2012, Ruyan Investment (Holdings) Limited (“Ruyan”) filed a lawsuit against the Company alleging infringement
of U.S. Patent No. 8,156,944 (the ‘944 Patent). Ruyan also filed separate cases for patent infringement against nine other
defendants asserting infringement of the 944 Patent. Ruyan’s lawsuit against the Company known as Ruyan Investment (Holdings)
Limited vs. Vapor Corp. CV-12-5466 is pending in the United States District Court for the Central District of California. All
of these lawsuits have been consolidated for discovery and pre-trial purposes. The Company intends to vigorously defend against
this lawsuit.
On
February 25, 2013, Ruyan’s second patent infringement lawsuit against the Company as well as all of the other consolidated
lawsuits were stayed as a result of the Court granting a stay in one of the consolidated lawsuits. The Court granted the motion
to stay Ruyan’s separate lawsuits against the Company and the other defendants based on the filing of a request for inter
partes reexamination of the ‘944 Patent at the United States Patent and Trademark Office.
All
reexamination proceedings of the ‘944 Patent have been stayed by the United States Patent and Trademark Office Patent Trial
and Appeal Board pending its approval of one or more of them.
On
March 5, 2014, Fontem Ventures, B.V. and Fontem Holdings 1 B.V. (the successors to Ruyan) filed a complaint against the Company
alleging infringement of U.S. Patent No. 8,365,742, entitled “Aerosol Electronic Cigarette”, U.S. Patent No. 8,375,957,
entitled “Electronic Cigarette”, U.S. Patent No. 8,393,331, entitled “Aerosol Electronic Cigarette” and
U.S. Patent No. 8,490,628, entitled “Electronic Atomization Cigarette. On April 8, 2014, plaintiffs amended their complaint
to add U.S. Patent No. 8,689,805, entitled “Electronic Cigarette.” The products accused of infringement by the plaintiff
are various Krave, Fifty-one and Hookah Stix products and parts. Eight other companies were also sued in separate lawsuits alleging
infringement of one or more of the patents listed above. The Company filed its Answer and Counterclaims on May 1, 2014. The Company
intends to vigorously defend against this lawsuit.
On
October 21, 2014, Fontem Ventures B.V. and Fontem Holdings 1 B.V. filed a complaint against the Company in the U.S. District Court
for the Central District of California, captioned Fontem Ventures B.V., et al. v. Vapor Corp., No. 14-cv-8155. The complaint alleges
infringement of United States Patent No. 8,863,752, entitled “Electronic Cigarette”. The products accused of infringement
by plaintiffs are various Krave and Fifty-One products and parts On January 15, 2015, the Company filed its Answer and Counterclaims.
The Company will vigorously defend itself against such allegations.
On
December 2, 2014, Fontem Ventures B.V. and Fontem Holdings 1 B.V. filed a complaint against the Company in the U.S. District Court
for the Central District of California, captioned Fontem Ventures B.V., et al. v. Vapor Corp., No. 14-cv-09267. The Complaint
alleges infringement by the plaintiffs against the Company relating to various Krave, Vapor X and Fifty-One products and parts.
Fontem amended its compliant on December 16, 2014, to allege infringement of United States Patent No. 8,910,641, entitled “Electronic
Cigarette” against the same products. On January 15, 2015, the Company filed its Answer and Counterclaims. The Company will
vigorously defend itself against such allegations.
All
of the above referenced cases filed by Fontem have been consolidated and are currently scheduled for trial in November 2015. The
parties are currently in active fact discovery and claim construction.
On
June 22, 2015, the Center for Environment Health, as plaintiff, filed suit against a number of defendants including Vapor Corp.,
its wholly-owned subsidiary, the Vape Store, Inc., Vaporin and another wholly-owned subsidiary, Vaporin Florida, Inc. The lawsuit
was filed in the Superior Court of the State of California, County of Alameda. The suit seeks relief under California Proposition
65 which makes it unlawful for businesses to knowingly and intentionally expose individuals in California to chemicals known to
cause birth defects or other harm without providing clear and reasonable warnings. All of the defendants are alleged to have sold
products containing significant quantities of nicotine in violation of Proposition 65. The plaintiff is seeking a civil penalty
against these defendants in the amount of $2,500 per day for each violation of Proposition 65, together with attorneys’
fees and costs. The Company and its subsidiaries are in the process of hiring counsel and intend to defend the allegations. The
Company believes that all of the products sold by Vapor Corp. have always contained an appropriate warning. The Vape Store, Inc.,
operates vape stores located only in the State of Florida and has not, to the best of its knowledge, sold any products into the
State of California.
Purchase
Commitments
At
March 31, 2015 and December 31, 2014, the Company has vendor deposits of $298,320 and $319,563, respectively, and vendor deposits
are included as a component of prepaid expenses and vendor deposits on the condensed consolidated balance sheets included herewith.
NOTE
9. SUBSEQUENT EVENTS
The
Company evaluates events that have occurred after the balance sheet date but before the condensed consolidated financial statements
are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would
have required adjustment or disclosure in the accompanying condensed consolidated financial statements, except for the following:
During
March and April 2015 the Company closed seven of their retail Kiosk locations. This comprised of three in Maryland, two in Texas
one in New Jersey and one in Florida. In addition, the Company decided not to proceed with opening the retail store located in
Ft, Lauderdale Florida. This was primarily due to the Company’s refocus of resources on management and expansion of the
acquired Vape Store brand retail locations. The Company is negotiating early terminations of the lease commitments.
Effective as of May 7,
2015, the Company entered an Engagement Agreement with Dawson James Securities (“Dawson”). In accordance with the
Engagement Agreement, Dawson has agreed to act as the lead or managing underwriter on a best-efforts basis in connection with
a proposed offering of approximately $24 million of the Company’s equity securities. The Engagement Agreement provides for
an underwriting discount of 8% and a $25,000 advance fee which has been paid to Dawson. The actual size of the offering and the
offering price will be subject to negotiation and the Company can provide no assurance that any such offering will be successful.
On May 19, 2015, the Company
received a deficiency letter from the Nasdaq Listing Qualifications department (the “Staff”) notifying the Company
that for the last 30 consecutive business days the Company’s common stock had closed below the minimum $1.00 per share bid
price requirement for continued inclusion on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2). In accordance
with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been provided an initial period of 180 calendar days, or until November
16, 2015, to regain compliance with the bid price requirement. If, at any time before November 16, 2015, the closing bid price
for the Company’s common stock is $1.00 or more for a minimum of 10 consecutive business days, the Staff will provide written
notification to the Company that it has regained compliance with the bid price requirement. If the Company does not regain compliance
with the bid price requirement by November 16, 2015, the Company may be eligible for an additional 180 calendar day compliance
period provided that it meets the continued listing requirement for the market value of publicly held shares and all other initial
listing standards, with the exception of the bid price requirement, and provides the Staff with written notice of its intention
to cure the deficiency. If the Company does not regain compliance by November 16, 2015 or the termination of any subsequent compliance
period, if applicable, the Staff will provide written notification to the Company that its common stock may be delisted. In anticipation
of receiving the Staff’s notice, on May 12, 2015, the Company filed a preliminary proxy statement on Schedule 14A with the
Securities and Exchange Commission, followed by a definitive proxy statement filed May 22, 2015, in connection with the Company’s
2015 Annual Meeting of shareholders that included a proposal to approve an amendment to the Company’s Certificate of Incorporation
to effect a reverse stock split. The Company’s Annual Meeting is scheduled for July 7, 2015. There can be no assurance that
the Company’s shareholders will approve the amendment, or that a reverse stock split will prevent the Company’s stock
price from falling below the bid price requirement in the future.
On
June 25, 2015, the Company closed on a Securities Purchase Agreement, dated as of June 22, 2015, with certain purchasers pursuant
to which the Company sold, at a 5% original issue discount, a total of $1,750,000 convertible debentures (the “Debentures”).
Net proceeds to the Company from sale of the Debentures, after payment of commissions and legal fees of the lead investor, were
$1,466,250. The Debentures mature December 22, 2015, and accrue interest at 10% per year. Amounts of principal and accrued interest
under the Debentures are convertible into common stock of the Company at a price per share of $2.50. Principal and accrued interest
on the Debentures are payable in three approximately equal installments on September 22, 2015, October 22, 2015 and December 22,
2015, at the election of the holders of the Debentures, (i) in cash for an additional 25% premium, or (ii) in common stock of
the Company at a price per share of $2.50. As lead investor under the Securities Purchase Agreement, Redwood Management, LLC received
a right of first refusal to purchase up to 100% of the securities offered by the Company in future private placement offerings
through December 22, 2015.
The
Company’s obligations under the Debentures can be accelerated in the event the Company undergoes a change in control and
other customary events of default. In the event of default and acceleration of the Company’s obligations, the Company would
be required to pay 130% of amounts of principal and interest then outstanding under the Debentures. The Company’s obligations
under the Debentures are secured under a Security Agreement, under which Redwood Management, LLC acts as Collateral Agent, by
a second lien on substantially all of the Company’s assets, including all of the Company’s interests in its consolidated
subsidiaries.
For
acting as placement agent in the offering of the Debentures, the Company paid Chardan Capital Management, LLC (the “Placement
Agent”) a fee equal to 10% of the gross proceeds from the sale of the Debentures, and issued the Placement Agent 70,000
five-year warrants exercisable at $2.50 per share. In addition, the Company agreed to reduce the exercise price of 143,072 warrants
held by the Placement Agent to $2.50 from their original exercise prices ranging from $2.01 to $2.41.
On
June 19, 2015, the Company entered into agreements (the “Waivers”), with certain investors in each of its private
placement offerings under the Securities Purchase Agreement dated March 3, 2015 (the “2015 Agreement”) and the Securities
Purchase Agreement dated November 14, 2014 (the “2014 Agreement,” and with the 2015 Agreement, the “Agreements”).
Under the terms of the Waivers, the signatories thereto (the “Prior Investors”) agreed to amend the Agreements and
waive or modify certain terms thereunder, including certain price protection provisions and participation rights in subsequent
securities offerings. In exchange, the Company agreed to issue the Prior Investors a total of 647,901 shares of common stock (including
142,000 shares issued to the lead investor under each of the Agreements in its capacity as lead investor) and 595,685 five-year
warrants exercisable at $2.525 per share. In the event that, prior to November 14, 2015, the Company issues shares of common stock,
or securities convertible into common stock, at an effective price per share of less than $2.70, the Prior Investors will be entitled
to the issuance of additional shares (the “Additional Shares”), the exact amount of which will depend on the effective
price per share of such subsequent issuance, but which will not exceed a total of 2,328,598 shares. The Company will not issue
any shares of common stock requiring shareholder approval under the Rules of the Nasdaq Stock Market without receipt of such approval.
The Company will not issue any of the Additional Shares unless the 647,901 shares of common stock, the shares issuable upon conversion
of the Debentures and the Additional Shares are either within the 19.9% Nasdaq limitation or the issuance is approved by shareholders.
The Company agreed to file a registration statement with the Securities and Exchange Commission registering the shares and warrant
shares issued to the Prior Investors under the Waivers.
On
June 16, 2015, the Company issued a total of 292,191 shares of common stock upon the vesting of restricted stock units assumed
by the Company in connection with its merger with Vaporin, Inc. effective March 4, 2015. Recipients of the shares issued upon
vesting of the restricted stock units included Gregory Brauser, the Company’s president and a member of the board of directors.
On May 27, 2015, the Company issued a total of 27,500 shares of common stock to consultants of the Company for consulting services.
On
July 7, 2015, the Company filed an amendment to its Certificate of Incorporation to effectuate a one-for-five reverse stock split
to its common stock and to increase its authorized common stock to 150,000,000 shares. The amendments were effective on July 8,
2015 at 11:59 pm. All warrant, option, common stock shares and per share information included herein gives effect to the 1 for
5 reverse split of the Company’s common stock effectuated on July 8, 2015.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Audit Committee of the
Board
of Directors and Stockholders
of
Vapor Corp.
We
have audited the accompanying consolidated balance sheets of Vapor Corp. (the “Company”) as of December 31, 2014 and
2013, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years
then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Vapor Corp. as of December 31, 2014 and 2013, and the consolidated results of its operations and its cash
flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As more fully discussed in Note 2, the Company has incurred net losses and needs to raise additional funds to meet its obligations
and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans in regard to these matters are described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this uncertainty.
/s/
Marcum LLP |
|
Marcum LLP |
|
New York, NY
March 31, 2015 , except for Note 14, as to which the date is July 10, 2015 |
|
VAPOR
CORP.
CONSOLIDATED
BALANCE SHEETS
| |
DECEMBER
31, | |
| |
2014 | | |
2013 | |
ASSETS | |
| | | |
| | |
CURRENT ASSETS: | |
| | | |
| | |
Cash | |
$ | 471,194 | | |
$ | 6,570,215 | |
Due from merchant credit card processors, net of reserve for charge-backs of $2,500 and $2,500,
respectively | |
| 111,968 | | |
| 205,974 | |
Accounts receivable, net of allowance of $369,731 and $256,833, respectively | |
| 239,652 | | |
| 1,802,781 | |
Inventories | |
| 2,048,883 | | |
| 3,321,898 | |
Prepaid expenses and vendor deposits | |
| 664,103 | | |
| 1,201,040 | |
Loans receivable, net | |
| 467,095 | | |
| - | |
Deferred financing costs, net | |
| 122,209 | | |
| - | |
Deferred tax asset, net | |
| - | | |
| 766,498 | |
TOTAL CURRENT ASSETS | |
| 4,125,104 | | |
| 13,868,406 | |
Property and equipment, net of accumulated depreciation of $84,314 and $27,879, respectively | |
| 712,019 | | |
| 28,685 | |
Other assets | |
| 91,360 | | |
| 65,284 | |
TOTAL ASSETS | |
$ | 4,928,483 | | |
$ | 13,962,375 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Accounts payable | |
$ | 1,920,135 | | |
$ | 1,123,508 | |
Accrued expenses | |
| 975,112 | | |
| 420,363 | |
Senior convertible notes payable – related parties, net of debt discount of $1,093,750
and $0, respectively | |
| 156,250 | | |
| - | |
Current portion of capital lease | |
| 52,015 | | |
| - | |
Term loan | |
| 750,000 | | |
| 478,847 | |
Customer deposits | |
| 140,626 | | |
| 182,266 | |
Income taxes payable | |
| 3,092 | | |
| 5,807 | |
TOTAL CURRENT LIABILITIES | |
| 3,997,230 | | |
| 2,210,791 | |
| |
| | | |
| | |
Capital lease, net of current portion | |
| 119,443 | | |
| - | |
TOTAL LIABILITIES | |
| 4,116,673 | | |
| 2,210,791 | |
| |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES | |
| | | |
| | |
STOCKHOLDERS’ EQUITY: | |
| | | |
| | |
Preferred stock, $.001 par value, 1,000,000 shares authorized, none issued or outstanding | |
| - | | |
| - | |
Common stock, $.001 par value,
50,000,000 shares authorized 3,352,382 and 3,242,906 shares issued and
3,352,382 and 3,242,906 shares outstanding, respectively
| |
| 3,352 | | |
| 3,243 | |
Additional paid-in capital | |
| 16,040,361 | | |
| 13,127,995 | |
Accumulated deficit | |
| (15,231,903 | ) | |
| (1,379,654 | ) |
TOTAL STOCKHOLDERS’ EQUITY | |
| 811,810 | | |
| 11,751,584 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | |
$ | 4,928,483 | | |
$ | 13,962,375 | |
See
notes to consolidated financial statements
Vapor
Corp.
CONSOLIDATED
STATEMENTS OF OPERATIONS
| |
FOR THE YEARS ENDED DECEMBER
31, | |
| |
2014 | | |
2013 | |
SALES NET | |
$ | 15,279,859 | | |
$ | 25,990,228 | |
Cost of goods sold | |
| 14,497,254 | | |
| 16,300,333 | |
Gross Profit | |
| 782,605 | | |
| 9,689,895 | |
| |
| | | |
| | |
EXPENSES: | |
| | | |
| | |
Selling, general and administrative | |
| 11,126,759 | | |
| 6,464,969 | |
Advertising | |
| 2,374,329 | | |
| 2,264,807 | |
Total operating expenses | |
| 13,501,088 | | |
| 8,729,776 | |
Operating (loss) income | |
| (12,718,483 | ) | |
| 960,119 | |
| |
| | | |
| | |
Other expense: | |
| | | |
| | |
Induced conversion expense | |
| - | | |
| 299,577 | |
Amortization of deferred financing costs | |
| 17,458 | | |
| - | |
Interest expense | |
| 348,975 | | |
| 383,981 | |
Total other expenses | |
| 366,433 | | |
| 683,558 | |
| |
| | | |
| | |
(LOSS) INCOME BEFORE INCOME TAX (EXPENSE) BENEFIT | |
| (13,084,916 | ) | |
| 276,561 | |
Income tax (expense) benefit | |
| (767,333 | ) | |
| 524,791 | |
| |
| | | |
| | |
NET (LOSS) INCOME | |
$ | (13,852,249 | ) | |
$ | 801,352 | |
| |
| | | |
| | |
BASIC (LOSS) EARNINGS PER COMMON SHARE | |
$ | ( 4.22 | ) | |
$ | 0. 31 | |
| |
| | | |
| | |
DILUTED (LOSS) EARNINGS PER COMMON SHARE | |
$ | ( 4.22 | ) | |
$ | 0. 30 | |
| |
| | | |
| | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC | |
| 3,283,030 | | |
| 2,563,697 | |
| |
| | | |
| | |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – DILUTED | |
| 3,283,030 | | |
| 2,637,273 | |
See
notes to consolidated financial statements
VAPOR
CORP.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2014 AND 2013
| |
| | |
| | |
Additional | | |
| | |
| |
| |
Common
Stock | | |
Paid-In | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
| |
| | |
| | |
| | |
| | |
| |
Balance
– January 1, 2013 | |
| 2,407,633 | | |
$ | 2,407 | | |
$ | 1,695,155 | | |
$ | (2,181,006 | ) | |
$ | (483,444 | ) |
Issuance of common stock for services | |
| 4,000 | | |
| 4 | | |
| 86 ,996 | | |
| — | | |
| 87,000 | |
Issuance of common stock in connection
with exercise of stock options | |
| 8,660 | | |
| 9 | | |
| 70 ,291 | | |
| — | | |
| 70,300 | |
Discount on convertible notes to related
parties | |
| — | | |
| — | | |
| 98,970 | | |
| — | | |
| 98,970 | |
Stock-based compensation expense | |
| — | | |
| — | | |
| 48,239 | | |
| — | | |
| 48,239 | |
Issuance of common stock for cash, net
of offering costs | |
| 666,668 | | |
| 667 | | |
| 9,124,436 | | |
| — | | |
| 9,125,103 | |
Issuance of common stock upon conversion
of debt | |
| 155,945 | | |
| 156 | | |
| 1, 704,331 | | |
| — | | |
| 1,704,487 | |
Induced conversion expense | |
| — | | |
| — | | |
| 299,577 | | |
| — | | |
| 299,577 | |
Net income | |
| — | | |
| — | | |
| — | | |
| 801,352 | | |
| 801,352 | |
Balance
– December 31, 2013 | |
| 3,242,906 | | |
| 3,243 | | |
| 13,127,995 | | |
| (1,379,654 | ) | |
| 11,751,584 | |
Offering costs incurred in 2014 pertaining
to December 2013 offering | |
| — | | |
| — | | |
| (109,104 | ) | |
| — | | |
| (109,104 | ) |
Issuance of common stock for services | |
| 80,000 | | |
| 80 | | |
| 1,602,853 | | |
| — | | |
| 1,602,933 | |
Issuance of common stock in connection
with exercise of stock options | |
| 1,000 | | |
| 1 | | |
| 4,999 | | |
| — | | |
| 5,000 | |
Issuance of common stock in connection
with cashless exercise of warrants | |
| 28,477 | | |
| 28 | | |
| ( 28 | ) | |
| — | | |
| — | |
Discount on senior convertible notes | |
| — | | |
| — | | |
| 1,250,000 | | |
| — | | |
| 1,250,000 | |
Stock-based compensation expense | |
| — | | |
| — | | |
| 163,646 | | |
| — | | |
| 163,646 | |
Net loss | |
| — | | |
| — | | |
| — | | |
| (13,852,249 | ) | |
| (13,852,249 | ) |
Balance
– December 31, 2014 | |
| 3,352,382 | | |
$ | 3,352 | | |
$ | 16,040,361 | | |
$ | (15,231,903 | ) | |
$ | 811,810 | |
See
notes to consolidated financial statements
VAPOR
CORP.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| |
FOR THE YEARS ENDED DECEMBER
31, | |
| |
2014 | | |
2013 | |
OPERATING ACTIVITIES: | |
| | | |
| | |
Net (loss) income | |
$ | (13,852,249 | ) | |
$ | 801,352 | |
Adjustments to reconcile net (loss) income to net cash used in operating
activities: | |
| | | |
| | |
Provision for doubtful accounts | |
| 112,898 | | |
| 183,333 | |
Depreciation | |
| 56,435 | | |
| 11,284 | |
Amortization of deferred debt discount | |
| 156,250 | | |
| 102,500 | |
Amortization of deferred financing costs | |
| 17,458 | | |
| - | |
Induced conversion expense | |
| - | | |
| 299,577 | |
Write down of loan receivable to realizable value | |
| 50,000 | | |
| - | |
Write down of obsolete and slow moving inventory | |
| 1,834,619 | | |
| - | |
Stock-based compensation | |
| 1,766,579 | | |
| 135,239 | |
Utilization of net operating loss carryforward | |
| - | | |
| (346,783 | ) |
Deferred tax | |
| 766,498 | | |
| (197,585 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | |
Due from merchant credit card processors | |
| 94,006 | | |
| 838,002 | |
Accounts receivable | |
| 1,450,231 | | |
| (1,250,034 | ) |
Prepaid expenses and vendor deposits | |
| 536,937 | | |
| (735,180 | ) |
Inventories | |
| (561,604 | ) | |
| (1,651,891 | ) |
Other assets | |
| (26,076 | ) | |
| (53,284 | ) |
Accounts payable | |
| 796,627 | | |
| (2,085,087 | ) |
Accrued expenses | |
| 554,749 | | |
| 70,212 | |
Customer deposits | |
| (41,640 | ) | |
| (295,429 | ) |
Income taxes | |
| (2,715 | ) | |
| 53,622 | |
NET CASH USED IN OPERATING ACTIVITIES | |
| (6,290,997 | ) | |
| (4,120,152 | ) |
| |
| | | |
| | |
INVESTING ACTIVITIES: | |
| | | |
| | |
Loans receivable | |
| (517,095 | ) | |
| - | |
Purchases of property and equipment | |
| (560,410 | ) | |
| (14,779 | ) |
NET CASH USED IN INVESTING ACTIVITIES | |
| (1,077,505 | ) | |
| (14,779 | ) |
| |
| | | |
| | |
FINANCING ACTIVITIES | |
| | | |
| | |
Proceeds from sale of common stock, net of offering costs | |
| (109,104 | ) | |
| 9,125,103 | |
Proceeds from senior convertible notes payable to related parties | |
| 1,250,000 | | |
| 425,000 | |
Proceeds from senior convertible notes payable | |
| - | | |
| 500,000 | |
Deferred financing costs | |
| (139,667 | ) | |
| - | |
Principal repayments of senior note payable to stockholder | |
| - | | |
| (70,513 | ) |
Proceeds from term loans payable | |
| 1,000,000 | | |
| 750,000 | |
Principal repayments of term loans payable | |
| (728,847 | ) | |
| (271,153 | ) |
Principal repayments of capital lease obligations | |
| (7,901 | ) | |
| - | |
Proceeds from factoring facility | |
| - | | |
| 407,888 | |
Principal repayments of factoring facility | |
| - | | |
| (407,888 | ) |
Proceeds from exercise of stock options | |
| 5,000 | | |
| 70,300 | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | |
| 1,269,481 | | |
| 10,528,737 | |
INCREASE (DECREASE) IN CASH | |
| (6,009,021 | ) | |
| 6,393,806 | |
CASH — BEGINNING OF YEAR | |
| 6,570,215 | | |
| 176,409 | |
CASH — END OF YEAR | |
$ | 471,194 | | |
$ | 6,570,215 | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |
| | | |
| | |
Cash paid for interest | |
$ | 103,068 | | |
$ | 297,508 | |
| |
| | | |
| | |
Cash paid for income taxes | |
$ | 3,550 | | |
$ | 13,770 | |
| |
| | | |
| | |
Noncash financing activities: | |
| | | |
| | |
Issuance of common stock in connection with conversion
of notes payable | |
$ | - | | |
$ | 1,704,487 | |
Cashless exercise of common stock purchase warrants | |
$ | 143 | | |
$ | - | |
Recognition of deferred debt discount on convertible
notes payable | |
$ | 1,250,000 | | |
$ | 98,970 | |
Purchase of equipment through capital lease obligation | |
$ | 179,359 | | |
$ | - | |
See
notes to consolidated financial statements
VAPOR
COrp.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1. ORGANIZATION, BASIS OF PRESENTATION AND RECENT DEVELOPMENTS
Organization
Vapor
Corp. (the “Company”) is the holding company for its wholly owned subsidiaries Smoke Anywhere U.S.A., Inc. (“Smoke”)
and IVGI Acquisition, Inc. The Company designs, markets and distributes vaporizers, e-liquids, electronic cigarettes and accessories
under the emagine vapor™, Krave®, VaporX®, Hookah Stix®, Fifty-One®
(also known as Smoke 51) and Alternacig® brands. “Vaporizers”, “Electronic cigarettes”
or “e-cigarettes,” are battery-powered products that enable users to inhale nicotine vapor without smoke, tar, ash,
or carbon monoxide.
The
Company was originally incorporated as Consolidated Mining International, Inc. in 1985 as a Nevada corporation, and the Company
changed its name in 1987 to Miller Diversified Corporation whereupon the Company operated in the commercial cattle feeding business
until October 31, 2003 when the Company sold substantially all of its assets and became a discontinued operation. On November
5, 2009, the Company acquired Smoke Anywhere USA, Inc., a distributor of electronic cigarettes, in a reverse triangular merger.
As a result of the merger, Smoke Anywhere USA, Inc. became the sole operating business. On January 7, 2010, the Company changed
its name to Vapor Corp. The Company reincorporated to the State of Delaware from the State of Nevada effective on December 31,
2013.
Basis
of Presentation and Reverse Stock Split
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) for financial information and with the rules and regulations of the U.S.
Securities and Exchange Commission (“SEC”).
Effective
on December 27, 2013, the Company effected a reverse stock split of its common stock at a ratio of 1-for-5. No fractional shares
of common stock were issued, and no cash or other consideration were paid as a result of the reverse stock split. Instead, the
Company issued one whole share of post-reverse stock split common stock in lieu of each fractional share of common stock. As a
result of the reverse stock split, the Company’s share capital was reduced to 51,000,000 shares from 251,000,000 shares,
of which 50,000,000 shares are common stock and 1,000,000 shares are “blank check” preferred stock.
All
references in these notes and in the related consolidated financial statements to number of shares, price per share and weighted
average number of shares outstanding of common stock prior to the reverse stock split (including the share capital decrease) have
been adjusted to reflect the reverse stock split (including the share capital decrease) on a retroactive basis, unless otherwise
noted.
Merger
with Vaporin, Inc.
As
fully-disclosed in Note 4 to these consolidated financial statements, on December 17, 2014, the Company entered into an Agreement
and Plan of Merger (the “Merger Agreement”) with Vaporin, Inc., a Delaware corporation (“Vaporin”) pursuant
to which Vaporin was to merge with and into the Company with the Company being the surviving entity. On the same date, the Company
also entered into a joint venture with Vaporin (the “Joint Venture”) through the execution of an operating agreement
(the “Operating Agreement”) of Emagine the Vape Store, LLC, a Delaware limited liability company (“Emagine”),
pursuant to which the Company and Vaporin were 50% members of Emagine.
On
March 4, 2015, the acquisition of Vaporin by the Company (the “Merger”) was completed pursuant to the terms of the
Merger Agreement. In connection with the Merger, Emagine became a wholly-owned subsidiary of the Company.
Note
2. GOING CONCERN AND MANAGEMENT PLANS
The
Company’s financial statements for the year ended December 31, 2014 indicate there is substantial doubt about its ability
to continue as a going concern as the Company requires additional equity and/or debt financing to continue its operations. The
Company must ultimately generate sufficient cash flow to met its obligations on a timely basis, attain profitability in its business
operations, and be able to fund its long term business development and growth plans. The Company’s business will require
significant amounts of capital to sustain operations and make the investments it needs to execute its longer-term business plan.
The Company’s liquidity and capital resources have decreased as a result of the net loss of $13,852,249 that it incurred
during the year ended December 31, 2014. At December 31, 2014, the Company’s accumulated deficit amounted to $15,231,903.
At December 31, 2014, the Company had working capital of $127,874 compared to $11,657,615 at December 31, 2013, a decrease of
$11,529,741. As described in Note 13 (Subsequent Events), on March 3, 2015, the Company and institutional and individual
accredited investors entered in a securities purchase agreement pursuant to which the Company issued and sold, in a $3.5 million
private placement ($2.9 million in net proceeds), 686,463 shares of common stock and warrants to purchase up to 547,026
shares of the Company’s common stock. The Company will use the net proceeds from the private placement for working capital.
In addition, the Merger with Vaporin also provides an additional financing transaction to occur subsequent to the closing of the
Merger for up to $25 million in exchange for common stock and warrants of the Company subject to the Company complying with certain
financial covenants and performance-based metrics still to be negotiated.
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern and realization
of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented
in the financial statements do not necessarily purport to represent realizable or settlement values. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
The
Company’s existing liquidity is not sufficient to fund its operations, anticipated capital expenditures, working capital
and other financing requirements for the foreseeable future. We believe we will need to raise additional debt or equity financing
to maintain and expand the business. Any equity financing or the issuance of equity equivalents including convertible debt could
be dilutive to our shareholders. If either such additional capital is not available on terms acceptable to the Company or at all
then the Company may need to curtail its operations and/or take additional measures to conserve and manage its liquidity and capital
resources, any of which would have a material adverse effect on our business, results of operations and financial condition.
Note
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of consolidation
The
accompanying consolidated financial statements include the accounts of the Company, its wholly owned subsidiary, Smoke Anywhere
USA, Inc., and its 50% joint venture interest in Emagine the Vape Store, LLC. All significant intercompany transactions and balances
were eliminated.
Use
of estimates in the preparation of financial statements
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of net revenue and expenses during the reporting periods. Actual
results could differ from those estimates. These estimates and assumptions include allowances, reserves and write-downs of receivables
and inventory, valuing equity securities and hybrid instruments, share-based payment arrangements, deferred taxes and related
valuation allowances, and the preliminary valuation of the net assets acquired subsequent to December 31, 2014 in the Merger.
Certain of our estimates could be affected by external conditions, including those unique to our industry, and general economic
conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to
differ from our estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions
and records adjustments when necessary.
Revenue
recognition
The
Company recognizes revenue from product sales or services rendered when the following four revenue recognition criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed
or determinable, and collectability is reasonably assured.
Product
sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded when the products are
shipped, title passes to customers and collection is reasonably assured. Retail sales to customers are made pursuant to a sales
contract that provides for transfer of both title and risk of loss upon the Company’s delivery to the carrier. Return allowances,
which reduce product revenue, are estimated using historical experience. Revenue from product sales and services rendered is recorded
net of sales and consumption taxes.
The
Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers,
such as percentage discounts off current purchases, inducement offers, such as offers for future discounts subject to a minimum
current purchase, and other similar offers. Current discount offers, when accepted by the Company’s customers, are treated
as a reduction to the purchase price of the related transaction, while inducement offers, when accepted by its customers, are
treated as a reduction to the purchase price of the related transaction based on estimated future redemption rates. Redemption
rates are estimated using the Company’s historical experience for similar inducement offers. The Company reports sales,
net of current discount offers and inducement offers on its consolidated statements of operations.
Shipping
and Handling Costs
The
Company policy is to provide free standard shipping and handling for most orders shipped during the year. Shipping and handling
costs incurred are recognized in selling, general and administrative expenses. Such amounts aggregated $661,583 and $658,586 for
the years ended December 31, 2014 and 2013 respectively.
In
certain circumstances, shipping and handling costs are charged to the customer and recognized in sales, net. The amounts recognized
for the years ended December 31, 2014 and 2013 were $71,225 and $129,761, respectively.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
For financial statement purposes, investments in money market funds are considered a cash equivalent and are included in cash
and cash equivalents. The Company maintains its cash and cash equivalents at high credit quality federally insured financial institutions,
with balances, at times, in excess of the Federal Deposit Insurance Corporation’s insurance coverage limit of $250,000 per
federally insured financial institution. Management believes that the financial institutions that hold the Company’s deposits
are financially sound and, therefore, pose a minimum credit risk. The Company has not experienced any losses in such accounts.
At December 31, 2014 and 2013, the Company did not hold cash equivalents.
Accounts
Receivable
Accounts
receivable, net is stated at the amount the Company expects to collect. The Company provides a provision for allowances that includes
returns, allowances and doubtful accounts equal to the estimated uncollectible amounts. The Company estimates its provision for
allowances based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably
possible that the Company’s estimate of the provision for allowances will change.
Due
From Merchant Credit Card Processor
Due
from merchant credit card processor represents monies held by the Company’s credit card processors. The funds are being
held by the merchant credit card processors pending satisfaction of their hold requirements and expiration of charge backs/refunds
from customers.
Inventories
Inventories
are stated at the lower of cost (determined by the first-in, first-out method) or market. If the cost of the inventories exceeds
their market value, provisions are recorded to write down excess inventory to its net realizable value. The Company’s inventories
consist primarily of merchandise available for resale.
Property
and equipment
Property
and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over
the expected useful life of the respective asset, after the asset is placed in service. The Company generally uses the following
depreciable lives for its major classifications of property and equipment:
Description |
|
Useful
Lives |
Warehouse
fixtures |
|
2
years |
Warehouse
equipment |
|
5
years |
Furniture
and fixtures |
|
5
years |
Computer
hardware |
|
3
years |
Impairment
of Long-Lived Assets
The
Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value
of the asset may not be recoverable. In connection with this review, the Company also reevaluates the depreciable lives for these
assets. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through
the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may
not be recoverable, it measures any impairment based on the projected future discounted cash flows as compared to the asset’s
carrying value. Through December 31, 2014, the Company has not recorded any impairment charges on its long-lived assets.
Advertising
The
Company expenses advertising cost as incurred.
Warranty
liability
The
Company’s limited lifetime warranty policy generally allows its end users and retailers to return defective purchased rechargeable
products in exchange for new products. The Company estimates a reserve for warranty liability and records that reserve amount
as a reduction of revenues and as an accrued expense on the accompanying consolidated balance sheets. The warranty claims and
expense was not deemed material for the years ended December 31, 2014 and 2013.
Income
taxes
The
Company uses the asset and liability method of accounting for income taxes in accordance with ASC 740, “Income Taxes”
(“ASC 740.”) Under this method, income tax expense is recognized as the amount of: (i) taxes payable or refundable
for the current year and (ii) future tax consequences attributable to differences between financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period
that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the
weight of available evidence it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Product
Development
The
Company includes product development expenses relating to the commercialization of new products which are expensed as incurred
as part of operating expenses. Product development expenses for the years ended December 31, 2014 and 2013 were approximately
$312,000 and $174,000, respectively.
Fair
value measurements
The
Company applies the provisions of Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and
Disclosures,” (“ASC 820”). The Company’s short term financial instruments include cash, due from merchant
credit card processors, accounts receivable, accounts payable and accrued expenses, each of which approximate their fair values
based upon their short term nature. The Company’s other financial instruments include notes payable obligations. The carrying
value of these instruments approximate fair value, as they bear terms and conditions comparable to market, for obligations with
similar terms and maturities.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may
be used to measure fair value: Level 1 – quoted prices in active markets for identical assets or liabilities; Level 2 –
quoted prices for similar assets and liabilities in active market or inputs that are observable; and Level 3 – inputs that
are unobservable.
Stock-Based
Compensation
The
Company accounts for stock-based compensation under ASC 718, “Compensation-Stock Compensation” (“ASC 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 fair value of the award as determined by the valuation model at the grant date or other measurement date. 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. The Company considers many factors when estimating expected forfeitures, including types of awards,
employee class, and historical experience.
Derivative
Instruments
The
Company accounts for free-standing derivative instruments and hybrid instruments that contain embedded derivative features in
accordance with ASC Topic No. 815, “Accounting for Derivative Instruments and Hedging Activities,” (“ASC 815”)
as well as related interpretations of this topic. In accordance with this topic, derivative instruments and hybrid instruments
are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized
in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized
at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value
of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration
to all of the rights and obligations of each instrument.
The
Company estimates fair values of derivative instruments and hybrid instruments using various techniques (and combinations thereof)
that are considered to be consistent with the objective of measuring fair values. In selecting the appropriate technique, the
Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means
of settlement. For less complex instruments, such as free-standing warrants, the Company generally uses the Black-Scholes-Merton
valuation model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading
volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of
derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to,
change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based
techniques (such as the Black-Scholes-Merton valuation model) are highly volatile and sensitive to changes in the trading market
price of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair
values, the Company’s income (loss) going forward will reflect the volatility in these estimates and assumption changes.
Under ASC 815, increases in the trading price of the Company’s common stock and increases in fair value during a given financial
quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Company’s
common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative
income.
Convertible
Debt Instruments
The
Company accounts for convertible debt instruments when the Company has determined that the embedded conversion options should
not be bifurcated from their host instruments in accordance with ASC 470-20 “Debt with Conversion and Other Options”.
The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in
debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the
note transaction and the effective conversion price embedded in the note. The Company amortizes the respective debt discount over
the term of the notes, using the straight-line method, which approximates the effective interest method. The Company records,
when necessary, induced conversion expense, at the time of conversion for the difference between the reduced conversion price
per share and the original conversion price per share.
Lease
Accounting
The
Company evaluates each lease for classification as either a capital lease or an operating lease. If substantially all of the benefits
and risks of ownership have been transferred to the Company as lessee, the Company records the lease as a capital lease at its
inception. The Company performs this evaluation at the inception of the lease and when a modification is made to a lease. If the
lease agreement calls for a scheduled rent increase during the lease term, the Company recognizes the lease expense on a straight-line
basis over the lease term. The Company determines the straight-line rent impact of an operating lease upon inception of the lease.
Recent
Accounting Pronouncements
The
Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (“ASU”) No. 2014-12,
Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That
a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects
vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance
target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation
cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent
the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments
in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015.
Earlier adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s
consolidated financial position and results of operations.
The
FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements
in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification.
The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This
ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively
with the cumulative effect of initially applying the ASU recognized at the date of initial application. The Company is currently
evaluating the potential impact, if any, the adoption of this standard will have on the Company’s consolidated financial
position and results of operations.
The
FASB has issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going Concern. The guidance, which is effective for annual reporting periods
ending after December 15, 2016, extends the responsibility for performing the going-concern assessment to management and contains
guidance on how to perform a going-concern assessment and when going-concern disclosures would be required under U.S. GAAP. The
Company has elected to early adopt the provisions of ASU 2014-15 in connection with the issuance of these consolidated financial
statements. Information regarding the substantial doubt relating to the Company’s ability to continue as a going concern
has been disclosed in Note 2.
Note
4. MERGER WITH VAPORIN, INC.
Merger
with Vaporin, Inc.
On
December 17, 2014, the Company entered into the Merger Agreement with Vaporin pursuant to which Vaporin was to merge with and
into the Company with Vapor being the surviving entity. The Merger closed on March 4, 2015 whereby 100% of the issued and outstanding
shares of Vaporin common stock (including shares of common stock issued upon conversion of Vaporin preferred stock immediately
prior to the consummation of the merger in accordance with the Merger Agreement) were converted into, and became 2,718,307
shares of the Company’s common stock such that the former Vaporin stockholders collectively hold approximately 45% of
the issued and outstanding shares of the Company’s common stock following consummation of the Merger. The options and warrants
to acquire Vaporin common stock that were issued and outstanding as of the effective time of the Merger, as well as 182 ,000
restricted stock units which were exchangeable for Vaporin common stock, were assumed by the Company in the merger and the number
of shares issued under such securities were adjusted to give effect to the Per Share Merger Consideration (as defined in the Merger
Agreement).
Pursuant
to the terms of the Merger Agreement, the Company completed actions to cause its board of directors immediately following the
consummation of the merger to be comprised of (x) three directors chosen by the Company’s Board of Directors (at least two
of whom shall be independent for purposes of the Nasdaq listing rules) and (y) two directors chosen by the Vaporin Board or Directors
(at least one of whom shall be independent for purposes of the Nasdaq listing rules), each to serve for a term expiring on the
earlier of his or her death, resignation, removal or the Company’s next annual meeting of stockholders and, despite the
expiration of his or her term, until his or her successor has been elected and qualified or there is a decrease in the size of
the Company’s Board of Directors. If at any time prior to the effective time of the merger, any such board designee becomes
unable or unwilling to serve as a director of the Company following consummation of the merger, then the party that designated
such individual shall designate another individual to serve in such individual’s place.
The
Merger Agreement contained customary representations and warranties of the Company and Vaporin relating to their respective businesses.
The Company and Vaporin have agreed to use commercially reasonable efforts to preserve intact its business organization and that
of its significant subsidiaries, as well as maintain its rights, franchises and existing relations with customers, suppliers and
employees. The Merger Agreement also contains covenants by each party to furnish current information to the other party.
The
Company has also agreed that, for a period of six years following the closing date of the merger, it will indemnify, defend and
hold harmless each officer and director of Vaporin and its subsidiaries against losses arising from such person’s status
as an officer or director of Vaporin or any of its subsidiaries prior to the effective time of the merger. The Company has also
agreed to cover such directors and officers with its existing directors’ and officers’ insurance policy or obtain
a six-year “tail” policy, in each case with coverages not less advantageous as Vaporin’s existing policy, provided,
however, that the Company will not be required to pay more than 200% of Vaporin’s current premium for such insurance.
The
Merger Agreement contained customary conditions that were satisfied prior to the closing of the merger, including the requirement
for the Company to receive gross proceeds from a $3.5 million equity offering disclosed in Note 13. Additionally, the Company
must have received commitments from certain third parties for financing of up to $25 million to be used for the construction of
retail stores and which is contingent on the achievement of certain performance metrics by the Company.
The
fair value of the purchase consideration issued to the sellers of Vaporin was allocated to fair value of the net tangible assets
acquired, with the resulting excess allocated to separately identifiable intangibles, and the remainder recorded as goodwill.
Goodwill recognized from the transactions mainly represented the expected operational synergies upon acquisition of the combined
entity and intangibles not qualifying for separate recognition. Goodwill is not expected to be deductible for income tax purposes
in the tax jurisdiction of the acquired business.
The
Company has not completed its evaluation of the purchase price allocation as it is currently conducting a thorough analysis to
identify the intangible assets acquired, including whether or not any goodwill is to be recorded, in the Merger and determine
the proper allocation of the fair value of such assets with the assistance of a third-party appraiser.
The
following table presents the unaudited pro-forma financial results, as if the acquisition of Vaporin had been completed as of
January 1, 2013 and 2014:
| |
For the Years Ended December
31, | |
| |
2014 | | |
2013 | |
Revenues | |
$ | 20,253,052 | | |
$ | 28,259,309 | |
Net (loss) income | |
$ | (19,595,702 | ) | |
$ | 415,316 | |
Loss per share - basic and diluted | |
$ | ( 2.95 | ) | |
$ | 0. 05 | |
The
unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations
are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2013
or to project potential operating results as of any future date or for any future periods.
The
Joint Venture
On
December 17, 2014, the Company and Vaporin agreed to enter into the Joint Venture through Emagine, a Delaware limited liability
company of which the Company and Vaporin are 50% members. The Operating Agreement provides that Vaporin will serve as the initial
manager of Emagine and will manage the day-to-day operations of Emagine, subject to certain customary limitations on managerial
actions that require the unanimous consent of the Company and Vaporin, including but not limited to making or guaranteeing loans,
distributing cash or other property to the members of Emagine, entering into affiliate transactions, amending or modifying limited
liability company organizational documents, and redeeming or repurchasing membership interests from any of the members.
The
purpose of the Joint Venture was to obtain and build-out retail stores for the sale of the Company and Vaporin’s products
under the “Emagine Vapor” name or “The Vape Store, Inc.” name or other brands of the respective parties.
The parties originally planned to finance the retail stores through third party loan financing secured by a blanket lien on the
assets of Emagine. In connection with the Joint Venture, Emagine entered into a Secured Line of Credit Agreement, pursuant to
which certain third parties have agreed to provide debt financing of up to $3 million to Emagine to finance the Joint Venture.
The Company has accounted for the joint venture under the equity method of accounting for investments. For the year ended December
31, 2014, the operations of the joint-venture were immaterial.
In
connection with the completion of the Merger on March 4, 2015, Emagine became a wholly-owned subsidiary of the Company.
Note
5. PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
| |
December 31, | |
| |
2014 | | |
2013 | |
Computer hardware | |
$ | 389,373 | | |
$ | 12,471 | |
Furniture and fixtures | |
| 347,612 | | |
| 19,821 | |
Warehouse fixtures | |
| 7,564 | | |
| 7,564 | |
Warehouse equipment | |
| 16,708 | | |
| 16,708 | |
Leasehold improvements | |
| 35,076 | | |
| - | |
| |
| 796,333 | | |
| 56,564 | |
Less: accumulated depreciation and amortization | |
| (84,314 | ) | |
| (27,879 | ) |
| |
$ | 712,019 | | |
$ | 28,685 | |
During
the year ended December 31, 2014 and 2013, the Company incurred $56,435 and $11,284, respectively, of depreciation expense.
Note
6. NOTES PAYABLE
$1,250,000
Senior Convertible Notes Payable to Related Parties
On
November 14, 2014, the Company entered into securities purchase agreements with certain accredited investors who are also stockholders
of Vaporin providing for the sale of $1,250,000 in aggregate principal amount of the Company’s senior convertible notes
(the “$1,250,000 Senior Convertible Notes”) and common stock purchase warrants to purchase up to an aggregate of 227,273
shares of the Company’s common stock, $0.001 par value per share with an exercise price of $ 10 .00 per share.
The $1,250,000 Senior Convertible Notes accrue interest on the outstanding principal at an annual rate of 7% per annum. The principal
and accrued interest on the Notes are due and payable on November 14, 2015, the maturity date of the Notes. The terms of the $1,250,000
Senior Convertible Notes included customary anti-dilution protection and also included “piggy-back” registration rights
with respect to the shares of common stock underlying the $1,250,000 Senior Convertible Notes and warrants. The terms of the Notes
provide that the Company may prepay the outstanding principal amount of the Notes, in whole or in part, by paying to the holders
thereof an amount in cash equal to 115% of the principal amount to be redeemed, together with accrued but unpaid interest thereon
and any and all other sums due, accrued or payable to such holders through the date of such redemption payment. In connection
with the completion of the securities purchase agreement for the $1,250,000 Senior Convertible Notes, the Company incurred financing
costs of $139,667, which are being amortized on a straight-line basis, which approximates the interest rate method, over the one-year
maturity period of the $1,250,000 Senior Convertible Notes. The Company incurred $17,458 in amortization expense of the deferred
financing costs during the year ended December 31, 2014.
The
Notes are convertible into shares of the Company’s Common Stock at any time, in whole or in part, at the option of the holder
thereof at a conversion price of $ 5.50 per share (the “Conversion Price”). The Conversion Price is subject
to customary adjustment upon the occurrence of certain events, including but not limited to stock dividends, stock splits, subsequent
rights offerings of the Company, pro rata distributions of the Company, and in connection with a “Fundamental Transaction”
(as such term is defined in the securities purchase agreement, which includes, without limitation, mergers, consolidations, a
sale of all or substantially all of the assets of the Company, transactions effecting a change in control of the Company and other
similar transactions).
In
connection with the sale and issuance of the $1,250,000 Senior Convertible Notes, the Company also issued warrants to acquire
an aggregate of 227,273 shares of the Company’s common stock. The Warrants are exercisable after 180 days from the
date of issuance, or May 14, 2015, until the fifth anniversary of such date of issuance at an exercise price of $ 10 .00
per share (subject to certain customary adjustments upon the occurrence of certain events, including but not limited to stock
dividends, stock splits, subsequent rights offerings of the Company, pro rata distributions of the Company, and in connection
with a Fundamental Transaction. Palladium Capital Advisors, LLC acted as the exclusive placement agent for the $1,250,000 Senior
Convertible Notes and, as compensation therefor, the Company paid Palladium Capital Advisors, LLC a placement agent fee of $62,500,
included as part of financing fees described above, and issued to them a common stock warrant to purchase up to 11,364
shares of our common stock at an initial exercise price of $ 10 .00 per share. The warrant is immediately exercisable and
expires on November 14, 2019. The exercise price and number of shares of common stock issuable under the warrant are subject to
customary anti-dilutive adjustments for stock splits, stock dividends, recapitalizations and similar transactions. At any time
the warrant may be exercised by means of a “cashless exercise” and the Company will not receive any proceeds at such
time.
On
the date of the issuance of the $1,250,000 Senior Convertible Notes, the Company recorded a debt discount of $1,250,000, of which
$701,250 was allocated on a relative fair value basis to the warrants issued and the remaining $548,750 was allocated on a relative
fair value basis to the conversion feature embedded within the $1,250,000 Senior Convertible Notes. The debt discount will be
amortized using the effective interest method over the life of the $1,250,000 Senior Convertible Note, as applicable, or until
such time that the $1,250,000 Senior Convertible Notes are converted, in full or in part, into shares of common stock of the Company
with any unamortized debt discount continuing to be amortized in the event of any partial conversion thereof and any unamortized
debt discount being expensed at such time of full conversion thereof. During the year ended December 31, 2014, the Company recorded
an aggregate $156,250 in non-cash interest expense related to the amortization of the debt discount, which is included in interest
expense in the accompanying consolidated statement of operations.
$300,000
Senior Convertible Notes Payable to Related Parties
On
June 19, 2012, the Company entered into securities purchase agreements with Kevin Frija, its former Chief Executive Officer, Harlan
Press, its former Chief Financial Officer, and Doron Ziv, a then greater than 10% stockholder of the Company, pursuant to which
Messrs. Frija, Press and Ziv purchased from the Company (i) $300,000 aggregate principal amount of the Company’s senior
convertible notes (the “$300,000 Senior Convertible Notes”) and (ii) common stock purchase warrants to purchase up
to an aggregate of 1,861 shares of the Company’s common stock.
The
Company incurred interest expense of $48,674 during 2013 on the $300,000 Senior Convertible Notes until they were converted in
full into 56,338 shares of the Company’s common stock and fully extinguished in conjunction with completion of the
Private Placement (as defined in Note 9), on October 29, 2013.
$50,000
Senior Convertible Notes Payable to Related Parties
On
September 28, 2012, the Company entered into a securities purchase agreement with Kevin Frija, its former Chief Executive Officer,
pursuant to which Mr. Frija purchased from the Company (i) a $50,000 principal amount senior convertible note of the Company (the
“$50,000 Senior Convertible Note”) and (ii) common stock purchase warrants to purchase up to an aggregate of 275
shares of the Company’s common stock.
The
Company incurred interest expense of $8,113 during 2013 on the $50,000 Senior Convertible Notes until they were converted in full
into 8,333 shares of the Company’s common stock and fully extinguished in conjunction with completion of the Private
Placement (as defined in Note 9), on October 29, 2013. During the year ended December 31, 2013, the Company recorded $3,530 in
amortization expense related to the debt discount, which is included in interest expense in the accompanying consolidated statements
of operations.
$350,000
Senior Convertible Notes Payable to Related Parties
On
July 9, 2013, the Company entered into securities purchase agreements with Ralph Frija, the father of the Company’s former
Chief Executive Officer Kevin Frija and a less than 5% stockholder of the Company, Philip Holman, the father of the Company’s
Chief Executive Officer Jeffrey Holman and a less than 5% stockholder of the Company, and Angela Vaccaro, the Company’s
Controller, pursuant to which Messrs. Frija and Holman and Ms. Vaccaro (each, a “Purchaser”) purchased from the Company
(i) $350,000 aggregate principal amount of the Company’s senior convertible notes (the “$350,000 Senior Convertible
Notes”) and (ii) common stock purchase warrants to purchase up to an aggregate of 675 shares of the Company’s
common stock (the “Warrants”) allocable among such Purchasers as follows:
|
● |
Ralph
Frija purchased a Convertible Note in the principal amount of $200,000 and a Warrant to purchase up to 385 shares of
the Company’s common stock (which number of shares represents the quotient obtained by dividing (x) $10,000 (5% of the
$200,000 principal amount of the Convertible Note) by (y) $5.19 (the 30-day weighted average closing price per share of the
Company’s common stock, as reported on the OTC Bulletin Board, preceding July 9, 2013)); |
|
|
|
|
● |
Philip
Holman purchased a Convertible Note in the principal amount of $100,000 and a Warrant to purchase up to 964 shares of the
Company’s common stock (which number of shares represents the quotient obtained by dividing (x) $5,000 (5% of the $100,000
principal amount of the Convertible Note) by (y) $5.19 (the 30-day weighted average closing price per share of the Company’s
common stock, as reported on the OTC Bulletin Board, preceding July 9, 2013)); and |
|
|
|
|
● |
Ms.
Vaccaro purchased a Convertible Note in the principal amount of $50,000 and a Warrant to purchase up to 482 shares of the
Company’s common stock (which number of shares represents the quotient obtained by dividing (x) $2,500 (5% of the $50,000
principal amount of the Convertible Note) by (y) $ 25.95 (the 30-day weighted average closing price per share of the
Company’s common stock, as reported on the OTC Bulletin Board, preceding July 9, 2013)). |
The
Convertible Notes issued on July 9, 2013 bear interest at 18% per annum, provide for cash interest payments on a monthly basis,
mature on July 8, 2016, are redeemable at the option of the holders at any time after July 8, 2014, subject to certain limitations,
are convertible into shares of the Company’s common stock at the option of the holders at an initial conversion price of
$ 28.55 per share (which represents 110% of the 30-day weighted average closing price per share of the Company’s common
stock, as reported on the OTC Bulletin Board, preceding July, 9, 2013) subject to certain anti-dilution protection and are senior
unsecured obligations of the Company.
The
Company incurred interest expense of $16,126 during 2013 on the $350,000 Senior Convertible Notes. In conjunction with completion
of the Private Placement (as defined in Note 9), on October 29, 2013, the conversion price was reduced to $ 15 .00 per share
inducing the holders of $350,000 Senior Convertible Notes to fully convert all of these senior convertible notes into 23,334
shares of our common stock, whereupon all of these senior convertible notes were fully extinguished and cease to be outstanding.
During the year ended December 31, 2013, the Company recorded $246,375 in induced conversion expense related to the reduction
in the conversion price for the $350,000 Senior Convertible Notes. The induced conversion expense is included in other expense
in the accompanying consolidated statements of operations.
The
Company recorded $4,550 as debt discount on the principal amount of the $350,000 Senior Convertible Notes issued on July 9, 2013
due to the valuation of the Warrants issued in conjunction therewith. Additionally, as a result of issuing the Warrants with the
$350,000 Senior Convertible Notes, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion
option intrinsic value benefit of $3,937, at the time of issuance provided to the holders of the Notes. The debt discounts applicable
to the $350,000 Senior Convertible Notes was amortized, using the straight-line method, over the life of the $350,000 Senior Convertible
Notes, until October 29, 2013 when the $350,000 Senior Convertible Notes were converted in full into shares of common stock of
the Company. The remaining unamortized debt discounts was expensed at the time of the conversion. During the year ended December
31, 2013, the Company recorded $4,550 and $3,937 in amortization expense related to the debt discounts and the beneficial conversion
option, respectively. The amortization expense related to the debt discounts and the beneficial conversion option is included
in interest expense in the accompanying consolidated statements of operations.
The Warrants issued on July 9,
2013 are exercisable at initial exercise prices of $ 28.55 per share (which represents 110% of the 30-day weighted average
closing price per share of the Company’s common stock, as reported on the OTC Bulletin Board, preceding July 9, 2013) subject
to certain anti-dilution protection and may be exercised at the option of the holders for cash or on a cashless basis until July
8, 2018.
$75,000
Senior Convertible Notes Payable to Related Parties
On
July 11, 2013, the Company and Ms. Vaccaro entered into another Securities Purchase Agreement pursuant to which she purchased
(i) a Convertible Note in the principal amount of $75,000 (the “$75,000 Senior Convertible Note”) and (ii) a Warrant
to purchase up to 144 shares of the Company’s common stock (which number of shares represents the quotient obtained
by dividing (x) $3,750 (5% of the $75,000 principal amount of the Convertible Note) by (y) $ 26.135 (the 30-day weighted
average closing price per share of the Company’s common stock, as reported on the OTC Bulletin Board, preceding July 11,
2013)).
The
Convertible Note issued on July 11, 2013 is the same as the Convertible Notes issued on July 9, 2013 except that it matures on
July 10, 2016, it is redeemable on July 10, 2014 and its initial conversion price is $ 28.75 per share. The Warrant issued
on July 11, 2013 is the same as the Warrants issued on July 9, 2013 except that its initial exercise price is $ 28 .75 per
share and it is exercisable until July 10, 2018.
The
Company incurred interest expense of $3,957 during 2013 on the $75,000 Senior Convertible Notes. In conjunction with completion
of the Private Placement (as defined in Note 9), on October 29, 2013, the conversion price was reduced to $ 15 .00 per share
inducing the holder of the $75,000 Senior Convertible Note to fully convert all of these senior convertible notes into 5,000 shares
of our common stock, whereupon all of these senior convertible notes were fully extinguished and cease to be outstanding. During
the year ended December 31, 2013, the Company recorded $53,202 in induced conversion expense related to the reduction in the conversion
price for the $75,000 Senior Convertible Note. The induced conversion expense is included in other expense in the accompanying
consolidated statements of operations.
The
Company recorded $825 as debt discount on the principal amount of the $75,000 Senior Convertible Note issued on July 11, 2013
due to the valuation of the Warrant issued in conjunction therewith. The debt discount applicable to the $75,000 Senior Convertible
Note was amortized, using the straight-line method, over the life of the $75,000 Senior Convertible Note, until October 29, 2013
when the $75,000 Senior Convertible Note was converted in full into shares of common stock of the Company. The remaining unamortized
debt discounts was expensed at the time of the conversion. During the year ended December 31, 2013, the Company recorded $825
in amortization expense related to the debt discount, and is included in interest expense in the accompanying consolidated statements
of operations.
The
$300,000 Senior Convertible Notes, as amended, the $50,000 Senior Convertible Note, as amended, the $350,000 Senior Convertible
Notes, and the $75,000 Senior Convertible Note did not restrict the Company’s ability to incur future indebtedness.
$500,000
Senior Convertible Note Payable to Stockholder
On
July 9, 2012, the Company borrowed $500,000 from Ralph Frija, the father of the Company’s former Chief Executive Officer
Kevin Frija and a less than 5% stockholder of the Company, pursuant to a senior note (the “Senior Note”). The Senior
Note, as amended (as described below), bears interest at 24% per annum, provides for cash principal and interest payments on a
monthly basis, is a senior unsecured obligation of the Company, matures on April 22, 2016, is convertible into shares of the Company’s
common stock at the option of the holder at an initial conversion price of $ 12.885 per share (which represents 110% of
the 30-day weighted average closing price per share of the Company’s common stock, as reported on the OTC Bulletin Board,
preceding April 30, 2013) subject to certain anti-dilution protection and is a senior unsecured obligation of the Company.
Initially,
this Senior Note provided for only cash interest payments on a monthly basis, matured at the discretion of the Company on the
earlier of (x) the date on which the Company consummated a single or series of related financings from which it received net proceeds
in excess of 125% of the initial principal amount of the Senior Note or (y) January 8, 2013 and was not convertible at the option
of the holder into shares of the Company’s common stock. On November 13, 2012, the Company and the above named holder of
the $500,000 Senior Note amended the Note to extend its maturity date for payment from January 8, 2013 to January 8, 2014. On
April 30, 2013, the Company and the above named holder of the Senior Note further amended the Note to provide for cash principal
and interest payments on a weekly basis, extend the maturity date for payment to April 22, 2016 and make the Note convertible
into shares of the Company’s common stock at the option of the holder at an initial conversion price of $ 12.885 per
share (which represents 110% of the 30-day weighted average closing price per share of the Company’s common stock, as reported
on the OTC Bulletin Board, preceding April 30, 2013) subject to certain anti-dilution protection.
The
Company incurred interest expense of $93,267 during 2013 on the $50,000 Senior Convertible Notes until they were converted in
full into 33,332 shares of the Company’s common stock and fully extinguished in conjunction with completion of the
Private Placement (as defined in Note 9), on October 29, 2013.
$500,000
Senior Convertible Note Payable
On
January 29, 2013, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with
Robert John Sali, pursuant to which Mr. Sali purchased from the Company (i) a $500,000 principal amount senior convertible note
of the Company (the “2013 Convertible Note”) and (ii) common stock purchase warrants to purchase up to an aggregate
of 1,628 shares of the Company’s common stock (the “Warrant”) (which number of shares represents the
quotient obtained by dividing (x) $25,000 (5% of the $500,000 principal amount of the 2013 Convertible Note) by (y) $ 15.35
(the 30-day weighted average closing price per share of the Company’s common stock, as reported on the OTC Bulletin
Board, preceding January 29, 2013)). The Company generated aggregate proceeds of $500,000 from the sale of these securities pursuant
to the Securities Purchase Agreement.
The
2013 Convertible Note bears interest at 18% per annum, provides for cash interest payments on a monthly basis, matures on January
28, 2016, is redeemable at the option of the holder at any time after January 28, 2014 subject to certain limitations, is convertible
into shares of the Company’s common stock at the option of the holder at an initial conversion price of $ 16.888 per
share (which represents 110% of the 30-day weighted average closing price per share of the Company’s common stock, as reported
on the OTC Bulletin Board, preceding January 29, 2013) subject to certain anti-dilution protection and is a senior unsecured obligation
of the Company. The 2013 Convertible Note does not restrict the Company’s ability to incur future indebtedness.
The
Company incurred interest expense of $66,329 during 2013 on the $50,000 Senior Convertible Notes until they were converted in
full into 148,039 shares of the Company’s common stock and fully extinguished in conjunction with completion of the Private
Placement (as defined in Note 9), on October 29, 2013.
The
Warrant is exercisable at initial exercise price of $ 16.888 per share (which represents 110% of the 30-day weighted average
closing price per share of the Company’s common stock, as reported on the OTC Bulletin Board, preceding January 29, 2013)
subject to certain anti-dilution protection and may be exercised at the option of the holder for cash or on a cashless basis until
January 28, 2018.
The
Company recorded $10,131 as debt discount on the principal amount of the 2013 Senior Convertible Note issued on January 29, 2013
due to the valuation of the Warrant issued in conjunction therewith. Additionally, as a result of issuing the Warrant with the
2013 Senior Convertible Note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion
option intrinsic value benefit of $79,527, at the time of issuance provided to the holder of the Note. The debt discounts applicable
to the 2013 Convertible Note was amortized, using the straight-line method, over the life of the 2013 Convertible Note, until
October 29, 2013 when the 2013 Convertible Note was converted in full into shares of common stock of the Company. The remaining
unamortized debt discounts was expensed at the time of the conversion. During the year ended December 31, 2013, the Company recorded
$10,131 and $79,527 in amortization expense related to the debt discounts and the beneficial conversion option, respectively.
The amortization expense related to the debt discounts and the beneficial conversion option is included in interest expense in
the accompanying consolidated statements of operations.
Note
7. FACTORING FACILITY AND TERM LOAN PAYABLE
Factoring
Facility
On
August 8, 2013, the Company and Smoke entered into an accounts receivable factoring facility (the “Factoring Facility”)
with Entrepreneur Growth Capital, LLC (the “Lender”) pursuant to an Invoice Purchase and Sale Agreement, dated August
8, 2013, by and among them (the “Factoring Agreement”).
The
Factoring Facility has an initial term of one year and automatically renews from month to month thereafter subject to the Company
terminating it earlier upon at least 15 business days’ advance written notice provided that all obligations are paid (including
a termination fee, if applicable, as specified in the Factoring Agreement). The Factoring Facility is secured by a security interest
in substantially all of the Company’s assets. Under the terms of the Factoring Agreement, the Lender may, at its sole discretion,
purchase certain of the Company’s eligible accounts receivable. Upon any acquisition of an account receivable, the Lender
will advance to the Company up to 50% of the face amount of the account receivable. Each account receivable purchased by the Lender
will be subject to a factoring fee of 1% of the gross face amount of such purchased account for each 30 day period (or part thereof)
the purchased account remains unpaid. The Lender will generally have full recourse against the Company in the event of nonpayment
of any such purchased account.
The
Factoring Agreement contains covenants and provisions relating to events of default that are customary for agreements of this
type. The failure to satisfy covenants under the Factoring Agreement or the occurrence of other specified events that constitute
an event of default could result in the termination of the Factoring Facility and/or the acceleration of the repayment obligations
of the Company.
During
the year ended December 31, 2013 gross borrowings under the Factoring Facility were $407,888, all of which were repaid as of September
30, 2013. There were no borrowings during the year ended December 31, 2014.
2013
Term Loan
On
August 16, 2013, the Company and Smoke entered into a $750,000 term loan (the “2013 Term Loan”) with the Lender pursuant
to a Credit Card Receivables Advance Agreement, dated August 16, 2013, by and among them (the “Term Agreement”).
The
Term Loan matured on August 15, 2014, was payable from the Company’s and Smoke’s merchant credit card receivables
at the annual rate of 16% subject to the Lender retaining a daily fixed amount of $3,346 from the daily collection of the merchant
credit card receivables and is secured by a security interest in substantially all of the Company’s assets. The Company
used the proceeds of the Term Loan for general working capital purposes.
At
December 31, 2013 the Company had $478,847 of borrowings outstanding under the 2013 Term Loan. During the year ended December
31, 2014 and 2013, the Company recorded $76,617 and $44,769, respectively, in interest expense for the 2013 Term Loan and this
amount is included in interest expense in the accompanying consolidated statements of operations. The 2013 Term Loan was repaid
in full during the year ended December 31, 2014.
2014
Term Loan
On
September 23, 2014, the Company and Smoke entered into a $1,000,000 term loan (the “2014 Term Loan”) with the Lender
pursuant to a secured promissory note entered into by the Company and Smoke in favor of the Lender (the “Secured Note”).
Under the Secured Note, the 2014 Term Loan bears interest at 14% per annum and is secured by a security interest in substantially
all of the Company’s assets. Under the Secured Note, the principal amount of the 2014 Term Loan is payable in twelve (12)
successive monthly installments of $83,333 with the last payment due in September 2015. Interest on the 2014 Term Loan is payable
in arrears. The Company used the proceeds of the 2014 Term Loan for general working capital purposes.
The
Term Agreement contains covenants that are customary for agreements of this type. The failure to satisfy covenants under the Term
Agreement or the occurrence of other specified events that constitute an event of default could result in the termination of the
Term Agreement (as well as the Factoring Agreement) and/or the acceleration of the repayment of the Term Loan and the other obligations
of the Company (including the Factoring Facility). The Term Agreement contains provisions relating to events of default that are
customary for agreements of this type.
At
December 31, 2014, the Company had $750,000 of borrowings outstanding under the 2014 Term Loan. During the year ended December
31, 2014, the Company recorded $24,086 in interest expense for the 2014 Term Loan and this amount is included in interest expense
in the accompanying consolidated statements of operations.
The
Company’s Chief Executive Officer and Former Chief Financial Officer have personally guaranteed performance of certain of
the Company’s obligations under the Factoring Agreement and the Term Agreement. In consideration of the Company’s
Former Chief Financial Officer providing the personal guarantee, the Company has agreed to amend his employment agreement as described
in Note 9.
Note
8. CAPITAL LEASE OBLIGATIONS
On
October 1, 2014, the Company entered into a capital lease obligation in connection with the acquisition of equipment for its retail
locations in the principal amount of $179,359. Annual interest on the capital lease obligation is 15.8% and borrowings are to
be repaid over 36 months maturing on October 17, 2017. During the year ended December 31, 2014, the Company incurred interest
expense associated with the capital lease obligation of $4,679. Depreciation expense incurred during the year ended December 31,
2014 for equipment held under capital lease obligations was $9,964. The net book value of equipment held under capital lease obligations
at December 31, 2014 is $169,395.
Future
minimum lease payments under non-cancelable capital leases that have initial or remaining terms in excess of one year at December
31, 2014 are due as follows:
| |
Capital Lease | |
2015 | |
$ | 75,485 | |
2016 | |
| 75,485 | |
2017 | |
| 62,904 | |
Total | |
| 213,874 | |
Amounts representing interest payments | |
| (42,416 | ) |
Present value of future minimum payments | |
| 171,458 | |
Current portion of capital lease obligations | |
| (52,015 | ) |
Capital lease obligations, long term | |
$ | 119,443 | |
Note
9. STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company’s amended and restated articles of incorporation authorizes the Company’s Board of Directors to issue up to
1,000,000 shares of “blank check” preferred stock, having a $0.001 par value, 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, 2014 and
2013, no shares of preferred stock were issued or outstanding.
Common
Stock
The
Company’s amended and restated articles of incorporation authorizes the Company’s Board of Directors to issue up to
50,000,000 shares of common stock having a par value of $0.001 per share. Each share entitles the holder to one vote.
Common
Stock Issued for Services
On
March 15 and June 15, 2013, the Company issued a total of 4,000 shares of common stock, pursuant to a consultancy agreement
dated March 4, 2013. The Company terminated this consultancy agreement effective June 2013. Prior to termination of the agreement,
the Company had agreed to issue on a quarterly basis common stock as compensation for services provided thereunder. The Company
determined that the fair value of the common stock issued was more readily determinable than the fair value of the services provided.
Accordingly, the Company recorded the fair market value of the stock as compensation expense. The Company valued the shares issued
on March 15 and June 15, 2013 shares at $29,500 and $57,500, respectively, based on closing price per share of the Company’s
common stock, as reported on the OTC Bulletin Board, on March 15 and June 15, 2013, respectively. During the year ended December
31, 2013, the Company recognized stock-based compensation expense in the amount of $87,000, which is included as part of selling,
general and administrative expense in the accompanying consolidated statements of operations.
On
February 3, 2014, the Company entered into a consulting agreement (the “Consulting Agreement”) with Knight Global
Services, LLC (“Knight Global”) pursuant to which the Company retained Knight Global to assist the Company with increasing
awareness of its electronic cigarette brands as well as assisting the Company to expand and diversify its relationships with large
retailers and national chains. Knight Global is a wholly owned subsidiary of Knight Global, LLC of which Ryan Kavanaugh is an
investor and principal. Effective March 5, 2014, the Board of Directors of the Company elected Mr. Kavanaugh as a member of the
Board of Directors in accordance with the Consulting Agreement. Knight Global serves as the family office for Mr. Kavanaugh. Mr.
Kavanaugh is the Founder and Chief Executive Officer of Relativity, a next-generation media company engaged in multiple aspects
of entertainment, including film production; financing and distribution; television; sports management; music publishing; and
digital media.
Under
the terms of the Consulting Agreement, the Company has issued to Mr. Kavanaugh 80 ,000 shares of its common stock, of which
10 ,000 shares vested immediately upon execution of the Consulting Agreement, 10 ,000 shares vested on May 3, 2014,
10 ,000 shares vested on August 3, 2014, 10 ,000 shares vested on November 3, 2014 and 10 ,000 shares will vest
in installments of 10 ,000 shares each quarterly period beginning on the 90th day following November 3, 2014 and each ensuing
quarterly period thereafter so long as the Consulting Agreement has not been terminated and during each quarterly period Knight
Global has presented the Company with a minimum of six (6) bona fide opportunities for activities specified in the Consulting
Agreement that are intended to increase awareness of the Company’s electronic cigarettes. In addition, during the term of
the Consulting Agreement, which is 2 years, and during an 18-month post-termination period, the Company has agreed to pay Knight
Global commissions payable in cash equal to 6% of “net sales” (as defined in the Consulting Agreement) of its products
to retailers introduced by Knight Global and to retailers with which the Company has existing relationships and with which Knight
Global is able, based on its verifiable efforts, to increase net sales of the Company’s products. No commissions were paid
under the consulting agreement during the year ended December 31, 2014.
The
grant date fair value of the common shares issued on February 3, 2014 was $3,080,000 based on closing price per share of the Company’s
common stock, as reported on the OTC Bulletin Board, on February 3, 2014. During the year ended December 31, 2014, the Company
recognized stock-based compensation expense relating to the Consulting Agreement, in the amount of $1,602,933, which is included
as part of selling, general and administrative expense in the accompanying consolidated statements of operations.
On
January 24, 2015, the Company and Knight Global mutually agreed to terminate the Consulting Agreement as it was in the best interests
of both parties to do so. As a result of such termination, the Company issued 10 ,000 shares of its common stock to Knight
Global pursuant to the early termination provisions of the Consulting Agreement. The Company will incur $322,067 in connection
with this final issuance during the first quarter of 2015. In addition, on January 24, 2015, the Company received notice from
Ryan Kavanaugh, a director of the Company that he had resigned from the Company’s board of directors, effective immediately.
Private
Placement of Common Stock
On
October 22, 2013, the Company entered into a purchase agreement (the “Purchase Agreement”) with various institutional
and individual accredited investors and certain of its officers and directors to raise gross proceeds of $10 million in a private
placement of 666,668 shares of its common stock at a per share price of $ 15 .00 (the “Private Placement”).
On October 29, 2013, the Company completed the Private Placement. The Company received net proceeds from the Private Placement
of approximately $9.0 million, after paying placement agent fees and estimated offering expenses, which the Company used to fund
its growth initiatives and for working capital purposes. Of the approximate $1 million in offering costs, approximately $110,000
were incurred during the year ended December 31, 2014.
Pursuant
to the Purchase Agreement, concomitantly with completion of the Private Placement, the Company entered into a registration rights
agreement with the investors (other than its participating officers and directors), pursuant to which the Company filed with the
SEC an initial registration statement to register for resale the 643,234 shares of the Company’s common stock purchased
by the investors (other than the Company’s participating officers and directors). The initial registration statement was
declared effective by the SEC on January 27, 2014. On March 5, 2014, the Company filed a post-effective amendment to the initial
registration statement. The post-effective amendment to the initial registration statement was declared effective by the SEC on
March 11, 2014. On June 20, 2014, the Company filed a second post-effective amendment to the initial registration statement. The
second post-effective amendment to the initial registration statement was declared effective by the SEC on June 27, 2014. If the
second post-effective amendment to the initial registration statement after being declared effective by the SEC is not effective
for resales for more than 20 consecutive days or more than 45 days in any 12 month period during the registration period (i.e.,
the earlier of the date on which the shares have been sold or are eligible for sale under SEC Rule 144 without restriction), the
Company is required to pay the investors (other than the Company’s participating officers and directors) liquidated damages
in cash equal to 1.5% of the aggregate purchase price paid by the investors for the shares for every 30 days or portion thereof
until the default is cured. These cash payments could be as much as $81,489 for every 30 days.
Under
the terms of the Purchase Agreement, the Company:
|
● |
Amended
its existing equity incentive plan on November 20, 2013 to reduce the number of shares of its common stock reserved and available
for issuance under the plan to 360,000 from 1,600,000 . |
|
|
|
|
● |
Effectuated
a reverse stock split of its common stock at a ratio of 1-for-5, which became effective in the marketplace at the opening
of business December 27, 2013 (as disclosed in Note 1 above). |
|
|
|
|
● |
Reincorporated
to the State of Delaware effective on December 31, 2013 (as disclosed in Note 1). |
|
|
|
|
● |
Reconstituted
its board of directors effective April 25, 2014 so that the board of directors consists of five members, a majority of whom
each qualify as an “independent director” as defined in NASDAQ Marketplace Rule 5605(a)(2) and the related NASDAQ
interpretative guidance; and |
|
|
|
|
● |
Listed
its common stock on The NASDAQ Capital Market effective May 30, 2014. |
In
conjunction with completion of the Private Placement, on October 29, 2013, the holders of the Company’s approximately $1.7
million of outstanding senior convertible notes, some of whom were officers and directors of the Company, converted in full all
of these senior convertible notes into approximately 780,000 shares of the Company’s common stock, whereupon all of these
senior convertible notes were fully extinguished and cease to be outstanding. See Note 6.
All
of the warrants issued in conjunction with the convertible notes described in Note 6 and the Private Placement were evaluated
in accordance with ASC 815 and were determined to be equity instruments. The Company estimated the fair value of these Warrants
using the Black-Scholes-Merton valuation model. The significant assumptions which the Company used to measure their respective
fair values included stock prices ranging from $ 5 .00 to $ 17 .50 per share, expected terms of 5 years, volatility
ranging from 30.3% to 51.4%, risk free interest rates ranging from 0.71% to 0.90%, and a dividend yield of 0.0%.
Warrants
A
summary of warrant activity for the years ended December 31, 2014 and 2013 is presented below:
| |
Number of Warrants | | |
Weighted- Average Exercise Price | | |
Weighted- Average Contractual Term | | |
Aggregate Intrinsic Value | |
Outstanding at January 1, 2013 | |
| 2,135 | | |
$ | 5.40 | | |
| | | |
| | |
Warrants granted | |
| 41,041 | | |
| 16.70 | | |
| | | |
| | |
Warrants exercised | |
| — | | |
| — | | |
| | | |
| | |
Warrants forfeited or expired | |
| — | | |
| — | | |
| | | |
| | |
Outstanding at December 31, 2013 | |
| 43,176 | | |
$ | 16.15 | | |
| | | |
| | |
Warrants granted | |
| 238,636 | | |
| 10.00 | | |
| | | |
| | |
Warrants exercised | |
| ( 38,594 | ) | |
| 16.50 | | |
| | | |
| | |
Warrants forfeited or expired | |
| — | | |
| — | | |
| | | |
| | |
Outstanding at December 31, 2014 | |
| 243,218 | | |
$ | 10.05 | | |
| 5.0 | | |
$ | — | |
Exercisable at December 31, 2014 | |
| 43,124 | | |
$ | 16.15 | | |
| 5.0 | | |
$ | — | |
During
the year ended December 31, 2014, 192,970 warrants were exercised in a cashless manner into 28,477 shares of common stock.
Equity
Incentive Plan
There
are 360,000 shares of common stock reserved for issuance under the Company’s Equity Incentive Plan (after giving
effect to the reduction of the number of shares reserved and available for issuance thereunder and the 1-for-5 reverse stock split,
each as implemented in accordance with the Purchase Agreement governing the Private Placement), which was duly adopted by the
stockholders on November 24, 2009. The Plan provides for the granting of incentive stock options to employees, the granting of
non-qualified stock options to employees, non-employee directors and consultants, and the granting of restricted stock to employees,
non-employee directors and consultants in connection with their retention and/or continued employment by the Company. Options
issued under the Plan generally have a ten-year term and generally become exercisable over a four-year period. Shares subject
to awards that expire unexercised or are forfeited or terminated will again become available for issuance under the Plan. No participant
in the Equity Incentive Plan can receive option grants and/or restricted shares for more than 20% of the total shares subject
to the Plan.
Stock-Based
Compensation
On
March 6, 2014, the Board granted to Ryan Kavanaugh a non-qualified Director’s stock option award under the Company’s
Equity Incentive Plan to purchase up to 12,000 shares of the Company’s common stock at an exercise price per share
equal to $ 41.50 (the closing share price of the Company’s common stock as reported on the OTC Bulletin Board at the
close of trading on the grant date). On April 25, 2014, the Board granted to each of the three (3) other New Directors a non-qualified
stock option award under the Company’s Equity Incentive Plan to purchase up to 12 ,000 shares of the Company’s
common stock at an exercise price per share equal to $ 32.40 (the closing share price of the Company’s common stock
as reported on the OTC Bulletin Board at the close of trading on the grant date). Each of the New Director’s stock options
expire on the fifth anniversary of the grant date, vest in equal annual installments over a three-year period from the grant date
subject to he/she serving as a member of the Board on each such vesting date and is to be evidenced by a non-qualified stock option
agreement customarily utilized under the Equity Incentive Plan. The weighted average grant date fair value of the March 6 and
April 25, 2014 awards were $149,160 and $315,720, respectively.
In
addition, during the year ended December 31, 2014, the Company issued non-qualified stock option awards under the Company’s
Equity Incentive Plan to purchase up to 2,400 shares of the Company’s common stock at an exercise price equal to
$8.30 (the closing share price of the Company’s common stock as reported on the OTC Bulletin Board at the close of trading
on the grant date). The options vest in 3 annual installments and had an aggregate grant date fair value of $29,832.
During
the year ended December 31, 2013, the Company issued non-qualified stock option awards under the Company’s Equity Incentive
Plan to purchase up to 2 ,000 shares of the Company’s common stock at an exercise price equal to $ 21.75 (the
closing share price of the Company’s common stock as reported on the OTC Bulletin Board at the close of trading on the grant
date) that vest in 3 annual installments and had an aggregate grant date fair value of $25,900 and up to 31,200 shares of the
Company’s common stock at an exercise price equal to $ 21.75 (the closing share price of the Company’s common
stock as reported on the OTC Bulletin Board at the close of trading on the grant date) that vest in 4 annual installments and
had an aggregate grant date fair value of $80,808.
The
fair value of employee stock options was estimated using the following weighted-average assumptions:
| |
For the Years Ended December 31, | |
| |
2014 | | |
2013 | |
Expected term | |
| 5
- 7 years | | |
| 6.3
- 10 years | |
Risk Free interest rate | |
| 1.57%
- 1.72 | % | |
| 2.62 | % |
Dividend yield | |
| 0.0 | % | |
| 0.0 | % |
Volatility | |
| 27%
- 31 | % | |
| 46.3 | % |
Stock
option activity
Options
outstanding at December 31, 2014 under the various plans are as follows (in thousands):
Plan | |
Total
Number of
Options
Outstanding
in Plans | |
Equity compensation plans not approved by security holders | |
| 180 | |
Equity Incentive Plan | |
| 89 | |
| |
| 269 | |
A
summary of activity under all option Plans for the years ended December 31, 2014 and 2013 is presented below (in thousands, except
per share data):
| |
Number of Shares | | |
Weighted- Average Exercise Price | | |
Weighted- Average Contractual Term | | |
Aggregate Intrinsic Value | |
Outstanding at January 1, 2013 | |
| 226 | | |
$ | 10.30 | | |
| | | |
| | |
Options granted | |
| 8 | | |
| 21.75 | | |
| | | |
| | |
Options exercised | |
| ( 8 | ) | |
| 7.85 | | |
| | | |
| | |
Options forfeited or expired | |
| ( 2 | ) | |
| 6.35 | | |
| | | |
| | |
Outstanding at December 31, 2013 | |
| 224 | | |
| 10.85 | | |
| | | |
| | |
Options granted | |
| 50 | | |
| 35 .00 | | |
| | | |
| | |
Options exercised | |
| ( 1 | ) | |
| 5 .00 | | |
| | | |
| | |
Options forfeited or expired | |
| ( 4 | ) | |
| 7.35 | | |
| | | |
| | |
Outstanding at December 31, 2014 | |
| 269 | | |
$ | 15.40 | | |
| 6.53 | | |
$ | - | |
Exercisable at December 31, 2014 | |
| 203 | | |
$ | 10.85 | | |
| 6.45 | | |
$ | - | |
Options available for grants at December 31, 2014 | |
| 260 | | |
| | | |
| | | |
| | |
For
the years ended December 31, 2014 and 2013, the Company’s estimated forfeiture rate utilized ranged from 0.01% to 0.02%.
During
the years ended December 31, 2014 and 2013, the Company recognized stock-based compensation expense, for the vesting of stock
options, of $163,646 and $48,239, respectively. Stock-based compensation expense is included as part of selling, general and administrative
expense in the accompanying consolidated statements of operations.
As
of December 31, 2014, 1,012,745 common stock options that were granted had vested and 66,311 common stock options were
unvested. At December 31, 2014 and 2013, the amount of unamortized stock-based compensation expense on unvested stock options
granted to employees and consultants was and $476,828 and $150,037, respectively. The unamortized amounts will be amortized over
the remaining vesting period through September 30, 2016.
The
Company accounts for share-based awards exchanged for employee services at the estimated grant date fair value of the award. Compensation
expense includes the impact of an estimate for forfeitures for all stock options. The Company estimated the fair value of employee
stock options using the Black-Scholes-Merton option pricing model. The fair value of employee stock options is being amortized
on a straight-line basis over the requisite service periods of the respective awards. The expected term of such stock options
represents the average period the stock options are expected to remain outstanding and is based on the expected term calculated
using the approach prescribed by SAB 107 for “plain vanilla” options. Through September 30, 2014, the expected stock
price volatility for the Company’s stock options was determined by using an average of the historical volatilities of the
Company and industry peers. Beginning in the fourth quarter of 2014, the Company began estimating its expected volatility using
the weekly trading prices of its own common stock as the Company felt this was a more appropriate measure. The risk-free interest
rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term of the Company’s
stock options. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts.
(Loss)
Earnings Per Share
The
Company utilizes ASC 260, “Earnings per Share,” (“ASC 260”) to calculate earnings or loss per share. Basic
earnings or loss per share is computed by dividing the net income or loss available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted earnings or loss per share is computed using the weighted average
number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist
of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion
of the Company’s convertible debt and warrants (using the if-converted method). Diluted loss per share excludes the shares
issuable upon the exercise of stock options, convertible notes and common stock purchase warrants from the calculation of net
loss per share, as their effect is antidilutive.
The
following table reconciles the numerator and denominator for the calculation:
| |
For the years ended December 31, | |
| |
2014 | | |
2013 | |
Net (loss) income - basic | |
$ | (13,852,249 | ) | |
$ | 801,352 | |
Denominator – basic: | |
| | | |
| | |
Weighted average number of common shares outstanding | |
| 3,283,030 | | |
| 2,563,697 | |
Basic (loss) earnings per common share | |
$ | ( 4.22 | ) | |
$ | 0. 31 | |
Net (loss) earnings – diluted | |
$ | (13,852,249 | ) | |
$ | 801,352 | |
Denominator – diluted: | |
| | | |
| | |
Basic weighted average number of common shares outstanding | |
| 3,283,030 | | |
| 2,563,697 | |
Weighted average effect of dilutive securities: | |
| | | |
| | |
Common share equivalents of outstanding stock options | |
| - | | |
| 69,886 | |
Common share equivalents of convertible debt | |
| - | | |
| - | |
Common share equivalents of outstanding warrants | |
| - | | |
| 3,690 | |
Diluted weighted average number of common shares outstanding | |
| 3,283,030 | | |
| 2,637,273 | |
Diluted (loss) earnings per common share | |
$ | ( 4.22 | ) | |
$ | 0. 30 | |
Securities excluded from the weighted outstanding calculation because their inclusion would have been antidilutive: | |
| | | |
| | |
Convertible debt | |
| 227,273 | | |
| — | |
Stock options | |
| 268,860 | | |
| 1,287 | |
Warrants | |
| 243,218 | | |
| 818 | |
Note
10. INCOME TAXES
The
income tax provision (benefit) consists of the following:
| |
For the Years ended
December 31, | |
| |
2014 | | |
2013 | |
Current: | |
| | | |
| | |
Federal | |
$ | - | | |
$ | 337,016 | |
State and local | |
| - | | |
| 29,344 | |
Utilization of net operating loss carryforward | |
| - | | |
| (346,783 | ) |
| |
| - | | |
| 19,577 | |
Deferred: | |
| | | |
| | |
Federal | |
| (4,337,272 | ) | |
| 202,531 | |
State and local | |
| (463,060 | ) | |
| 34,178 | |
| |
| (4,800,332 | ) | |
| 236,709 | |
Change in valuation allowance | |
| 5,567,665 | | |
| (781,077 | ) |
| |
| 767,333 | | |
| (544,368 | ) |
Income tax provision (benefit) | |
$ | 767,333 | | |
$ | (524,791 | ) |
The
following is a reconciliation of the expected tax expense (benefit) on the U.S. statutory rate to the actual tax expense (benefit)
reflected in the accompanying statement of operations:
| |
For the Years Ended
December 31, | |
| |
2014 | | |
2013 | |
U.S. federal statutory rate | |
| (34.00 | )% | |
| 34.00 | % |
State and local taxes, net of federal benefit | |
| (2.98 | )% | |
| 3.63 | % |
Amortization of debt discount | |
| — | | |
| 13.95 | % |
Debt conversion inducement | |
| — | | |
| 40.76 | % |
Net operating loss tax adjustment | |
| — | | |
| (9.65 | )% |
Other permanent differences | |
| 0.29 | % | |
| 3.00 | % |
Alternative minimum tax | |
| — | | |
| 6.97 | % |
Change in valuation allowance | |
| 42.55 | % | |
| (282.42 | )% |
Income tax provision (benefit) | |
| 5.86 | % | |
| (189.76 | )% |
As
of December 31, 2014 and 2013, the Company’s deferred tax assets and liabilities consisted of the effects of temporary differences
attributable to the following:
| |
Years Ended December 31, | |
| |
2014 | | |
2013 | |
Current deferred tax assets: | |
| | | |
| | |
Net operating loss carryforwards | |
$ | 4,556,515 | | |
$ | 169,404 | |
Stock-based compensation expense | |
| 507,864 | | |
| 442,813 | |
Alternative minimum tax credit carryforwards | |
| 15,336 | | |
| 19,283 | |
Reserves and allowances | |
| 263,609 | | |
| 97,587 | |
Inventory | |
| 269,865 | | |
| 59,320 | |
Accrued expenses and deferred income | |
| 53,442 | | |
| 8,824 | |
Severance | |
| 27,555 | | |
| — | |
Charitable contributions | |
| 1,260 | | |
| 1,317 | |
Total current deferred tax assets | |
| 5,695,446 | | |
| 798,548 | |
Current deferred tax liabilities: | |
| | | |
| | |
Section 481 (a) adjustment | |
| — | | |
| (24,450 | ) |
Property and equipment | |
| — | | |
| (7,600 | ) |
Total current deferred tax liabilities | |
| — | | |
| (32,050 | ) |
Net current deferred tax assets | |
| 5,695,446 | | |
| 766,498 | |
Valuation allowance | |
| (5,695,446 | ) | |
| — | |
| |
| | | |
| | |
Net deferred tax assets | |
$ | — | | |
$ | 766,498 | |
In
assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or
all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After
consideration of all of the positive and negative evidence available, management has determined that a valuation allowance of
$5,695,446 and $0 are required at December 31, 2014 and 2013, respectively, to reduce the deferred tax assets to amounts that
are more likely than not to be realized. Should the factors underlying management’s analysis change, future valuation adjustments
to the Company’s net deferred tax assets may be necessary.
At
December 31, 2014 the Company had U.S. federal and state net operating loss carryforwards (“NOLS”) of $12,214,479
and $12,812,444, respectively. At December 31, 2013 the Company had U.S. federal and state NOLS of $251,269 and $1,526,482, respectively.
These NOLs expire beginning in 2032. Utilization of our NOLS may be subject to an annual limitation under section 382 and similar
state provisions of the Internal Revenue Code due to changes of ownership that may have occurred or that could occur in the future,
as defined under the regulations.
As
required by the provisions of ASC 740, the Company recognizes the financial statement benefit of a tax position only after determining
that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting
the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that
has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Differences
between tax positions taken or expected to be taken in a tax return and the net benefit recognized and measured pursuant to the
interpretation are referred to as “unrecognized benefits.” A liability is recognized (or amount of NOL or amount of
tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation
to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.
If
applicable, interest costs and penalties related to unrecognized tax benefits are required to be calculated and would be classified
as interest and penalties in general and administrative expense in the statement of operations. As of December 31, 2014 and 2013,
no liability for unrecognized tax benefit was required to be reported. No interest or penalties were recorded during the years
ended December 31, 2014 and 2013. The Company does not expect any significant changes in its unrecognized tax benefits in the
next year. The Company files U.S. federal and Florida, Maryland, Texas, New Jersey and Wisconsin state income tax returns. As
of December 31, 2014, the Company’s U.S. and state tax returns remain subject to examination by tax authorities beginning
with the tax year ended December 31, 2011.
Note
11. COMMITMENTS AND CONTINGENCIES
Employment
Agreements
On
February 19, 2013, the Company entered into an employment agreement with Mr. Jeffrey Holman pursuant to which Mr. Holman will
be employed as President of the Company for a term that shall begin on February 19, 2013, and, unless sooner terminated as provided
therein, shall end on December 31, 2015; provided that such term of employment shall automatically extend for successive one-year
periods unless either party gives at least six months’ advance written notice of its intention not to extend the term of
employment. Mr. Holman will receive a base salary of $182,000 for the first two years of the employment agreement. Mr. Holman
shall be eligible to participate in the Company’s annual performance based bonus program, as the same may be established
from time to time by the Company’s Board of Directors in consultation with Mr. Holman for executive officers of the Company.
Resignation
of Chief Executive Officer and Appointment of New Chief Executive Officer
Effective
April 25, 2014, Kevin Frija resigned as the Company’s Chief Executive Officer and the Company’s Board of Directors
appointed the Company’s President and incumbent member of the Board, Jeffrey Holman, as the Company’s new Chief Executive
Officer. In connection with Mr. Frija’s resignation as Chief Executive Officer, the Board approved severance payments to
Mr. Frija in an aggregate amount equal to one year of base salary at the rate of $159,000 per annum payable in installments in
accordance with the Company’s normal payroll schedule conditioned upon his execution and delivery of a general release to
the Company, which has become irrevocable in accordance with its terms and applicable law, and his compliance with the non-solicitation,
confidentiality and non-competition covenants of his Employment Agreement dated February 27, 2012 with the Company until April
24, 2015 in certain respects and indefinitely in other respects. During the year ended December 31, 2014 the Company accrued severance
expense in the amount of $167,003, which is included as part of the selling, general and administrative expenses in accompanying
consolidated statements of operations in connection with Mr. Frija’s resignation. During the year ended December 31, 2014
$89,925 was paid and $77,028 is included in accrued expenses in accompanying consolidated balance sheets.
Termination
of Asset Purchase Agreement With International Vapor Group, Inc.
On
May 14, 2014, the Company and the Company’s wholly-owned subsidiary IVGI Acquisition, Inc., a Delaware corporation (the
“Buyer”) entered into the Asset Purchase Agreement with International Vapor Group, Inc. (“IVG”) pursuant
to which the Company was to purchase the business of IVG by acquiring substantially all of the assets and assuming certain of
the liabilities of IVG in an asset purchase transaction. On July 25, 2014, the Company, the Buyer and the Owners David Epstein,
David Herrera and Nicolas Molina, in their capacities as the representatives of the Sellers and Owners, entered into a First Amendment
to Asset Purchase Agreement (the “First Amendment”). In connection with the First Amendment, the Company entered into
a Secured Promissory Note whereby it loaned IVG $500,000 for working capital purposes. The secured promissory note accrued interest
at a rate of 8% per year and was due at the earlier of (a) six months after the date of the termination of the Asset Purchase
Agreement or the date the asset purchase closed. During the year ended December 31, 2014, the Company recognized interest income
of $17,095 relating to this loan receivable.
On
August 26, 2014, the Company, the Buyer, and the Sellers and David Epstein, David Herrera and Nicolas Molina, in their capacities
as the representatives of the Sellers and the owners of International Vapor Group, Inc., entered into a Termination Letter, pursuant
to which the parties mutually terminated their previously announced Asset Purchase Agreement entered into on May 14, 2014 and
amended on July 25, 2014. The Company and the Sellers mutually terminated the Asset Purchase Agreement because the parties could
not agree upon certain operational and financial matters pertaining to the post-closing integration of the Sellers’ business
operations. There are no current disputes or disagreements between the Company and the Sellers and neither party is liable for
any breakup fees or reimbursement of costs to the other party as a result of the termination of the Asset Purchase Agreement.
On
January 12, 2015, the Company entered into an agreement with IVG whereby the Company agreed to reduce the principal amount of
the loan receivable by $50,000 if IVG were to remit payment of all principal and interest accrued on the loan receivable within
one day. The Company included the write-down of the loan receivable in selling, general and administrative expenses on the consolidated
statement of operations for the year ended December 31, 2014. On January 13, 2015, IVG paid the Company in full.
Lease
Commitments
The
Company leases its Florida office and warehouse facilities under a twenty-four month lease agreement with an initial term through
April 30, 2013 that the Company extended in March 2014 when it exercised the second of three successive one-year renewal options.
The lease provides for annual rental payments of $144,000 per annum (including 45 days of total rent abatement) during the initial
twenty-four month term and annual rental payments of $151,200, $158,760 and $174,636 during each of the three one-year renewal
options. In October 2013, the Company amended the master lease to include an additional approximately 2,200 square feet for an
additional annual rental payment of $18,000 subject to the same renewal options and other terms and conditions set forth in the
master lease.
During
the year ended December 31, 2014, the Company entered into nine (9) real estate leases for eight (8) new retail kiosks and one
(1) new retail store. The kiosks opened during the fourth quarter of 2014 and the store is scheduled to open during 2015. The
kiosks are located in malls in Florida, Maryland, New Jersey and Texas. The retail store is located in Ft. Lauderdale, FL. Under
these leases, the initial lease terms range from one to five years, the Company is required to pay base and percentage rents and
the Company is required to pay for common area and maintenance charges and utilities.
Future
minimum lease payments under non-cancelable operating that have initial or remaining terms in excess of one year at December 31,
2014 are due as follows:
| |
Operating Leases | |
2015 | |
$ | 572,798 | |
2016 | |
| 307,488 | |
2017 | |
| 300,279 | |
2018 | |
| 253,841 | |
2019 | |
| 203,964 | |
Total | |
$ | 1,638,370 | |
Rent
expense for the years ended December 31, 2014 and 2013 was $307,110 and $162,498, respectively.
Legal
Proceedings
From
time to time the Company may be involved in various claims and legal actions arising in the ordinary course of our business.
On
May 15, 2011, the Company became aware that Ruyan Investment (Holdings) Limited (“Ruyan”) had named the Company, along
with three other sellers of electronic cigarettes in a lawsuit filed in the U.S. District Court for the Central District of California
alleging infringement of U.S. Patent No. 7,832,410, entitled “Electronic Atomization Cigarette” against the Company’s
Fifty-One Trio products. In that lawsuit, which was initially filed on January 12, 2011, Ruyan was unsuccessful in bringing suit
against the Company due to procedural rules of the court. Subsequent thereto, on July 29, 2011, Ruyan filed a new lawsuit in which
it named the Company, along with seven other sellers of electronic cigarettes, alleging infringement of the same patent. On March
1, 2013, the Company and Ruyan settled this multi-defendant federal patent infringement lawsuit as to them pursuant to a settlement
agreement by and between them. Under the terms of the settlement agreement:
|
● |
The
Company acknowledged the validity of Ruyan’s U.S. Patent No. 7,832,410 for “Electronic Atomization Cigarette”
(the “410 Patent”), which had been the subject of Ruyan’s patent infringement claim against the Company;
|
|
|
|
|
● |
The
Company paid Ruyan a lump sum payment of $12,000 for the Company’s previous sales of electronic cigarettes based on
the 410 Patent; and |
|
|
|
|
● |
On
March 1, 2013, in conjunction with releasing one another (including their respective predecessors, successors, officers, directors
and employees, among others) from claims related to the 410 Patent, the Company and Ruyan filed a Stipulated Judgment and
Permanent Injunction with the above Court dismissing with prejudice all claims which have been or could have been asserted
by them in the lawsuit. |
On
June 22, 2012, Ruyan filed a second lawsuit against the Company alleging infringement of U.S. Patent No. 8,156,944, entitled “Aerosol
Electronic Cigarette” (the “944 Patent”). Ruyan also filed separate cases for patent infringement against nine
other defendants asserting infringement of the ‘944 Patent. Ruyan’s second lawsuit against the Company known as Ruyan
Investment (Holdings) Limited v. Vapor Corp., No. 12-cv-5466, is pending in the United States District Court for the Central District
of California. All of these lawsuits have been consolidated for discovery and pre-trial purposes. The Company intends to vigorously
defend against this lawsuit.
On
February 25, 2013, Ruyan’s second patent infringement lawsuit against the Company as well as all of the other consolidated
lawsuits were stayed as a result of the Court granting a stay in one of the consolidated lawsuits. The Court granted the motion
to stay Ruyan’s separate lawsuits against the Company and the other defendants based on the filing of a request for inter
partes reexamination of the 944 Patent at the U.S. Patent and Trademark Office. As a result of the stay, all of the consolidated
lawsuits involving the 944 Patent have been stayed until the reexamination is completed. As a condition to granting the stay of
all the lawsuits, the Court required any other defendant who desires to seek reexamination of the 944 Patent and potentially seek
another stay (or an extension of the existing stay) based on any such reexamination to seek such reexamination no later than July
1, 2013. Two other defendants sought reexamination of the 944 Patent before expiration of such Court-imposed deadline of July
1, 2013. All reexamination proceedings of the 944 Patent have been stayed by the United States Patent and Trademark Office Patent
Trial and Appeal Board pending its approval of one or more of them. On December 24, 2014, the Patent Trial and Appeal Board issued
its ruling that all of the challenged claims in the reexamination proceedings of the ‘944 patent were invalid except for
one claim. To the extent claim 11 is asserted against the Company, the Company will vigorously defend itself against such allegations.
Currently, the case remains stayed.
On
March 5, 2014, Fontem Ventures, B.V. and Fontem Holdings 1 B.V. (the successors to Ruyan) filed a complaint against the Company
in the U.S. District Court for the Central District of California, captioned Fontem Ventures B.V., et al. v. Vapor Corp., No.
14-cv-1650. The complaint alleges infringement of U.S. Patent No. 8,365,742, entitled “Aerosol Electronic Cigarette”,
U.S. Patent No. 8,375,957, entitled “Electronic Cigarette” (the “957 Patent”), U.S. Patent No. 8,393,331,
entitled “Aerosol Electronic Cigarette” (the “331 Patent”) and U.S. Patent No. 8,490,628, entitled “Electronic
Atomization Cigarette” (the “628 Patent”). On April 8, 2014, plaintiffs amended their complaint to add U.S.
Patent No. 8,689,805, entitled “Electronic Cigarette” (the “805 Patent”). The products accused of infringement
by plaintiffs are various Krave, Fifty-One and Hookah Stix products and parts. Nine other companies were also sued in separate
lawsuits alleging infringement of one or more of the patents listed above. The Company filed its Answer and Counterclaims on May
1, 2014 and believes the claims are without merit. Other defendants have filed petitions for inter partes reexamination of the
331, 628 and 805 Patents at the U.S. Patent and Trademark Office, which petitions are pending.
On
October 21, 2014, Fontem Ventures B.V. and Fontem Holdings 1 B.V. filed a complaint against the Company in the U.S. District Court
for the Central District of California, captioned Fontem Ventures B.V., et al. v. Vapor Corp., No. 14-cv-8155. The complaint alleges
infringement of United States Patent No. 8,863,752, entitled “Electronic Cigarette”. The products accused of infringement
by plaintiffs are various Krave and Fifty-One products and parts. On January 15, 2015, the Company filed its Answer and Counterclaims.
The Company will vigorously defend itself against such allegations.
On
December 2, 2014, Fontem Ventures B.V. and Fontem Holdings 1 B.V. filed a complaint against the Company in the U.S. District Court
for the Central District of California, captioned Fontem Ventures B.V., et al. v. Vapor Corp., No. 14-cv-09267. The Compliant
alleges infringement by plaintiffs are various Krave, Vapor X and Fifty-One products and parts. Fontem amended its compliant on
December 16, 2014, to allege infringement of United States Patent No. 8,910,641, entitled “Electronic Cigarette” against
the same products. On January 15, 2015, the Company filed its Answer and Counterclaims. The Company will vigorously defend itself
against such allegations.
All
of the above referenced cases filed by Fontem have been consolidated and are currently scheduled for trail in November 2014. The
parties are currently in active fact discovery and claim construction.
Purchase
Commitments
At
December 31, 2014 and 2013, the Company has vendor deposits of $319,563 and $782,363, respectively, and vendor deposits are included
as a component of prepaid expenses and vendor deposits on the consolidated balance sheets included herewith.
Note
12. CONCENTRATION OF CREDIT RISK
At
December 31, 2014 accounts receivable balances included concentrations from seven customers that had balances of an amount greater
than 10%. The amounts ranged from $27,729 to $177,200. At December 31 2013, accounts receivable balances included a concentration
from one customer in the amount of $268,768, which was an amount greater than 10% of the total net accounts receivable balance.
Beginning
the first quarter of 2012, the Company began selling electronic cigarettes in the country of Canada exclusively through a Canadian
distributor. For the years ended December 31, 2014 and 2013, the Company had sales in excess of 10% to this Canadian distributor
of $2,912,525 and $3,847,310, respectively. For the year ended December 31, 2014 one other customer accounted for sales in excess
of 10% with sales of $1,536,050. No other customer accounted for sales of 10% for the year ended December 31, 2013.
Note
13. SUBSEQUENT EVENTS
The
Company evaluates events that have occurred after the balance sheet date but before the consolidated financial statements are
issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would
have required adjustment or disclosure in the consolidated financial statements other disclosed.
The
merger closed on March 4, 2015. Prior to the closing of the Merger, Vapor and Vaporin entered into a Securities Purchase Agreement
(“Securities Purchase Agreement”) with certain accredited investors providing for the sale of $350,000 of Vaporin’s
Convertible Notes (the “Notes”). On January 29, 2015, the Company issued the notes. The Note accrues interest on the
outstanding principal at an annual rate of 12%. The principal and accrued interest on the Note is due and payable on January 29,
2016 (the “Maturity Date”) The Note will not be convertible until such time as the Nasdaq Stock Market (“Nasdaq”)
approves the listing of the shares to be issued upon conversion of the Note. In no event will the number of shares of the Company’s
common stock issuable upon conversion of the Note exceed 19.99% of the Company’s issued and outstanding common stock, regardless
of the conversion price.
In
connection with the Merger, on March 3, 2015, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”)
with certain accredited investors providing for the sale of $3,500,960 in shares of the Company’s Common Stock, par value
$0.001 per share at a price of $ 5.10 per share. The Company also issued Warrants to purchasers of the shares to acquire
an aggregate of 547,026 shares of the Company’s Common Stock with an exercise price of $ 6.40 per share. The
shares and Warrants were issued and sold through an exempt private securities offering to certain accredited investors.
Under
the Purchase Agreement, the Company made certain customary representations and warranties to the purchasers concerning the Company
and its operations. The Company has also agreed to register the Common Stock and the Warrants for resale pursuant to an effective
registration statement which must be filed within 45 days of March 3, 2015 and must be effective by the later of (i) the 90th
day following March 3, 2015 (if no SEC review) or (ii) the 120th day following March 3, 2015 (if subject to SEC review). If the
Form S-3 Registration Statement is not effective for resales for more than 10 consecutive days or more than 15 days in any 12
month period during the registration period (i.e., the earlier of the date on which the shares have been sold or are eligible
for sale under SEC Rule 144 without restriction), we are required to pay the investors (other than our participating officers
and directors) liquidated damages in cash equal to 1.5% of the aggregate purchase price paid by the investors for the shares for
every 30 days or portion thereof until the default is cured. Such cash payments could be as much as $52,500 for every 30 days.
Note
14. REVERSE STOCK SPLIT
On
July 7, 2015, the Company filed an amendment to its Certificate of Incorporation to effectuate a one-for-five reverse stock split
to its common stock and to increase its authorized common stock to 150,000,000 shares. The amendments were effective on July 8,
2015 at 11:59 pm. All warrant, option, common stock shares and per share information included herein gives effect to the 1 for
5 reverse split of the Company’s common stock effectuated on July 8, 2015.
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and Stockholders of
Vaporin
Inc.
We
have audited the accompanying balance sheet of Vaporin Inc. as of December 31, 2014 and the related statement of operations, stockholders’
deficit, and cash flows for the year ended. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vaporin,
Inc. as of December 31, 2014 and the results of its operations, stockholders’ deficit, and cash flows for the year then
ended in conformity accounting principles generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note
3 to the financial statements, the Company has suffered losses from operations, which raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
/s/
RBSM LLP |
|
Las
Vegas Nevada |
|
May
12, 2015 |
|
New
York, NY, Washington DC, San Francisco, CA, Athens, Greece, Beijing, China, and Mumbai, India
Member
of Antea Alliance with affiliated offices worldwide
VAPORIN,
Inc.
(FORMERLY
VALOR GOLD CORP.)
CONSOLIDATED
BALANCE SHEETS
| |
December
31, 2014 | | |
December
31, 2013 | |
ASSETS | |
| | | |
| | |
CURRENT ASSETS | |
| | | |
| | |
Cash
and cash equivalents | |
$ | 865,737 | | |
$ | 25,221 | |
Due
from merchant credit card processor, net of reserve | |
| 160,216 | | |
| – | |
Accounts
receivable – trade net Allowance for uncollectable accounts | |
| 88,614 | | |
| 16,587 | |
Prepaid
expenses and other current assets | |
| 42,996 | | |
| 32,522 | |
Inventory | |
| 1,173,124 | | |
| 316,195 | |
Total
Current Assets | |
| 2,330,687 | | |
| 390,525 | |
FIXED ASSETS | |
| | | |
| | |
Property
and equipment, net | |
| 160,620 | | |
| 8,395 | |
OTHER ASSETS | |
| | | |
| | |
Intangible
assets, net | |
| 1,472 | | |
| 12,276 | |
Goodwill | |
| 3,732,268 | | |
| – | |
Total
Other Assets | |
| 3,894,360 | | |
| 12,276 | |
TOTAL
ASSETS | |
$ | 6,225,047 | | |
$ | 411,196 | |
| |
| | | |
| | |
LIABILITIES
AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
CURRENT LIABILITIES | |
| | | |
| | |
Accounts
payable and accrued liabilities | |
$ | 824,104 | | |
$ | 31,312 | |
Accrued
interest – related party | |
| – | | |
| 804 | |
Notes
payable | |
| – | | |
| 75,000 | |
Notes
payable – related party | |
| 1,000,000 | | |
| 260,899 | |
Derivative
liabilities | |
| 43,944 | | |
| – | |
Total
Current Liabilities | |
| 1,868,048 | | |
| 368,015 | |
STOCKHOLDERS’ EQUITY | |
| | | |
| | |
Preferred Stock, $.0001 par value per share,
50,000,000 shares authorized, as of December 31, 2014 and December 31, 2013, respectively. | |
| | | |
| | |
Preferred Stock Series A, $0.0001 par value
per share, 100,000 shares authorized and 0 shares issued and outstanding, as of December 31, 2014 and December 31, 2013, respectively. | |
| – | | |
| – | |
Preferred Stock Series B, $0.0001 par value
per share, 5,000,000 shares authorized, 100,000 and 0 shares issued and outstanding, as of December 31, 2014 and December
31, 2013, respectively. | |
| 10 | | |
| – | |
Preferred Stock Series C, $0.0001 par value
per share, 100,000 shares authorized 1,550 and 0 shares issued and outstanding, as December 31, 2014 and December 31, 2013,
respectively. | |
| – | | |
| – | |
Preferred Stock Series E, $0.0001 par value
per share, 2 shares authorized 0 shares issued and outstanding, as of December 31, 2014 and December 31, 2013. | |
| – | | |
| – | |
Common Stock, $0.0001 par value per share,
200,000,000 shares authorized, 4,893,254 and 700,000 shares issued and outstanding, as of December 31, 2014 and December 31,
2013, respectively. | |
| 489 | | |
| 70 | |
Additional paid-in capital | |
| 10,864,408 | | |
| 349,930 | |
Accumulated
deficit | |
| (6,502,903 | ) | |
| (306,819 | ) |
Total
Vaporin Stockholders’ Equity | |
| 4,362,004 | | |
| 43,181 | |
Non-Controlling
Interest in Subsidiary | |
| (5,005 | ) | |
| – | |
Total
Stockholders’ Equity | |
| 4,356,999 | | |
| – | |
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
$ | 6,225,047 | | |
$ | 411,196 | |
The
accompanying notes are an integral part of these consolidated financial statements.
VAPORIN,
Inc.
(FORMERLY
VALOR GOLD CORP.)
CONSOLIDATED
STATEMENTS OF OPERATIONS
| |
For
the Year Ended
December 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Revenues | |
$ | 3,281,838 | | |
$ | 23,268 | |
| |
| | | |
| | |
Cost of sales | |
| 1,790,098 | | |
| 10,851 | |
| |
| | | |
| | |
Gross
margin | |
| 1,491,740 | | |
| 12,417 | |
| |
| | | |
| | |
Costs and expenses | |
| | | |
| | |
Promotional
and marketing | |
| 983,507 | | |
| 57,189 | |
General
and administrative | |
| 6,131,510 | | |
| 238,999 | |
Depreciation
and amortization | |
| 19,987 | | |
| 6,082 | |
Professional
fees | |
| 315,086 | | |
| 15,779 | |
| |
| | | |
| | |
Total
operating costs and expenses | |
| 7,450,090 | | |
| 318,049 | |
Operating
loss | |
| (5,958,350 | ) | |
| (305,632 | ) |
| |
| | | |
| | |
Other income and (expense) | |
| | | |
| | |
Derivative
expense | |
| (86,484 | ) | |
| – | |
Change
in fair value of derivatives | |
| 251,625 | | |
| (219 | ) |
Interest
expense – related party | |
| (407,890 | ) | |
| (804 | ) |
Total
other income and expense | |
| (242,749 | ) | |
| (1,023 | ) |
Loss before provision
for income tax | |
| (6,201,099 | ) | |
| (306,655 | ) |
Provision
for income tax | |
| – | | |
| – | |
Net
loss | |
$ | (6,201,099 | ) | |
$ | (306,655 | ) |
Loss attributable to
common stockholders and loss per common share: | |
| | | |
| | |
Net
loss | |
| (6,196,084 | ) | |
| (306,655 | ) |
Non-Controlling
interest | |
| 5,015 | | |
| – | |
Net
loss | |
| (6,201,099 | ) | |
| (306,655 | ) |
Weighted average
shares outstanding, basic and diluted | |
| 3,554,486 | | |
| 700,000 | |
| |
| | | |
| | |
Net
loss per basic and diluted share | |
$ | (1.74 | ) | |
$ | (0.44 | ) |
The
accompanying notes are an integral part of these consolidated financial statements.
VAPORIN,
INC.
(FORMERLY
VALOR GOLD CORP.)
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2014 AND DECEMBER 31, 2013
| |
Preferred
Stock | | |
| | |
| | |
Additional | | |
| | |
Non- | | |
| |
| |
Series
A | | |
Series
B | | |
Series
C | | |
Series
E | | |
Common
Stock | | |
Paid
in | | |
Accumulated | | |
Controlling | | |
| |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Interest | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balance
at December 31, 2013 | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 700,000 | | |
| 70 | | |
$ | 349,930 | | |
$ | (306,819 | ) | |
| – | | |
$ | 43,181 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Recapitalization
of the company | |
| 60,000 | | |
| 6 | | |
| – | | |
| – | | |
| 2,000 | | |
| – | | |
| – | | |
| – | | |
| 1,883,250 | | |
| 188 | | |
| 66,026 | | |
| – | | |
| – | | |
| 66,220 | |
Issuance
of common stock – private placement | |
| – | | |
| – | | |
| 100,000 | | |
| 10 | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 820,993 | | |
| 82 | | |
| 4,357,378 | | |
| | | |
| | | |
| 4,357,470 | |
Shares
issued for services | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 363,250 | | |
| 36 | | |
| 1,294,459 | | |
| – | | |
| – | | |
| 1,294,495 | |
Shares
issued for the conversion of debt | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 44,333 | | |
| 5 | | |
| 321,395 | | |
| – | | |
| – | | |
| 321,400 | |
Series
E issued in connection with an acquisition | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 2 | | |
| – | | |
| – | | |
| – | | |
| 3,142,854 | | |
| – | | |
| – | | |
| 3,142,854 | |
Conversion
of Series E into common shares | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| (2 | ) | |
| – | | |
| 571,428 | | |
| 57 | | |
| (57 | ) | |
| – | | |
| | | |
| – | |
Reclassification
of derivative liability to equity | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 90,064 | | |
| – | | |
| – | | |
| 90,064 | |
Stock
based compensation in connection with restricted stock grants | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 1,239,130 | | |
| – | | |
| – | | |
| 1,239,130 | |
Stock
based compensation in connection with stock option grants | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 3,284 | | |
| – | | |
| – | | |
| 3,284 | |
Shares
issued for conversion of preferred stock | |
| (60,000 | ) | |
| (6 | ) | |
| – | | |
| – | | |
| (450 | ) | |
| – | | |
| – | | |
| – | | |
| 510,000 | | |
| 51 | | |
| (45 | ) | |
| – | | |
| – | | |
| – | |
Non-Controlling
interest in subsidiary | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| | | |
| | | |
| – | | |
| – | | |
| (10 | ) | |
| – | | |
| 10 | | |
| – | |
Net
loss | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| (6,196,084 | ) | |
| (5015 | ) | |
| (6,201,099 | ) |
Balance
at December 31, 2014 | |
| – | | |
$ | – | | |
| 100,000 | | |
| 10 | | |
| 1,550 | | |
| – | | |
| – | | |
| – | | |
| 4,893,254 | | |
$ | 489 | | |
$ | 10,864,408 | | |
| (6,502,903 | ) | |
| (5,005 | ) | |
$ | 4,356,999 | |
See
accompanying notes to consolidated financial statements.
VAPORIN,
Inc.
(FORMERLY
VALOR GOLD CORP.)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| |
Twelve
Months Ended December
31, | |
| |
2014 | | |
2013 | |
OPERATING
ACTIVITIES | |
| | | |
| | |
Net
loss | |
$ | (6,201,099 | ) | |
$ | (306,655 | ) |
Adjustments
to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation
and amortization | |
| 19,987 | | |
| 6,082 | |
Amortization
of debt discount | |
| 253,844 | | |
| – | |
Derivative
expense | |
| 86,484 | | |
| – | |
Change
in fair value of derivative liabilities | |
| (251,625 | ) | |
| – | |
Interest
expense in connection with the grant of warrants | |
| 78,869 | | |
| – | |
Interest
expense in connection with conversion of debt | |
| 26,400 | | |
| – | |
Stock
based compensation | |
| 2,536,909 | | |
| – | |
Changes
in operating assets and liabilities | |
| | | |
| | |
Due
from merchant credit card processor | |
| (160,216 | ) | |
| – | |
Trade
and related party receivable | |
| (72,027 | ) | |
| (16,587 | ) |
Inventory | |
| (517,908 | ) | |
| (316,195 | ) |
Other
current assets | |
| (3,877 | ) | |
| (32,522 | ) |
Accounts
payable and accrued liabilities | |
| 746,312 | | |
| 31,312 | |
Accrued
Interest – Related party | |
| – | | |
| 804 | |
NET
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | |
| (3,457,947 | ) | |
| (633,761 | ) |
INVESTING
ACTIVITIES | |
| | | |
| | |
Acquisition
of business, net of cash acquired | |
| (798,000 | ) | |
| – | |
(Increase)
decrease in intangible assets | |
| – | | |
| (17,678 | ) |
(Increase)
decrease in fixed assets | |
| (61,007 | ) | |
| (9,075 | ) |
NET
CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | |
| (859,007 | ) | |
| (26,753 | ) |
FINANCING
ACTIVITIES | |
| | | |
| | |
Payment
of notes payable | |
| (100,000 | ) | |
| – | |
Proceeds
received from issuance of note payable | |
| – | | |
| 75,000 | |
Proceeds
received from issuance of note payable - related party | |
| 1,000,000 | | |
| 610,735 | |
Proceeds
received from issuance of note prior to recapitalization | |
| 100,000 | | |
| – | |
Issuance
of common stock, net of issuance costs | |
| 3,857,470 | | |
| – | |
Issuance
of preferred stock | |
| 500,000 | | |
| – | |
NET
CASH PROVIDED BY FINANCING ACTIVITIES | |
| 5,157,470 | | |
| 685,735 | |
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | |
| 840,516 | | |
| 25,221 | |
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | |
| 25,221 | | |
| – | |
CASH
AND CASH EQUIVALENTS AT END OF PERIOD | |
$ | 865,737 | | |
$ | 25,221 | |
Supplemental
disclosures: | |
| | | |
| | |
Non
cash activities: | |
| | | |
| | |
Reclassification
of derivative liability to equity | |
| 90,064 | | |
| – | |
Note
payable converted to common stock | |
| 295,000 | | |
| – | |
Note
payable – related party exchanged to preferred stock pursuant to the Share Exchange | |
| 285,710 | | |
| – | |
Issuance
of note payable in connection with the acquisition of
business | |
| 200,000 | | |
| – | |
Purchase
of inventory and other assets upon acquisition of business | |
| 345,618 | | |
| – | |
Purchase
of property and equipment upon acquisition of business | |
| 100,401 | | |
| – | |
Assumption
of liabilities upon acquisition of business | |
| 37,433 | | |
| – | |
| |
| | | |
| | |
Preferred
Series A shares issued for conversion of debt | |
| – | | |
| 350,000 | |
The
accompanying notes are an integral part of these consolidated financial statements
NOTE
1 – NATURE OF OPERATIONS
Vaporin,
Inc. (the “Company”), (formerly Valor Gold Corp.), was incorporated under the laws of the State of Delaware in June
2009. In January 2014, the Company entered into a Share Exchange Agreement (the “Share Exchange”) with Vaporin Florida,
Inc., a privately-held Florida corporation (“Vaporin Florida”). Pursuant to the Exchange Agreement, all of the issued
and outstanding common stock of Vaporin Florida was exchanged for an aggregate of 35 million shares of the Company’s common
stock. The Share Exchange was accounted for as a reverse acquisition and re-capitalization, whereas Vaporin Florida is deemed
the accounting acquirer and Vaporin, Inc. the legal acquirer. As a result, the assets and liabilities and the historical operations
that are reflected in the Company’s financial statements are those of Vaporin Florida, and the Company’s assets, liabilities
and results of operations will be consolidated with the assets, liabilities and results of operations of Vaporin Florida effective
January 24, 2014. The Company is a distributor and marketer of vaporizers, e-liquids and related products.
Effective
August 29, 2014 (the “Closing”), the Company , Vaporin Acquisitions, Inc., a Florida corporation and wholly-owned
subsidiary of the Company (the “Merger Sub”), The Vape Store, Inc., a Florida corporation (“Vape Store”),
and Steve and Christy Cantrell, holders of all outstanding Vape Store shares (the “Cantrells”) entered into and closed
an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, Vape Store merged with
and into Merger Sub (the “Merger”), with Merger Sub continuing as the surviving corporation and a wholly-owned subsidiary
of the Company (see Note 7).
On
September 8, 2014, the Company filed an amendment to its Certificate of Incorporation with the Secretary of State of Delaware
effecting a 1-for-50 reverse stock split of the Company’s common stock (the “Reverse Split”). As a result of
the Reverse Split, every 50 shares of the Company’s common stock were combined into one share of common stock. All shares
and per share values for all periods presented in the accompanying consolidated financial statements are retroactively restated
for the effect of the reverse stock split (see Note 10).
On
November 6, 2014, the Company executed a binding Term Sheet to merge with and into Vapor Corp., a NASDAQ listed issuer. Shareholders
of the Company will receive 45% of the combined company as merger consideration. On December 17, 2014, Vaporin, Inc. (“Vaporin”)
and Vapor Corp. (“Vapor”) entered into an Agreement and Plan of Merger (the “Vapor Merger Agreement”)
providing for the acquisition of Vaporin by Vapor. The Merger Agreement provides that, upon the terms and subject to the conditions
set forth in the Merger Agreement, Vaporin will be merged with and into Vapor (the “Vapor Merger”). Following the
Merger, current shareholders of Vaporin common and preferred stock will own 45% of the outstanding shares of common stock of the
combined company. On the same date, Vapor also entered into a joint venture with Vaporin (the “Joint Venture”) through
the execution of an operating agreement (the “Operating Agreement”) of Emagine the Vape Store, LLC, a Delaware limited
liability company (“Emagine”), pursuant to which the Registrant and Vaporin are 50% members of Emagine.
On
March 4, 2015, the acquisition of Vaporin by Vapor (the “Vapor Merger”) was completed pursuant to the terms of the
Merger Agreement. In connection with the Merger, Emagine became a wholly-owned subsidiary of the Vapor.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation and Principles of Consolidation
The
consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States
of America (“US GAAP”) and present the consolidated financial statements of the Company and its wholly-owned subsidiary.
In the preparation of consolidated financial statements of the Company, all intercompany transactions and balances were eliminated.
Use
of Estimates
The
preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
Risks
and Uncertainties
The
Company operates in an industry that is subject to rapid change and intense competition. The Company’s operations will be
subject to significant risk and uncertainties including financial, operational, technological, regulatory and other risks, including
the potential risk of business failure.
Cash
and cash equivalents
The
Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents.
At December 31, 2014 and December 31, 2013, the Company had no cash equivalents.
Accounts
receivable
The
Company accounts receivable, represents our estimate of the amount that ultimately will be realized in cash. The Company reviews
the adequacy and adjusts its allowance for doubtful accounts on an ongoing basis, using historical payment trends and the age
of the receivables and knowledge of its individual customers. However, if the financial condition of our customers were to deteriorate,
additional allowances may be required. While estimates are involved, bad debts historically have not been a significant factor
given the diversity of its customer base and well established historical payment patterns. As of December 31, 2014 and December
31, 2013, the Company recorded allowance for uncollectable accounts of $61,000 and $0 respectively.
Inventory
Inventories
are stated at the lower of cost or market value. We regularly review our inventory quantities on hand and record a provision for
excess and obsolete inventory based primarily on our estimated forecast of product demand, production availability and/or our
ability to sell the product(s) concerned. Demand for our products can fluctuate significantly. Factors that could affect demand
for our products include unanticipated changes in consumer preferences, general market and economic conditions or other factors
that may result in cancellations of advance orders or reductions in the rate of reorders placed by customers and/or continued
weakening of economic conditions. Additionally, our estimates of future product demand may be inaccurate, which could result in
an understated or overstated provision required for excess and obsolete inventory. Product-related inventories are primarily maintained
using the average cost method.
Fixed
Assets
Property
and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements,
maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of,
the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results
of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using
the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally accelerated)
for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:
Equipment |
|
3-5
years |
Furniture |
|
7
years |
The
Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate
that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use
and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment
loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets.
Intangible
assets
ASC
350 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment
at least annually in accordance with the provisions of ASC 350. This standard also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment.
The Company did not record any impairment charges on its intangible assets during the twelve months ended December 31, 2014 and
2013.
The
Company’s intangible assets consist of the costs of building company’s website. Amortization will be recorded over
the estimated useful life of the assets using the straight-line method for financial statement purposes.
Website
Development Costs
Costs
incurred in the planning stage of a website are expensed, while costs incurred in the development stage are capitalized and amortized
over the estimated useful life of the asset.
Revenue
recognition
The
Company recognizes ecommerce revenues and the related cost of goods sold at the time the products are delivered to customers.
Revenue generated through the Company’s brick and mortar locations is recognized at the point of sale. Discounts provided
to customers are accounted for as a reduction of sales. The Company records a reserve for estimated product returns in each reporting
period. Shipping and handling fees charged to the customer are recognized as revenue at the time the products are delivered to
the customer. Revenues are presented net of any taxes collected from customers and remitted to governmental authorities.
Cost
of sales
Cost
of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost of merchandise, inbound
freight expenses, freight-to-store expenses and other inventory related costs such as shrinkage, damages and replacements. Occupancy
expenses consist of rent, depreciation and other occupancy costs, including common area maintenance, property taxes and utilities.
Shipping costs consist of third party delivery services and shipping materials.
Shipping
and Handling
Product
sold to customers is shipped from our warehouse. Any freight billed to customers is offset against shipping costs and included
in cost of goods sold.
Income
taxes
The
Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”) Income Taxes. Under ASC
740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment date.
Fair
Value of Financial Instruments
We
hold certain financial assets, which are required to be measured at fair value on a recurring basis in accordance with the Statement
of Financial Accounting Standard No. 157, “Fair Value Measurements” (“ASC Topic 820-10”). ASC Topic
820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level
1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). ASC Topic 820-10 defines fair value as
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
on the measurement date. Level 1 instruments include cash, account receivable, prepaid expenses, inventory and account payable
and accrued liabilities. The carrying values are assumed to approximate the fair value due to the short term nature of the instrument.
The carrying amount of the notes payable at December 31, 2014 approximate their respective fair value based on the Company’s
incremental borrowing rate.
The
following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis using significant
unobservable input (Level 3) from January 1, 2014 to December 31, 2014:
| |
Conversion
feature derivative liability | | |
Warrant
liability | |
Balance at January 1, 2014 | |
$ | 41,881 | | |
$ | – | |
Recognition of derivative
liability | |
| 72,064 | | |
| 271,688 | |
Reclassification of derivative
liability to equity | |
| (90,064 | ) | |
| – | |
Change
in fair value included in earnings | |
| (23,881 | ) | |
| (227,742 | ) |
Balance at December
31, 2014 | |
$ | - | | |
$ | 43,944 | |
The
three levels of the fair value hierarchy under ASC Topic 820-10 are described below:
|
● |
Level
1 - Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability
to access. We believe our carrying value of level 1 instruments approximate their fair value at December 30, 2014. |
|
|
|
|
● |
Level
2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities
in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially
the full term of the assets or liabilities. |
|
|
|
|
● |
Level
3 - Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities. We consider depleting assets, asset retirement obligations and net profit interest liability
to be Level 3. We determine the fair value of Level 3 assets and liabilities utilizing various inputs, including NYMEX price
quotations and contract terms. |
Advertising
The
Company expenses advertising costs as incurred. The Company’s advertising expenses totaled $983,507 and $0 during the twelve
months ended December 31, 2014 and 2013.
Earnings
(Loss) Per Share
Net
earnings (loss) per share is computed by dividing net income (loss) less preferred dividends for the period by the weighted average
number of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss)
less preferred dividends for the period by the weighted average number of common stock, common stock equivalents and potentially
dilutive securities outstanding during each period.
For
the year ended December 31, 2014, diluted net loss per share did not include the effect of a total of 1,680,374 shares of stock
represented by 11,000 shares of common stock issuable upon the exercise of outstanding stock options, 119,374 shares of common
stock issuable upon the exercise of outstanding warrants, and 1,650,000 shares of common stock issuable on the conversion of the
preferred stock as their effect would be anti-dilutive.
Warranty
A
return program for defective goods is offered to all of the Company’s online customers. Customers are allowed to return
defective goods within a specified period of time (90 days), after shipment. The Company records a liability for its defective
goods allowance program at the time of sale for the estimated costs that may be incurred. The liability for defective goods is
included in warranty provisions on the Consolidated Balance Sheets.
Changes
in the Company’s obligations for return and allowance programs are presented in the following table:
| |
Year
Ended | |
| |
December
31, 2014 | | |
December
31, 2013 | |
Estimated
return and allowance liabilities at beginning of period | |
$ | 0 | | |
$ | 0 | |
| |
| | | |
| | |
Costs accrued for new
estimated returns and allowances | |
$ | 4,500 | | |
$ | 0 | |
| |
| | | |
| | |
Return
and allowance obligations honored | |
| (0 | ) | |
| (0 | ) |
| |
| | | |
| | |
Estimated
return and allowance liabilities at end of period | |
$ | 4,500 | | |
$ | 0 | |
Concentration
of Business and Credit Risk
The
Company has no significant off-balance sheet risk such as foreign exchange contracts, option contracts or other foreign hedging
arrangements. The Company’s financial instruments that are exposed to concentration of credit risks consist primarily of
cash. The Company maintains its cash in bank accounts which, may at times, exceed federally-insured limits. We review a customer’s
credit history before extending credit.
The
following table shows significant concentrations in our revenues and accounts receivable for the periods indicated.
| |
Percentage
of Revenue during the | | |
Percentage
of Accounts Receivable | |
| |
period
ended, | | |
period
ended, | |
| |
December
31, 2014 | | |
December
31, 2013 | | |
December
31, 2014 | | |
December
31, 2013 | |
Customer
A | |
| 17 | % | |
| 51 | % | |
| 26 | % | |
| 71 | % |
Customer B | |
| 5 | % | |
| 14 | % | |
| 18 | % | |
| 0 | % |
Recent
accounting pronouncements
Accounting
standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have
a material impact on our consolidated financial statements upon adoption.
Year-end
The
Company has adopted December 31 as its fiscal year end.
NOTE
3 – GOING CONCERN
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates
the recoverability of assets and the satisfaction of liabilities in the normal course of business. Since its inception, the Company
has been engaged substantially in financing activities and developing its business plan and marketing. As a result, the Company
incurred accumulated net losses during the year ended December 31, 2014 of $6,201,099. In addition to raising capital from the
sale of equity, the Company’s development activities since inception have been financially sustained through capital contributions
from note holders.
The
ability of the Company to continue as a going concern is dependent upon its ability to raise additional capital from the sale
of common stock or through debt financing and, ultimately, the achievement of significant operating revenues. These financial
statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts
and classification of liabilities that might result from this uncertainty.
NOTE
4 – INVENTORY
Inventories
consist of the following:
| |
December
31, 2014 | | |
December
31, 2013 | |
Finished
goods | |
$ | 1,173,124 | | |
$ | 316,195 | |
NOTE
5 – PROPERTY & EQUIPMENT
The
following is a summary of property and equipment:
| |
December
31, 2014 | | |
December
31, 2013 | |
Leasehold
Improvements | |
$ | 47,443 | | |
| – | |
Computer Equipment | |
| 8,413 | | |
$ | 8,413 | |
Furniture, Fixtures and
Equipment | |
| 114,627 | | |
| 662 | |
Less:
accumulated depreciation | |
| (9,863 | ) | |
| (680 | ) |
| |
$ | 160,620 | | |
$ | 8,395 | |
Depreciation
for the twelve months ended December 31, 2014 and 2013 was $9,183 and $680, respectively.
NOTE
6 – INTANGIBLE ASSETS
Intangible
assets consist of the following:
| |
December
31, 2014 | | |
December
31, 2013 | |
Website,
capitalized | |
$ | 17,678 | | |
$ | 17,678 | |
Less:
accumulated amortization | |
| (16,206 | ) | |
| (5,402 | ) |
| |
$ | 1,472 | | |
$ | 12,276 | |
Amortization
for the twelve months ended December 31, 2014 and 2013 was $10,804 and $5,402 respectively.
NOTE
7 – ACQUISITION
Effective
August 29, 2014 (the “Closing”), the Company, Vaporin Acquisitions, Inc., a Florida corporation and wholly-owned subsidiary
of the Company (the “Merger Sub”), The Vape Store, Inc., a Florida corporation (“Vape Store”), and Steve
and Christy Cantrell, holders of all outstanding Vape Store shares (the “Cantrells”) entered into and closed an Agreement
and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, Vape Store merged with and into Merger
Sub (the “Merger”), with Merger Sub continuing as the surviving corporation and a wholly-owned subsidiary of the Company.
In
connection with the Merger Agreement, the Company paid the Cantrells $800,000 at the Closing and agreed to pay the Cantrells an
additional $200,000 within 30 days of the Closing. In addition, the Company issued the Cantrells two shares of the Company’s
newly created Series E Convertible Preferred Stock. On September 8, 2014, the Company’s Series E shares were converted to
571,428 shares of the Company’s common stock 10% of the shares of common stock will remain in escrow until completion of
an audit of Vape Store’s balance sheet as of Closing. Additionally, the Company agreed to assume certain liabilities and
business obligations of Vape Store, with respect to which the Company will indemnify the Cantrells. The Company valued these common
shares at the fair market value on the date of grant at $5.50 per share or $3,142,854 based on a recent sale of common stock in
a private placement. The total purchase price aggregated to $4,142,854. The transaction resulted in a business combination and
caused Vape Store to become a wholly-owned subsidiary of the Company.
Pursuant
to the Merger Agreement, the Company has an irrevocable option to repurchase from the Cantrells up to a total of 280,000 shares
of the Company’s common stock at a price of $5.00 per share during the first 12 months following the Closing and at a price
of $7.50 per share during the second 12 months following the Closing.
In
connection with the Merger, the Company entered into an employment agreement, dated as of August 29, 2014 (the “Employment
Agreement”) with Steve Cantrell. Under the terms of the Employment Agreement, Mr. Cantrell will serve as Vice President
of the Company and receive an annual salary of $200,000. The Employment Agreement has an initial term of two years and is automatically
renewable for successive one-year terms unless either party opts not to renew. In the event of termination by the Company other
than for Cause or Abandonment, or in the event of termination by Mr. Cantrell for Good Reason (as capitalized terms are defined
in the Employment Agreement), Mr. Cantrell will be entitled to severance in an amount equal to $400,000 less all salary previously
received under the Employment Agreement. In accordance with the Employment Agreement, on September 5, 2014 the Company appointed
Mr. Cantrell to serve as Vice President and as a Director of the Company.
The
Company accounted for the acquisition utilizing the purchase method of accounting in accordance with ASC 805 “Business Combinations”.
The Company is the acquirer for accounting purposes and Vape Store is the acquired company. Accordingly, the Company applied push–down
accounting and adjusted to fair value all of the assets and liabilities directly on the financial statements of the subsidiary.
The net purchase price paid by the Company was allocated to assets acquired and liabilities assumed on the records of the Company
as follows:
Current assets
(including cash of $2,000) | |
$ | 341,021 | |
Other Assets | |
| 6,597 | |
Property and equipment | |
| 100,401 | |
Goodwill | |
| 3,732,268 | |
Liabilities
assumed | |
| (37,433 | ) |
Net purchase price | |
$ | 4,142,854 | |
The
following table summarizes the unaudited pro forma consolidated results of operations as though the Company and Vape Store acquisition
had occurred on January 1, 2014:
| |
For
the twelve months Ended | |
| |
December
31, 2014 | |
| |
As
Reported | | |
Pro
Forma | |
| |
| | |
| |
Net Revenues | |
$ | 3,281,838 | | |
$ | 5,056,029 | |
Loss from operations | |
| (5,958,350 | ) | |
| (5,348,336 | ) |
Net Loss | |
| (6,201,099 | ) | |
| (5,534,088 | ) |
Loss per common share: | |
| | | |
| | |
Basic | |
$ | (1.74 | ) | |
$ | (1.56 | ) |
Diluted | |
$ | (1.74 | ) | |
$ | (1.56 | ) |
The
unaudited pro forma consolidated income statements are for informational purposes only and should not be considered indicative
of actual results that would have been achieved if the Company and Vape Store acquisition had been completed at the beginning
of 2014, or results that may be obtained in any future period.
NOTE
8 – MERGER WITH VAPOR CORP.
On
December 17, 2014, Vaporin, Inc. (“Vaporin”) and Vapor Corp. (“Vapor”) entered into an Agreement and Plan
of Merger (the “Vapor Merger Agreement”) providing for the acquisition of Vaporin by Vapor. The Vapor Merger Agreement
provides that, upon the terms and subject to the conditions set forth in the Vapor Merger Agreement, Vaporin will be merged with
and into Vapor (the “Vapor Merger”).The merger closed on March 4, 2015 whereby 100% of the issued and outstanding
shares of Vaporin common stock (including shares of common stock issued upon conversion of Vaporin preferred stick immediately
prior to the consummation of the merger agreement in accordance with the Vapor Merger Agreement) were converted into, and became
13,591,533 shares of Vapor common stock such that the former Vaporin stockholders collectively hold approximately 45% of the issued
and outstanding shares of Vapor’s common stock following the consummation of the merger.
The
options and warrants to acquire Vaporin common stock that are issued and outstanding as of the effective time of the Merger, as
well as 910,000 restricted stock units which are exchangeable for Vaporin common stock, will be assumed by Vapor in the Merger
and the number of shares issuable under such securities shall be adjusted to give effect to the Per Share Merger Consideration
(as defined in the Merger Agreement).
The
Merger Agreement contained customary representations and warranties of the Company and Vapor relating to their respective businesses.
The Company and Vapor have agreed to use commercially reasonable efforts to preserve intact its business organization and that
of its significant subsidiaries, as well as maintain its rights, franchises and existing relations with customers, suppliers and
employees. The Merger Agreement also contains covenants by each party to furnish current information to the other party.
The
Merger Agreement contained customary conditions that were satisfied prior to the closing of the merger, including the requirement
for the Vapor to receive gross proceeds from a $3.5 million equity offering disclosed in Note 13. Additionally, the Vapor must
have received commitments from certain third parties for financing of up to $25 million to be used for the construction of retail
stores and which is contingent on the achievement of certain performance metrics.
NOTE
9 – NOTES PAYABLE
Convertible
notes payable
On
January 24, 2014, following the closing of the Share Exchange, the Company assumed convertible notes payable for a total of $350,000.
On January 24, 2014, the debt discount on the convertible notes has a remaining balance of $253,844. These convertible notes payable
consisted of the following:
$75,000
10% secured convertible promissory note due in June 2014 with a 5-year warrant to purchase 75,000 shares of the Company’s
common stock at an exercise price of $10 per share for gross proceeds to the Company of $75,000. The note was convertible into
shares of the Company’s common stock at an initial conversion price of $10 per share. In September 2014, the Company issued
11,000 shares of common stock for the conversion of principal debt of $75,000 including accrued interest of $7,500. The warrants
have an exercise price of $0.50 per share, as a result of being reduced from $10 per share pursuant to full-ratchet anti-dilution
protection. The Company accounted for the reduction of the conversion price from $10 to a lower price per share and such conversion
under ASC 470-20-40 “Debt with Conversion and Other Options” and accordingly recorded an additional interest expense
of $9,900 which is equal to the fair value of shares issued in excess of the fair value issuable pursuant to the original conversion
terms.
$175,000
10% secured convertible promissory notes due in August 2014 with a 5-year warrant to purchase 30,000 shares of the Company’s
common stock at an exercise price of $0.50 per share for gross proceeds to the Company of $175,000. The notes are convertible
into shares of the Company’s common stock at an initial conversion price of $10 per share. In February 2014, the Company
paid back the principal plus accrued interest owed to one of the investors for a sum total of $52,433. In September 2014, the
Company issued 18,333 shares of common stock for the conversion of principal debt of $125,000 including accrued interest of $12,500.
The warrants have an exercise price of $0.50 per share, as a result of being reduced from $10 per share pursuant to full-ratchet
anti-dilution protection. The Company accounted for the reduction of the conversion price from $10 to a lower price per share
and such conversion under ASC 470-20-40 “Debt with Conversion and Other Options” and accordingly recorded an additional
interest expense of $16,500 which is equal to the fair value of shares issued in excess of the fair value issuable pursuant to
the original conversion terms.
$100,000
of its 10% convertible promissory notes due in January 2015 with warrants to purchase up to an aggregate of 20,000 shares of the
Company’s common stock at an exercise price of $5.00 per share for gross proceeds to the Company of $100,000. The notes
are convertible into shares of the Company’s common stock at an initial conversion price of $5.00 per share, subject to
adjustment. On January 22, 2014, prior to the closing of the Share Exchange, the Company issued 10,000 shares of the Company’s
common stock in connection with the conversion of $50,000 of the notes at a conversion price of $5.00 per share. The warrants
have an initial exercise price of $5.00 per share.
In
accordance with ASC 470-20-25, the convertible notes were considered to have an embedded beneficial conversion feature because
the effective conversion price was less than the fair value of the Company’s common stock. These convertible notes were
fully convertible at the issuance date thus the value of the beneficial conversion and the warrants were treated as a discount
on the convertible notes to be amortized over the term of the convertible notes. The fair value of this warrant was estimated
on the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: expected dividend
yield of 0%; expected volatility ranging from 120% to 131%; risk-free interest rate ranging from 1.39% to 1.73% and an expected
holding period of five years. During the nine months ended December 31, 2014, amortization of debt discount amounted to $253,844
and was included in interest expense.
On
January 14, 2014, prior to the closing of the Share Exchange, the Company granted warrants to purchase up to an aggregate of 12,500
shares of the Company’s common stock at an exercise price of $0.50 (collectively the “Additional Warrants”)
to a certain note holder in connection with a note that is due in August 2014. The Company issued the Additional Warrants in connection
with certain protection clause contained in the note holder’s respective securities purchase agreements as a result of the
Company’s subsequent issuance in January 2014 of its warrants related to a convertible note payable at a per share price
lower than the per share price paid by the note holder. The fair value of this warrant was estimated on the date of grant using
the Black-Scholes option-pricing model using the following weighted-average assumptions: expected dividend yield of 0%; expected
volatility of 131%; risk-free interest rate of 1.65% and an expected holding period of five years. During the year ended December
31, 2014, the Company recognized an interest expense of $78,869 and a corresponding derivative liability in connection with the
Additional Warrants.
The
initial conversion price of the notes above and initial exercise prices of warrants issued above are subject to full-ratchet anti-dilution
protection. In accordance with ASC Topic 815 “Derivatives and Hedging”, these convertible notes include a down-round
provision under which the conversion price and exercise price could be affected by future equity offerings (see Note 7). Instruments
with down-round protection are not considered indexed to a company’s own stock under ASC Topic 815, because neither the
occurrence of a sale of common stock by the company at market nor the issuance of another equity-linked instrument with a lower
strike price is an input to the fair value of a fixed-for-fixed option on equity shares.
Notes
payable
On
December 19, 2013, the Company issued a six month 10% note payable of $50,000. The note was scheduled to mature on June 18, 2014.
In April 2014, the Company paid off the note including interest in the amount of $51,762.
On
December 19, 2013, the Company issued a six month 10% note payable of $25,000. The note was scheduled to mature on June 18, 2014.
In February 2014, the Company issued 5,000 shares of the Company’s common stock in connection with the full conversion of
this note.
Notes
payable – related party
In
connection with the Merger Agreement, the Company agreed to pay the Cantrells $200,000 within 30 days of the Closing. The Company
subsequently paid the $200,000 in October 2014.
At
the closing of the Share Exchange, $285,710 in principal amount plus accrued interest of the notes were cancelled in exchange
for the issuance of an aggregate of 100,000 shares of Series C Preferred Stock of the Company.
On
December 8, 2014, Emagine the Vape Stores, LLC, a Delaware limited liability company (“Emagine”) managed by Vaporin,
Inc., a Delaware corporation (the “Company”), entered into a Secured Line of Credit Agreement (the “Agreement”),
effective as of December 1, 2014, with one affiliated shareholder of the Company and two unaffiliated investors (the “Lenders”).
Under the Agreement, the Lenders agreed to advance up to $3,000,000 in three equal tranches in exchange for secured promissory
notes which mature on March 31, 2016, bear interest at 12% per annum, and are secured by a first lien on the assets of Emagine.
The first tranche of funding under the Agreement was provided on December 1, 2014.
The
funds will be used to purchase and/or open Vape Stores similar to those operated by the Company. In connection with the completion
of the Vapor Merger on March 4, 2015, Emagine became a wholly-owned subsidiary of Vapor.
NOTE
10 – DERIVATIVE LIABILITIES
In
connection with the issuance of the 10% convertible notes (see Note 9), the Company determined that the terms of the convertible
notes include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings
undertaken by the Company. Accordingly, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging - Contracts
in an Entity’s Own Stock”, the convertible instrument was accounted for as a derivative liability at the date of issuance
and adjusted to fair value through earnings at each reporting date. The Company has recognized a derivative liability of $43,944
and $0 at December 31, 2014 and December 31, 2013, respectively. The gain resulting from the decrease in fair value of this convertible
instrument was $251,625 for year ended December 31, 2014. The derivative expense was $86,484, for year ended December 31, 2014.
The Company reclassified $90,064 to paid-in capital due to the payment of convertible notes during the twelve months ended December
31, 2014.
The
Company used the following assumptions for determining the fair value of the convertible instruments under the Black-Scholes option
pricing model:
| |
December
31, 2014 | |
Dividend
rate | |
| 0 | % |
Term (in years) | |
| 0.33
- 5 Years | |
Volatility | |
| 126%
- 131 | % |
Risk-free interest rate | |
| 0.05%
- 1.73 | % |
NOTE
11 – STOCKHOLDERS’ EQUITY
The
Company is authorized to issue up to 200,000,000 shares of common stock, par value $0.0001 per share, and 50,000,000 shares of
blank check preferred stock, par value $0.0001 per share. On September 8, 2014, the Company filed an amendment to its Certificate
of Incorporation with the Secretary of State of Delaware effecting the Reverse Split (the “Reverse Split”). As a result
of the Reverse Split, every 50 shares of the Company’s common stock were combined into one share of common stock. Immediately
after the September 8, 2014 effective date, the Company had approximately 3,826,493 shares of common stock outstanding. The authorized
number of shares of the Company’s common stock and the par value remained the same. The Reverse Split did not affect the
number of shares of preferred stock and certain derivative securities outstanding; however it did affect the number of shares
issuable to holders upon conversion or exercise of such securities. All share and per share values for all periods presented in
the accompanying consolidated financial statements are retroactively restated for the effect of the reverse stock split.
On
May 30, 2014, the Board of Directors of the Company approved an amendment (the “Amendment”) to the 2014 Equity Incentive
Plan (the “Plan”) which provides for the grant of incentive stock options, non-qualified stock options, restricted
stock, restricted stock units (“RSUs”) and stock appreciation rights to employees, consultants, officers and directors
of the Company in order to help the Company attract, retain and incentivize qualified individuals that will contribute to the
Company’s success. The Amendment increased the maximum number of shares of the Company’s common stock that may be
issued under the Plan from a total of 500,000 shares to a total of 1,000,000 shares.
Series
A Preferred Stock
On
April 8, 2014, the holders of all shares of the Company’s Series A Preferred Stock converted the shares of Series A Preferred
Stock into a total of 60,000 shares of common stock. At December 31, 2014, the Company did not have any shares of Series A Preferred
Stock outstanding.
Series
B Preferred Stock
The
Company has outstanding 100,000 shares of Series B Preferred Stock. Each share has a liquidation preference equal to $0.0001 per
share. Shares of Series B Preferred Stock are convertible at any time on a share-for-share basis, subject to a limitation that
the holder shall not at any time be a beneficial owner of more than 9.99% of the Company’s common stock outstanding at such
time. The Series B votes on an as-converted basis, subject to this limitation. Holders of Series B have no dividend preference.
Series
C Preferred Stock
The
Company has outstanding 1,550 shares of Series C Preferred Stock. Each share has a liquidation preference equal to $0.0001 per
share. Shares of Series C Preferred Stock are convertible at any time on a 1 share of Series C Preferred Stock-for-1,000 shares
of common stock basis, subject to a limitation that the holder shall not at any time be a beneficial owner of more than 9.99%
of the Company’s common stock outstanding at such time. The Series C votes on an as-converted basis, subject to this limitation.
Holders of Series C have no dividend preference.
Series
E Preferred Stock
On
September 2, 2014, the Company filed a Certificate of Designation creating the Series E Convertible Preferred Stock of the Company.
The Series E shares: (i) automatically convert into shares of the Company’s common stock at a rate of 285,714.29 shares
of common stock for each share of Series E at such time that the Company has sufficient authorized capital, (ii) are entitled
to vote on all matters submitted to shareholders of the Company on an as-converted basis and (iii) have a nominal liquidation
preference. The Series E converted into common stock on September 8, 2014.
(A) |
Share Exchange |
|
|
|
In January 2014, the
Company entered into the Share Exchange with Vaporin Florida. Pursuant to the Exchange Agreement, all of the issued and outstanding
common stock of Vaporin Florida was exchanged for an aggregate of 700,000 shares of the Company’s common stock. Additionally,
the holders of all of Vaporin Florida’s issued and outstanding Series A Preferred Stock and the holders of outstanding
notes of Vaporin Florida in the aggregate principal amount of $285,710 (the “Vaporin Florida Notes”) exchanged
all of the outstanding shares of Vaporin Florida’s Series A Preferred Stock and converted the Vaporin Florida Notes
into an aggregate of 2,000 shares of the Company’s Series C Preferred Stock. This transaction was accounted for as a
reverse recapitalization of Vaporin Florida whereby Vaporin Florida is considered the acquirer for accounting purposes. The
Company is deemed to have issued 1,883,250 shares of common stock and 60,000 shares of Series A Preferred Stock which represents
the outstanding common and preferred stock of the Company just prior to the closing of the transaction. |
|
|
(B) |
Private Placement |
|
|
|
In January 2014, the
Company entered into stock purchase agreements with accredited investors pursuant to which they purchased 115,000 shares of
common stock and 100,000 shares of Series B Preferred Stock at a price of $5.00 per share for net proceeds of $1,043,500.
The Company paid placement agent fees of $31,500 in connection with the sale of common and preferred stock. |
|
|
|
On April 1, 2014,
the Company closed on a private placement of 503,993 shares of the Company’s common stock to accredited investors at
a price per share of $5.00. Subsequent closings took place on April 7, 2014 and May 6, 2014. The offering generated gross
proceeds to the Company of $2,529,965. As compensation, the acting placement agent for the offering received a commission
of 10% of the gross proceeds from the shares it sold and a number of five-year warrants equal to 10% of the shares it sold.
To date, the Company has paid the placement agent $144,997 and issued the placement agent 28,999 five-year warrants exercisable
at $5.00 per share. The net proceeds to the Company, after deducting placement agent fees, legal fees, filing fees and escrow
expenses, were $2,290,768. |
|
|
|
On August 29, 2014,
the Company raised $880,000 in gross proceeds from the sale of 160,000 shares of common stock at a price of $5.50 per share
in a private placement offering to four accredited investors. The Company has paid legal fees and escrow expenses related
to the private placement of approximately $58,000 which resulted to a net proceeds to the Company of approximately $822,000. |
|
|
|
On September 29, 2014,
the Company raised $220,000 in gross proceeds from the sale of 40,000 shares of common stock at a price of $5.50 per share
in a private placement offering to four accredited investors. The Company has paid legal fees, filing fees and escrow expenses
related to the private placement of approximately $18,700 which resulted to a net proceeds to the Company of approximately
$201,000. |
|
|
|
The securities were
not registered under the Securities Act and were issued and sold in reliance upon the exemption from registration contained
in Section 4(a)(2) of the Act and Rule 506(b) promulgated thereunder. |
|
|
(C) |
Common stock for services |
|
|
|
In March 2014, the
Company issued an aggregate of 51,000 shares of the Company’s common stock to two consultants for consulting services
rendered. The Company valued these common shares at the fair market value on the date of grant at approximately $5.00 per
share or $255,000 based on the sale of commons stock in a private placement at $5.00 per common share. In connection with
the issuance of these common shares, the Company recorded stock based consulting for the year ended December 31, 2014 of $255,000. |
|
|
|
Between April 2014
and May 2014, the Company issued an aggregate of 102,000 shares of the Company’s common stock to various consultants
for consulting and accounting service rendered. The Company valued these common shares at the fair market value on the date
of grant at approximately $5.00 per share or $510,000 based on the sale of commons stock in a private placement at $5.00 per
common share. In connection with the issuance of these common shares, the Company recorded stock based consulting for the
year ended December 31, 2014 of $510,000. |
On
May 30, 2014, the Board of Directors approved the grant under the Plan of 400,000 restricted stock units (“RSU”) to
Marlin Capital Investments, LLC, a consultant to the Company, 200,000 RSU’s to Greg Brauser, the Company’s Chief Operating
Officer, and 200,000 RSU’s to Scott Frohman, the Company’s Chief Executive Officer and Director. All the RSU’s
will vest quarterly in approximately equal installments over a three-year period from the date of issuance or upon a “change
in control” as defined in the Plan, subject to the consultant’s or individual’s continued service to the Company
on each applicable vesting date, with delivery of shares taking place on the third anniversary of the date of issuance. In connection
with the grant of these RSU’s, the Company recorded stock based compensation and consulting in the year ended December 31,
2014 of $1,239,129.
Between
July 2014 and August 2014, the Company issued an aggregate of 34,250 shares of the Company’s common stock to various consultants
for consulting service rendered. In connection with the issuance of these common shares, the Company recorded stock based consulting
for twelve year ended December 31, 2014 of $124,375.
In
July 2014, the Company entered into a one-year employment agreement for a Vice President of Internet Marketing. The Company granted
the executive 10,000 restricted shares of common stock and 5,000 stock options exercisable at $4.15 vesting quarterly over a three-year
period. The Company valued these common shares at the fair market value on the date of grant at $5.00 per share or a total of
$50,000 based on the quoted trading price on the grant date. In connection with the issuance of these common shares, the Company
recorded stock based compensation for the year ended December 31, 2014 of $50,000. The 5,000 stock options were valued on the
grant date at approximately $17,650 or $3.53 per option using a Black-Scholes option pricing model with the following assumptions:
stock price of approximately $4.15 per share, volatility of 127%, expected term of 5 years, and a risk free interest rate of 1.70%.
Between
October 2014 and December 2014, the Company issued an aggregate of 196,000 shares of the Company’s common stock to various
consultants for consulting service rendered. In connection with the issuance of these common shares, the Company recorded stock
based consulting for year ended December 31, 2014 of $355,120.
(D)
Stock Options
A
summary of the stock options for the twelve months ending December 31, 2014 and for the year ending December 31, 2013 and changes
during the period are presented below:
| |
Number
of
Options | | |
Weighted
Average Exercise
Price | | |
Weighted
Average
Remaining
Contractual Life
(Years) | |
Recapitalization on January
24, 2014 | |
| 6,000 | | |
| 20.00 | | |
| 8.69 | |
Granted | |
| 5,000 | | |
| 4.15 | | |
| 5.00 | |
Exercised | |
| - | | |
| - | | |
| - | |
Forfeited | |
| - | | |
| - | | |
| - | |
Cancelled | |
| - | | |
| - | | |
| - | |
Balance outstanding at December 31, 2014 | |
| 11,000 | | |
$ | 12.80 | | |
| 6.29 | |
| |
| | | |
| | | |
| | |
Options exercisable at December 31, 2014 | |
| 4,917 | | |
$ | 19.00 | | |
| | |
Options expected to vest | |
| 4,583 | | |
| | | |
| | |
| |
| | | |
| | | |
| | |
Weighted
average fair value of options granted during the twelve months ended December 31, 2014 | |
| | | |
| | | |
$ | 3.53 | |
Stock
options outstanding at December 31, 2014 as disclosed in the above table have no intrinsic value at the end of the period. For
the twelve months ended December 31, 2014, total stock-based compensation related to the options was $3,284. The value of stock
based compensation expense not yet recognized pertaining to unvested options and stock grants was approximately $2,047,883 at
December 31, 2014.
(E)
Stock Warrants
A
summary of the status of the Company’s outstanding stock warrants for the twelve months ending December 31, 2014 and for
the year ending December 31, 2013 and changes during the period then ended is as follows:
| | |
Number
of
Warrants | | |
Weighted
Average
Exercise
Price | | |
Weighted
Average
Remaining Contractual
Life
(Years) | |
Recapitalization
on January 24, 2014 | | |
| 90,375 | | |
| 14.00 | | |
| 4.32 | |
Granted | | |
| 28,999 | | |
| 5.00 | | |
| 5.00 | |
Cancelled | | |
| - | | |
| - | | |
| - | |
Forfeited | | |
| - | | |
| - | | |
| - | |
Exercised | | |
| - | | |
| - | | |
| - | |
Balance
at December 31, 2014 | | |
| 119,374 | | |
$ | 12.00 | | |
| 3.60 | |
| | |
| | | |
| | | |
| | |
Warrants
exercisable at December 31, 2014 | | |
| 119,374 | | |
$ | 12.00 | | |
| 3.60 | |
| | |
| | | |
| | | |
| | |
Weighted
average fair value of warrants granted during the twelve months ended December 31, 2014 | | |
| | | |
$ | 5.00 | | |
| | |
NOTE
12 – RELATED PARTY TRANSACTIONS
The
Company purchases most of its products from Direct Source China, LLC. , an entity controlled by Gregory Brauser, our Chief Operating
Officer. This entity purchases the products directly from the manufacturers in China and charges the Company an 8% premium. The
Company paid Direct Source net of all credits approximately $509,000 for products for the twelve months ended December 31, 2014.
Note
Payable – Related Party – See Note 9
During
the year ended December 31, 2014, the Company paid total of $24,500 in consulting fees to related parties.
The
Company purchases most of its products from Direct Source China, LLC. , an entity controlled by Gregory Brauser, our Chief Operating
Officer. This entity purchases the products directly from the manufacturers in China and charges the Company an 8% premium. The
Company paid Direct Source net of all credits approximately $509,000 for products for the twelve months ended December 31, 2014.
NOTE
13 – SUBSEQUENT EVENTS
On
January 20, 2015, Vaporin, Inc. (the “Company”) and Vapor Corp. (“Vapor”) entered into a Securities Purchase
Agreement with certain accredited investors providing for the sale of $350,000 of the Company’s Convertible Notes (the “Notes”).
The Notes accrue interest on the outstanding principal at an annual rate of 10%. The principal and accrued interest on the Notes
is due and payable on January 20, 2016. Assuming the merger between the Company and Vapor (“Merger”) closes, the Notes
will be convertible into Vapor common stock at the lower of (i) $1.08 or (ii) a 15% discount to a 20-trading day VWAP following
the closing of the merger (subject to a maximum issuance of 525,000 shares). If the Merger does not close, the Notes will not
be convertible into either the Company’s or Vapor’s stock. Investors were provided with standard piggyback registration
rights which are conditioned on the Merger closing.
On
January 29, 2015, Vaporin, Inc. (the “Company”) was issued a $350,000 note by Vapor Corp. (“Borrower”)
in consideration for a loan of $350,000. The note accrues interest on the outstanding principal at an annual rate of 12%. The
principal and accrued interest on the note is due and payable on January 29, 2016 (the “Maturity Date”). If the merger
between the Company and the Borrower (“Merger”) does not close by May 31, 2015 (the “End Date”), the Maturity
Date will accelerate and become due June 1, 2015. Additionally, if the Merger does not close by the End Date or in the event of
a default by the Borrower, the note will be convertible into the Borrower’s common stock at 85% of the Borrower’s
closing price on May 29, 2015. If the merger closes prior to the End Date, the note shall not be convertible. The note shall not
be convertible until such time as the Nasdaq Stock Market (“Nasdaq”) approves the issuance of the shares underlying
the note.
On
March 4, 2015, the acquisition of Vaporin by Vapor (the “Vapor Merger”) was completed pursuant to the terms of the
Merger Agreement. In connection with the Merger, Emagine became a wholly-owned subsidiary of the Vapor.
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Background
of the Merger
Vapor
completed its acquisition of Vaporin, pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated
December 17, 2014, by and between the Vapor and Vaporin. In accordance with the Merger Agreement, the Company acquired Vaporin
through the merger of Vaporin with and into Vapor with Vapor being the surviving entity and maintaining control (as a result of
the current stockholders of Vapor maintaining more than 50% ownership in the Company’s outstanding shares of common stock
and the current Vapor directors comprising the majority of the board) (the “Merger”). The assets and liabilities and
the historical operations that are reflected in the Company’s financial statements filed with the SEC are those of Vapor,
and Vaporin’s assets, liabilities and results of operations are consolidated with the assets, liabilities and results of
operations of Vapor effective March 4, 2015.
Basis
of Presentation
The
accompanying Unaudited Pro Forma Condensed Combined Balance Sheet, or the pro forma balance sheet, as of December 31, 2014 and
the Unaudited Pro Forma Condensed Combined Statement of Operations, or the pro forma statements of operations, for the year ended
December 31, 2014 combine the historical financial information of Vaporin and Vapor and are adjusted on a pro forma basis to give
effect to the Merger as described in the notes to the unaudited pro forma condensed combined financial statements. The pro forma
balance sheet reflects the Merger, which was completed on March 4, 2015, as if it had been consummated on December 31, 2014, and
the pro forma statement of operations for the year ended December 31, 2014 reflects the Merger as if it had been consummated on
January 1, 2014. The pro forma financial statements have been derived from and should be read in conjunction with the historical
consolidated financial statements of each of Vaporin and Vapor, which are included herein.
The
following unaudited pro forma condensed combined financial statements give effect to the merger under the acquisition method of
accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Topic 805, Business
Combinations (“ASC 805”). The pro forma financial statements are provided for illustrative purposes only and are not
intended to represent, and are not necessarily indicative of, what the operating results or financial position of the Company
would have been had the Merger been completed on the dates indicated, nor are they necessarily indicative of the Company’s
future operating results or financial position. The pro forma financial statements do not reflect the impacts of any potential
operational efficiencies, asset dispositions, cost savings or economies of scale that the Company may achieve with respect to
the combined operations. Additionally, the pro forma statements of operations do not include non-recurring charges or credits
which result directly from the transactions. Differences between estimates used in the purchase price allocation included here
within this unaudited pro forma financial information and the final purchase price allocation amounts will occur and these differences
could have a material impact on the accompanying unaudited pro forma condensed combined financial statements.
The
historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial statements
to give effect to pro forma events that are (1) directly attributable to the Merger, (2) factually supportable, and (3) expected
to have a continuing impact on the combined results of Vapor and Vaporin. These unaudited pro forma condensed combined financial
statements do not give effect to anticipated synergies, integration costs or nonrecurring transaction costs which result directly
from the merger. The unaudited pro forma condensed combined financial statements also do not contemplate any additional debt that
Vapor may elect to incur in the future, which could result in interest expense that is different from what is reflected in these
unaudited pro forma condensed combined financial statements. Further, because the tax rate used for these unaudited pro forma
condensed combined financial statements is an estimated statutory tax rate, it will likely vary from the actual effective rate
in periods subsequent to completion of the transactions, and no adjustment has been made to the unaudited pro forma condensed
combined financial information as it relates to limitations on the ability to utilize deferred tax assets, such as those related
to net operating losses and tax credit carryforwards, as a result of the transaction.
The
unaudited pro forma condensed combined financial statements should be read in conjunction with the accompanying notes to the unaudited
pro forma condensed combined financial statements, the audited historical consolidated financial statements and accompanying notes
of Vapor and Vaporin.
VAPOR
CORP, INC.
UNAUDITED
PRO FORMA CONDENSED COMBINED BALANCE SHEET
December
31, 2014
| |
Historical | | |
Historical | | |
Pro
Forma |
| | |
Pro
Forma | |
| |
Vapor Corp. | | |
Vaporin, Inc. | | |
Adjustments |
| | |
Combined | |
CURRENT
ASSETS: | |
| | | |
| | | |
| |
| | |
| | |
Cash | |
$ | 471,194 | | |
$ | 865,737 | | |
| 2,941,960 |
(b) | | |
| 4,278,891 | |
Due from merchant credit
card processor, net | |
| 111,968 | | |
| 160,216 | | |
| - |
| | |
| 272,184 | |
Accounts receivable,
net | |
| 239,652 | | |
| 88,614 | | |
| - |
| | |
| 328,266 | |
Inventory | |
| 2,048,883 | | |
| 1,173,124 | | |
| - |
| | |
| 3,222,007 | |
Prepaid expenses and
vendor deposits | |
| 664,103 | | |
| 42,996 | | |
| - |
| | |
| 707,099 | |
Loan receivable, net | |
| 467,095 | | |
| - | | |
| - |
| | |
| 467,095 | |
Deferred
financing costs, net | |
| 122,209 | | |
| - | | |
| - |
| | |
| 122,209 | |
TOTAL
CURRENT ASSETS | |
| 4,125,104 | | |
| 2,330,687 | | |
| 2,941,960 |
| | |
| 9,397,751 | |
| |
| | | |
| | | |
| |
| | |
| | |
Property and equipment,
net | |
| 712,019 | | |
| 160,620 | | |
| - |
| | |
$ | 872,639 | |
Intangible assets | |
| - | | |
| - | | |
| 2,080,600 |
(a) | | |
$ | 2,080,600 | |
Goodwill | |
| - | | |
| 3,732,268 | | |
| 12,296,819 |
(a) | | |
$ | 16,029,087 | |
Other
assets | |
| 91,360 | | |
| 1,472 | | |
| - |
| | |
$ | 92,832 | |
TOTAL
ASSETS | |
$ | 4,928,483 | | |
$ | 6,225,047 | | |
$ | 17,319,379 |
| | |
$ | 28,472,909 | |
| |
| | | |
| | | |
| |
| | |
| | |
CURRENT
LIABILITIES: | |
| | | |
| | | |
| |
| | |
| | |
Accounts payable and
accrued expenses | |
$ | 2,895,247 | | |
$ | 824,104 | | |
$ | - |
| | |
$ | 3,719,351 | |
Current portion of capital
lease | |
| 52,015 | | |
| | | |
| |
| | |
| 52,015 | |
Derivative liabilities | |
| - | | |
| 43,944 | | |
| - |
| | |
| 43,944 | |
Senior convertible notes
payable – related parties, net of debt discount of $1,093,750 | |
| 156,250 | | |
| - | | |
| |
| | |
| 156,250 | |
Term loan | |
| 750,000 | | |
| - | | |
| - |
| | |
| 750,000 | |
Customer deposits | |
| 140,626 | | |
| - | | |
| - |
| | |
| 140,626 | |
Income
taxes payable | |
| 3,092 | | |
| - | | |
| - |
| | |
| 3,092 | |
TOTAL
CURRENT LIABILITIES | |
| 3,997,230 | | |
| 868,048 | | |
| - |
| | |
| 4,865,278 | |
| |
| | | |
| | | |
| |
| | |
| | |
Capital lease, net of
current portion | |
| 119,443 | | |
| - | | |
| - |
| | |
| 119,443 | |
Loan
payable - related party | |
| - | | |
| 1,000,000 | | |
| - |
| | |
| 1,000,000 | |
TOTAL
LONG-TERM DEBT | |
| 119,443 | | |
| 1,000,000 | | |
| - |
| | |
| 1,119,443 | |
| |
| | | |
| | | |
| |
| | |
| | |
COMMITMENTS
AND CONTINGENCIES | |
| | | |
| | | |
| |
| | |
| | |
STOCKHOLDERS’
EQUITY | |
| | | |
| | | |
| |
| | |
| | |
Preferred stock | |
| - | | |
| - | | |
| - |
| | |
| - | |
Series B preferred stock | |
| - | | |
| 10 | | |
| (10 |
(c) | | |
| - | |
Common stock | |
| 3,352
| | |
| 489 | | |
| 3,307 |
(c,d) | | |
| 7,148 | |
Additional paid-in capital | |
| 16,040,361 | | |
| 10,864,408 | | |
| 11,367,174 |
(c,d) | | |
| 38,271,943 | |
Accumulated
deficit | |
| (15,231,903 | ) | |
| (6,502,903 | ) | |
| 5,943,903 |
(b,c) | | |
| (15,790,903 | |
TOTAL
STOCKHOLDERS’ EQUITY | |
| 811,810 | | |
| 4,362,004 | | |
| 17,314,374 |
| | |
| 22,488,188 | |
Non-Controlling
Interest in Subsidiary | |
| - | | |
| (5,005 | ) | |
| 5,005 |
(c) | | |
| - | |
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
$ | 4,928,483 | | |
$ | 6,225,047 | | |
$ | 17,319,379 |
| | |
$ | 28,472,909 | |
See
accompanying notes to the pro forma condensed combined financial statements.
VAPOR
CORP, INC.
UNAUDITED
PRO FORMA CONDENSED COMBINED
STATEMENT
OF OPERATIONS
For
the year ended December 31, 2014
| |
| | |
Pro
Forma Vaporin | | |
| | |
| |
| |
Audited | | |
Audited | | |
| | |
| | |
| |
| | |
| |
| |
12/31/2014 | | |
12/31/2014 | | |
Historical | | |
| | |
Pro Forma | |
| | |
| |
| |
Vapor
Corp. | | |
Vaporin,
Inc. | | |
Vape
Store | | |
Pro
Forma
Adjustment | | |
Vaporin
(e) | |
Pro
Forma
Adjustments | | |
Pro
Forma
Combined | |
| |
| | |
| | |
| | |
| | |
| |
| | |
| |
Revenue | |
$ | 15,279,859 | | |
$ | 3,281,838 | | |
$ | 1,774,191 | | |
$ | - | | |
$5,056,029 | |
$ | - | | |
$ | 20,335,888 | |
Cost
of goods sold | |
| 14,497,254 | | |
| 1,790,098 | | |
| 315,958 | | |
| - | | |
2,106,056 | |
| - | | |
| 16,603,310 | |
Gross
Profit | |
| 782,605 | | |
| 1,491,740 | | |
| 1,458,233 | | |
| - | | |
2,949,973 | |
| - | | |
| 3,732,578 | |
| |
| | | |
| | | |
| | | |
| | | |
| |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
| |
| | | |
| | |
Selling, general and
administrative | |
| 11,126,759 | | |
| 6,466,583 | | |
| 842,830 | | |
| - | | |
7,309,413 | |
| 266,120 | (f) | |
| 18,702,291 | |
Advertising | |
| 2,374,329 | | |
| 983,507 | | |
| 28,409 | | |
| - | | |
1,011,916 | |
| - | | |
| 3,386,245 | |
Total
operating expenses | |
| 13,501,088 | | |
| 7,450,090 | | |
| 871,239 | | |
| - | | |
8,321,329 | |
| 266,120 | | |
| 22,088,537 | |
Operating
income (loss) | |
| (12,718,483 | ) | |
| (5,958,350 | ) | |
| 586,995 | | |
| - | | |
(5,371,355) | |
| (266,120 | ) | |
| (18,355,958 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| |
| | | |
| | |
Other expenses/income | |
| | | |
| | | |
| | | |
| | | |
| |
| | | |
| | |
Derivative expense | |
| - | | |
| 86,484 | | |
| - | | |
| - | | |
86,484 | |
| - | | |
| 86,484 | |
Change in fair value
of derivatives | |
| - | | |
| (251,625 | ) | |
| - | | |
| - | | |
(251,625) | |
| - | | |
| (251,625 | ) |
Amortization of deferred
financing cost | |
| 17,458 | | |
| - | | |
| - | | |
| - | | |
- | |
| - | | |
| 17,458 | |
Interest
expenses | |
| 348,975 | | |
| 407,890 | | |
| - | | |
| - | | |
407,890 | |
| - | | |
| 756,865 | |
Total
other expenses | |
| 366,433 | | |
| 242,749 | | |
| - | | |
| - | | |
242,749 | |
| - | | |
| 609,182 | |
| |
| | | |
| | | |
| | | |
| | | |
| |
| | | |
| | |
Net
income (loss) before income taxes | |
| (13,084,916 | ) | |
| (6,201,099 | ) | |
| 586,995 | | |
| - | | |
(5,614,104) | |
| (266,120 | ) | |
| (18,965,140 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| |
| | | |
| | |
Income
tax (expense) benefit | |
| (767,333 | ) | |
| - | | |
| - | | |
| - | | |
- | |
| - | | |
| (767,333 | ) |
Net
income (loss) | |
| (13,852,249 | ) | |
$ | (6,201,099 | ) | |
| 586,995 | | |
$ | - | | |
(5,614,104) | |
| (266,120 | ) | |
| (19,732,473 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| |
| | | |
| | |
Net
loss per common share - basic and diluted | |
| (4.22 | ) | |
$ | (1.74 | ) | |
| - | | |
| - | | |
| |
| | | |
| (2.95 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| |
| | | |
| | |
Weighted
average common shares outstanding - basic and diluted | |
| 3,283,030 | | |
| 3,554,486
| | |
| | | |
| | | |
| |
| 3,404,773 | (g) | |
| 6,687,803 | |
See
accompanying notes to the pro forma condensed combined financial statements.
1.
Description of Transaction
Merger
with Vaporin, Inc.
On
December 17, 2014, Vapor Corp, Inc. (the “Company”) entered into the Merger Agreement with Vaporin, Inc. (“Vaporin”)
pursuant to which Vaporin was to merge with and into the Company with Vapor being the surviving and controlling entity. The Merger
closed on March 4, 2015 and the purchase price consideration paid by the Company consisted of the following:
|
1. |
100%
of the issued and outstanding shares of Vaporin common stock (including shares of common stock issued upon conversion of Vaporin
preferred stock immediately prior to the consummation of the merger in accordance with the Merger Agreement) were converted
into, and became 2,718,310 shares of the Company’s common stock such that the former Vaporin stockholders collectively
hold approximately 45% of the issued and outstanding shares of the Company’s common stock following consummation of
the Merger. |
|
|
|
|
2. |
100%
of the issued shares of Vaporin restricted stock units were converted into the right to receive 1,890,237 shares of the Company’s
common stock. The restricted stock units became fully-vested in connection with the Merger and as a result, were included
as a part of the Company’s purchase price as no further services from the holders is required to be provided to the
Company. The 1,890,237 restricted stock units remain outstanding as of March 31, 2015. Based on the terms of the Merger Agreement,
the Company has agreed to issue these in twelve equal monthly instalments, with the first delivery date being the date of
the closing of the Merger, however, all shares of common stock to be delivered on March 15, 2016 to the extent they are not
previously delivered. |
The
Merger Agreement contained customary conditions that were satisfied prior to the closing of the Merger, including the requirement
for the Company to receive gross proceeds from a $3.5 million equity offering. Additionally, as required by the Merger Agreement
the Company received non-binding commitments from certain third parties for financing of up to $25 million to be used for the
construction of retail stores and which is contingent on the achievement of certain performance metrics by the Company. In addition,
in connection with the Merger, an aggregate $354,029 of a note and interest payable by the Company to Vaporin was forgiven.
Vaporin,
Inc. merger with The Vape Store, Inc.
On
August 29, 2014, Vaporin, Vaporin Acquisitions, Inc., Vaporin Acquisitions, Inc., a Florida corporation and wholly-owned subsidiary
of Vaporin (the “Merger Sub”), The Vape Store, Inc., a Florida corporation (“Vape Store”), and Steve and
Christy Cantrell, holders of all outstanding Vape Store shares entered into and closed an Agreement and Plan of Merger (the “Merger
Agreement”). Pursuant to the Merger Agreement, Vape Store merged with and into Merger Sub, with Merger Sub continuing as
the surviving corporation and a wholly-owned subsidiary of the Vaporin.
The
pro forma statement of operations for Vaporin was prepared as if the merger of The Vape Store, Inc. had occurred on January 1,
2014.
2.
Purchase Consideration and Preliminary Purchase Price Allocation
Assuming
the merger was completed on December 31, 2014, each share of Vaporin’s common stock and each share of Vaporin’s preferred
stock outstanding immediately prior to closing would have been exchanged for approximately .42 shares of Vapor common stock.
An estimate of the merger consideration paid to Vaporin stockholders assuming the merger was completed on December 31, 2014 is
presented below:
Vaporin common
shares outstanding | |
| 4,893,254 | |
Restricted stock units | |
| 910,000 | |
Issuable common shares
upon conversion: | |
| | |
Series B preferred stock | |
| 100,000 | |
Series
C preferred stock | |
| 1,550,000 | |
Total Vaporin common
and preferred shares eligible for exchange | |
| 7,453,254 | |
Exchange
ratio | |
| 0.42
| |
Vapor common shares to
be issued | |
| 3,096,082
| |
Vapor price per
common share at December 31, 2014 | |
$ | 6.05
| |
Fair
value of total consideration transferred | |
$ | 18,732,947 | |
The fair value
of the purchase consideration issued to the sellers of Vaporin was based on a preliminary valuation analysis and was allocated
to fair value of the net tangible assets acquired, with the resulting excess allocated to separately identifiable intangibles,
and the remainder recorded as goodwill. Goodwill recognized from the transactions mainly represented the expected operational
synergies upon acquisition of the combined entity and intangibles not qualifying for separate recognition. Goodwill is not expected
to be deductible for income tax purposes in the tax jurisdiction of the acquired business.
Purchase
Consideration |
|
|
|
|
|
|
|
Value
of consideration paid: |
|
$ |
18,732,947 |
|
|
|
|
|
|
Tangible
assets acquired and liabilities assumed at fair value |
|
|
|
|
Cash |
|
$ |
865,737 |
|
Due
from merchant credit card processor |
|
|
160,216 |
|
Accounts
receivable |
|
|
88,614 |
|
Inventories |
|
|
1,173,124 |
|
Property
and Equipment |
|
|
160,620 |
|
Other
Assets |
|
|
42,996 |
|
Notes
payable – related party |
|
|
(1,000,000 |
) |
Accounts
Payable and accrued expenses |
|
|
(824,103 |
) |
Derivative
Liabilities |
|
|
(43,944 |
) |
Net
tangible assets acquired |
|
$ |
623,260 |
|
|
|
|
|
|
Consideration: |
|
|
|
|
Value
of common stock issued |
|
|
18,732,947 |
|
Net
tangible assets acquired |
|
|
623,260 |
|
Excess
purchase price over net tangible assets acquired |
|
$ |
18,109,687 |
|
|
|
|
|
|
Identifiable
intangible assets |
|
|
|
|
Trade
names and technology |
|
|
1,500,000 |
|
Customer
relationships |
|
|
488,274 |
|
Assembled
workforce |
|
|
92,326 |
|
Total
Identifiable Intangible Assets |
|
|
2,080,600 |
|
Goodwill |
|
|
16,029,087 |
|
Total
allocation to identifiable intangible assets and goodwill |
|
$ |
18,109,687 |
|
As
of December 31, 2014, Vaporin’s consolidated balance sheet included goodwill of $3,732,286 resulting from the acquisition
of Vape Store. Such amount was not considered as a component of the net tangible assets acquired of Vaporin for purposes of the
allocation of the purchase by Vapor and was based on its preliminary valuation.
3.
Pro Forma Adjustments
Pro
forma adjustments reflect those matters that are direct result of the Merger Agreement with Vaporin, which are factually supportable
and, for pro forma adjustments to the unaudited pro forma statements of operations, are expected to have continuing impact. The
pro forma adjustments are based on preliminary estimates that may change as additional information is obtained.
Unaudited
Pro Forma Condensed Combined Balance Sheet
|
a) |
To
adjust the amount of goodwill to $15,983,039 as a result of the merger and to record identifiable intangible assets of $1,500,000
of trade names and technology, $488,274 of customer relationships and $92,326 for assembled workforce based on a preliminary
valuation analysis. |
|
|
|
|
b) |
Represents
(a) cash received by Vapor of $3.5 million in exchange for 686,463 shares of common stock in connection with the
required financing transaction per the terms of the merger offset by (b) $559,000 of estimated costs incurred by Vapor in
connection with the acquisition of Vaporin and assumes such expenses were incurred on December 31, 2014 in connection with
the closing of the merger. |
|
|
|
|
c) |
Reflects
an adjustment to remove the historical equity balances of Vaporin and account for the $3.5 million required financing as disclosed
in “b” above. |
|
|
|
|
d) |
Reflects
the issuance of 2,718,310 shares of $0.001 par value Vapor common stock as merger consideration. Such number of shares
issued was calculated based on the number of outstanding shares of Vapor common stock. The value of the consideration transferred
was based on the closing stock price of the Vapor common stock at December 31, 2014. |
Unaudited
Pro Forma Condensed Combined Statements of Operations
|
e) |
As
discussed above, Vaporin completed its acquisition of Vape Store on August 29, 2014. For purposes of this pro forma, Vaporin
has included adjustments to reflect the results of operations of Vape Store as of the acquisition had occurred on January
1, 2014. The pro forma adjustments represent the combined results of Vaporin and The Vape Store for the respective period
presented. |
|
|
|
|
f) |
Reflects
the incremental depreciation and amortization expense based on the preliminary fair values of the tangible and identifiable
intangible assets acquired as follows: |
| |
Pro
Forma Amortization | |
| |
Intangible
Assets | | |
Estimated
Useful
Lives (years) | | |
For
the Year Ended
December 31, 2014 | |
Trade Names
and Technology | |
$ | 1,500,000 | | |
| 10 | | |
$ | 150,000 | |
Customer Relationships | |
| 488,274 | | |
| 5 | | |
$ | 97,655 | |
Assembled
Workforce | |
| 92,326 | | |
| 5 | | |
| 18,465 | |
| |
$ | 2,080,600 | | |
| | | |
$ |
266,120 | |
|
g) |
Reflects
the issuance of (a) 2,718,310 shares of $0.001 par value Vapor common stock as merger consideration, as described
in the Basis of the Pro Forma Presentation note above (b) 1,890,237 shares of common stock to be issued by Vapor in connection
with restricted stock units as part of the merger consideration and (c) the 3,462,314 shares of common stock to be issued
by Vapor in connection with the $3.5 million financing . |
PART
II—INFORMATION NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
following table sets forth all expenses, other than the underwriting commissions, payable by the registrant in connection with
the sale of the common stock being registered. All the amounts shown are estimates except the SEC registration fee and the FINRA
filing fee.
| |
Amount
to be paid |
SEC registration
fee | |
$ |
8,819.50
|
FINRA filing fee | |
$ |
11,885 |
NASDAQ listing fees | |
$ |
5,000
|
Blue sky qualification fees
and expenses | |
$ |
10,000 |
Transfer agent and registrar
fees | |
$ |
5,000 |
Accounting fees and expenses | |
$ |
30,000 |
Legal fees and expenses | |
$ |
120,000
|
Printing and engraving expenses | |
$ |
5,000 |
Miscellaneous | |
$ |
9,295.50
|
Total | |
$ |
205,000
|
Item
14. Indemnification of Directors and Officers
Section
145(a) of the Delaware General Corporation Law (the “DGCL”), which Vapor is subject to, provides that a corporation
may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation)
by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good
faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful. Section
145(b) of the DGCL provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by the person in
connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.
To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in Section 145(a) and (b) of the DGCL, or in defense of any claim, issue
or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably
incurred by such person in connection therewith.
Any
indemnification under Section 145(a) and (b) of the DGCL (unless ordered by a court) shall be made by Vapor only as authorized
in the specific case upon a determination that indemnification of the present or director, officer, employee or agent is proper
in the circumstances because the person has met the applicable standard of conduct set forth in Section 145(a) and (b). Such determination
shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote
of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee
of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors,
or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the shareholders. Expenses (including
attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action,
suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined
that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including
attorneys’ fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms
and conditions, if any, as the corporation deems appropriate. The indemnification and advancement of expenses provided by, or
granted pursuant to, Section 145 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement
of expenses may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in such person’s official capacity and as to action in another capacity while holding such office.
Section
145 of the DGCL also empowers a corporation to purchase and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted
against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether
or not the corporation would have the power to indemnify such person against such liability under Section 145.
Article
10 of the Vapor’s Certificate of Incorporation and Article 7 of Vapor’s Bylaws provide that directors, officers, employees
and agents shall be indemnified to the fullest extent permitted by the DGCL.
Vapor
carries directors and officers liability coverages designed to insure its officers and directors and those of its subsidiaries
against certain liabilities incurred by them in the performance of their duties, and also providing for reimbursement in certain
cases to Vapor and its subsidiaries for sums paid to directors and officers as indemnification for similar liability. Vapor has
entered into Indemnification Agreements with its executive officers and directors providing for advancement of expenses and indemnification
to the fullest extent permissible under DGCL.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling
persons pursuant to the foregoing provisions, or otherwise, Vapor has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
Item
15. Recent Sales of Unregistered
Securities
On
June 25, 2015, the Company closed on a Securities Purchase Agreement, dated as of June 22, 2015, with certain purchasers pursuant
to which the Company sold, at a 5% original issue discount, a total of $1,750,000 convertible debentures (the “Debentures”).
Net proceeds to the Company from sale of the Debentures, after payment of commissions and legal fees of the lead investor, were
$1,466,250. The Debentures mature December 22, 2015, and accrue interest at 10% per year. Amounts of principal and accrued interest
under the Debentures are convertible into common stock of the Company at a price per share of $2.50. Principal and accrued interest
on the Debentures are payable in three approximately equal installments on September 22, 2015, October 22, 2015 and December 22,
2015, at the election of the holders of the Debentures, (i) in cash for an additional 25% premium, or (ii) in common stock of
the Company at a price per share of $2.50. As lead investor under the Securities Purchase Agreement, Redwood Management, LLC received
a right of first refusal to purchase up to 100% of the securities offered by the Company in future private placement offerings
through December 22, 2015.
The
Company’s obligations under the Debentures can be accelerated in the event the Company undergoes a change in control and
other customary events of default. In the event of default and acceleration of the Company’s obligations, the Company would
be required to pay 130% of amounts of principal and interest then outstanding under the Debentures. The Company’s obligations
under the Debentures are secured under a Security Agreement, under which Redwood Management, LLC acts as Collateral Agent, by
a second lien on substantially all of the Company’s assets, including all of the Company’s interests in its consolidated
subsidiaries.
For
acting as placement agent in the offering of the Debentures, the Company paid Chardan Capital Management, LLC (the “Placement
Agent”) a fee equal to 10% of the gross proceeds from the sale of the Debentures, and issued the Placement Agent 70,000
five-year warrants exercisable at $2.50 per share. In addition, the Company agreed to reduce the exercise price of 28,614 warrants
held by the Placement Agent to $2.50 from their original exercise prices ranging from $10.05 to $12.05.
On
June 19, 2015, the Company entered into agreements (the “Waivers”), with certain investors in each of its private
placement offerings under the Securities Purchase Agreement dated March 3, 2015 (the “2015 Agreement”) and the Securities
Purchase Agreement dated November 14, 2014 (the “2014 Agreement,” and with the 2015 Agreement, the “Agreements”).
Under the terms of the Waivers, the signatories thereto (the “Prior Investors”) agreed to amend the Agreements and
waive or modify certain terms thereunder, including certain price protection provisions and participation rights in subsequent
securities offerings. In exchange, the Company agreed to issue the Prior Investors a total of 647,901 shares of common stock (including
142,000 shares issued to the lead investor under each of the Agreements in its capacity as lead investor) and 595,685 five-year
warrants exercisable at $2.525 per share. In the event that, prior to November 14, 2015, the Company issues shares of common stock,
or securities convertible into common stock, at an effective price per share of less than $2.70, the Prior Investors will be entitled
to the issuance of additional shares (the “Additional Shares”), the exact amount of which will depend on the effective
price per share of such subsequent issuance, but which will not exceed a total of 2,328,598 shares. The Company will not issue
any shares of common stock requiring shareholder approval under the Rules of the Nasdaq Stock Market without receipt of such approval.
The Company will not issue any of the Additional Shares unless the 647,901 shares of common stock, the shares issuable upon conversion
of the Debentures and the Additional Shares are either within the 19.9% Nasdaq limitation or the issuance is approved by shareholders.
The Company agreed to file a registration statement with the Securities and Exchange Commission registering the shares and warrant
shares issued to the Prior Investors under the Waivers.
On
June 16, 2015, the Company issued a total of 292,191 shares of common stock upon the vesting of restricted stock units assumed
by the Company in connection with its merger with Vaporin, Inc. effective March 4, 2015. Recipients of the shares issued upon
vesting of the restricted stock units included Gregory Brauser, the Company’s President and a member of the Board. On May
27, 2015, the Company issued a total of 27,500 shares of common stock to consultants of the Company for consulting services.
The
shares and warrants issued under the Waivers, the shares issued upon vesting of the restricted stock units, and the shares issued
to consultants, were issued without registration under the Securities Act of 1933 in reliance upon the exemption provided in Section
4(a)(2).
Item
16. Exhibits and Financial Statement
Schedules
(a)
Exhibits
See
the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this registration statement
on Form S-1, which Exhibit Index is incorporated herein by reference.
(b)
Financial Statement Schedules
Schedules
have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements
or notes thereto.
Item
17. Undertakings
The
undersigned registrant hereby undertakes:
|
(1) |
To
file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
|
|
(i) |
to
include any prospectus required by section 10(a)(3) of the Securities Act of 1933; |
|
|
|
|
(ii) |
to
reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
and |
|
|
|
|
(iii) |
to
include any material information with respect to the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement. |
|
(2) |
That,
for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof. |
|
|
|
|
(3) |
To
remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold
at the termination of the offering. |
|
(4) |
That,
for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution
of the securities, the undersigned undertakes that in a primary offering of securities of the undersigned registrant pursuant
to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant
will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: |
|
(i) |
Any
preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant
to Rule 424; |
|
|
|
|
(ii) |
Any
free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred
to by the undersigned registrant; |
|
|
|
|
(iii) |
The
portion of any other free writing prospectus relating to the offering containing material
information about the undersigned registrant or its securities provided by or on behalf
of the undersigned registrant; and |
|
|
|
|
(iv) |
Any
other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions described under Item 14 above, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy
as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The
undersigned registrant hereby undertakes that:
|
(1) |
For
purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective. |
|
|
|
|
(2) |
For
the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, has duly caused this registration statement to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Dania Beach, State of Florida, on July 10, 2015.
|
Vapor
Corp. |
|
|
|
|
By:
|
/s/
Jeffrey Holman |
|
|
Jeffrey
Holman |
|
|
Chief
Executive Officer |
In
accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons
in the capacities and on the dates indicated.
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/
Jeffrey Holman |
|
Principal
Executive Officer and Director |
|
July
10 , 2015 |
Jeffrey
Holman |
|
|
|
|
|
|
|
|
|
/s/
James Martin |
|
Chief
Financial Officer (Principal Financial Officer) and |
|
July
10 , 2015 |
James
Martin |
|
Chief
Accounting Officer (Principal Accounting Officer) |
|
|
|
|
|
|
|
/s/
Gregory Brauser |
|
Director |
|
July
10 , 2015 |
Gregory
Brauser |
|
|
|
|
|
|
|
|
|
/s/
William Conway III
|
|
Director
|
|
July
10 , 2015 |
William
Conway III
|
|
|
|
|
|
|
|
|
|
/s/
Daniel MacLachlan
|
|
Director
|
|
July
10 , 2015 |
Daniel
MacLachlan |
|
|
|
|
|
|
|
|
|
/s/
Nikhil Raman |
|
Director
|
|
July
10 , 2015 |
Nikhil
Raman |
|
|
|
|
EXHIBIT
INDEX
Exhibit
Number |
|
Description
of Exhibit |
|
|
|
1.1 * |
|
Form
of Underwriting Agreement |
|
|
|
2.1 |
|
Smoke
Anywhere USA, Inc. Acquisition Agreement and Plan of Merger dated as of September 1, 2009 (1) |
|
|
|
2.2†† |
|
Vaporin,
Inc. Agreement and Plan of Merger, dated as of December 17, 2014 (19) |
|
|
|
3.1 |
|
Certificate
of Incorporation (3) |
|
|
|
3.2* |
|
Certificate of Amendment
to the Certificate of Incorporation |
|
|
|
3.3 |
|
Bylaws
(3) |
|
|
|
3.4* |
|
Certificate
of Designation for Series A Convertible Preferred Stock |
|
|
|
4.1 |
|
Specimen
Common Stock Certificate (3) |
|
|
|
4.2 * |
|
Form
of Series A Warrant to be issued in connection with this Offering |
|
|
|
4.3 * |
|
Form of Unit Purchase
Option to be issued in connection with this Offering |
|
|
|
4. 4 **
|
|
Form
of Unit Certificate
|
|
|
|
5.1 * |
|
Opinion
Regarding Legality |
|
|
|
10.1† |
|
2009
Equity Incentive Plan (2) |
|
|
|
10.2 |
|
Lease
Agreement dated March 21, 2011 - 3001 Griffin Partners, LLC (5) |
|
|
|
10.3† |
|
Kevin
Frija Employment Agreement, dated February 27, 2012 (6) |
|
|
|
10.4† |
|
Harlan
Press Employment Agreement, dated February 27, 2012 (6) |
|
|
|
10.5† |
|
Christopher
Santi Employment Agreement, dated December 12, 2012 (7) |
|
|
|
10.6† |
|
Jeffrey
Holman Employment Agreement, dated February 19, 2013 (8) |
|
|
|
10.7 |
|
Spike
Marks Inc./Casa Cubana Private Label Production and Supply
Agreement (9) |
|
|
|
10.8 |
|
Form
of Warrant, dated as of June 19, 2012 (10) |
|
|
|
10.9 |
|
Entrepreneur
Growth Capital, LLC Invoice Purchase and Sale Agreement made as of August 8, 2013 (11) |
|
|
|
10.10† |
|
Form
of Letter Amendment to Harlan Press Employment Agreement (11) |
|
|
|
10.11 |
|
Entrepreneur
Growth Capital, LLC Credit Card Receivables Advance Agreement dated as of August 16, 2013 (12) |
10.12 |
|
Entrepreneur
Growth Capital LLC Secured Promissory Note dated September 23, 2014 (13) |
|
|
|
10.13 |
|
Purchase
Agreement, dated as of October 22, 2013 (4) |
|
|
|
10.14 |
|
Registration
Rights Agreement, dated as of October 29, 2013 (4) |
|
|
|
10.15 |
|
Form
of Warrant issued to Roth Capital Partners, LLC (16) |
|
|
|
10.16 |
|
Securities
Purchase Agreement, dated as of November 14, 2014 (18) |
|
|
|
10. 17 |
|
Form
of Convertible Note Due November 14, 2015 (18) |
|
|
|
10. 18 |
|
Form
of Warrant, dated as of November 14, 2014 (18) |
|
|
|
10. 19 † |
|
Form
of 2009 Equity Incentive Plan Stock Option Agreement (14) |
|
|
|
10. 20 † |
|
Form
of Non-Equity Incentive Plan Stock Option Agreement (14) |
|
|
|
10. 21 † |
|
Amendment
to 2009 Equity Incentive Plan (15) |
|
|
|
10. 22 |
|
Knight
Global Services Consulting Agreement dated as of February 3, 2014 (17) |
|
|
|
10. 23 |
|
Operating
Agreement of Emagine the Vape Store, LLC (19) |
|
|
|
10. 24 |
|
Convertible Promissory
Note, dated January 29, 2015 (20) |
|
|
|
10. 25 |
|
Securities Purchase Agreement,
dated as of January 20, 2015 (21) |
|
|
|
10. 26 |
|
Form of Note, dated as
of January 20, 2015 (21) |
|
|
|
10. 27Ω†
|
|
2015
Equity Incentive Plan |
|
|
|
10. 28 |
|
Securities
Purchase Agreement, dated as of March 3, 2015 (22) |
|
|
|
10. 29 |
|
Form
of Warrant, dated as of March 3, 2015 (22) |
|
|
|
10.30 |
|
Form
of Waiver Agreement relating to November 14, 2014 Securities Purchase Agreement (23)
|
|
|
|
10.31 |
|
Form
of Waiver Agreement relating to March 3, 2015 Securities Purchase Agreement (23)
|
|
|
|
10.32 |
|
Form
of Warrant, dated as of June 19, 2015 (23)
|
|
|
|
10.33 |
|
Form
of Registration Rights Agreement, dated as of June 16, 2015 (23)
|
|
|
|
10.34 |
|
Form
of Securities Purchase Agreement, dated as of June 22, 2015 (23)
|
|
|
|
10.35 |
|
Form
of Senior Secured Convertible Debenture, due December 22, 2015 (23)
|
|
|
|
10.36 |
|
Form
of Security Agreement dated as of June 22, 2015 (23)
|
|
|
|
21. 1Ω
|
|
Subsidiaries
|
|
|
|
23.1* |
|
Consent
of Marcum LLP |
|
|
|
23.2*
|
|
Consent
of RBSM LLP
|
|
|
|
23. 3 |
|
Consent
of Nason, Yeager, Gerson, White & Lioce, P.A. (contained in Exhibit 5.1) |
|
|
|
101.INS* |
|
XBRL
Instance Document^ |
101.SCH* |
|
XBRL
Taxonomy Extension Schema Document^ |
101.CAL* |
|
XBRL
Taxonomy Extension Calculation Linkbase Document^ |
101.LAB* |
|
XBRL
Taxonomy Extension Label Linkbase Document^ |
101.PRE* |
|
XBRL
Taxonomy Extension Presentation Linkbase Document^ |
101.DEF* |
|
XBRL
Taxonomy Definition Linkbase Document^ |
*
Filed herewith.
^ XBRL (Extensible
Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes
of Sections 11 or 12 of the Securities Act of 1933 , is deemed not filed for purposes of Section 18 of the Securities Exchange
Act of 1934, and otherwise is not subject to liability under these sections.
Ω Previously filed.
† Represents management
contract or compensatory plan.
†† A schedule to
the agreement has been omitted pursuant to Item 601(b)(2) of Regulation S-K; a copy of the schedule will be furnished supplementary
to the SEC upon request.
| (1) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated November 11,
2009, as filed with the Securities and Exchange Commission (“SEC”) on November
13, 2009. |
| | |
| (2) | Incorporated
by reference to the Registrant’s Definitive Information Statement on Schedule 14C
dated November 24, 2009, as filed with the SEC on December 10, 2009. |
| | |
| (3) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated December 31,
2013, as filed with the SEC on December 31, 2013. |
| | |
| (4) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated October 22, 2013,
as filed with the SEC on October 23, 2013. |
| | |
| (5) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated March 21, 2011,
as filed with the SEC on April 7, 2011. |
| | |
| (6) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated February 27,
2012, as filed with the SEC on February 28, 2012. |
| | |
| (7) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated December 12,
2012, as filed with the SEC on December 13, 2012. |
| (8) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated February 19,
2013, as filed with the SEC on February 26, 2013. |
| | |
| (9) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated December 6, 2011,
as filed with the SEC on April 25, 2012. |
| | |
| (10) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated June 19, 2012,
as filed with the SEC on June 22, 2012. |
| | |
| (11) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated August 8, 2013,
as filed with the SEC on August 13, 2013. |
| | |
| (12) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated August 16, 2013,
as filed with the SEC on August 19, 2013. |
| | |
| (13) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated August 16, 2013,
as filed with the SEC on September 23, 2014. |
| | |
| (14) | Incorporated
by reference to the Registrant’s Form S-8 Registration Statement (No. 333-188888),
as filed with the SEC on May 28, 2013. |
| | |
| (15) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated November 20,
2013, as filed with the SEC on November 20, 2013. |
| | |
| (16) | Incorporated
by reference to the Registrant’s Form S-1 Registration Statement (No. 333-192391),
as filed with the SEC on November 18, 2013 and declared effective on January 27, 2014.
|
| (17) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated February 3, 2014,
as filed with the SEC on February 6, 2014. |
| | |
| (18) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated November 14,
2014, as filed with the SEC on November 17, 2014 |
| | |
| (19) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated December 17,
2014, as filed with the SEC on December 18, 2014. |
| | |
| (20) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated January 29, 2015,
as filed with the SEC on February 3, 2015. |
| | |
| (21) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated January 20, 2015,
as filed with the SEC on January 26, 2015. |
| | |
| (22) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated March 3, 2015,
as filed with the SEC on March 5, 2015. |
| | |
| (23) | Incorporated
by reference to the Registrant’s Current Report on Form 8-K dated June 19, 2015,
as filed with the SEC on June 25, 2015.
|
Exhibit
1.1
UNDERWRITING
AGREEMENT
between
VAPOR
CORP. and
DAWSON
JAMES SECURITIES, INC.,
as
Representative of the Several Underwriters
VAPOR
CORP.
UNDERWRITING
AGREEMENT
Boca
Raton, Florida
[●],
2015
Dawson
James Securities, Inc.
As Representative
of the several Underwriters named on Schedule 1 attached hereto
1
North Federal Highway, 5th Floor
Boca
Raton, FL 33432
Ladies
and Gentlemen:
The
undersigned, Vapor Corp., a corporation formed under the laws of the State of Delaware (the “Company”), hereby
confirms its agreement (this “Agreement”) with Dawson James Securities, Inc. (hereinafter referred to as “you”
(including its correlatives) or the “Representative”) and with the other underwriters named on Schedule
1 hereto for which the Representative is acting as representative (the Representative and such other underwriters being collectively
called the “Underwriters” or, individually, an “Underwriter”) as follows:
1. Purchase
and Sale of Units.
1.1 Series
A Preferred Shares and Series A Warrants.
1.1.1 Nature
and Purchase of Series A Preferred Shares and Series A Warrants.
(i)
On the basis of the representations and warranties herein contained,
but subject to the terms and conditions herein set forth, the Company agrees to offer and sell, on a “best efforts”
basis (the “Offering”), up to [●] units (“Units”) of securities, each such Unit consisting
of (a) one-fourth of a share of Series A Convertible Preferred Stock (the “Preferred Shares”)
of the Company’s preferred stock, par value $0.001 per share, which Preferred Share is convertible into [●] shares
of the Company’s common stock, par value $0.001 per share (the “Common Stock”) and (b) [●] Series
A Warrants, which Series A Warrants are each exercisable to purchase one share of Common Stock (the “Warrants”).
The Units, the Preferred Shares, the Warrants and the shares of Common Stock issuable upon
conversion or exercise thereof are hereinafter referred to together as the “Public Securities.”
(ii)
The Underwriters, severally and not jointly, agree to act as agent
to offer and sell up to the number of Units set forth opposite their respective names on Schedule 1 attached hereto and
made a part hereof at the public offering price per Unit. The Units are to be offered initially to the public at the offering
price set forth on the cover page of the Prospectus (as defined in Section 2.1.1 hereof). The Underwriters will be paid an underwriting
commission by the Company equal to [●] percent ([●]%) of the public offering price with respect to all Units sold.
1.1.2 Shares
Payment and Delivery.
(i)
Delivery and payment for the Units to the Company and all fees and
commissions payable to the Underwriters in connection with the offering shall be made at 10:00 a.m., Eastern time, on the third
(3rd) Business Day following the effective date (the “Effective Date”) of the Registration Statement (as defined
in Section 2.1.1 below) (or the fourth (4th) Business Day following the Effective Date if the Registration Statement is declared
effective after 4:01 p.m., Eastern time) or at such earlier time as shall be agreed upon by the Representative and the Company,
at the offices of Schiff Hardin LLP, 901 K Street, NW, Suite 700, Washington, DC 20001 (“Representative Counsel”
or “Schiff Hardin”), or at such other place (or remotely by facsimile or other electronic transmission) as
shall be agreed upon by the Representative and the Company. The hour and date of delivery and payment for the Units is called
the “Closing Date.”
(ii)
Payment for the Units shall be made on the Closing Date by wire
transfer in federal (same day) funds, payable to the order of the Company upon delivery of the certificates (in form and substance
satisfactory to the Underwriters) representing the Units (or through the facilities of the Depository Trust Company (“DTC”))
for the account of the Underwriters. The Units shall be registered in such name or names and in such authorized denominations
as the Representative may request in writing at least two (2) full Business Days prior to the Closing Date. The term “Business
Day” means any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions are authorized
or obligated by law to close in New York, New York. The Company shall not be obligated to sell or deliver the Units except upon
tender of payment by the Underwriters for the sold Units.
1.2 Representative’s
Unit Purchase Option.
1.2.1
Unit Purchase Option. The
Company hereby agrees to issue to the Representative (and/or its designees) on the Closing Date a unit purchase option (“Representative’s
Unit Purchase Option”) for the purchase of a number of Units equal to 5.0% of the number of Units issued in the Offering,
in the form attached hereto as Exhibit A (the “Representative’s Unit Purchase Option Agreement”),
at an initial exercise price of $[●], which is equal to 125% of the initial
public offering price per Unit. The Representative’s Unit Purchase Option, the Preferred Shares, the Warrants and the shares
of Common Stock issuable upon conversion or exercise thereof are hereinafter referred to together as the “Representative’s
Securities.” The Representative understands and agrees that there are significant restrictions pursuant to FINRA
Rule 5110 against transferring the Representative’s Unit Purchase Option and the underlying securities during the one hundred
eighty (180) days after the Effective Date and by its acceptance thereof shall agree that it will not sell, transfer, assign,
pledge or hypothecate the Representative’s Unit Purchase Option, or any portion thereof, or be the subject of any hedging,
short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities for
a period of one hundred eighty (180) days following the Effective Date to anyone other than (i) an Underwriter or a selected dealer
in connection with the Offering, or (ii) a bona fide officer or partner of the Representative or of any such Underwriter or selected
dealer; or as otherwise expressly permitted by Rule 5110(g), and only if any such transferee agrees to the foregoing lock-up restrictions.
1.2.2
Delivery. Delivery of the Representative’s Unit Purchase
Option Agreement shall be made on the Closing Date and shall be issued in the name or names and in such authorized denominations
as the Representative may request.
2.
Representations and Warranties of the Company. The Company
represents and warrants to the Underwriters as of the Applicable Time (as defined below) and as of the Closing Date, as follows:
2.1 Filing
of Registration Statement.
2.1.1
Pursuant to the Securities Act. The Company has filed with
the U.S. Securities and Exchange Commission (the “Commission”) a registration statement, and an amendment or
amendments thereto, on Form S-1 (File No. 333-204599), including any related prospectus or prospectuses, for the registration
of the Public Securities and the Representative’s Securities under the Securities Act of 1933, as amended (the “Securities
Act”), which registration statement and amendment or amendments have been prepared by the Company in conformity in all
material respects with the requirements of the Securities Act and the rules and regulations of the Commission under the Securities
Act (the “Securities Act Regulations”) and will contain all material statements that are required to be stated
therein in accordance with the Securities Act and the Securities Act Regulations. Except as the context may otherwise require,
such registration statement, as amended, on file with the Commission at the time the registration statement became effective (including
the Preliminary Prospectus included in the registration statement, financial statements, schedules, exhibits and all other documents
filed as a part thereof or incorporated therein and all information deemed to be a part thereof as of the Effective Date pursuant
to paragraph (b) of Rule 430A of the Securities Act Regulations (the “Rule 430A Information”)), is referred
to herein as the “Registration Statement.” If the Company files any registration statement pursuant to Rule
462(b) of the Securities Act Regulations related to the Public Securities, then after such filing, the term “Registration
Statement” shall include such registration statement filed pursuant to Rule 462(b). The Registration Statement has been
declared effective by the Commission on the date hereof.
Each
prospectus used prior to the effectiveness of the Registration Statement, and each prospectus that omitted the Rule 430A Information
that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a “Preliminary
Prospectus.” The Preliminary Prospectus, subject to completion, dated [●], 2015, that was included in the Registration
Statement immediately prior to the Applicable Time is hereinafter called the “Pricing Prospectus.” The final
prospectus in the form first furnished to the Underwriters for use in the Offering is hereinafter called the “Prospectus.”
Any reference to the “most recent Preliminary Prospectus” shall be deemed to refer to the latest Preliminary Prospectus
included in the Registration Statement.
“Applicable
Time” means 4:05 p.m., Eastern time, on the date of this Agreement.
“Issuer Free Writing
Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433 of the Securities Act
Regulations (“Rule 433”), including without limitation any “free writing prospectus” (as
defined in Rule 405 of the Securities Act Regulations) relating to the Public Securities that is (i) required to be filed
with the Commission by the Company, (ii) a “road show that is a written communication” within the meaning of Rule
433(d)(8)(i), whether or not required to be filed with the Commission, or (iii) exempt from filing with the Commission
pursuant to Rule 433(d)(5)(i) because it contains a description of the Public Securities or of the Offering that does not
reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be
filed, in the form retained in the Company’s records pursuant to Rule 433(g).
“Issuer
General Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is intended for general distribution
to prospective investors (other than a “bona fide electronic road show,” as defined in Rule 433 (the “Bona Fide
Electronic Road Show”), as evidenced by its being specified in Schedule 2-B hereto.
“Issuer
Limited Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is not an Issuer General Use
Free Writing Prospectus.
“Pricing
Disclosure Package” means any Issuer General Use Free Writing Prospectus issued at or prior to the Applicable Time,
the Pricing Prospectus and the information included on Schedule 2-A hereto, all considered together.
2.1.2
Pursuant to the Exchange Act. Prior to Closing, the Company
will file with the Commission a Form 8-A providing for the registration pursuant to Section 12(b) under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), of the Units. The registration of the Units under the Exchange
Act has been declared effective by the Commission on or prior to the date hereof. The Company has taken no action designed to,
or likely to have the effect of, terminating the registration of the Units under the Exchange Act, nor has the Company received
any notification that the Commission is contemplating terminating such registration.
2.2
Stock Exchange Listing. The Units have been approved for
listing on The NASDAQ Capital Market (the “Exchange”) and the Company has taken no action designed to, or likely
to have the effect of, delisting the Units from the Exchange, nor has the Company received any notification that the Exchange
is contemplating terminating such listing except as described in the Registration Statement, the Pricing Disclosure Package and
the Prospectus.
2.3
No Stop Orders, etc. Neither the Commission nor, to the Company’s
knowledge, any state regulatory authority has issued any order preventing or suspending the use of the Registration Statement,
any Preliminary Prospectus or the Prospectus or has instituted or, to the Company’s knowledge, threatened to institute,
any proceedings with respect to such an order. The Company has complied with each request (if any) from the Commission for additional
information.
2.4 Disclosures
in Registration Statement.
2.4.1 Compliance
with Securities Act and 10b-5 Representation.
(i)
Each of the Registration Statement and any post-effective amendment
thereto, at the time it became effective, complied in all material respects with the requirements of the Securities Act and the
Securities Act Regulations. Each Preliminary Prospectus, including the prospectus filed as part of the Registration Statement
as originally filed or as part of any amendment or supplement thereto, and the Prospectus, at the time each was filed with the
Commission, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations.
Each Preliminary Prospectus delivered to the Underwriters for use in connection with this Offering and the Prospectus was or will
be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(ii)
Neither the Registration Statement nor any amendment thereto, at
its effective time, as of the Applicable Time, at the Closing Date, contained, contains or will contain an untrue statement of
a material fact or omitted, omits or will omit to state a material fact required to be stated therein or necessary to make the
statements therein not misleading.
(iii)
The Pricing Disclosure Package, as of the Applicable Time or at
the Closing Date, did not and does not include an untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and each
Issuer Limited Use Free Writing Prospectus hereto does not conflict with the information contained in the Registration Statement,
any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, and each such Issuer Limited Use Free Writing Prospectus,
as supplemented by and taken together with the Pricing Prospectus as of the Applicable Time, did not include an untrue statement
of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to statements
made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to
the Underwriters by the Representative expressly for use in the Registration Statement, the Pricing Prospectus or the Prospectus
or any amendment thereof or supplement thereto. The parties acknowledge and agree that such information provided by or on behalf
of any Underwriter consists solely of the following disclosure contained in the “Underwriting” section of the Prospectus:
the first sentence of the first paragraph under the heading entitled “Commissions and Expenses;” and under the heading
entitled “Price Stabilization, Short Positions and Penalty Bids” (the “Underwriters’ Information”);
and
(iv)
Neither the Prospectus nor any amendment or supplement thereto (including
any prospectus wrapper), as of its issue date, at the time of any filing with the Commission pursuant to Rule 424(b), or at the
Closing Date, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state
a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that this representation and warranty shall not apply to the Underwriters’ Information.
2.4.2
Disclosure of Agreements. The agreements and documents described
in the Registration Statement, the Pricing Disclosure Package and the Prospectus conform in all material respects to the descriptions
thereof contained therein and there are no agreements or other documents required by the Securities Act and the Securities Act
Regulations to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus or to be filed with
the Commission as exhibits to the Registration Statement, that have not been so described or filed. Each agreement or other instrument
(however characterized or described) to which the Company is a party or by which it is or may be bound or affected and (i) that
is referred to in the Registration Statement, the Pricing Disclosure Package and the Prospectus, and (ii) is material to the Company’s
business, has been duly authorized and validly executed by the Company, is in full force and effect in all material respects and
is enforceable against the Company and, to the Company’s knowledge, the other parties thereto, in accordance with its terms,
except (x) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’
rights generally, (y) as enforceability of any indemnification or contribution provision may be limited under the federal and
state securities laws, and (z) that the remedy of specific performance and injunctive and other forms of equitable relief may
be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. None
of such agreements or instruments has been assigned by the Company, and neither the Company nor, to the Company’s knowledge,
any other party is in default thereunder and, to the Company’s knowledge, no event has occurred that, with the lapse of
time or the giving of notice, or both, would constitute a default thereunder, except as disclosed in the Registration Statement,
the Pricing Disclosure Package and the Prospectus. Except as described in the Registration Statement, the Pricing Disclosure Package,
and the Prospectus, performance by the Company of the material provisions of such agreements or instruments will not result in
a violation of any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic
or foreign, having jurisdiction over the Company or any of its assets or businesses (each, a “Governmental Entity”),
including, without limitation, those relating to environmental laws and regulations, that would constitute a Material Adverse
Change (as defined below).
2.4.3
Prior Securities Transactions. No securities of the Company
have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by or
under common control with the Company, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the
Preliminary Prospectus.
2.4.4
Regulations. The disclosures in the Registration Statement,
the Pricing Disclosure Package and the Prospectus concerning the effects of federal, state, local and all foreign regulation on
the Offering and the Company’s business as currently contemplated are correct in all material respects and no other such
regulations are required to be disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus which
are not so disclosed.
2.5 Changes
After Dates in Registration Statement.
2.5.1
No Material Adverse Change. Since the respective dates as
of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except as otherwise
specifically stated therein: (i) there has been no material adverse change in the financial position or results of operations
of the Company, nor any change or development that, singularly or in the aggregate, would involve a material adverse change or
a prospective material adverse change, in or affecting the condition (financial or otherwise), results of operations, business,
assets or prospects of the Company (a “Material Adverse Change”); (ii) there have been no material transactions
entered into by the Company not in the ordinary course of business, other than as contemplated pursuant to this Agreement; and
(iii) no officer or director of the Company has resigned from any position with the Company.
2.5.2
Recent Securities Transactions, etc. Subsequent to the respective
dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, and except
as may otherwise be indicated or contemplated herein or disclosed in the Registration Statement, the Pricing Disclosure Package
and the Prospectus, the Company has not: (i) issued any securities or incurred any liability or obligation, direct or contingent,
for borrowed money (other than the issuance of shares of Common Stock upon the exercise of stock options and warrants described
as outstanding in the Registration Statement); or (ii) declared or paid any dividend or made any other distribution on or in respect
to its capital stock.
2.6
Independent Accountants. To the knowledge of the Company,
Marcum LLP (the “Auditor”), whose report is filed with the Commission as part of the Registration Statement,
the Pricing Disclosure Package and the Prospectus, is an independent registered public accounting firm as required by the Securities
Act and the Securities Act Regulations and the Public Company Accounting Oversight Board. The Auditor has not, during the periods
covered by the financial statements included in the Registration Statement, the Pricing Disclosure Package and the Prospectus,
provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Exchange Act.
2.7
Financial Statements, etc. The financial statements, including
the notes thereto and supporting schedules included in the Registration Statement, the Pricing Disclosure Package and the Prospectus,
fairly present in all material respects the financial position and the results of operations of the Company at the dates and for
the periods to which they apply; and such financial statements have been prepared in conformity with U.S. generally accepted accounting
principles (“GAAP”), consistently applied throughout the periods involved (provided that unaudited interim
financial statements are subject to year-end audit adjustments that are not expected to be material in the aggregate and do not
contain all footnotes required by GAAP); and the supporting schedules included in the Registration Statement present fairly in
all material respects the information required to be stated therein. Except as included therein, no historical or pro forma financial
statements are required to be included in the Registration Statement, the Pricing Disclosure Package or the Prospectus under the
Securities Act or the Securities Act Regulations. The pro forma and pro forma as adjusted financial information and the related
notes, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus have been properly compiled
and prepared in accordance with the applicable requirements of the Securities Act and the Securities Act Regulations and present
fairly in all material respects the information shown therein, and the assumptions used in the preparation thereof are reasonable
and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. All
disclosures contained in the Registration Statement, the Pricing Disclosure Package or the Prospectus regarding “non-GAAP
financial measures” (as such term is defined by the rules and regulations of the Commission), if any, comply with Regulation
G of the Exchange Act and Item 10 of Regulation S-K of the Securities Act, to the extent applicable. Each of the Registration
Statement, the Pricing Disclosure Package and the Prospectus discloses all material off-balance sheet transactions, arrangements,
obligations (including contingent obligations), and other relationships of the Company with unconsolidated entities or other persons
that may have a material current or future effect on the Company’s financial condition, changes in financial condition,
results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses.
Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, (a) the Company has not
incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions other than in
the ordinary course of business, (b) the Company has not declared or paid any dividends or made any distribution of any kind with
respect to its capital stock, (c) there has not been any change in the capital stock of the Company, or, other than in the ordinary
course of business, any grants under any stock compensation plan, and (d) there has not been any Material Adverse Change in the
Company’s long-term or short-term debt.
2.8
Authorized Capital; Options, etc. The Company had, at the
date or dates indicated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the duly authorized,
issued and outstanding capitalization as set forth therein. Based on the assumptions stated in the Registration Statement, the
Pricing Disclosure Package and the Prospectus, the Company will have on the Closing Date the adjusted stock capitalization set
forth therein. Except as set forth in, or contemplated by, the Registration Statement, the Pricing Disclosure Package and the
Prospectus, on the Effective Date, as of the Applicable Time and on the Closing Date, there will be no stock options, warrants,
stock appreciation rights, scrip or other rights to purchase or otherwise acquire any authorized, but unissued shares of Common
Stock of the Company or any security convertible or exercisable into shares of Common Stock of the Company, or any contracts or
commitments to issue or sell shares of Common Stock or any such options, warrants, rights or convertible securities, except as
provided on Schedule 2.8.
2.9 Valid
Issuance of Securities, etc.
2.9.1
Outstanding Securities. All issued and outstanding securities
of the Company issued prior to the transactions contemplated by this Agreement have been duly authorized and validly issued and
are fully paid and non-assessable; the holders thereof have no rights of rescission with respect thereto, and are not subject
to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive
rights of any holders of any security of the Company or similar contractual rights granted by the Company. The authorized shares
of Common Stock conform in all material respects to all statements relating thereto contained in the Registration Statement, the
Pricing Disclosure Package and the Prospectus. The offers and sales of the outstanding shares of Common Stock were at all relevant
times either registered under the Securities Act and the applicable state securities or “blue sky” laws or, based
in part on the representations and warranties of the purchasers of such shares, exempt from such registration requirements.
2.9.2
Securities Sold Pursuant to this Agreement. The Public Securities
and Representative’s Securities have been duly authorized for issuance and sale and, when issued and paid for, will be validly
issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of
being such holders; the Public Securities and Representative’s Securities are not and will not be subject to the preemptive
rights of any holders of any security of the Company or similar contractual rights granted by the Company; and all corporate action
required to be taken for the authorization, issuance and sale of the Public Securities and Representative’s Securities has
been duly and validly taken. All corporate action required to be taken for the authorization, issuance and sale of the Units,
the Preferred Shares and the Warrants, has been duly and validly taken; the shares of Common Stock issuable upon conversion of
the Preferred Shares and exercise of the Warrants have been duly authorized and reserved for issuance by all necessary corporate
action on the part of the Company and issued in accordance with the Preferred Shares or when paid for, if applicable, and issued
in accordance with the Warrants, such shares of Common Stock will be validly issued, fully paid and non-assessable; the holders
thereof are not and will not be subject to personal liability by reason of being such holders; and such Preferred Shares or shares
of Common Stock are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar
contractual rights granted by the Company. The Public Securities and Representative’s Securities conform in all material
respects to all statements with respect thereto contained in the Registration Statement, the Pricing Disclosure Package and the
Prospectus. All corporate action required to be taken for the authorization, issuance and sale of the Representative’s Unit
Purchase Option has been duly and validly taken; the Preferred Shares, Warrants and shares of Common Stock issuable upon conversion
or exercise of such securities, in each case upon initial exercise of the Representative’s Unit Purchase Option have been
duly authorized and reserved for issuance by all necessary corporate action on the part of the Company and when paid for and issued
in accordance with the Representative’s Unit Purchase Option, such Preferred Shares and shares of Common Stock will be validly
issued, fully paid and non-assessable; such Warrants will be validly issued; the holders thereof are not and will not be subject
to personal liability by reason of being such holders; and such Preferred Shares and shares of Common Stock are not and will not
be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the
Company.
2.10
Registration Rights of Third Parties. Except as set forth
in Schedule 2.10, the Registration Statement, the Pricing Disclosure Package and the Prospectus, no holders of any securities
of the Company or any rights exercisable for or convertible or exchangeable into securities of the Company have the right to require
the Company to register any such securities of the Company under the Securities Act or to include any such securities in a registration
statement to be filed by the Company.
2.11
Validity and Binding Effect of Agreements. This Agreement,
the Warrant Agreement by and between the Company and Equity Stock Transfer (the “Warrant Agreement”) and the
Representative’s Unit Purchase Option Agreement have been duly and validly authorized by the Company, and, when executed
and delivered, will constitute, the valid and binding agreements of the Company, enforceable against the Company in accordance
with their respective terms, except: (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar
laws affecting creditors’ rights generally; (ii) as enforceability of any indemnification or contribution provision may
be limited under the federal and state securities laws; and (iii) that the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding
therefor may be brought.
2.12
No Conflicts, etc. The execution, delivery and performance
by the Company of this Agreement, the Warrant Agreement, the Representative’s Unit Purchase Option Agreement and all ancillary
documents, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company
with the terms hereof and thereof do not and will not, with or without the giving of notice or the lapse of time or both: (i)
result in a material breach of, or conflict with any of the terms and provisions of, or constitute a material default under, or
result in the creation, modification, termination or imposition of any lien, charge or encumbrance upon any property or assets
of the Company pursuant to the terms of any agreement or instrument to which the Company is a party; (ii) result in any violation
of the provisions of the Company’s Certificate of Incorporation (as the same may be amended or restated from time to time,
the “Charter”) or the by-laws of the Company (as the same may be amended or restated from time to time, the
“Bylaws”); or (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any
Governmental Entity as of the date hereof (including, without limitation, those promulgated by the Food and Drug Administration
of the U.S. Department of Health and Human Services (the “FDA”) or by any foreign, federal, state or local
regulatory authority performing functions similar to those performed by the FDA.
2.13
No Defaults; Violations. Except as disclosed on Schedule
2.13, no material default exists in the due performance and observance of any term, covenant or condition of any material
license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument evidencing
an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the
Company may be bound or to which any of the properties or assets of the Company is subject. The Company is not (i) in violation
of any term or provision of its Charter or Bylaws, or (ii) in violation of any franchise, license, permit, applicable law, rule,
regulation, judgment or decree of any Governmental Entity applicable to the Company.
2.14 Corporate
Power; Licenses; Consents.
2.14.1
Conduct of Business. Except as described in the Registration
Statement, the Pricing Disclosure Package and the Prospectus, the Company has all requisite corporate power and authority, and
has all necessary material authorizations, approvals, orders, licenses, certificates and permits of and from all governmental
regulatory officials and bodies that it needs as of the date hereof to conduct its business purpose as described in the Registration
Statement, the Pricing Disclosure Package and the Prospectus.
2.14.2
Transactions Contemplated Herein. The Company has all corporate
power and authority to enter into this Agreement and to carry out the provisions and conditions hereof, and all consents, authorizations,
approvals and orders required in connection therewith have been obtained. No consent, authorization or order of, and no filing
with, any court, government agency or other body is required for the valid issuance, sale and delivery of the Public Securities
and the consummation of the transactions and agreements contemplated by this Agreement, and the Representative’s Warrant
Agreement and as contemplated by the Registration Statement, the Pricing Disclosure Package and the Prospectus, except with respect
to applicable federal and state securities laws and the rules and regulations of the Financial Industry Regulatory Authority,
Inc. (“FINRA”).
2.15
D&O Questionnaires. To the Company’s knowledge,
all information contained in the questionnaires (the “Questionnaires”) completed by each of the Company’s
directors and officers immediately prior to the Offering (the “Insiders”) as supplemented by all information
concerning the Company’s directors, officers and principal stockholders as described in the Registration Statement, the
Pricing Disclosure Package and the Prospectus, as well as in the Lock-Up Agreement (as defined in Section 2.25 below), provided
to the Underwriters, is true and correct in all material respects and the Company has not become aware of any information which
would cause the information disclosed in the Questionnaires to become materially inaccurate and incorrect.
2.16
Litigation; Governmental Proceedings. There is no action,
suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding pending or, to the Company’s
knowledge, threatened against, or involving the Company or, to the Company’s knowledge, any executive officer or director
which has not been disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus or in connection
with the Company’s listing application for the listing of the Public Securities on the Exchange which would result in a
Material Adverse Change.
2.17
Good Standing. The Company has been duly organized and is
validly existing as a corporation and is in good standing under the laws of the State of Delaware as of the date hereof, and is
duly qualified to do business and is in good standing in each other jurisdiction in which its ownership or lease of property or
the conduct of business requires such qualification, except where the failure to qualify, singularly or in the aggregate, would
not have or reasonably be expected to result in a Material Adverse Change.
2.18
Insurance. The Company carries or is entitled to the benefits
of insurance, with, to the Company’s knowledge, reputable insurers, and in such amounts and covering such risks which the
Company believes are reasonably adequate, and all such insurance is in full force and effect. The Company has no reason to believe
that it will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable
coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that
would not result in a Material Adverse Change.
2.19 Transactions
Affecting Disclosure to FINRA.
2.19.1
Finder’s Fees. Except as described in the Registration Statement,
the Pricing Disclosure Package and the Prospectus, there are no claims, payments, arrangements, agreements or understandings relating
to the payment of a finder’s, consulting or origination fee by the Company or any Insider with respect to the sale of the
Public Securities hereunder or any other arrangements, agreements or understandings of the Company or, to the Company’s
knowledge, any of its stockholders that may affect the Underwriters’ compensation, as determined by FINRA.
2.19.2
Payments Within Twelve (12) Months. Except as described in
Schedule 2.19.2, the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not made any direct
or indirect payments (in cash, securities or otherwise) to: (i) any person, as a finder’s fee, consulting fee or otherwise,
in consideration of such person raising capital for the Company or introducing to the Company persons who raised or provided capital
to the Company; (ii) any FINRA member; or (iii) any person or entity that has any direct or indirect affiliation or association
with any FINRA member, within the twelve (12) months prior to the Effective Date, other than the payment to the Underwriters as
provided hereunder in connection with the Offering.
2.19.3
Use of Proceeds. None of the net proceeds of the Offering
will be paid by the Company to any participating FINRA member or its affiliates, except as specifically authorized herein.
2.19.4
FINRA Affiliation. There is no (i) officer or director of
the Company, (ii) beneficial owner of 5% or more of any class of the Company’s securities or (iii) beneficial owner of the
Company’s unregistered equity securities which were acquired to its knowledge, during the 180-day period immediately preceding
the filing of the Registration Statement, in each case that is an affiliate or associated person of a FINRA member participating
in the Offering (as determined in accordance with the rules and regulations of FINRA).
2.20
Foreign Corrupt Practices Act. Neither the Company nor, to
the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company or any other person acting on
behalf of the Company, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal
price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer
or supplier, or official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or
any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help
or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) that (i) might subject
the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (ii) if not given in the
past, might have had a Material Adverse Change or (iii) if not continued in the future, might adversely affect the assets, business,
operations or prospects of the Company. The Company has taken reasonable steps to provide reasonable assurance that its accounting
controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices
Act of 1977, as amended.
2.21
Compliance with OFAC. Neither of the Company nor, to the
Company’s knowledge, any director, officer, agent, employee or affiliate of the Company or any other person acting on behalf
of the Company, is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department
of the Treasury (“OFAC”), and the Company will not, directly or indirectly, use the proceeds of the Offering
hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person
or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.
2.22
Money Laundering Laws. The operations of the Company are
and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency
and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all applicable jurisdictions, the
rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced
by any Governmental Entity (collectively, the “Money Laundering Laws”); and no action, suit or proceeding by
or before any Governmental Entity involving the Company with respect to the Money Laundering Laws is pending or, to the knowledge
of the Company, threatened.
2.23
Regulatory. Except as disclosed in the Registration Statement,
the Pricing Disclosure Package and the Prospectus, the Company has not received any written notices or statements from the FDA
or any other similar governmental agency.
2.24
Officers’ Certificate. Any certificate signed by any
duly authorized officer of the Company and delivered to you or to Representative Counsel shall be deemed a representation and
warranty by the Company to the Underwriters as to the matters covered thereby.
2.25
Lock-Up Agreements. Schedule 3 hereto contains a complete
and accurate list of the Company’s officers, directors and certain large beneficial owners of Common Stock (or securities
convertible or exercisable into shares of Common Stock) that the Company has caused to deliver to the Representative an executed
Lock-Up Agreement, in the form attached hereto as Exhibit B (the “Lock-Up Agreement”), prior to the execution
of this Agreement (collectively, the “Lock-Up Parties”).
2.26 Subsidiaries.
Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has no direct
or indirect subsidiaries.
2.27 Related
Party Transactions. There are no business relationships or related party transactions involving the Company or any other person
required to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus that have not been described
as required.
2.28
Board of Directors. The Board of Directors of the Company
is comprised of the persons set forth under the heading of the Pricing Prospectus and the Prospectus captioned “Management.”
The qualifications of the persons serving as board members and the overall composition of the board comply with the Exchange Act,
the Exchange Act Regulations, the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder (the “Sarbanes-Oxley
Act”) applicable to the Company and the listing rules of the Exchange. At least one member of the Audit Committee of
the Board of Directors of the Company qualifies as an “audit committee financial expert,” as such term is defined
under Regulation S-K and the listing rules of the Exchange. In addition, at least a majority of the persons serving on the Board
of Directors qualify as “independent,” as defined under the listing rules of the Exchange.
2.29 Sarbanes-Oxley
Compliance.
2.29.1 Disclosure
Controls. The Company has developed and currently maintains disclosure controls and procedures that will comply with Rule
13a-15 or 15d-15 under the Exchange Act Regulations applicable to it, and such controls and procedures are effective to provide
reasonable assurance that all material information concerning the Company will be made known on a timely basis to the individuals
responsible for the preparation of the Company’s Exchange Act filings and other public disclosure documents.
2.29.2
Compliance. The Company is, or at the Applicable Time and
on the Closing Date will be, in material compliance with the provisions of the Sarbanes-Oxley Act applicable to it, and has implemented
or will implement such programs and taken reasonable steps to provide reasonable assurance of the Company’s future compliance
(not later than the relevant statutory and regulatory deadlines therefor) with all of the material provisions of the Sarbanes-Oxley
Act.
2.30
Accounting Controls. The Company maintains systems of “internal
control over financial reporting” (as defined under Rules 13a-15 and 15d-15 under the Exchange Act Regulations) that comply
with the requirements of the Exchange Act and have been designed by, or under the supervision of, its principal executive and
principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, including, but
not limited to, internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with GAAP and to maintain asset accountability; (iii) access to assets is permitted only
in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as disclosed
in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company is not aware of any material weaknesses
in its internal controls. The Company’s auditors and the Audit Committee of the Board of Directors of the Company have been
advised of: (i) all significant deficiencies and material weaknesses, if any, in the design or operation of internal controls
over financial reporting which are known to the Company’s management and that have adversely affected or are reasonably
likely to adversely affect the Company’ ability to record, process, summarize and report financial information; and (ii)
any fraud, if any, known to the Company’s management, whether or not material, that involves management or other employees
who have a significant role in the Company’s internal controls over financial reporting.
2.31
No Investment Company Status. The Company is not and, after
giving effect to the Offering and the application of the proceeds thereof as described in the Registration Statement, the Pricing
Disclosure Package and the Prospectus, will not be, required to register as an “investment company,” as defined in
the Investment Company Act of 1940, as amended.
2.32
No Labor Disputes. No labor dispute with the employees of
the Company exists or, to the knowledge of the Company, is imminent.
2.33
Intellectual Property Rights. The Company owns or possesses
or has valid rights to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations,
service mark registrations, copyrights, licenses, inventions, trade secrets and similar rights (“Intellectual Property
Rights”) necessary for the conduct of the business of the Company as currently carried on and to the extent described
in the Registration Statement, the Pricing Disclosure Package and the Prospectus. To the knowledge of the Company, no action or
use by the Company necessary for the conduct of its business as currently carried on and as described in the Registration Statement
and the Prospectus will involve or give rise to any infringement of any Intellectual Property Rights of others. The Company has
not received any notice alleging any such infringement, fee or conflict with asserted Intellectual Property Rights of others.
Except as would not reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change (A) to the
knowledge of the Company, there is no infringement, misappropriation or violation by third parties of any of the Intellectual
Property Rights owned by the Company; (B) there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding
or claim by others challenging the rights of the Company in or to any such Intellectual Property Rights that would, individually
or in the aggregate, together with any other claims in this Section 2.33, reasonably be expected to result in a Material Adverse
Change; (C) the Intellectual Property Rights owned by the Company and, to the knowledge of the Company, the Intellectual Property
Rights licensed to the Company have not been adjudged by a court of competent jurisdiction invalid or unenforceable, in whole
or in part, and there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others
challenging the validity or scope of any such Intellectual Property Rights, that would, individually or in the aggregate, together
with any other claims in this Section 2.33, reasonably be expected to result in a Material Adverse Change; (D) there is no pending
or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company infringes, misappropriates
or otherwise violates any Intellectual Property Rights or other proprietary rights of others, the Company has not received any
written notice of such claim that would, individually or in the aggregate, together with any other claims in this Section 2.33,
reasonably be expected to result in a Material Adverse Change; and (E) to the Company’s knowledge, no employee of the Company
is in or has ever been in violation in any material respect of any term of any employment contract, patent disclosure agreement,
invention assignment agreement, non-competition agreement, non-solicitation agreement, nondisclosure agreement or any restrictive
covenant to or with a former employer where the basis of such violation relates to such employee’s employment with the Company,
or actions undertaken by the employee while employed with the Company and would reasonably be expected to result, individually
or in the aggregate, in a Material Adverse Change. To the Company’s knowledge, all material technical information developed
by and belonging to the Company which has not been patented has been kept confidential. To the Company’s knowledge, the
Company is not a party to or bound by any options, licenses or agreements with respect to the Intellectual Property Rights of
any other person or entity that are required to be set forth in the Registration Statement, the Pricing Disclosure Package and
the Prospectus and are not described therein. The Registration Statement, the Pricing Disclosure Package and the Prospectus contain
in all material respects the same description of the matters set forth in the preceding sentence. To the Company’s knowledge,
none of the technology employed by the Company has been obtained or is being used by the Company in violation of any contractual
obligation binding on the Company or, to the Company’s knowledge, any of its officers, directors or employees, or otherwise
in violation of the rights of any persons.
2.34
Taxes. The Company has filed all returns (as hereinafter
defined) required to be filed with taxing authorities prior to the date hereof or has duly obtained extensions of time for the
filing thereof. The Company has paid all taxes (as hereinafter defined) shown as due on such returns that were filed and has paid
all taxes imposed on or assessed against the Company. The provisions for taxes payable, if any, shown on the financial statements
filed with or as part of the Registration Statement are sufficient for all accrued and unpaid taxes, whether or not disputed,
and for all periods to and including the dates of such consolidated financial statements. Except as disclosed in writing to the
Underwriters, (i) no issues have been raised (and are currently pending) by any taxing authority in connection with any of the
returns or taxes asserted as due from the Company, and (ii) no waivers of statutes of limitation with respect to the returns or
collection of taxes have been given by or requested from the Company. The term “taxes” mean all federal, state,
local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license,
lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall
profits, customs, duties or other taxes, fees, assessments or charges of any kind whatever, together with any interest and any
penalties, additions to tax or additional amounts with respect thereto. The term “returns” means all returns, declarations,
reports, statements and other documents required to be filed in respect to taxes.
2.35
ERISA Compliance. The Company and any “employee benefit
plan” (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, “ERISA”)) established or maintained by the Company or its “ERISA
Affiliates” (as defined below) are in compliance in all material respects with ERISA. “ERISA Affiliate”
means, with respect to the Company, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the
Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the “Code”)
of which the Company is a member. No “reportable event” (as defined under ERISA) has occurred or is reasonably expected
to occur with respect to any “employee benefit plan” established or maintained by the Company or any of its ERISA
Affiliates. No “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates, if
such “employee benefit plan” were terminated, would have any “amount of unfunded benefit liabilities”
(as defined under ERISA). Neither the Company nor any of its ERISA Affiliates has incurred or reasonably expects to incur any
material liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any “employee benefit
plan” or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each “employee benefit plan” established or maintained
by the Company or any of its ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified
and, to the knowledge of the Company, nothing has occurred, whether by action or failure to act, which would cause the loss of
such qualification.
2.36
Compliance with Laws. The Company: (A) is and at all times
has been in compliance with all statutes, rules, or regulations applicable to the ownership, testing, development, manufacture,
packaging, processing, use, distribution, marketing, labeling, promotion, sale, offer for sale, storage, import, export or disposal
of any product manufactured or distributed by the Company (“Applicable Laws”), except as would not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Change; (B) has not received any notice of adverse finding,
warning letter, untitled letter or other similar correspondence or notice from the FDA or any other Governmental Entity alleging
or asserting noncompliance with any Applicable Laws or any licenses, certificates, approvals, clearances, authorizations, permits
and supplements or amendments thereto required by any such Applicable Laws (“Authorizations”); (C) possesses
all material Authorizations and such Authorizations are valid and in full force and effect and the Company is not in material
violation of any term of any such Authorizations, in each case except as would not, individually or in the aggregate, reasonably
be expected to have a Material Adverse Change; (D) has not received written notice of any claim, action, suit, proceeding, hearing,
enforcement, investigation, arbitration or other action from any Governmental Entity or third party alleging that any product
operation or activity is in violation of any Applicable Laws or Authorizations and has no knowledge that any such Governmental
Entity or third party is considering any such claim, litigation, arbitration, action, suit, investigation or proceeding; (E) has
not received written notice that any Governmental Entity has taken, is taking or intends to take action to limit, suspend, modify
or revoke any Authorizations; (F) has filed, obtained, maintained or submitted all material reports, documents, forms, notices,
applications, records, claims, submissions and supplements or amendments as required by any Applicable Laws or Authorizations
and that all such reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments
were complete and correct on the date filed (or were corrected or supplemented by a subsequent submission); and (G) has not, either
voluntarily or involuntarily, initiated, conducted, or issued or caused to be initiated, conducted or issued, any recall, market
withdrawal or replacement, safety alert, or other notice or action relating to the alleged lack of safety of any product or any
alleged product defect or violation and, to the Company’s knowledge, no third party has initiated, conducted or intends
to initiate any such notice or action.
2.37
Ineligible Issuer. At the time of filing the Registration
Statement and any post- effective amendment thereto, at the time of effectiveness of the Registration Statement and any amendment
thereto, at the earliest time thereafter that the Company or another offering participant made a bona fide offer (within the meaning
of Rule 164(h)(2) of the Securities Act Regulations) of the Public Securities and at the date hereof, the Company was not and
is not an “ineligible issuer,” as defined in Rule 405, without taking account of any determination by the Commission
pursuant to Rule 405 that it is not necessary that the Company be considered an ineligible issuer.
2.38
Industry Data. The statistical and market-related data included
in each of the Registration Statement, the Pricing Disclosure Package and the Prospectus are based on or derived from sources
that the Company reasonably and in good faith believes are reliable and accurate or represent the Company’s good faith estimates
that are made on the basis of data derived from such sources.
2.39
Electronic Road Show. If required, the Company has made available
a Bona Fide Electronic Road Show in compliance with Rule 433(d)(8)(ii) of the Securities Act Regulations such that no filing of
any “road show” (as defined in Rule 433(h) of the Securities Act Regulations) is required in connection with the Offering.
2.40
Margin Securities. The Company owns no “margin securities”
as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System (the “Federal Reserve
Board”), and none of the proceeds of Offering will be used, directly or indirectly, for the purpose of purchasing or
carrying any margin security, for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase
or carry any margin security or for any other purpose which might cause any of the shares of Common Stock to be considered a “purpose
credit” within the meanings of Regulation T, U or X of the Federal Reserve Board.
2.41
Florida Statutes. The Company has complied and will comply
with all the provisions of Florida Statutes, Section 517.075 (Chapter 92-198, Laws of Florida); and neither the Company nor any
of the subsidiaries or affiliates does business with the government of Cuba or with any person or affiliate located in Cuba. [Confirm
no business is done with anyone located in Cuba.
2.42
Environmental Laws. The Company and its subsidiaries are,
and at all times prior were, (i) in compliance with any and all applicable federal, state, local and foreign laws, regulations,
ordinances, rules, orders, judgments, decrees, permits or other legal requirements relating to the protection of human health
and safety, the environment, natural resources, petroleum or hazardous or toxic substances or wastes, pollutants or contaminants
(“Environmental Laws”), which compliance includes obtaining, maintaining and complying with all permits and
authorizations and approvals required by Environmental Laws to conduct their respective businesses and (ii) have not received
notice of nor do they otherwise have knowledge of any actual or potential liability for the investigation or remediation of any
disposal or release of petroleum, hazardous or toxic substances or wastes, pollutants or contaminants, except in the case of clause
(i) or (ii) where such non-compliance with or liability under Environmental Laws could not, individually or in the aggregate,
have a Material Adverse Change; and neither the Company nor any of its subsidiaries has been named as a “potentially responsible
party” under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or any other
similar Environmental Law, except with respect to any matters that could not, individually or in the aggregate, have a Material
Adverse Change. Neither the Company nor any of its subsidiaries (A) is a party to any proceeding under Environmental Laws to which
a governmental authority is also a party, other than such proceedings regarding which it is believed no monetary penalties of
$100,000 or more will be imposed, or (B) anticipates making material capital expenditures relating to Environmental Laws.
2.43
Exchange. All securities issued by the Company, any of the subsidiaries or any trusts established by the Company or any
subsidiary, have been or will be issued and sold in compliance with (i) all applicable federal and state securities laws, (ii)
the laws of the applicable jurisdiction of incorporation of the issuing entity and, (iii) to the extent applicable to the issuing
entity, the requirements of the Nasdaq Stock Market.
3. Covenants
of the Company. The Company covenants and agrees as follows:
3.1
Amendments to Registration Statement. The Company shall deliver
to the Representative, prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be
filed after the Effective Date and not file any such amendment or supplement to which the Representative shall reasonably object
in writing.
3.2 Federal
Securities Laws.
3.2.1
Compliance. The Company, subject to Section 3.2.2, shall
comply with the requirements of Rule 430A of the Securities Act Regulations, and will notify the Representative promptly, and
confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective or any
amendment or supplement to the Prospectus has been filed; (ii) of the receipt of any comments from the Commission; (iii) of any
request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or
for additional information; (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment or of any order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus, or of the suspension of the qualification of the Public Securities and Representative’s Securities for offering
or sale in any jurisdiction, or of the initiation or, to the Company’s knowledge, threatening, of any proceedings for any
of such purposes or of any examination pursuant to Section 8(d) or 8(e) of the Securities Act concerning the Registration Statement
and (v) if the Company becomes the subject of a proceeding under Section 8A of the Securities Act in connection with the Offering
of the Public Securities and Representative’s Securities. The Company shall effect all filings required under Rule 424(b)
of the Securities Act Regulations, in the manner and within the time period required by Rule 424(b) (without reliance on Rule
424(b)(8)), and shall take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for
filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such
prospectus. The Company shall use reasonable efforts to prevent the issuance of any stop order, prevention or suspension and,
if any such order is issued, to obtain the lifting thereof at the earliest possible moment.
3.2.2
Continued Compliance. The Company shall comply with the Securities
Act, the Securities Act Regulations, the Exchange Act and the Exchange Act Regulations so as to permit the completion of the distribution
of the Public Securities (including, without limitation, the conversion of the Preferred Shares and the exercise of the Warrants)
as contemplated in this Agreement and in the Registration Statement, the Pricing Disclosure Package and the Prospectus. If at
any time when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172 of the Securities
Act Regulations (“Rule 172”), would be) required by the Securities Act to be delivered in connection with sales
of the Public Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion
of counsel for the Underwriters or for the Company, to (i) amend the Registration Statement in order that the Registration Statement
will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; (ii) amend or supplement the Pricing Disclosure Package or the Prospectus in order
that the Pricing Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser; or (iii) amend the Registration Statement or amend or supplement the Pricing
Disclosure Package or the Prospectus, as the case may be, in order to comply with the requirements of the Securities Act or the
Securities Act Regulations, the Company will promptly (A) give the Representative notice of such event; (B) prepare any amendment
or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the Pricing Disclosure
Package or the Prospectus comply with such requirements and, a reasonable amount of time prior to any proposed filing or use,
furnish the Representative with copies of any such amendment or supplement and (C) file with the Commission any such amendment
or supplement; provided that the Company shall not file or use any such amendment or supplement to which the Representative or
counsel for the Underwriters shall reasonably object. The Company will furnish to the Underwriters such number of copies of such
amendment or supplement as the Underwriters may reasonably request. The Company has given the Representative notice of any filings
made pursuant to the Exchange Act or the Exchange Act Regulations within 48 hours prior to the Applicable Time. The Company shall
give the Representative notice of its intention to make any such filing from the Applicable Time until the Closing Date and will
furnish the Representative with copies of the related document(s) a reasonable amount of time prior to such proposed filing, as
the case may be, and will not file or use any such document to which the Representative or counsel for the Underwriters shall
reasonably object.
3.2.3
Exchange Act Registration. Until the earlier of five (5)
years after the date of this Agreement or the date on which no Warrants are outstanding, the Company shall use its reasonable
efforts to maintain the registration of the shares of Common Stock under the Exchange Act. The Company shall not deregister the
shares of Common Stock under the Exchange Act without the prior written consent of the Representative.
3.2.4
Free Writing Prospectuses. The Company agrees that, unless
it obtains the prior written consent of the Representative, it shall not make any offer relating to the Public Securities that
would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a “free writing prospectus,”
or a portion thereof, required to be filed by the Company with the Commission or retained by the Company under Rule 433; provided
that the Representative shall be deemed to have consented to each Issuer General Use Free Writing Prospectus hereto and any “road
show that is a written communication” within the meaning of Rule 433(d)(8)(i) that has been reviewed by the Representative.
The Company represents that it has treated or agrees that it will treat each such free writing prospectus consented to, or deemed
consented to, by the Underwriters as an “issuer free writing prospectus,” as defined in Rule 433, and that it has
complied and will comply with the applicable requirements of Rule 433 with respect thereto, including timely filing with the Commission
where required, legending and record keeping. If at any time following issuance of an Issuer Free Writing Prospectus there occurred
or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the
information contained in the Registration Statement or included or would include an untrue statement of a material fact or omitted
or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing
at that subsequent time, not misleading, the Company will promptly notify the Underwriters and will promptly amend or supplement,
at its own expense, such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.
3.3
Delivery to the Underwriters of Registration Statements.
The Company has delivered or made available or shall deliver or make available to the Representative and counsel for the Representative,
without charge, signed copies of the Registration Statement as originally filed and each amendment thereto (including exhibits
filed therewith) and signed copies of all consents and certificates of experts, and will also deliver to the Underwriters, without
charge, a conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits) for each
of the Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be
identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
3.4
Delivery to the Underwriters of Prospectuses. The Company
has delivered or made available or will deliver or make available to each Underwriter, without charge, as many copies of each
Preliminary Prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for
purposes permitted by the Securities Act. The Company will furnish to each Underwriter, without charge, during the period when
a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered
under the Securities Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably
request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
3.5
Effectiveness and Events Requiring Notice to the Representative.
The Company shall use its commercially reasonable efforts to cause the Registration Statement to remain effective with a current
prospectus through and including the Termination Date of the Warrants (or the date all Warrants have been exercised, if earlier),
and shall notify the Representative immediately and confirm the notice in writing: (i) of the effectiveness of the Registration
Statement and any amendment thereto; (ii) of the issuance by the Commission of any stop order or of the initiation, or to the
Company’s knowledge, the threatening, of any proceeding for that purpose; (iii) of the issuance by any state securities
commission of any proceedings for the suspension of the qualification of the Public Securities for offering or sale in any jurisdiction
or of the initiation, or to the Company’s knowledge, the threatening, of any proceeding for that purpose; (iv) of the mailing
and delivery to the Commission for filing of any amendment or supplement to the Registration Statement or Prospectus; (v) of the
receipt of any comments or request for any additional information from the Commission; and (vi) of the happening of any event
during the period described in this Section 3.5 that, in the judgment of the Company, makes any statement of a material fact made
in the Registration Statement, the Pricing Disclosure Package or the Prospectus untrue or that requires the making of any changes
(a) in the Registration Statement in order to make the statements therein not misleading, or (b) in the Pricing Disclosure Package
or the Prospectus in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
If the Commission or any state securities commission shall enter a stop order or suspend such qualification at any time, the Company
shall make every reasonable effort to obtain promptly the lifting of such order.
3.6
Listing. The Company shall use its commercially reasonable
efforts to maintain the listing of the shares of Common Stock (including the Public Securities) on the Exchange for until the
earlier of five (5) years after the date of this Agreement or the date on which no Warrants are outstanding.
3.7 Reports
to the Representative.
3.7.1
Periodic Reports, etc. For a period of three (3) years after
the date of this Agreement, the Company shall furnish to the Representative copies of such financial statements and other periodic
and special reports as the Company from time to time furnishes generally to holders of any class of its securities and also promptly
furnish to the Representative: (i) a copy of each periodic report the Company shall be required to file with the Commission under
the Exchange Act and the Exchange Act Regulations; (ii) a copy of every press release and every news item and article with respect
to the Company or its affairs which was released by the Company and filed or furnished on a Current Report on Form 8-K; (iii)
a copy of each Current Report on Form 8-K prepared and filed by the Company; and (iv) five copies of each registration statement
filed by the Company under the Securities Act. Documents filed with the Commission pursuant to its EDGAR system shall be deemed
to have been delivered to the Representative pursuant to this Section 3.7.1.
3.7.2
Transfer Agent; Transfer Sheets. The Company shall maintain
a transfer agent and registrar for the Common Stock and Preferred Shares and a warrant agent and registrar for the Warrants.
3.8 Payment
of Expenses.
3.8.1
General Expenses Related to the Offering. The Company hereby
agrees to pay on each of the Closing Date and the Option Closing Date, if any, to the extent not paid at the Closing Date, all
expenses incident to the performance of the obligations of the Company under this Agreement, including, but not limited to: (a)
all filing fees and communication expenses relating to the registration of the securities to be sold in the Offering with the
Commission; (b) all actual Public Filing System filing fees associated with the review of the Offering by FINRA and $10,000 for
legal expenses of the Underwriters in connection with such FINRA Public Offering filing; (c) all fees and expenses relating to
the listing of such Public Securities on the Exchange and such other stock exchanges as the Company and the Representative together
determine; (d) all fees, expenses and disbursements relating to the registration or qualification of the Public Securities under
the “blue sky” securities laws of such states and other jurisdictions as the Representative may reasonably designate
(including, without limitation, all filing and registration fees) in an amount not to exceed $25,000; (e) all actual fees, expenses
and disbursements relating to the registration, qualification or exemption of the Public Securities under the securities laws
of such foreign jurisdictions as the Representative may reasonably designate; (f) the costs of all mailing and printing of the
underwriting documents, Registration Statements, Prospectuses and all amendments, supplements and exhibits thereto and as many
preliminary and final Prospectuses as the Representative may reasonably deem necessary; (g) the costs of preparing, printing and
delivering certificates representing the Public Securities; (h) fees and expenses of the transfer agent for the shares of Common
Stock and Preferred Shares and warrant agent for the Warrants; (i) stock transfer and/or stamp taxes, if any, payable upon the
transfer of securities from the Company to the Underwriters; (j) the fees and expenses of the Company’s accountants; and
(k) the fees and expenses of the Company’s legal counsel and other agents and representatives. The Representative may deduct
from the net proceeds of the Offering payable to the Company on the Closing Date the expenses set forth herein to be paid by the
Company to the Underwriters, provided, however, that in the event that the Offering is terminated, the Company agrees to reimburse
the Underwriters pursuant to Section 8.3 hereof.
3.9
Application of Net Proceeds. The Company shall apply the
net proceeds from the Offering received by it in a manner consistent with the application thereof described under the caption
“Use of Proceeds” in the Registration Statement, the Pricing Disclosure Package and the Prospectus.
3.10
Rule 158. The Company will timely file such reports pursuant
to the 1934 Act as are necessary in order to make generally available to its security holders as soon as practicable an earnings
statement for the purposes of, and to provide to the Underwriters the benefits contemplated by, Rule 158(a) under Section 11(a)
of the 1933 Act; provided, however, that (1) such delivery requirements of the Company’s security holders shall be deemed
met by the Company’s compliance with its reporting requirements pursuant to the Exchange Act if such compliance satisfied
the conditions of Rule 158 and (2) such delivery requirements to the Underwriters shall be deemed met by the Company if the related
reports are available on the Commissions’ Electronic Data Gathering Analysis and Retrieval System.
3.11
Stabilization. Neither the Company nor, to its knowledge,
any of its employees, directors or stockholders (without the consent of the Representative) has taken or shall take, directly
or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in, under
Regulation M of the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate
the sale or resale of the Public Securities.
3.12
Internal Controls. The Company shall maintain a system of
internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with
management’s general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation
of financial statements in accordance with GAAP and to maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets
is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
3.13
Accountants. The Company shall continue to retain a nationally
recognized independent registered public accounting firm for a period of at least three (3) years after the date of this Agreement.
The Representative acknowledges that the Auditor is acceptable to the Representative.
3.14
FINRA. The Company shall advise the Representative (who shall
make an appropriate filing with FINRA) if it is or becomes aware that (i) any officer or director of the Company, (ii) any beneficial
owner of 5% or more of any class of the Company’s securities or (iii) any beneficial owner of the Company’s unregistered
equity securities which were acquired during the 180 days immediately preceding the filing of the Registration Statement is or
becomes an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the
rules and regulations of FINRA). In June 2015, the Company issued warrants to Chardan Capital Markets, LLC as compensation for
acting as placement agent.
3.15
No Fiduciary Duties. The Company acknowledges and agrees
that the Underwriters’ responsibility to the Company is solely contractual in nature and that none of the Underwriters or
their affiliates or any selling agent shall be deemed to be acting in a fiduciary capacity, or otherwise owes any fiduciary duty
to the Company or any of its affiliates in connection with the Offering and the other transactions contemplated by this Agreement.
3.16 Lock-Up
Agreements.
3.16.1
Restriction on Sales of Capital Stock. The Company, on behalf
of itself and any successor entity, agrees that, without the prior written consent of the Representative, it will not, for a period
of 120 days after the date of this Agreement (the “Lock-Up Period”), (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase,
lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company or any securities
convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) file or cause to be filed any
registration statement with the Commission relating to the offering of any shares of capital stock of the Company or any securities
convertible into or exercisable or exchangeable for shares of capital stock of the Company other than the filing of a Registration
Statement on Form S-8 or related to registration rights agreements previously entered into prior to the date of this Agreement;
or (iii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences
of ownership of capital stock of the Company, whether any such transaction described in clause (i), (ii) or (iii) above is to
be settled by delivery of shares of capital stock of the Company or such other securities, in cash or otherwise.
The
restrictions contained in this Section 3.16.1 shall not apply to (i) the Units to be sold hereunder, (ii) the issuance by the
Company of shares of Common Stock upon the exercise of a stock option or warrant or the conversion of a security outstanding on
the date hereof, of which the Representative has been advised in writing or (iii) the grant by the Company of stock options or
other stock-based awards, or the issuance of shares of capital stock of the Company under any equity compensation plan of the
Company.
3.16.2
Restriction on Continuous Offerings. Notwithstanding the
restrictions contained in Section 3.16.1, the Company, on behalf of itself and any successor entity, agrees that, without the
prior written consent of the Representative, it will not, for a period of four months after the date of this Agreement, directly
or indirectly in any “at-the- market” or continuous equity transaction, offer to sell, sell, contract to sell, grant
any option to sell or otherwise dispose of shares of capital stock of the Company or any securities convertible into or exercisable
or exchangeable for shares of capital stock of the Company.
3.17
Release of D&O Lock-up Period. If the Representative,
in its sole discretion, agrees to release or waive the restrictions set forth in the Lock-Up Agreements described in Section 2.26
hereof for an officer or director of the Company and provide the Company with notice of the impending release or waiver at least
three (3) Business Days before the effective date of the release or waiver, the Company agrees to announce the impending release
or waiver by a press release substantially in the form of Exhibit C hereto through a major news service at least two (2) Business
Days before the effective date of the release or waiver.
3.18
Blue Sky Qualifications. The Company shall use reasonable
efforts, in cooperation with the Underwriters, if necessary, to qualify the Public Securities for offering and sale under the
applicable securities laws of such U.S. jurisdictions (and such foreign jurisdictions as the Company and the Underwriters shall
mutually agree) as the Representative may designate and to maintain such qualifications in effect so long as required to complete
the distribution of the Public Securities; provided, however, that the Company shall not be obligated to file any general consent
to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not
so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so
subject.
3.19
Reporting Requirements. The Company, during the period when
a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered
under the Securities Act, will file all documents required to be filed with the Commission pursuant to the Exchange Act within
the time periods required by the Exchange Act and Exchange Act Regulations. Additionally, the Company shall report the use of
proceeds from the issuance of the Public Securities as may be required under Rule 463 under the Securities Act Regulations.
4.
Conditions of Underwriters’ Obligations. The obligations
of the Underwriters to purchase and pay for the Public Securities, as provided herein, shall be subject to (i) the continuing
accuracy of the representations and warranties of the Company as of the date hereof and as of the Closing Date; (ii) the accuracy
of the statements of officers of the Company made pursuant to the provisions hereof; (iii) the performance by the Company of its
obligations hereunder; and (iv) the following conditions:
4.1 Regulatory
Matters.
4.1.1
Effectiveness of Registration Statement; Rule 430A Information.
The Registration Statement has become effective not later than 5:00 p.m., Eastern time, on the date of this Agreement or such
later date and time as shall be consented to in writing by the Representative, and, at the Closing Date, no stop order suspending
the effectiveness of the Registration Statement or any post-effective amendment thereto has been issued under the Securities Act,
no order preventing or suspending the use of any Preliminary Prospectus or the Prospectus has been issued and no proceedings for
any of those purposes have been instituted or are pending or, to the Company’s knowledge, contemplated by the Commission.
The Company has complied with each request (if any) from the Commission for additional information. The Prospectus containing
the Rule 430A Information shall be filed with the Commission in the manner and within the time frame required by Rule 424(b) (without
reliance on Rule 424(b)(8)) or a post-effective amendment providing such information shall be filed with, and declared effective
by, the Commission in accordance with the requirements of Rule 430A.
4.1.2
FINRA Clearance. On or before the date of this Agreement,
the Representative has received clearance from FINRA as to the amount of compensation allowable or payable to the Underwriters
as described in the Registration Statement.
4.1.3
Exchange Stock Market Clearance. On the Closing Date, the
Units have been approved for listing on the Exchange, and the additional listing application for the Common Stock underlying the
Preferred Shares and Warrants shall have been approved by the Exchange, subject only to official notice of issuance.
4.2 Company
Counsel Matters.
4.2.1
Closing Date Opinion of Counsel. On the Closing Date, the
Representative has received the favorable opinion of Nason, Yeager, Gerson, White & Lioce, P.A., counsel to the Company, dated
the Closing Date and addressed to the Representative, substantially in form and substance reasonably satisfactory to the Representative.
4.2.2
Reliance. In rendering such opinions, such counsel may rely:
(i) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which any member
of its Board of Directors is admitted and upon the Delaware General Corporation Law, to the extent such counsel deems proper and
to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory
to the Representative) of other counsel reasonably acceptable to the Representative, familiar with the applicable laws; and (ii)
as to matters of fact, to the extent they deem proper, on certificates or other written statements of officers of the Company
and officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing
of the Company, provided that copies of any such statements or certificates shall be delivered to Representative Counsel if requested.
4.3 Comfort
Letters.
4.3.1
Cold Comfort Letter. At the time this Agreement is executed,
the Representative shall have received a cold comfort letter containing statements and information of the type customarily included
in accountants’ comfort letters with respect to the financial statements and certain financial information contained in
the Registration Statement, the Pricing Disclosure Package and the Prospectus, addressed to the Representative and in form and
substance satisfactory in all respects to you and to the Auditor, dated as of the date of this Agreement.
4.3.2
Bring-down Comfort Letter. At the Closing Date, the Representative
shall receive from the Auditor a letter, dated as of the Closing Date to the effect that the Auditor reaffirms the statements
made in the letter furnished pursuant to Section 4.3.1, except that the specified date referred to shall be a date not more than
three (3) business days prior to the Closing Date.
4.4 Officers’
Certificates.
4.4.1
Officers’ Certificate. The Company shall furnish to
the Representative a certificate, dated the Closing Date, of its Chief Executive Officer, and its Chief Financial Officer stating
that (i) such officers have carefully examined the Registration Statement, the Pricing Disclosure Package, any Issuer Free Writing
Prospectus and the Prospectus and, in their opinion, the Registration Statement and each amendment thereto, as of the Applicable
Time and as of the Closing Date did not include any untrue statement of a material fact and did not omit to state a material fact
required to be stated therein or necessary to make the statements therein not misleading, and the Pricing Disclosure Package,
as of the Applicable Time and as of the Closing Date, any Issuer Free Writing Prospectus as of its date and as of the Closing
Date, the Prospectus and each amendment or supplement thereto, as of the respective date thereof and as of the Closing Date, did
not include any untrue statement of a material fact and did not omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances in which they were made, not misleading, (ii) since the effective date of the Registration
Statement, no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement,
the Pricing Disclosure Package or the Prospectus, (iii) to their knowledge as of the Closing Date, the representations and warranties
of the Company in this Agreement are true and correct and the Company has complied with all agreements and satisfied all conditions
on its part to be performed or satisfied hereunder at or prior to the Closing Date, and (iv) there has not been, subsequent to
the date of the most recent audited financial statements included or incorporated by reference in the Pricing Disclosure Package,
any Material Adverse Change in the financial position or results of operations of the Company, or any change or development that,
singularly or in the aggregate, would involve a Material Adverse Change or a prospective Material Adverse Change, in or affecting
the condition (financial or otherwise), results of operations, business, assets or prospects of the Company, except as set forth
in the Prospectus.
4.4.2
Secretary’s Certificate. At the Closing Date, the Representative
shall receive a certificate of the Company signed by the Secretary of the Company, dated the Closing Date certifying: (i) that
each of the Charter and Bylaws is true and complete, has not been modified and is in full force and effect; (ii) that the resolutions
of the Company’s Board of Directors relating to the Offering are in full force and effect and have not been modified; (iii)
as to the accuracy and completeness of all correspondence between the Company or its counsel and the Commission; and (iv) as to
the incumbency of the officers of the Company. The documents referred to in such certificate shall be attached to such certificate.
4.5
No Material Changes. Prior to and on the Closing Date: (i)
there shall have been no Material Adverse Change or development involving a prospective Material Adverse Change in the condition
or prospects or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition
is set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (ii) no action, suit or proceeding,
at law or in equity, shall have been pending or threatened against the Company or any Insider before or by any court or federal
or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may materially adversely
affect the business, operations, prospects or financial condition or income of the Company, except as set forth in the Registration
Statement, the Pricing Disclosure Package and the Prospectus; (iii) no stop order shall have been issued under the Securities
Act and no proceedings therefor shall have been initiated or threatened by the Commission; and (iv) the Registration Statement,
the Pricing Disclosure Package and the Prospectus and any amendments or supplements thereto shall contain all material statements
which are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations and shall conform
in all material respects to the requirements of the Securities Act and the Securities Act Regulations, and neither the Registration
Statement, the Pricing Disclosure Package nor the Prospectus nor any amendment or supplement thereto shall contain any untrue
statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not misleading.
4.6 Delivery
of Agreements.
4.6.1
Lock-Up Agreements. On or before the date of this Agreement,
the Company has delivered to the Representative executed copies of the Lock-Up Agreements from each of the persons listed in Schedule
3 hereto.
4.6.2
Representative’s Unit Purchase Option Agreement. On
the Closing Date, the Company shall deliver to the Representative executed copies of the Representative’s Unit Purchase
Option Agreement.
4.7
Additional Documents. At the Closing Date Representative
Counsel has been furnished with such documents and opinions as they may require for the purpose of enabling Representative Counsel
to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained;
and all proceedings taken by the Company in connection with the issuance and sale of the Public Securities and the Representative’s
Securities as herein contemplated shall be satisfactory in form and substance to the Representative and Representative Counsel.
5. Indemnification.
5.1 Indemnification
of the Underwriters.
5.1.1
General. Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless each Underwriter, its affiliates and each of its and their respective directors, officers,
members, employees, representatives and agents and each person, if any, who controls any such Underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively the “Underwriter Indemnified Parties,”
and each an “Underwriter Indemnified Party”), against any and all loss, liability, claim, damage and expense whatsoever
(including but not limited to any and all legal or other expenses reasonably incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever, whether arising out of any action between any of the
Underwriter Indemnified Parties and the Company or between any of the Underwriter Indemnified Parties and any third party, or
otherwise) and agrees to advance payment of such expenses as they are incurred by an Underwriter Indemnified Party in investigating,
preparing, pursuing or defending any actions, whether or not any Underwriter Indemnified Party is a party thereto, to which they
or any of them may become subject under the Securities Act, the Exchange Act or any other statute or at common law or otherwise
or under the laws of foreign countries, arising out of or based upon any untrue statement or alleged untrue statement of a material
fact contained in (i) the Registration Statement, the Pricing Disclosure Package, the Preliminary Prospectus, the Prospectus,
or in any Issuer Free Writing Prospectus (as from time to time each may be amended and supplemented); (ii) any materials or information
provided to investors by, or with the approval of, the Company in connection with the marketing of the Offering, including any
“road show” or investor presentations made to investors by the Company (whether in person or electronically); or (iii)
any application or other document or written communication (in this Section 5, collectively called “application”)
executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the
Public Securities and Representative’s Securities under the securities laws thereof or filed with the Commission, any state
securities commission or agency, the Exchange or any other national securities exchange; or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, unless such statement or omission was made in reliance upon, and in conformity with,
the Underwriters’ Information. With respect to any untrue statement or omission or alleged untrue statement or omission
made in the Pricing Disclosure Package, the indemnity agreement contained in this Section 5.1.1 shall not inure to the benefit
of any Underwriter Indemnified Party to the extent that any loss, liability, claim, damage or expense of such Underwriter Indemnified
Party results from the fact that a copy of the Prospectus was not given or sent to the person asserting any such loss, liability,
claim or damage at or prior to the written confirmation of sale of the Public Securities to such person as required by the Securities
Act and the Securities Act Regulations, and if the untrue statement or omission has been corrected in the Prospectus, unless such
failure to deliver the Prospectus was a result of non-compliance by the Company with its obligations under Section 3.3 hereof.
The Underwriter Indemnified Parties are intended third party beneficiaries of this Agreement and shall have the right to enforce
the provisions of Section 5 of this Agreement as if they were parties.
5.1.2
Procedure. If any action is brought against an Underwriter
Indemnified Party in respect of which indemnity may be sought against the Company pursuant to Section 5.1.1, such Underwriter
Indemnified Party shall promptly notify the Company in writing of the institution of such action and the Company shall assume
the defense of such action, including the employment and fees of counsel (subject to the reasonable approval of such Underwriter
Indemnified Party) and payment of actual expenses. Such Underwriter Indemnified Party has the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Underwriter Indemnified Party
unless (i) the employment of such counsel at the expense of the Company has been authorized in writing by the Company in connection
with the defense of such action, or (ii) the Company shall not have employed counsel to have charge of the defense of such action,
or (iii) counsel to the Underwriter Indemnified Party or Parties has reasonably concluded that there may be defenses available
to it or them which are different from or additional to those available to the Company (in which case the Company shall not have
the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events the reasonable
fees and expenses of not more than one additional firm of attorneys selected by the Underwriter Indemnified Party (in addition
to local counsel) shall be borne by the Company. All fees and expenses incurred by an Underwriter Indemnified Party shall be reimbursed
within 30 days of their respective invoices. The Company will have the right to approve the terms of any settlement of such action,
which approval shall not be unreasonably withheld or delayed, and all Underwriter Indemnified Parties shall consent to any settlement,
unless such settlement (i) includes an unconditional release of each Underwriter Indemnified Party, acceptable to such Underwriter
Indemnified Party, from all Liabilities arising out of such action for which indemnification or contribution may be sought hereunder
and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any
Underwriter Indemnified Party.
5.2
Indemnification of the Company. Each Underwriter, severally
and not jointly, agrees to indemnify and hold harmless the Company, its directors, its officers who signed the Registration Statement
and persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against
any and all loss, liability, claim, damage and expense described in the foregoing indemnity from the Company to the several Underwriters,
as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions made in the Registration
Statement, any Preliminary Prospectus, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or
in any application, in reliance upon, and in strict conformity with, the Underwriters’ Information. In case any action shall
be brought against the Company or any other person so indemnified based on any Preliminary Prospectus, the Registration Statement,
the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or any application, and in respect of which
indemnity may be sought against any Underwriter, such Underwriter will have the rights and duties given to the Company, and the
Company and each other person so indemnified will have the rights and duties given to the several Underwriters by the provisions
of Section 5.1.2. The Company agrees promptly to notify the Representative of the commencement of any litigation or proceedings
against the Company or any of its officers, directors or any person, if any, who controls the Company within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, in connection with the issuance and sale of the Public Securities
or in connection with the Registration Statement, the Pricing Disclosure Package, the Prospectus, or any Issuer Free Writing Prospectus.
5.3 Contribution.
5.3.1
Contribution Rights. If the indemnification provided for
in this Section 5 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 5.1
or 5.2 in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying
party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party
as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate
to reflect the relative benefits received by the Company, on the one hand, and the Underwriters, on the other, from the Offering
of the Public Securities, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion
as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the
Company, on the one hand, and the Underwriters, on the other, with respect to the statements or omissions that resulted in such
loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative
benefits received by the Company, on the one hand, and the Underwriters, on the other, with respect to such Offering shall be
deemed to be in the same proportion as the total net proceeds from the Offering of the Public Securities purchased under this
Agreement (before deducting expenses) received by the Company, as set forth in the table on the cover page of the Prospectus,
on the one hand, and the total underwriting commissions received by the Underwriters with respect to the Public Securities purchased
under this Agreement, as set forth in the table on the cover page of the Prospectus, on the other hand. The relative fault shall
be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission
to state a material fact relates to information supplied by the Company or the Underwriters, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the
Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 5.3.1 were to be determined
by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation
that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 5.3.1
shall be deemed to include, for purposes of this Section 5.3.1, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5.3.1
in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total underwriting
commissions received by such Underwriter with respect to the Offering of the Public Securities exceeds the amount of any damages
that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
5.3.2
Contribution Procedure. Within fifteen (15) days after receipt
by any party to this Agreement (or its representative) of notice of the commencement of any action, suit or proceeding, such party
will, if a claim for contribution in respect thereof is to be made against another party (“contributing party”), notify
the contributing party of the commencement thereof, but the failure to so notify the contributing party will not relieve it from
any liability which it may have to any other party other than for contribution hereunder. In case any such action, suit or proceeding
is brought against any party, and such party notifies a contributing party or its representative of the commencement thereof within
the aforesaid 15 days, the contributing party will be entitled to participate therein with the notifying party and any other contributing
party similarly notified. Any such contributing party shall not be liable to any party seeking contribution on account of any
settlement of any claim, action or proceeding affected by such party seeking contribution on account of any settlement of any
claim, action or proceeding affected by such party seeking contribution without the written consent of such contributing party.
The contribution provisions contained in this Section 5.3.2 are intended to supersede, to the extent permitted by law, any right
to contribution under the Securities Act, the Exchange Act or otherwise available. Each Underwriter’s obligations to contribute
pursuant to this Section 5.3 are several and not joint.
6. Reserved.
7.
Additional Covenants.
7.1
Board Composition and Board Designations. The Company shall
ensure that: (i) the qualifications of the persons serving as members of the Board of Directors and the overall composition of
the Board comply with the Sarbanes-Oxley Act, with the Exchange Act and with the listing rules of the Exchange or any other national
securities exchange, as the case may be, in the event the Company seeks to have its Public Securities listed on another exchange
or quoted on an automated quotation system, and (ii) if applicable, at least one member of the Audit Committee of the Board of
Directors qualifies as an “audit committee financial expert,” as such term is defined under Regulation S-K and the
listing rules of the Exchange
7.2
Prohibition on Press Releases and Public Announcements. The
Company shall not issue press releases or engage in any other publicity, without the Representative’s prior written consent,
for a period ending at 5:00 p.m., Eastern time, on the first (1st) Business Day following the twenty-fifth (25th) day after the
Closing Date, other than normal and customary releases issued in the ordinary course of the Company’s business.
8.
Effective Date of this Agreement and Termination Thereof.
8.1
Effective Date. This Agreement shall become effective when
both the Company and the Representative have executed the same and delivered counterparts of such signatures to the other party.
8.2
Termination. The Representative has the right to terminate
this Agreement, with written notice to the Company, at any time prior to any Closing Date, (i) if any domestic or international
event or act or occurrence has materially disrupted, or in Representative’s opinion will in the immediate future materially
disrupt, general securities markets in the United States; or (ii) if trading on the New York Stock Exchange or the NASDAQ Stock
Market LLC has been suspended or materially limited, or minimum or maximum prices for trading shall have been fixed, or maximum
ranges for prices for securities shall have been required by FINRA or by order of the Commission or any other government authority
having jurisdiction; or (iii) if the United States shall have become involved in a new war or an increase in major hostilities;
or (iv) if a banking moratorium has been declared by a New York State or federal authority; or (v) if a moratorium on foreign
exchange trading has been declared which materially adversely impacts the United States securities markets; or (vi) if the Company
shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act which, whether or not such loss shall have been insured, will, in Representative opinion, make it inadvisable to proceed with
the delivery of the Units; or (vi) if the Company is in material breach of any of its representations, warranties or covenants
hereunder; or (vii) if the Representative shall have become aware after the date hereof of such a Material Adverse Change in the
conditions or prospects of the Company, or such adverse material change in general market conditions as in the Representative’s
judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Public Securities or to enforce
contracts made by the Underwriters for the sale of the Public Securities.
8.3
Expenses. Notwithstanding anything to the contrary in this
Agreement, in the event that this Agreement shall not be carried out for any reason whatsoever, within the time specified herein
or any extensions thereof pursuant to the terms herein, the Company shall be obligated to pay to the Underwriters their actual
and accountable out-of-pocket expenses related to the transactions contemplated herein then due and payable and upon demand the
Company shall pay the full amount thereof to the Representative on behalf of the Underwriters as required and limited to the legal
and road show expenses under Section 3.8.1; provided, however, that such expense cap in no way limits or impairs the indemnification
and contribution provisions of this Agreement.
8.4
Indemnification. Notwithstanding any contrary provision contained
in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise
carried out, the provisions of Section 5 shall remain in full force and effect and shall not be in any way affected by, such election
or termination or failure to carry out the terms of this Agreement or any part hereof.
8.5
Representations, Warranties, Agreements to Survive. All representations,
warranties and agreements of the Company contained in this Agreement or in certificates of officers of the Company submitted pursuant
hereto, shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter
or its Affiliates or selling agents, any person controlling any Underwriter, its officers or directors or any person controlling
the Company or (ii) delivery of and payment for the Public Securities, and shall survive any termination of this Agreement. All
representations and warranties of the Underwriters and all agreements of the Underwriters set forth in Section 5 of this Agreement
shall remain operative and in full effect and shall survive any termination of this Agreement.
9. Miscellaneous.
9.1
Notices. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and shall be mailed (registered or certified mail, return receipt requested), personally
delivered or sent by facsimile transmission and confirmed and shall be deemed given when so delivered or faxed and confirmed or
if mailed, two (2) days after such mailing.
If
to the Representative:
Dawson
James Securities, Inc.
1
North Federal Highway, 5th Floor
Boca
Raton, FL 33432
Attention:
Robert D. Keyser, Jr.
Fax No.: 561.391.5757
with
a copy (which shall not constitute notice) to:
Schiff Hardin LLP
901
K Street, NW, Suite 700
Washington,
DC 20001
Attention:
Ralph V. De Martino, Esq.
Fax
No.: 202.778.6460
If
to the Company:
Vapor
Corp.
3001
Griffin Road
Dania
Beach, Florida 33312
Attention:
Chief Executive Officer
Fax
No.: [●]
with
a copy (which shall not constitute notice) to:
Nason,
Yeager, Gerson, White & Lioce, P.A.
1645
Palm Beach Lakes Blvd., Suite 1200
West
Palm Beach, Florida 33401
Attention:
Michael Harris, Esq.
Fax
No.: [●]
9.2
Headings. The headings contained herein are for the sole
purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms
or provisions of this Agreement.
9.3
Amendment. This Agreement may only be amended by a written
instrument executed by each of the parties hereto.
9.4
Entire Agreement. This Agreement (together with the other
agreements and documents being delivered pursuant to or in connection with this Agreement) constitutes the entire agreement of
the parties hereto with respect to the subject matter hereof and thereof, and supersedes all prior agreements and understandings
of the parties, oral and written, with respect to the subject matter hereof.
9.5
Binding Effect. This Agreement shall inure solely to the
benefit of and shall be binding upon the Representative, the Underwriters, the Company and the controlling persons, directors
and officers referred to in Section 5 hereof, and their respective successors, legal representatives, heirs and assigns, and no
other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue
of this Agreement or any provisions herein contained. The term “successors and assigns” shall not include a purchaser,
in its capacity as such, of securities from any of the Underwriters.
9.6
Governing Law; Consent to Jurisdiction; Trial by Jury. This
Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving
effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising
out of, or relating in any way to this Agreement shall be brought and enforced in the New York Supreme Court, County of New York,
or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which
jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent
an inconvenient forum. Any such process or summons to be served upon the Company may be served by transmitting a copy thereof
by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section
9.1 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding
or claim. The Company agrees that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies)
all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with
the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders
and affiliates) and each of the Underwriters hereby irrevocably waives, to the fullest extent permitted by applicable law, any
and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated
hereby.
9.7
Execution in Counterparts. This Agreement may be executed
in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be
an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one
or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Delivery
of a signed counterpart of this Agreement by facsimile or email/pdf transmission shall constitute valid and sufficient delivery
thereof.
9.8
Waiver, etc. The failure of any of the parties hereto to
at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision,
nor to in any way effect the validity of this Agreement or any provision hereof or the right of any of the parties hereto to thereafter
enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions
of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or
which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed
or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
[Signature
Pages Follow]
If
the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a binding agreement between us.
|
Very truly yours, |
|
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VAPOR CORP. |
|
|
|
By: |
|
|
Name:
|
|
|
Title: |
|
[additional
signature page follows]
If
the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a binding agreement between us.
|
Confirmed
as of the date first written above, on behalf of itself and as Representative of the several Underwriters named on Schedule
I hereto: |
|
|
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DAWSON JAMES SECURITIES, INC. |
|
|
|
By: |
|
|
Name: |
Robert
D. Keyser |
|
Title:
|
Chief
Executive Officer |
SCHEDULE
1
Underwriter |
|
Total
Number of
Units to be
Offered |
|
|
|
Dawson
James Securities, Inc. |
|
Up
to [●] |
|
|
|
TOTAL |
|
Up
to [●] |
SCHEDULE
2-A
Pricing
Information
Number
of Units: [●]
Number of
Series A Convertible Preferred Shares included in the Units: One-fourth of a share of Series A Convertible Preferred Stock
per Unit
Number
of Series A Warrants included in the Units: [●] Series A Warrants per Unit
Shares underlying
one-fourth of a share of Series A Preferred Shares: [●] shares of Common Stock
Shares
underlying Series A Warrant: One share per Series A Warrant
Public
Offering Price per Unit: $[●]
Underwriting
Discount per Unit: $[●] ([●]% per Unit)
Proceeds
to Company per Unit (before expenses): $[●]
SCHEDULE
2-B
Issuer
General Use Free Writing Prospectuses
None.
SCHEDULE
3
List
of Lock-Up Parties
[●]
EXHIBIT
A
Form
of Representative’s Unit Purchase Option Agreement
EXHIBIT
B
Form
of Lock-Up Agreement
EXHIBIT
C
Form
of Press Release
Vapor
Corp.
[Date]
Vapor
Corp. (the “Company”) announced today that Dawson James Securities, Inc., acting as representative for
the underwriters in the Company’s recent public offering of _____ units (consisting of _____ shares of the Company’s
Series A Convertible Preferred Stock and _____ Series A Warrants), is [waiving] [releasing] a lock-up restriction with respect
to shares of the Company’s common stock held by [certain officers or directors or stockholders] [an officer or director
or stockholders] of the Company. The [waiver] [release] will take effect on ________, 2015 and the shares may be sold on or after
such date.
This
press release is not an offer or sale of the securities in the United States or in any other jurisdiction where such offer or
sale is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from
registration under the Securities Act of 1933, as amended.
Exhibit
3.2
CERTIFICATE
OF AMENDMENT TO CERTIFICATE OF INCORPORATION OF VAPOR CORP.
Vapor
Corp. (the “Company”), a corporation organized and existing under the General Corporation Law of the State of Delaware
(the “Delaware General Corporation Law”), hereby certifies as follows:
1.
Pursuant to Sections 242 and 228 of the Delaware General Corporation Law, the amendment herein set forth has been duly approved
by the Board of Directors and holders of a majority of the outstanding capital stock of the Company.
2.
Section 4 of the Certificate of Incorporation is hereby replaced by the following:
The
total number of shares of stock which the Corporation is authorized to issue is 151,000,000. 150,000,000 shares shall be common
stock, par value $0.001 per share (“Common Stock”), and 1,000,000 shall be preferred stock, par value $0.001 per share
(“Preferred Stock”). Except as otherwise provided in this Corporation’s Certificate of Incorporation, as amended,
authority is hereby vested in the Board of Directors of the Corporation from time to time to provide for the issuance of shares
of one or more series of Preferred Stock and in connection therewith to fix by resolution or resolutions providing for the issue
of any such series, the number of shares to be included therein, the voting powers thereof, and such of the designations, preferences
and relative participating, optional or other special rights and qualifications, limitations and restrictions of each such series,
including, without limitation, dividend rights, voting rights, rights of redemption, or conversion into Common Stock rights, and
liquidation preferences, to the fullest extent now or hereafter permitted by the Delaware General Corporation Law and any other
provisions of the Certificate of Incorporation, as amended. The Board of Directors is further authorized to increase or decrease
(but not below the number of such shares of such class or series then outstanding) the number of shares of any such class or series
subsequent to the issuance of shares of that class or series.
At
the Effective Time (as defined below), pursuant to the Delaware General Corporation Law, each five shares of Common Stock either
issued and outstanding or held by the Corporation in treasury stock immediately prior to the Effective Time shall, automatically
and without any action on the part of the respective holders thereof, be combined and converted into one share of Common Stock
(the “Reverse Stock Split”). No fractional shares shall be issued in connection with the Reverse Stock Split. Stockholders
who otherwise would be entitled to receive fractional shares of Common Stock shall be entitled to receive cash (without interest
or deduction) from the Corporation’s transfer agent in lieu of such fractional share interests upon the submission of a
transmission letter by a stockholder holding the shares in book-entry form and, where shares are held in certificated form, upon
the surrender of the stockholder’s Old Certificates (as defined below), in an amount equal to the product obtained by multiplying
(a) the closing price per share of the Common Stock as reported on the Nasdaq Stock Market as of the date of the Effective Time,
by (b) the fraction of one share owned by the stockholder. Each certificate that immediately prior to the Effective Time represented
shares of Common Stock (“Old Certificates”), shall thereafter represent that number of shares of Common Stock into
which the shares of Common Stock represented by the Old Certificate shall have been combined, subject to the elimination of fractional
share interests as described above.
The
foregoing amendment shall be effective as of 11:59 PM on July 8, 2015 (the “Effective Time”).
3.
This Certificate of Amendment to Certificate of Incorporation was duly adopted and approved by the shareholders of this Company
on the 7th day of July 2015 in accordance with Section 242 of the Delaware General Corporation Law.
[Signature
Page Immediately Follows]
IN
WITNESS WHEREOF, the undersigned has executed this Certificate of Amendment to Certificate of Incorporation as of the 7th
day of July 2015.
|
VAPOR CORP. |
|
|
|
|
By: |
/s/ James Martin |
|
|
James
Martin, |
|
|
CFO |
Exhibit 3.4
CERTIFICATE
OF DESIGNATION OF SERIES A CONVERTIBLE
PREFERRED
STOCK OF VAPOR CORP.
Pursuant
to Section 151 of the General Corporation Law of the State of Delaware, Vapor Corp., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the “Corporation”), in accordance with the provisions of Section
103 thereof, does hereby submit the following:
WHEREAS,
the Certificate of Incorporation of the Corporation (the “Certificate of Incorporation”) authorizes the issuance
of up to 1,000,000 shares of preferred stock, par value $0.001 per share, of the Corporation (“Preferred Stock”) in
one or more series, and expressly authorizes the Board of Directors of the Corporation (the “Board”), subject to limitations
prescribed by law, to provide, out of the unissued shares of Preferred Stock, for series of Preferred Stock, and, with respect
to each such series, to establish and fix the number of shares to be included in any series of Preferred Stock and the designation,
rights, preferences, powers, restrictions and limitations of the shares of such series; and
WHEREAS,
it is the desire of the Board to establish and fix the number of shares to be included in a new series of Preferred Stock and
the designation, rights, preferences and limitations of the shares of such new series.
NOW,
THEREFORE, BE IT RESOLVED, that the Board does hereby provide for the issue of a series of Preferred Stock and does hereby in
this Certificate of Designation (the “Certificate of Designation”) establish and fix and herein state and express
the designation, rights, preferences, powers, restrictions and limitations of such series of Preferred Stock as follows:
1.
Designation. There shall be a series of Preferred Stock that shall be designated as “Series A Convertible Preferred
Stock” (the “Series A Preferred Stock”) and the number of shares constituting such series shall be 1,000,000.
The rights, preferences, powers, restrictions and limitations of the Series A Preferred Stock shall be as set forth herein.
2.
Defined Terms. For purposes hereof, the following terms shall have the following meanings:
“Affiliate”
has the meaning provided for in Rule 12b-2 under the Exchange Act.
“Board”
has the meaning set forth in the Recitals.
“Certificate
of Designation” has the meaning set forth in the Recitals.
“Certificate
of Incorporation” has the meaning set forth in the Recitals.
“Common
Stock” means the common stock, par value $0.001 per share, of the Corporation.
“Corporation”
has the meaning set forth in the Preamble.
“Date
of Issuance” means, for any Share of Series A Preferred Stock, the date on the prospectus included in the registration statement
pursuant to which the units were issued of which the Series A Preferred Stock was a component.
“Earliest
Conversion Date” has the meaning set forth in Section 5.1(a).
“Early
Conversion Trigger Date” has the meaning set forth in Section 5.1(b).
“Exchange
Act” means the Securities Exchange Act of 1934.
“Fundamental
Transaction” means that (i) the Corporation or any of its subsidiaries shall, directly or indirectly, in one or more related
transactions, (1) consolidate or merge with or into (whether or not the Corporation or any of its subsidiaries is the surviving
corporation) any other Person unless the shareholders of the Corporation immediately prior to such consolidation or merger continue
to hold more than 50% of the outstanding shares of Voting Stock after such consolidation or merger, or (2) sell, lease, license,
assign, transfer, convey or otherwise dispose of all or substantially all of its respective properties or assets to any other
Person, or (3) allow any other Person to make a purchase, tender or exchange offer that is accepted by the holders of more than
50% of the outstanding shares of Voting Stock of the Corporation (not including any shares of Voting Stock of the Corporation
held by the Person or Persons making or party to, or associated or affiliated with the Persons making or party to, such purchase,
tender or exchange offer), or (4) consummate a stock or share purchase agreement or other business combination (including, without
limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with any other Person whereby such other Person
acquires more than 50% of the outstanding shares of Voting Stock of the Corporation (not including any shares of Voting Stock
of the Corporation held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons
making or party to, such stock or share purchase agreement or other business combination), or (ii) any “person” or
“group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act and the rules and regulations
promulgated thereunder) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of 50% of the aggregate ordinary voting power represented by issued and outstanding Voting Stock of the
Corporation.
“Person”
means an individual, corporation, partnership, joint venture, limited liability company, governmental authority, unincorporated
organization, trust, association or other entity.
“Maximum
Percentage” has the meaning set forth in Section 5.5.
“Preferred
Stock” has the meaning set forth in the Recitals.
“Series
A Preferred Stock” has the meaning set forth in Section 1.
“Transfer
Agent” has the meaning set forth in Section 5.1(b).
“Voting
Stock” of a Person means capital stock of such Person of the class or classes pursuant to which the holders thereof have
the general voting power to elect, or the general power to appoint, at least a majority of the board of directors, managers or
trustees of such Person (irrespective of whether or not at the time capital stock of any other class or classes shall have or
might have voting power by reason of the happening of any contingency).
3.
Rank. With respect to payment of dividends and distribution of assets upon liquidation or dissolution or winding up of
the Corporation, whether voluntary or involuntary, the Series A Preferred Stock shall rank equal to the Common Stock on an as
converted basis.
4.
Voting.
4.1
The Series A Convertible Preferred Stock shall have no voting rights, except as expressly set forth in this Section 4.
4.2
So long as any shares of Series A Preferred Stock are outstanding, the affirmative vote of the holders of all of the Series A
Preferred Stock at the time outstanding, given in person or by proxy, either in writing without a meeting or by vote at any meeting
called for the purpose, shall be necessary for effecting or validating any amendment, alteration or repeal of any of the provisions
of this Certificate of Designation that materially and adversely affects the powers, preferences or special rights of the Series
A Preferred Stock, whether by merger or consolidation or otherwise; provided, however, that in the event of an amendment
to terms of the Series A Preferred Stock, including by merger or consolidation, so long as the Series A Preferred Stock remains
outstanding with the terms thereof materially unchanged, or the Series A Preferred Stock is converted into, preference securities
of the surviving entity, or its ultimate parent, with such powers, preferences or special rights, taken as a whole, not materially
less favorable to the holders of the Series A Preferred Stock than the powers, preferences or special rights of the Series A Preferred
Stock, taken as a whole, the occurrence of such event shall not be deemed to materially and adversely affect such powers, preferences
or special rights of the Series A Preferred Stock, and in such case such holders shall not have any voting rights with respect
to the occurrence of such events.
4.3
For purposes of Section 4.2, each share of Series A Preferred Stock shall have one vote per share. Except as set forth herein,
the Series A Preferred Stock shall not have any relative, participating, optional or other special voting rights and powers other
than as set forth herein, and the consent of the holders thereof shall not be required for the taking of any corporate action.
4.4
No amendment to these terms of the Series A Preferred Stock shall require the vote of the holders of Common Stock (except as required
by law) or any series of Preferred Stock other than the Series A Preferred Stock.
4.5
Without the consent of the holders of the Series A Preferred Stock, so long as such action does not materially and adversely affect
the powers, preferences or special rights of the Series A Preferred Stock, taken as a whole, and to the extent permitted by law,
the Corporation may amend, alter, supplement, or repeal any terms of this Certificate of Designation for the following purposes:
(a)
to cure any ambiguity, or to cure, correct, or supplement any provision that may be ambiguous, defective, or inconsistent; or
(b)
to make any provision with respect to matters or questions relating to the Series A Preferred Stock that is not inconsistent with
the provisions of this Certificate of Designation.
5.
Conversion.
5.1
Right to Convert
(a)
Right to Convert. Subject to the provisions of this Section 5, at any time and from time to time on or after the date that
is six months after the Date of Issuance, any holder of Series A Preferred Stock shall have the right by written election to the
Corporation to convert each whole share of Series A Preferred Stock held by such holder into [____] shares of Common Stock
(and any fraction of a share of Series A Preferred Stock shall convert into a proportionate amount of shares of Common Stock).
Notwithstanding anything to the contrary in this Certificate of Designation, the Series A Preferred Stock shall not be convertible
until at least 30 days from the Date of Issuance (the “Earliest Conversion Date”).
(b)
Early Conversion. Subject to the provisions of this Section 5, if at any time after the Earliest Conversion Date, either
(i) the closing price of the Common Stock is greater than $[ ]
per share (subject to adjustment for stock splits, stock dividends or similar events) for 10 consecutive trading days (a “Trading
Separation Trigger”), or (ii) the Units are delisted from the Nasdaq Capital Market for any reason, then, at any time
and from time to time after the 15th day after the Trading Separation Trigger, or immediately after a Delisting Trigger (such
applicable day, the “Early Conversion Trigger Date”), any holder of Series A Preferred Stock shall have the
right by written election to the Corporation and the Corporation’s transfer agent, Equity Stock Transfer (the “Transfer
Agent”), to convert each outstanding whole share of Series A Preferred Stock held by such holder into [___] shares
of Common Stock (and any fraction of a share of Series A Preferred Stock shall convert into a proportionate amount of shares of
Common Stock). The 10 consecutive trading day period calculation for the Trading Separation Trigger may not commence until after
the Earliest Conversion Date.
5.2
Fundamental Transaction Automatic Conversion. Subject to the provisions of this Section 5, if at any time and from time
to time on or after the Date of Issuance, the Corporation enters into or is party to a Fundamental Transaction, each whole share
of Series A Preferred Stock shall convert automatically into [ ]
shares of Common Stock (and any fraction of a share shall convert into a proportionate amount of shares of Common Stock)
immediately prior to consummation of such Fundamental Transaction. To the extent such a conversion would be limited by Section
5.5, the holder shall be entitled to convert the Series A Preferred Stock that it could not initially convert at a later date
or dates, provided that at such later date or dates the limitation in Section 5.5 would no longer apply to the holder because
such holder would no longer own in excess of the Maximum Percentage.
5.3
Procedures for Conversion; Effect of Conversion
(a)
Procedures for holder Conversion. In order to effectuate a conversion of shares of Series A Preferred Stock pursuant to
Section 5.1(a) or 5.1(b), a holder shall submit a written election to the Corporation and the Corporation’s Transfer Agent
that such holder elects to convert such shares, which election sets forth the number of shares (or fraction of shares) elected
to be converted. The conversion of such shares hereunder shall be deemed effective as of the date of receipt of such written election
by the Transfer Agent. All shares of capital stock issued hereunder by the Corporation shall be duly and validly issued, fully
paid and nonassessable, free and clear of all taxes, liens, charges and encumbrances with respect to the issuance thereof.
(b)
Effect of Conversion. All shares of Series A Preferred Stock converted as provided in this Section 5 shall no longer be
deemed outstanding as of the effective time of the applicable conversion and all rights with respect to such shares shall immediately
cease and terminate as of such time, other than the right of the holder to receive shares of Common Stock in exchange therefor.
5.4
Reservation of Stock. The Corporation shall at all times when any shares of Series A Preferred Stock are outstanding reserve
and keep available out of its authorized but unissued shares of capital stock, solely for the purpose of issuance upon the conversion
of the Series A Preferred Stock, such number of shares of Common Stock issuable upon the conversion of all outstanding Series
A Preferred Stock. The Corporation shall take all such actions as may be necessary to assure that all such shares of Common Stock
may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities
exchange upon which shares of Common Stock may be listed (except for official notice of issuance which shall be immediately delivered
by the Corporation upon each such issuance). The Corporation shall not close its books against the transfer of any of its capital
stock in any manner which would prevent the timely conversion of the shares of Series A Preferred Stock.
5.5.
Limitations on Conversion. Notwithstanding anything to the contrary contained in this Certificate, the Series A Preferred
Stock shall not be convertible by a holder to the extent (but only to the extent) that the holder or any of its Affiliates would
beneficially own in excess of 4.99% (the “Maximum Percentage”) of the Common Stock. To the extent the above limitation
applies, the determination of whether the holder’s shares shall be convertible (in relation to other convertible securities
owned by the holder or any of its Affiliates) and of which such securities shall be convertible (as among all such securities
owned by the holder) shall, subject to such Maximum Percentage limitation, be determined on the basis of the first submission
to the Corporation for conversion. No prior inability to convert the shares of Series A Preferred Stock pursuant to this Section
5.5 shall have any effect on the applicability of the provisions of this Section 5.5 with respect to any subsequent determination
of convertibility. For the purposes of this Section 5.5, beneficial ownership and all determinations and calculations (including,
without limitation, with respect to calculations of percentage ownership) shall be determined in accordance with Section 13(d)
of the Exchange Act, and the rules and regulations promulgated thereunder. The provisions of this Section 5.5 shall be implemented
in a manner otherwise than in strict conformity with the terms of this Section 5.5 to correct this Section 5.5 (or any portion
hereof) which may be defective or inconsistent with the intended Maximum Percentage beneficial ownership limitation herein contained
or to make changes or supplements necessary or desirable to properly give effect to such Maximum Percentage limitation. The limitations
contained in this Section 5.5 shall apply to a successor holder of the shares of Series A Preferred Stock. The holders of Common
Stock shall be third party beneficiaries of this Section 5.5 and the Corporation may not amend or waive this Section 5.5 without
the consent of holders of a majority of its Common Stock. For any reason at any time, upon the written or oral request of the
holder, the Corporation shall within one Business Day confirm orally and in writing to the holder the number of shares of Common
Stock then outstanding, including by virtue of any prior conversion of convertible securities into Common Stock, including, without
limitation, pursuant to this Certificate of Designation or securities issued pursuant to the Certificate of Designation.
6.
Status of Converted or Acquired Shares. All shares of Series A Preferred Stock (i) converted into shares of Common Stock
in accordance with Section 5 herein or (ii) acquired by the Corporation shall be restored to the status of authorized but unissued
shares of undesignated Preferred Stock of the Corporation.
7.
Maturity. The Series A Preferred Stock has no maturity date, no sinking fund has been established for the retirement or
redemption of Series A Preferred Stock, and the Series A Preferred Stock has no redemption provisions.
8.
Notices. Except as otherwise provided herein, all notices, requests, consents, claims, demands, waivers and other communications
hereunder shall be in writing and shall be deemed to have been given: (a) when delivered by hand (with written confirmation of
receipt); (b) when received by the addressee if sent by a nationally recognized overnight courier (receipt requested); (c) on
the date sent by facsimile or e-mail of a PDF document (with confirmation of transmission) if sent during normal business hours
of the recipient, and on the next business day if sent after normal business hours of the recipient; or (d) on the third day after
the date mailed, by certified or registered mail, return receipt requested, postage prepaid. Such communications must be sent
(a) to the Corporation, at its principal executive offices and (b) to any stockholder, at such holder’s address at it appears
in the stock records of the Corporation (or at such other address for a stockholder as shall be specified in a notice given in
accordance with this Section 8).
9.
Amendment and Waiver. No provision of this Certificate of Designation may be amended, modified or waived except by an instrument
in writing executed by the Corporation, and any such written amendment, modification or waiver will be binding upon the Corporation
and each holder of Series A Preferred Stock; provided, that no amendment, modification or waiver of the terms or relative
priorities of the Series A Preferred Stock may be accomplished by the merger, consolidation or other transaction of the Corporation
with another corporation or entity unless the Corporation has obtained the prior written consent of the holders in accordance
with Section 4 and this Section 9.
[SIGNATURE
PAGE FOLLOWS]
IN
WITNESS WHEREOF, this Certificate of Designation is executed on behalf of the Corporation by its Chief Executive Officer this
day of ,
2015.
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VAPOR
CORP. |
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By: |
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Name: |
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Title: |
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Exhibit
4.2
FORM
OF SERIES A WARRANT
VAPOR
CORP.
WARRANT
TO PURCHASE COMMON STOCK
Warrant
No.:
Date of
Issuance: [ ], 2015 (“Issuance Date”)
Vapor
Corp., a Delaware corporation (the “Company”), hereby certifies that, for good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, [ ], the registered holder hereof or its permitted assigns (the
“Holder”), is entitled, subject to the terms set forth below, to purchase from the Company, at the Exercise
Price (as defined below) then in effect, upon exercise of this Series A Warrant, to purchase Common Stock (including any Warrants
to Purchase Common Stock issued in exchange, transfer or replacement hereof, the “Warrant”), at any time or
times on or after the Issuance Date, but not after 11:59 p.m., New York time, on the Expiration Date (as defined below), [5 YEARS
FROM DATE OF THE PROSPECTUS] (subject to adjustment as provided herein) fully paid and non-assessable shares of Common Stock (as
defined below) (the “Warrant Shares”). Except as otherwise defined herein, capitalized terms in this Warrant
shall have the meanings set forth in Section 16. This Warrant is one of the Warrants to Purchase Common Stock (the “Purchased
Warrants”) underlying certain Units issued pursuant to the Offering (as defined in that certain Underwriting Agreement,
dated as of [ ], 2015, by and between the Company and Dawson James Securities, Inc., as representative of the several underwriters
(the “Underwriting Agreement”)).
This
Warrant shall be issuable in book entry form (the “Book-Entry Warrant Certificate”) and shall initially be
represented by one or more Book-Entry Warrant Certificates deposited with Equity Stock Transfer (the “Warrant Agent”)
and registered in the name of the Holder, or as otherwise directed by the Warrant Agent. Ownership of beneficial interests in
this Warrant shall be shown on, and the transfer of such ownership shall be effected through, records maintained by the Warrant
Agent (the “Warrant Register”). The Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent
actual written notice to the contrary.
1.
EXERCISE OF WARRANT.
(a)
Mechanics of Exercise. Subject to the terms and conditions hereof (including, without limitation, the limitations set forth
in Section 1(f)), this Warrant may be exercised by the Holder, in whole or in part, upon the earlier of (but in no event earlier
than 30 days from the Date of Issuance) on (i) any day on or after the date that is six months after the Date of Issuance, (ii)
any day on or after the Early Exercise Trigger Date, or (iii) immediately if exercised for cash, in each case by delivery (whether
via e-mail, facsimile or otherwise) of a written notice, in the form attached hereto as Exhibit A (the “Exercise
Notice”) to the Warrant Agent or such other office or agency of the Company as it may designate by notice in writing
to the registered Holder at the address of the Holder appearing on the books of the Company or the Warrant Agent (or to the Company
if the exercise is made pursuant to a Cashless Exercise (as defined in Section 1(d)), of the Holder’s election to exercise
this Warrant. Within one (1) Trading Day following an exercise of this Warrant as aforesaid, the Holder shall deliver payment
to the Warrant Agent of an amount equal to the Exercise Price in effect on the date of such exercise multiplied by the number
of Warrant Shares as to which this Warrant was so exercised (in respect of such specific exercise, the “Aggregate Exercise
Price”) in cash or via wire transfer of immediately available funds (to the account set forth on Schedule A
hereto) if the Holder did not notify the Company in such Exercise Notice that such exercise was made pursuant to a Cashless Exercise
(as defined in Section 1(d)). The Holder shall not be required to deliver the original of this Warrant in order to effect an exercise
hereunder. Execution and delivery of an Exercise Notice with respect to less than all of the Warrant Shares shall have the same
effect as cancellation of the original of this Warrant certificate and issuance of a new Warrant certificate evidencing the right
to purchase the remaining number of Warrant Shares. Execution and delivery of an Exercise Notice for all of the then-remaining
Warrant Shares shall have the same effect as cancellation of the original of this Warrant certificate after delivery of the Warrant
Shares in accordance with the terms hereof. The Holder and the Company or the Warrant Agent shall maintain records showing the
number of Warrant Shares purchased and the date of such purchases.
The Company or the Warrant Agent shall deliver any objection
to any Notice of Exercise form within two Business Days of receipt of the applicable Notice of Exercise. On or before the first
(1st) Trading Day following the date on which the Company has received an Exercise Notice for a Cashless Exercise, the Company
shall transmit by e-mail or facsimile an acknowledgment of confirmation of receipt of such Exercise Notice, in the form attached
hereto as Exhibit B, to the Warrant Agent. On or before the third (3rd) Trading Day following (A) in the event of
a Cashless Exercise, the date on which the Company has received such Exercise Notice or (B) in the event of an exercise for cash,
the later of (i) the date on which the Warrant Agent has received such Exercise Notice or (ii) the date on which the Warrant Agent
receives the Aggregate Exercise Price (such date is referred to herein as the “Delivery Date”), the Company
shall, (X) provided that (I) the Transfer Agent is participating in The Depository Trust Company (“DTC”) Fast
Automated Securities Transfer Program and (II) either a registration statement for the issuance to the Holder of the applicable
Warrant Shares to be issued pursuant to such Exercise Notice is effective and the prospectus contained therein is usable or such
Warrant Shares to be so issued are otherwise freely tradable, cause the Warrant Agent to credit such aggregate number of shares
of Common Stock to which the Holder is entitled pursuant to such exercise to the Holder’s or its designee’s balance
account with DTC through its Deposit/Withdrawal at Custodian system, or (Y) if either of the immediately preceding clauses (I)
or (II) are not satisfied, issue and deliver to the Holder or, at the Holder’s instruction pursuant to the Exercise Notice,
the Holder’s agent or designee, in each case, sent by reputable overnight courier to the address as specified in the applicable
Exercise Notice, a certificate, registered in the Company’s share register in the name of the Holder or its designee (as
indicated in the applicable Exercise Notice), for the number of shares of Common Stock to which the Holder is entitled pursuant
to such exercise. Upon (A) in the event of a Cashless Exercise, the date on which the Company has received such Exercise Notice
or (B) in the event of an exercise for cash, the later of (i) the date on which the Warrant Agent has received such Exercise Notice
or (ii) the date on which the Warrant Agent receives the Aggregate Exercise Price, the Holder shall be deemed for all corporate
purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective
of the date such Warrant Shares are credited to the Holder’s DTC account or the date of delivery of the certificates evidencing
such Warrant Shares (as the case may be); provided, however, that if the date of such receipt is a date upon which the Common
Stock transfer books of the Company are closed, such Holder shall be deemed to have become the record holder of such shares on,
the next succeeding day on which the Common Stock transfer books of the Company are open. If this Warrant is submitted in connection
with any exercise pursuant to this Section 1(a) and the number of Warrant Shares represented by this Warrant submitted for exercise
is greater than the number of Warrant Shares being acquired upon an exercise, then, at the request of the Holder and upon surrender
hereof by the Holder at the principal office of the Company, the Company shall as soon as practicable and in no event later than
three (3) Business Days after any exercise and at its own expense, issue and deliver to the Holder (or its designee) a new Warrant
(in accordance with Section 7(d)) representing the right to purchase the number of Warrant Shares purchasable immediately prior
to such exercise under this Warrant, less the number of Warrant Shares with respect to which this Warrant is exercised. No fractional
shares of Common Stock are to be issued upon the exercise of this Warrant, but rather the number of shares of Common Stock to
be issued shall be rounded up to the nearest whole number. The Company shall pay any and all taxes and fees which may be payable
with respect to the issuance and delivery of Warrant Shares upon exercise of this Warrant.
(b)
Exercise Price. For purposes of this Warrant, “Exercise Price” means $[ ], subject to adjustment
as provided herein.
(c)
Company’s Failure to Timely Deliver Securities. If the Company shall fail, for any reason or for no reason, to
issue to the Holder on or before the applicable Delivery Date, a certificate for the number of shares of Common Stock to which
the Holder is entitled and register such shares of Common Stock on the Company’s share register or to credit the Holder’s
balance account with DTC for such number of shares of Common Stock to which the Holder is entitled upon the Holder’s exercise
of this Warrant (as the case may be), then, in addition to all other remedies available to the Holder, the Company shall pay in
cash to the Holder on each day after such third (3rd) Trading Day that the issuance of such shares of Common Stock is not timely
effected an amount equal to 2% of the product of (A) the aggregate number of shares of Common Stock not issued to the Holder on
a timely basis and to which the Holder is entitled and (B) the Closing Sale Price of the Common Stock on the Trading Day immediately
preceding the last possible date on which the Company could have issued such shares of Common Stock to the Holder without violating
Section 1(a).
In addition to the foregoing, if the Company shall fail to issue and deliver a certificate to the Holder and register
such shares of Common Stock on the Company’s share register or credit the Holder’s balance account with DTC for the
number of shares of Common Stock to which the Holder is entitled upon the Holder’s exercise or exchange hereunder (as the
case may be) on or prior to the applicable Delivery Date, and if on or after such Delivery Date the Holder (or any other Person
in respect, or on behalf, of the Holder) purchases (in an open market transaction or otherwise) shares of Common Stock to deliver
in satisfaction of a sale by the Holder of all or any portion of the number of shares of Common Stock, or a sale of a number of
shares of Common Stock equal to all or any portion of the number of shares of Common Stock, issuable upon such exercise or exchange
that the Holder so anticipated receiving from the Company, then, in addition to all other remedies available to the Holder, the
Company shall, within three (3) Business Days after the Holder’s request and in the Holder’s discretion, either (i)
pay cash to the Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions and other
out-of-pocket expenses, if any) for the shares of Common Stock so purchased (including, without limitation, by any other Person
in respect, or on behalf, of the Holder) (the “Buy-In Price”), at which point the Company’s obligation
to so issue and deliver such certificate or credit the Holder’s balance account with DTC for the number of shares of Common
Stock to which the Holder is entitled upon the Holder’s exercise or exchange hereunder (as the case may be) (and to issue
such shares of Common Stock) shall terminate, or (ii) promptly honor its obligation to so issue and deliver to the Holder a certificate
or certificates representing such shares of Common Stock or credit the Holder’s balance account with DTC for the number
of shares of Common Stock to which the Holder is entitled upon the Holder’s exercise or exchange hereunder (as the case
may be) and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such
number of shares of Common Stock multiplied by (B) the lowest Closing Sale Price of the Common Stock on any Trading Day during
the period commencing on the date of the applicable Exercise Notice or Exchange Notice, as the case may be, and ending on the
date of such issuance and payment under this clause (ii),
(d)
Cashless Exercise. Notwithstanding anything contained herein to the contrary (other than Section 1(f) below), the Holder
may, in its sole discretion (and without limiting the Holder’s rights and remedies contained herein), exercise this Warrant
in whole or in part and, subject to the provisions of Section 1(a), in lieu of making the cash payment otherwise contemplated
to be made to the Company upon such exercise in payment of the Aggregate Exercise Price, elect instead to receive upon such exercise
a cash payment from the Company equal to the product of (i) the total number of shares with respect to which this Warrant is then
being exercised multiplied by (ii) the Black Scholes Value (as defined below) (the “Exchange Amount”). In the
Company’s sole discretion, so long as the Equity Conditions have occurred the Company may elect to treat such notice as
a cashless exercise of the Warrant with respect to the number of shares specified in “A” below for the “Net
Number” of shares of Common Stock determined according to the following formula with respect thereto (a “Cashless
Exercise”), as follows:
Net Number
= (A x B) / C
For purposes
of the foregoing formula:
A= the total
number of shares with respect to which this Warrant is then being exercised.
B= Black
Scholes Value (as defined below).
C=
the Closing Bid Price of the Common Stock as of two (2) Trading Days prior to the time of such exercise (as defined below).
(e)
Disputes. In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the
number of Warrant Shares to be issued pursuant to the terms hereof (including, without limitation, the Net Number), the Company
shall promptly issue to the Holder the number of Warrant Shares that are not disputed, provided that following such issuance to
Holder such dispute shall be resolved in accordance with Section 13.
(f)
Limitations on Exercises and Exchanges. Notwithstanding anything to the contrary contained in this Warrant, this Warrant
shall not be exercisable or exchangeable by the Holder hereof to the extent (but only to the extent) that the Holder or any of
its Affiliates would beneficially own in excess of 4.9% (the “Maximum Percentage”) of the Common Stock. To
the extent the above limitation applies, the determination of whether this Warrant shall be exercisable or exchangeable (vis-à-vis
other convertible, exercisable or exchangeable securities owned by the Holder or any of its Affiliates) and of which such securities
shall be exercisable or exchangeable (as among all such securities owned by the Holder) shall, subject to such Maximum Percentage
limitation, be determined on the basis of the first submission to the Company for conversion, exercise or exchange (as the case
may be). No prior inability to exercise or exchange this Warrant pursuant to this paragraph shall have any effect on the applicability
of the provisions of this paragraph with respect to any subsequent determination of exercisability or exchangeability.
For the
purposes of this paragraph, beneficial ownership and all determinations and calculations (including, without limitation, with
respect to calculations of percentage ownership) shall be determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended (the “1934 Act”), and the rules and regulations promulgated thereunder. The provisions
of this paragraph shall be implemented in a manner otherwise than in strict conformity with the terms of this paragraph to correct
this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Maximum Percentage beneficial
ownership limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such
Maximum Percentage limitation. The limitations contained in this paragraph shall apply to a successor Holder of this Warrant.
The holders of Common Stock shall be third party beneficiaries of this paragraph and the Company may not amend or waive this paragraph
without the consent of holders of a majority of its Common Stock. For any reason at any time, upon the written or oral request
of the Holder, the Company shall within one (1) Business Day confirm orally and in writing to the Holder the number of shares
of Common Stock then outstanding, including by virtue of any prior conversion or exercise or exchange of convertible or exercisable
or exchangeable securities into Common Stock, including, without limitation, pursuant to this Warrant or securities issued pursuant
to the Certificate of Designation for the Series A Convertible Preferred Stock.
(g)
Insufficient Authorized Shares.
The
Company shall at all times keep reserved for issuance under this Warrant a number of shares of Common Stock as shall be necessary
to satisfy the Company’s obligation to issue shares of Common Stock hereunder (without regard to any limitation otherwise
contained herein with respect to the number of shares of Common Stock that may be acquirable upon exercise or exchange of this
Warrant). If, notwithstanding the foregoing, and not in limitation thereof, at any time while any of the Purchased Warrants remain
outstanding the Company does not have a sufficient number of authorized and unreserved shares of Common Stock to satisfy its obligation
to reserve for issuance upon exercise or exchange of the Purchased Warrants at least a number of shares of Common Stock equal
to the number of shares of Common Stock as shall from time to time be necessary to effect the exercise or exchange of all of the
Purchased Warrants then outstanding (the “Required Reserve Amount”) (an “Authorized Share Failure”),
then the Company shall immediately take all action necessary to increase the Company’s authorized shares of Common Stock
to an amount sufficient to allow the Company to reserve the Required Reserve Amount for all the Purchased Warrants then outstanding.
Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized
Share Failure, but in no event later than ninety (90) days after the occurrence of such Authorized Share Failure, the Company
shall hold a meeting of its shareholders for the approval of an increase in the number of authorized shares of Common Stock. In
connection with such meeting, the Company shall provide each shareholder with a proxy statement and shall use its commercially
reasonable efforts to solicit its shareholders’ approval of such increase in authorized shares of Common Stock and to cause
its board of directors to recommend to the shareholders that they approve such proposal.
2.
ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The Exercise Price and number of Warrant Shares issuable upon
exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 2.
(a)
Stock Dividends and Splits. Without limiting any provision of Section 4, if the Company, at any time on or after the
Issuance Date, (i) pays a stock dividend on one or more classes of its then outstanding shares of Common Stock or otherwise makes
a distribution on any class of capital stock that is payable in shares of Common Stock, (ii) subdivides (by any stock split, stock
dividend, recapitalization or otherwise) one or more classes of its then outstanding shares of Common Stock into a larger number
of shares or (iii) combines (by combination, reverse stock split or otherwise) one or more classes of its then outstanding shares
of Common Stock into a smaller number of shares, then in each such case the Exercise Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator
shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause
(i) of this paragraph shall become effective immediately after the record date for the determination of shareholders entitled
to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this paragraph shall become effective
immediately after the effective date of such subdivision or combination. If any event requiring an adjustment under this paragraph
occurs during the period that an Exercise Price is calculated hereunder, then the calculation of such Exercise Price shall be
adjusted appropriately to reflect such event.
(b)
[RESERVED].
(c)
Number of Warrant Shares. Simultaneously with any adjustment to the Exercise Price pursuant to paragraph (a) of this
Section 2, the number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately,
so that after such adjustment the Aggregate Exercise Price payable hereunder for the adjusted number of Warrant Shares shall be
the same as the Aggregate Exercise Price in effect immediately prior to such adjustment (without regard to any limitations on
exercise contained herein). In addition, and notwithstanding anything to the contrary contained herein, (x) upon a Cashless Exercise
as set forth in Section 1(d) hereof, the number of Warrant Shares for which this Warrant is exercisable immediately following
such Cashless Exercise shall be equal to (i) the number of Warrant Shares for which this Warrant was exercisable immediately prior
to such Cashless Exercise less (ii) the number of Warrant Shares as to which such Cashless Exercise was exercised (such
number of Warrant Shares in this clause (ii) in respect of such Cashless Exercise being equal to “A” in such Cashless
Exercise formula in respect of such Cashless Exercise) and (y) the number of Warrant Shares issuable hereunder shall automatically
be increased, as necessary, to enable to the Company to comply with its obligations to issue the Net Number of shares of Common
Stock under Section 1(d) hereof upon any Cashless Exercise hereunder.
(d)
Calculations. All calculations under this Section 2 shall be made by rounding to the nearest 1/10000th of a cent and
the nearest 1/100th of a share, as applicable. The number of shares of Common Stock outstanding at any given time shall not include
shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue
or sale of Common Stock.
(e)
Other Events. In the event that the Company shall take any similar action to which the provisions hereof are not strictly
applicable, or, if applicable, would not operate to protect the Holder from dilution or if any event occurs of the type contemplated
by the provisions of this Section 2 but not expressly provided for by such provisions, then the Company’s board of directors
shall in good faith determine and implement an appropriate adjustment in the Exercise Price and the number of Warrant Shares (if
applicable) so as to protect the rights of the Holder, provided that no such adjustment pursuant to this Section 2(e) will increase
the Exercise Price or decrease the number of Warrant Shares as otherwise determined pursuant to this Section 2, provided further
that if the Required Holders (as defined below) do not accept such adjustments as appropriately protecting its interests hereunder
against such dilution, then the Company’s board of directors and the Required Holders shall agree, in good faith, upon an
independent investment bank of nationally recognized standing to make such appropriate adjustments, whose determination shall
be final and binding and whose fees and expenses shall be borne by the Company.
3.
RIGHTS UPON DISTRIBUTION OF ASSETS. In addition to any adjustments pursuant to Section 2 above, if the Company, at any
time prior to the Expiration Date, shall declare or make any dividend or other distribution of its assets (or rights to acquire
its assets) to all or substantially all of the holders of shares of Common Stock, by way of return of capital or otherwise (including,
without limitation, any distribution of cash, stock or other securities, indebtedness, property or options by way of a dividend,
spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”),
at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution
to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock
acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation,
the Maximum Percentage) immediately before the date on which a record is taken for such Distribution, or, if no such record is
taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution
(provided, however, to the extent that the Holder’s right to participate in any such Distributions would result in the Holder
exceeding the Maximum Percentage, then the Holder shall not be entitled to participate in such Distribution to such extent (or
the beneficial ownership of any such shares of Common Stock as a result of such Distribution to such extent) and such Distribution
to such extent shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not
result in the Holder exceeding the Maximum Percentage), provided further, such Distribution shall be held in abeyance for the
benefit of the Holder until such time as the Holder exercises this Warrant (whether in whole or in part), and subject to the foregoing
proviso, upon each exercise of this Warrant the Company shall make such Distribution to the Holder with respect to each Warrant
Share for which this Warrant is so exercised until such time as this Warrant has been exercised in full).
4.
PURCHASE RIGHTS; FUNDAMENTAL TRANSACTIONS.
(a)
Purchase Rights. In addition to any adjustments pursuant to Section 2 above, if the Company, at any time prior to the
Expiration Date, grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities
or other property pro rata to all or substantially all of the record holders of any class of shares of Common Stock (the “Purchase
Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon
complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Maximum
Percentage) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or,
if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such
Purchase Right would result in the Holder exceeding the Maximum Percentage, then the Holder shall not be entitled to participate
in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right
to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its
right thereto would not result in the Holder exceeding the Maximum Percentage), and provided further, that such Purchase Rights
shall be held in abeyance for the benefit of the Holder until such time as the Holder exercises this Warrant (whether in whole
or in part), and subject to the foregoing proviso, upon each exercise of this Warrant the Company shall deliver such Purchase
Rights to the Holder with respect to each Warrant Share for which this Warrant is so exercised until such time as this Warrant
has been exercised in full).
(b)
Fundamental Transactions. The Company shall not enter into or be party to a Fundamental Transaction unless the Successor
Entity assumes in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section
4(b) pursuant to written agreements in form and substance reasonably satisfactory to the Required Holders and approved by the
Required Holders prior to such Fundamental Transaction, including agreements confirming the obligations of the Successor Entity
as set forth in this paragraph (b) and (c) and elsewhere in this Warrant and an obligation to deliver to the Holder in exchange
for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance
to this Warrant, including, without limitation, which is exercisable for a corresponding number of shares of capital stock equivalent
to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the
exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder
to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental
Transaction and the value of such shares of capital stock for the purpose of protecting the economic value of this Warrant immediately
prior to the consummation of such Fundamental Transaction). Notwithstanding the foregoing, at the election of the Holder upon
exercise of this Warrant following a Fundamental Transaction, the Successor Entity shall deliver to the Holder, in lieu of the
shares of Common Stock (or other securities, cash, assets or other property (except such items still issuable under Sections 3
and 4(a) above, which shall continue to be receivable thereafter)) issuable upon the exercise of this Warrant prior to the applicable
Fundamental Transaction, such shares of common stock (or its equivalent) of the Successor Entity (including its Parent Entity),
or other securities, cash, assets or other property, which the Holder would have been entitled to receive upon the happening of
the applicable Fundamental Transaction had this Warrant been exercised immediately prior to the applicable Fundamental Transaction
(without regard to any limitations on the exercise of this Warrant).
(c)
Black Scholes Value—FT. Notwithstanding the foregoing and the provisions of Section 4(b) above, at the request
of the Holder delivered at any time commencing on the date of the consummation of any such Fundamental Transaction through the
date that is thirty (30) days after the consummation of any such Fundamental Transaction, the Company or the Successor Entity,
at the election of the Holder, shall purchase this Warrant from the Holder on the date of such request by paying to the Holder
cash in an amount equal to the Black Scholes Value—FT.
(d)
Application. The provisions of this Section 4 shall apply similarly and equally to successive Fundamental Transactions
and shall be applied as if this Warrant (and any such subsequent warrants issued hereunder) were fully exercisable and without
regard to any limitations on the exercise of this Warrant (provided that the Holder shall continue to be entitled to the benefit
of the Maximum Percentage, applied however with respect to shares of capital stock registered under the 1934 Act and thereafter
receivable upon exercise of this Warrant (or any such other warrant)).
5.
NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will not, by amendment of its Charter (as defined
in the Underwriting Agreement), Bylaws (as defined in the Underwriting Agreement) or through any reorganization, transfer of assets,
consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms of this Warrant, and will at all times in good faith carry out
all the provisions of this Warrant and take all action as may be required to protect the rights of the Holder. Without limiting
the generality of the foregoing, the Company (i) shall not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Exercise Price then in effect, (ii) shall take all such actions as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of Common Stock upon
the exercise of this Warrant, and (iii) shall, so long as any of the Purchased Warrants are outstanding, take all action necessary
to reserve and keep available out of its authorized and unissued shares of Common Stock, solely for the purpose of effecting the
exercise of the Purchased Warrants, the maximum number of shares of Common Stock as shall from time to time be necessary to effect
the exercise of the Purchased Warrants then outstanding (without regard to any limitations on exercise).
6.
WARRANT HOLDER NOT DEEMED A SHAREHOLDER. Except as otherwise specifically provided herein, the Holder, solely in its capacity
as a holder of this Warrant, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the
Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder, solely in its capacity
as the Holder of this Warrant, any of the rights of a shareholder of the Company or any right to vote, give or withhold consent
to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance
or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the
Holder of the Warrant Shares which it is then entitled to receive upon the due exercise of this Warrant. In addition, nothing
contained in this Warrant shall be construed as imposing any liabilities on the Holder to purchase any securities (upon exercise
of this Warrant or otherwise) or as a shareholder of the Company, whether such liabilities are asserted by the Company or by creditors
of the Company. Notwithstanding this Section 6, the Company shall provide the Holder with copies of the same notices and other
information given to the shareholders of the Company generally, contemporaneously with the giving thereof to the shareholders;
provided however, that the Company shall not be obligated to provide such information if it is filed with the SEC through EDGAR
and available to the public through the EDGAR system.
7.
REISSUANCE OF WARRANTS.
(a)
Transfer of Warrant. If this Warrant is to be transferred, the Holder shall surrender this Warrant (or the Book Entry Warrant
Certificate) to the Company or the Warrant Agent (or other designated agent), whereupon the Company or the Warrant Agent (or other
designated agent) will forthwith issue and deliver upon the order of the Holder a new Warrant (or Book Entry Warrant Certificate)
(in accordance with Section 7(d)), registered as the Holder may request, representing the right to purchase the number of Warrant
Shares being transferred by the Holder and, if less than the total number of Warrant Shares then underlying this Warrant is being
transferred, a new Warrant (or Book Entry Warrant Certificate) (in accordance with Section 7(d)) to the Holder representing the
right to purchase the number of Warrant Shares not being transferred.
(b)
Lost, Stolen or Mutilated Warrant. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of this Warrant (or the Book Entry Warrant Certificate) (as to which a written certification
and the indemnification contemplated below shall suffice as such evidence), and, in the case of loss, theft or destruction, of
any indemnification undertaking by the Holder to the Company in customary and reasonable form (including posting a bond) and,
in the case of mutilation, upon surrender and cancellation of this Warrant (or the Book Entry Warrant Certificate), the Company
shall execute and deliver to the Holder a new Warrant (or Book Entry Warrant Certificate) (in accordance with Section 7(d)) representing
the right to purchase the Warrant Shares then underlying this Warrant.
(c)
Exchangeable for Multiple Warrants. This Warrant is exchangeable, upon the surrender hereof (or of the Book Entry Warrant
Certificate) by the Holder at the principal office of the Company, for a new Warrant or Warrants (or Book Entry Warrant Certificates)
(in accordance with Section 7(d)) representing in the aggregate the right to purchase the number of Warrant Shares then underlying
this Warrant, and each such new Warrant (or Book Entry Warrant Certificate) will represent the right to purchase such portion
of such Warrant Shares as is designated by the Holder at the time of such surrender; provided, however, no warrants for fractional
shares of Common Stock shall be given.
(d)
Issuance of New Warrants. Whenever the Company is required to issue a new Warrant (or Book Entry Warrant Certificate)
pursuant to the terms of this Warrant, such new Warrant (or Book Entry Warrant Certificate) (i) shall be of like tenor with this
Warrant (or Book Entry Warrant Certificate), (ii) shall represent, as indicated on the face of such new Warrant (or Book Entry
Warrant Certificate), the right to purchase the Warrant Shares then underlying this Warrant (or in the case of a new Warrant (or
Book Entry Warrant Certificate) being issued pursuant to Section 7(a) or Section 7(c), the Warrant Shares designated by the Holder
which, when added to the number of shares of Common Stock underlying the other new Warrants (or Book Entry Warrant Certificates)
issued in connection with such issuance, does not exceed the number of Warrant Shares then underlying this Warrant), (iii) shall
have an issuance date, as indicated on the face of such new Warrant (or Book Entry Warrant Certificate) which is the same as the
Issuance Date, and (iv) shall have the same rights and conditions as this Warrant.
8.
NOTICES. Whenever notice is required to be given under this Warrant, unless otherwise provided herein, such notice shall
be in writing and shall be deemed given (w) the date of transmission, if such notice or communication is delivered via facsimile
or email at the number or email address set forth below prior to 5:00 p.m. (New York time) on a Business Day, (x) on the date
delivered, if delivered personally, (y) on the first Business Day following the deposit thereof with Federal Express or another
recognized overnight courier, if sent by Federal Express or another recognized overnight courier, and (z) on the fourth Business
Day following the mailing thereof with postage prepaid, if mailed by registered or certified mail (return receipt requested),
in each case to the parties at the following addresses (or at such other address for a party as shall be specified by like notice).
|
(a)
|
If
to the Company, to: |
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|
|
|
|
Vapor Corp. |
|
|
3001 Griffin Road |
|
|
Dania Beach, Florida
33312 |
|
|
Attention: Chief
Financial Officer |
|
|
Facsimile: [ ]
|
|
|
Email: jmartin@vpco.com |
|
|
|
|
|
Equity Stock Transfer
Co. |
|
|
237 West 37th
Street, Suite 601 |
|
|
New York, NY 10018 |
|
|
Attention: Nora
Marckwordt |
|
|
Email: nora@equitystock.com |
(c)
If to the Holder, to the address of such holder as shown on the Warrant Register. Any notice required to be delivered
by the Company to the Holder may be given by the Warrant Agent on behalf of the Company. The Company shall provide the Holder
with prompt written notice of all actions taken pursuant to this Warrant, including in reasonable detail a description of such
action and the reason therefor. Without limiting the generality of the foregoing, the Company will give written notice to the
Holder (i) as soon as practicable upon each adjustment of the Exercise Price and the number of Warrant Shares, setting forth in
reasonable detail, and certifying, the calculation of such adjustment(s) and (ii) at least fifteen (15) days prior to the date
on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the shares of Common
Stock, (B) with respect to any grants, issuances or sales of any Options, Convertible Securities or rights to purchase stock,
warrants, securities, indebtedness, or other property pro rata to holders of shares of Common Stock or (C) for determining rights
to vote with respect to any Fundamental Transaction, dissolution or liquidation, provided in each case that such information (to
the extent it constitutes, or contains, material, non-public information regarding the Company or any of its Subsidiaries shall
be made known to the public prior to or in conjunction with such notice being provided to the Holder and (iii) at least ten (10)
Trading Days prior to the consummation of any Fundamental Transaction. To the extent that any notice provided hereunder (whether
under this Section 8 or otherwise) constitutes, or contains, material, non-public information regarding the Company or any of
its Subsidiaries, the Company shall simultaneously file such notice with the SEC pursuant to a Current Report on Form 8-K.
9.
AMENDMENT AND WAIVER. Except as otherwise expressly set forth herein, the provisions of this Warrant may be amended only
with the written consent of the Company and the Holders holding 100% of the then outstanding Warrants. Except as otherwise expressly
set forth herein, no waiver shall be effective unless it is in writing and signed by an authorized representative of the waiving
party, and any waiver of any provision of this Warrant made in conformity with the provisions of this Section 9 shall be binding
on the Holder, provided that no such waiver shall be effective to the extent that it (1) applies to less than all Purchased Warrants
then outstanding (unless a party gives a waiver as to itself only) or (2) imposes any obligation or liability on the Holder without
the Holder’s prior written consent (which may be granted or withheld in the Holder’s sole discretion). Notwithstanding
the foregoing, nothing contained in this Section 9 shall permit any amendment or waiver of any provision of Section 1(f).
10.
SEVERABILITY. If any provision of this Warrant is prohibited by law or otherwise determined to be invalid or unenforceable
by a court of competent jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed
amended to apply to the broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such
provision shall not affect the validity of the remaining provisions of this Warrant so long as this Warrant as so modified continues
to express, without material change, the original intentions of the parties as to the subject matter hereof and the prohibited
nature, invalidity or unenforceability of the provision(s) in question does not substantially impair the respective expectations
or reciprocal obligations of the parties or the practical realization of the benefits that would otherwise be conferred upon the
parties. The parties will endeavor in good faith negotiations to replace the prohibited, invalid or unenforceable provision(s)
with a valid provision(s), the effect of which comes as close as possible to that of the prohibited, invalid or unenforceable
provision(s).
11.
GOVERNING LAW. This Warrant shall be governed by and construed and enforced in accordance with, and all questions concerning
the construction, validity, interpretation and performance of this Warrant shall be governed by, the internal laws of the State
of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York
or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York.
The Company hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New
York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an
inconvenient forum or that the venue of such suit, action or proceeding is improper. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law. Nothing contained herein shall (i) be deemed or
operate to preclude the Holder from bringing suit or taking other legal action against the Company in any other jurisdiction to
collect on the Company’s obligations to the Holder or to enforce a judgment or other court ruling in favor of the Holder
or (ii) limit, or be deemed to limit, any provision of Section 13. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE
TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT
OF THIS WARRANT OR ANY TRANSACTION CONTEMPLATED HEREBY.
12.
CONSTRUCTION; HEADINGS. This Warrant shall be deemed to be jointly drafted by the Company and the Holder and shall not
be construed against any Person as the drafter hereof. The headings of this Warrant are for convenience of reference and shall
not form part of, or affect the interpretation of, this Warrant.
13. DISPUTE
RESOLUTION.
(a)
Disputes Over the Exercise Price, Exchange Amount, Closing Sale Price, Bid Price, the Black Scholes Value—FT or Fair
Market Value.
(i)
In the case of a dispute relating to the Exercise Price, the Exchange Amount, the Closing Sale Price, the Closing Bid Price,
the Bid Price, the Black Scholes Value—FT or fair market value (as the case may be) (including, without limitation, a dispute
relating to the determination of any of the foregoing), the Company or the Required Holders (as the case may be) shall submit
the dispute via e-mail or facsimile (I) within twenty (20) Business Days after delivery of the applicable notice giving rise to
such dispute to the Company or the Required Holders (as the case may be) or (II) if no notice gave rise to such dispute, at any
time after the Required Holders learned of the circumstances giving rise to such dispute. If the Required Holders and the Company
are unable to resolve such dispute relating to the Exercise Price, the Exchange Amount, the Closing Sale Price, the Closing Bid
Price, the Bid Price, the Black Scholes Value—FT or fair market value (as the case may be) by 5:00 p.m. (New York time)
on the third (3rd) Business Day following such delivery by the Company or the Required Holders (as the case may be) of such dispute
to the Company or the Required Holders (as the case may be), then the Required Holders shall select an independent, reputable
investment bank to resolve such dispute.
(ii)
The Required Holders and the Company shall each deliver to such investment bank (x) a copy of the initial dispute submission so
delivered in accordance with the first sentence of this Section 13(a) and (y) written documentation supporting its position with
respect to such dispute, in each case, no later than 5:00 p.m. (New York time) by the fifth (5th) Business Day immediately following
the date on which the Required Holders selected such investment bank (the “Dispute Submission Deadline”) (the
documents referred to in the immediately preceding clauses (x) and (y) are collectively referred to herein as the “Required
Dispute Documentation”) (it being understood and agreed that if either the Required Holders or the Company fails to
so deliver all of the Required Dispute Documentation by the Dispute Submission Deadline, then the party who fails to so submit
all of the Required Dispute Documentation shall no longer be entitled to (and hereby waives its right to) deliver or submit any
written documentation or other support to such investment bank with respect to such dispute and such investment bank shall resolve
such dispute based solely on the Required Dispute Documentation that was delivered to such investment bank prior to the Dispute
Submission Deadline). Unless otherwise agreed to in writing by both the Company and the Required Holders or otherwise requested
by such investment bank, neither the Company nor the Required Holders shall be entitled to deliver or submit any written documentation
or other support to such investment bank in connection with such dispute (other than the Required Dispute Documentation).
(iii)
The Company and the Required Holders shall cause such investment bank to determine the resolution of such dispute and notify the
Company and the Required Holders of such resolution no later than ten (10) Business Days immediately following the Dispute Submission
Deadline. The fees and expenses of such investment bank shall be borne by the Company (provided that such fees and expenses shall
be borne equally by the Company and the Required Holders only if such investment bank’s determination of the disputed Exercise
Price, Exchange Amount, Closing Sale Price, Closing Bid Price, Bid Price, Black Scholes Value—FT or fair market value (as
the case may be) was equal to or greater than 98% of the Company’s determination thereof that gave rise to the applicable
dispute), and such investment bank’s resolution of such dispute shall be final and binding upon all parties absent manifest
error.
(b)
Disputes Over Arithmetic Calculation of Warrant Shares.
(i)
In the case of a dispute as to the arithmetic calculation of the number of Warrant Shares, the Company or the Required Holders
(as the case may be) shall submit the disputed arithmetic calculation via facsimile (i) within twenty (20) Business Days after
delivery of the applicable notice giving rise to such dispute to the Company or the Required Holders (as the case may be) or (ii)
if no notice gave rise to such dispute, at any time after the Required Holders learned of the circumstances giving rise to such
dispute. If the Required Holders and the Company are unable to resolve such disputed arithmetic calculation of the number of Warrant
Shares by 5:00 p.m. (New York time) on the third (3rd) Business Day following such delivery by the Company or the Required Holders
(as the case may be) of such disputed arithmetic calculation of the number of Warrant Shares to the Company or the Required Holders
(as the case may be), then the Required Holders shall select an independent, reputable accountant or accounting firm to perform
such disputed arithmetic calculation of the number of Warrant Shares.
(ii)
The Required Holders and the Company shall each deliver to such accountant or accounting firm (as the case may be) (x) a copy
of the initial dispute submission so delivered in accordance with the first sentence of this Section 13(b) and (y) written documentation
supporting its position with respect to such disputed arithmetic calculation of the number of Warrant Shares, in each case, no
later than 5:00 p.m. (New York time) by the fifth (5th) Business Day immediately following the date on which the Required Holders
selected such accountant or accounting firm (as the case may be) (the “Submission Deadline”) (the documents
referred to in the immediately preceding clauses (x) and (y) are collectively referred to herein as the “Required Documentation”)
(it being understood and agreed that if either the Required Holders or the Company fails to so deliver all of the Required Documentation
by the Submission Deadline, then the party who fails to so submit all of the Required Documentation shall no longer be entitled
to (and hereby waives its right to) deliver or submit any written documentation or other support to such accountant or accounting
firm (as the case may be) with respect to such disputed arithmetic calculation of the number of Warrant Shares and such accountant
or accounting firm (as the case may be) shall perform such disputed arithmetic calculation of the number of Warrant Shares based
solely on the Required Documentation that was delivered to such accountant or accounting firm (as the case may be) prior to the
Submission Deadline). Unless otherwise agreed to in writing by both the Company and the Required Holders or otherwise requested
by such accountant or accounting firm (as the case may be), neither the Company nor the Required Holders shall be entitled to
deliver or submit any written documentation or other support to such accountant or accounting firm (as the case may be) in connection
with such disputed arithmetic calculation of the number of Warrant Shares (other than the Required Documentation).
(iii)
The Company and the Required Holders shall cause such accountant or accounting firm (as the case may be) to perform such disputed
arithmetic calculation and notify the Company and the Required Holders of the results no later than ten (10) Business Days immediately
following the Submission Deadline. The fees and expenses of such accountant or accounting firm (as the case may be) shall be borne
solely by the Company, and such accountant’s or accounting firm’s (as the case may be) arithmetic calculation shall
be final and binding upon all parties absent manifest error.
(c)
Miscellaneous. The Company expressly acknowledges and agrees that (i) this Section 13 constitutes an agreement
to arbitrate between the Company and the Required Holders (and constitutes an arbitration agreement) under § 7501, et seq.
of the New York Civil Practice Law and Rules (“CPLR”) and that each party is authorized to apply for an order
to compel arbitration pursuant to CPLR § 7503(a) in order to compel compliance with this Section 13, (ii) the terms of this
Warrant shall serve as the basis for the selected investment bank’s resolution of the applicable dispute, such investment
bank shall be entitled (and is hereby expressly authorized) to make all findings, determinations and the like that such investment
bank determines are required to be made by such investment bank in connection with its resolution of such dispute and in resolving
such dispute such investment bank shall apply such findings, determinations and the like to the terms of this Warrant, (iii) the
terms of this Warrant shall serve as the basis for the selected accountant’s or accounting firm’s performance of the
applicable arithmetic calculation of the number of Warrant Shares, (iv) for clarification purposes and without implication that
the contrary would otherwise be true, disputes relating to matters described in Section 13(a) shall be governed by Section 13(a)
and not by Section 13(b), (v) the Required Holders (and only the Required Holders), in their sole discretion, shall have the right
to submit any dispute described in this Section 13 to any state or federal court sitting in The City of New York, Borough of Manhattan
in lieu of utilizing the procedures set forth in this Section 13 and (vi) nothing in this Section 13 shall limit the Holder from
obtaining any injunctive relief or other equitable remedies (including, without limitation, with respect to any matters described
in Section 13(a) or Section 13(b)).
14.
REMEDIES, CHARACTERIZATION, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies provided in this Warrant shall
be cumulative and in addition to all other remedies available under this Warrant, at law or in equity (including a decree of specific
performance and/or other injunctive relief), and nothing herein shall limit the right of the Holder to pursue damages for any
failure by the Company to comply with the terms of this Warrant. The Company covenants to the Holder that there shall be no characterization
concerning this instrument other than as expressly provided herein. Amounts set forth or provided for herein with respect to payments,
exercises and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as
expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges
that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any
such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the holder
of this Warrant shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without
the necessity of showing economic loss and without any bond or other security being required. The Company shall provide all information
and documentation to the Holder that is requested by the Holder to enable the Holder to confirm the Company’s compliance
with the terms and conditions of this Warrant (including, without limitation, compliance with Section 2 hereof). The issuance
of shares and certificates for shares as contemplated hereby upon the exercise of this Warrant shall be made without charge to
the Holder or such shares for any issuance tax or other costs in respect thereof, provided that the Company shall not be required
to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name
other than the Holder or its agent on its behalf.
15.
TRANSFER. This Warrant may be offered for sale, sold, transferred or assigned without the consent of the Company.
16.
CERTAIN DEFINITIONS. For purposes of this Warrant, the following terms shall have the following meanings:
(a)
“Bid Price” means, for any security as of the particular time of determination, the bid price for such
security on the Principal Market as reported by Bloomberg as of such time of determination, or, if the Principal Market is not
the principal securities exchange or trading market for such security, the bid price of such security on the principal securities
exchange or trading market where such security is listed or traded as reported by Bloomberg as of such time of determination,
or if the foregoing does not apply, the bid price of such security in the over-the-counter market on the electronic bulletin board
for such security as reported by Bloomberg as of such time of determination, or, if no bid price is reported for such security
by Bloomberg as of such time of determination, the average of the bid prices of all of the market makers for such security as
reported in the “pink sheets” by OTC Markets Group Inc. as of such time of determination. If the Bid Price cannot
be calculated for a security as of the particular time of determination on any of the foregoing bases, the Bid Price of such security
as of such time of determination shall be the fair market value as mutually determined by the Company and the Required Holders.
If the Company and the Required Holders are unable to agree upon the fair market value of such security, then such dispute shall
be resolved in accordance with the procedures in Section 13. All such determinations shall be appropriately adjusted for any stock
dividend, stock split, stock combination or other similar transaction during such period.
(b)
“Black Scholes Value” means the Black Scholes value of an option for one share of Common Stock at the date
of the applicable Cashless Exercise, as such Black Scholes value is determined, calculated using the Black Scholes Option Pricing
Model obtained from the “OV” function on Bloomberg utilizing (i) an underlying price per share equal to the Closing
Bid Price of the Common Stock as of the Date of Issuance (adjusted to the same extent that the Exercise Price hereunder has been
adjusted pursuant to Section 2(a) hereof), (ii) a risk-free interest rate corresponding to the U.S. Treasury rate for a period
equal to the remaining term of the Warrant as of the applicable Cashless Exercise, (iii) a strike price equal to the Exercise
Price in effect at the time of the applicable Cashless Exercise, (iv) an expected volatility equal to 135% and (v) a remaining
term of such option equal to five (5) years (regardless of the actual remaining term of the Warrant).
(c)
“Black Scholes Value—FT” means the value of the unexercised portion of this Warrant remaining on
the date of the Holder’s request pursuant to Section 4(c), which value is calculated using the Black Scholes Option Pricing
Model obtained from the “OV” function on Bloomberg utilizing (i) an underlying price per share equal to the
greater of (1) the highest Closing Sale Price of the Common Stock during the period beginning on the Trading Day immediately preceding
the earliest to occur of (x) the public disclosure of the applicable Fundamental Transaction, (y) the consummation of the applicable
Fundamental Transaction and (z) the date on which the Holder first became aware of the applicable Fundamental Transaction and
ending on the Trading Day of the Holder’s request pursuant to Section 4(c) and (2) the sum of the price per share being
offered in cash in the applicable Fundamental Transaction (if any) plus the value of the non-cash consideration being offered
in the applicable Fundamental Transaction (if any), (ii) a strike price equal to the Exercise Price in effect on the date of the
Holder’s request pursuant to Section 4(c), (iii) a risk-free interest rate corresponding to the U.S. Treasury rate for a
period equal to the greater of (1) the remaining term of this Warrant as of the date of the Holder’s request pursuant to
Section 4(c) and (2) the remaining term of this Warrant as of the date of consummation of the applicable Fundamental Transaction
and (iv) an expected volatility equal to the greater of 135% and the 100 day volatility obtained from the HVT function on Bloomberg
(determined utilizing a 365 day annualization factor) as of the Trading Day immediately following the earliest to occur of (x)
the public disclosure of the applicable Fundamental Transaction, (y) the consummation of the applicable Fundamental Transaction
and (z) the date on which the Holder first became aware of the applicable Fundamental Transaction.
(d)
“Bloomberg” means Bloomberg, L.P.
(e)
“Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City
of New York are authorized or required by law to remain closed.
(f)
“Closing Bid Price” and “Closing Sale Price” means, for any security as of any date,
the last closing bid price and the last closing trade price, respectively, for such security on the Principal Market, as reported
by Bloomberg, or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid
price or the closing trade price (as the case may be) then the last bid price or last trade price, respectively, of such security
prior to 4:00:00 p.m., New York time, as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange
or trading market for such security, the last closing bid price or last trade price, respectively, of such security on the principal
securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the average of the bid prices, or the ask prices, respectively, of all of the market makers for such security as reported
in the “pink sheets” by OTC Markets Group, Inc. If the Closing Bid Price or the Closing Sale Price cannot be calculated
for a security on a particular date on any of the foregoing bases, the Closing Bid Price or the Closing Sale Price (as the case
may be) of such security on such date shall be the fair market value as mutually determined by the Company and the Required Holders.
If the Company and the Required Holders are unable to agree upon the fair market value of such security, then such dispute shall
be resolved in accordance with the procedures in Section 13. All such determinations shall be appropriately adjusted for any stock
dividend, stock split, stock combination or other similar transaction during such period.
(g)
“Common Stock” means (i) the Company’s shares of common stock, $0.001 par value per share, and (ii) any
capital stock into which such common stock shall have been changed or any share capital resulting from a reclassification of such
common stock.
(h)
“Convertible Securities” means any stock, note, debenture or other security (other than Options) that is,
or may become, at any time and under any circumstances, directly or indirectly, convertible into, exercisable or exchangeable
for, or which otherwise entitles the holder thereof to acquire, any shares of Common Stock.
(i)
“Early Exercise Trigger Date” means either: (i) 15 days after the tenth (10th) consecutive trading day
upon which the Common Stock trades above 200% of the Exercise Price (subject to adjustment as set forth in Section 2), or (ii)
immediately upon the delisting of the Units, provided, however, that such 10-day period under (i) cannot begin, nor any Early
Exercise Trigger Date cannot take place until at least thirty (30) days after the date of the prospectus included in the registration
statement pursuant to which the Units were issued of which this Warrant was a component (the “Date of Issuance”).
(j)
“Eligible Market” means the NYSE MKT, the New York Stock Exchange, The Nasdaq Global Select Market, The
Nasdaq Global Market, the Principal Market, the OTCQX or the OTCQB (or any successor to any of the foregoing).
(k)
“Equity Conditions” means: (i) the Company shall have complied in all material respects with all applicable
securities laws and regulations and all rules and regulations of the Eligible Markets in respect of the offer, sale and issuance
of the Securities, (ii) the Common Stock (including all shares of Common Stock to be received by Holder) shall be listed or designated
for quotation (as applicable) on an Eligible Market and no Trading Market Event (or event which with notice or passage of time
would be a Trading Market Event) has occurred, nor shall delisting or suspension by any Eligible Market be pending or threatened,
unless upon the occurrence of such Trading Market Event, delisting or suspension, the Common Stock would be eligible for listing
or for quotation (as applicable) on another Eligible Market, (iii) the Company shall be in compliance in all material respects
with all of its obligations under this Warrant, (iv) each of the Registration Statement (as defined in the Underwriting Agreement)
and the prospectus contained therein shall be effective and fully available for use with respect to the issuance of all of the
Securities, including, without limitation, any Warrant Shares issued pursuant to a cash exercise hereof, (v) all Warrant Shares
(including any Warrant Shares to be received upon exercise or exchange of this Warrant and including any Warrant Shares to be
issued in a cash exercise, but taking into account the limitations of Section 1(f)) shall be then (or upon such issuance (as the
case may be)) freely tradable by the Holder without restriction of any kind or nature (and the Company shall have no knowledge
of any fact which would reasonably be expected to negate the foregoing in the foreseeable future), (vi) no limitation shall be
applicable with respect to the issuance of any Warrant Shares hereunder (other than under Section 1(f)), and (vii) the Company
is fully reporting under the Securities Exchange Act of 1934, as amended (“1934 Act”). For purposes hereof, a “Trading
Market Event” shall mean if the Company or the Common Stock or any shares of Common Stock issued or issuable hereunder
shall cease or fail to be listed for trading or quoted on any Eligible Market or shall fall below any dollar threshold for listing
or qualification or the Company shall then not be in compliance with any applicable listing or qualification standard (or will
be with the passage of time).
(l)
“Equity Conditions Failure” means that on any applicable date of determination, any of the Equity Conditions
have not been satisfied.
(m)
“Expiration Date” means the date that is the fifth (5th) anniversary of the Issuance Date or, if such date
falls on a day other than a Business Day or on which trading does not take place on the Principal Market (a “Holiday”),
the next date that is not a Holiday.
(n)
“Fundamental Transaction” means that (i) the Company or any of its Subsidiaries shall, directly or indirectly,
in one or more related transactions, (1) consolidate or merge with or into (whether or not the Company or any of its Subsidiaries
is the surviving corporation) any other Person unless the shareholders of the Company immediately prior to such consolidation
or merger continue to hold more than 50% of the outstanding shares of Voting Stock after such consolidation or merger, or (2)
sell, lease, license, assign, transfer, convey or otherwise dispose of all or substantially all of its respective properties or
assets to any other Person, or (3) allow any other Person to make a purchase, tender or exchange offer that is accepted by the
holders of more than 50% of the outstanding shares of Voting Stock of the Company (not including any shares of Voting Stock of
the Company held by the Person or Persons making or party to, or associated or affiliated with the Persons making or party to,
such purchase, tender or exchange offer), or (4) consummate a stock or share purchase agreement or other business combination
(including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with any other Person whereby
such other Person acquires more than 50% of the outstanding shares of Voting Stock of the Company (not including any shares of
Voting Stock of the Company held by the other Person or other Persons making or party to, or associated or affiliated with the
other Persons making or party to, such stock or share purchase agreement or other business combination), or (ii) any “person”
or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the 1934 Act and the rules and regulations
promulgated thereunder) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly
or indirectly, of 50% of the aggregate ordinary voting power represented by issued and outstanding Voting Stock of the Company.
(o)
“Options” means any rights, warrants or options to subscribe for or purchase shares of Common Stock or
Convertible Securities.
(p)
“Parent Entity” of a Person means an entity that, directly or indirectly, controls the applicable Person
and whose common stock or equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one
such Person or Parent Entity, the Person or Parent Entity with the largest public market capitalization as of the date of consummation
of the Fundamental Transaction.
(q)
“Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation,
a trust, an unincorporated organization, any other entity or a government or any department or agency thereof.
(r)
“Principal Market” means The Nasdaq Capital Market.
(s)
“Required Holders” means, collectively, as of a particular time of determination, (as applicable) holders
of Purchased Warrants then exercisable for an aggregate number of shares of Common Stock equal to at least 66.7% of the number
of shares of Common Stock issuable upon exercise of all Purchased Warrants outstanding as of such time of determination (disregarding
all limitations on exercise set forth in the Purchased Warrants).
(t)
“Successor Entity” means the Person (or, if so elected by the Holder, the Parent Entity) formed by, resulting
from or surviving any Fundamental Transaction or the Person (or, if so elected by the Holder, the Parent Entity) with which such
Fundamental Transaction shall have been entered into.
(u)
“Trading Day” means, as applicable, (x) with respect to all price determinations relating to the Common
Stock, any day on which the Common Stock is traded on the Principal Market, or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or securities market on which the Common Stock is then
traded, provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to trade on such
exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of
trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on
such exchange or market, then during the hour ending at 4:00:00 p.m., New York time) unless such day is otherwise designated as
a Trading Day in writing by the Holder or (y) with respect to all determinations other than price determinations relating to the
Common Stock, any day on which The New York Stock Exchange (or any successor thereto) is open for trading of securities.
(v)
“Voting Stock” of a Person means capital stock of such Person of the class or classes pursuant to which
the holders thereof have the general voting power to elect, or the general power to appoint, at least a majority of the board
of directors, managers or trustees of such Person (irrespective of whether or not at the time capital stock of any other class
or classes shall have or might have voting power by reason of the happening of any contingency).
[Signature
page follows]
IN
WITNESS WHEREOF, the Company has caused this Warrant to Purchase Common Stock to be duly executed as of the Issuance Date
set out above.
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VAPOR
CORP. |
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By: |
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Name: |
Jeffrey E. Holman |
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Title: |
Chief Executive
Officer |
[Signature
Page to Warrant to Purchase Common Stock]
SCHEDULE
A
WIRE
INSTRUCTIONS FOR CASH EXERCISE
[NAME
OF BANK] |
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ABA # [ ] |
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ACCT # [ ] |
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ACCT NAME: [ ]
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Schedule
A-1
EXHIBIT
A
EXERCISE
NOTICE
TO
BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS
WARRANT
TO PURCHASE COMMON STOCK
VAPOR
CORP.
The
undersigned holder hereby exercises the right to purchase of the shares of Common Stock (“Warrant Shares”)
of Vapor Corp., a company incorporated under the laws of the Delaware (the “Company”), evidenced by Warrant
to Purchase Common Stock No. (the “Warrant”). Capitalized terms used herein and not otherwise defined shall
have the respective meanings set forth in the Warrant.
1.
Form of Exercise Price. The Holder intends that payment of the Exercise Price shall be made as:
a
“Cash Exercise” with respect to Warrant Shares; and/or
a
“Cashless Exercise” with respect to Warrant Shares.
In
the event of a “Cash Exercise”, this Exercise Notice and the Aggregate Exercise Price shall be delivered to the Warrant
Agent. In the event of a “Cashless Exercise”, this Exercise Notice shall be delivered to the Company.
In
the event that the Holder has elected a Cashless Exercise with respect to some or all of the Warrant Shares, the Holder represents
and warrants that the Exchange Amount is $ and, if the Company is permitted to elect to issue shares of Common Stock, shares of
Common Stock are to be delivered to Holder as the Net Number pursuant to such Cashless Exercise, as further specified in Annex
A to this Exercise Notice.
2.
Payment of Exercise Price. In the event that the Holder has elected a Cash Exercise with respect to some or all of the
Warrant Shares, the Holder shall pay the Aggregate Exercise Price in the sum of $ to the Warrant Agent in accordance with the
terms of the Warrant.
3.
Delivery of Warrant Shares and Net Number of shares of Common Stock. The Company shall cause the Warrant Agent to deliver
to Holder, or its designee or agent as specified below, shares of Common Stock in respect of the exercise contemplated hereby.
Delivery shall be made to Holder, or for its benefit, to the following address:
Exhibit
A-1
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Name of Registered Holder |
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By: |
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Name: |
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Title: |
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Account Number: |
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(if electronic book entry transfer) |
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Transaction Code Number: |
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(if electronic book entry transfer) |
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Exhibit
A-2
ANNEX
A TO EXERCISE NOTICE
CASHLESS
EXERCISE EXCHANGE CALCULATION
TO
BE FILLED IN BY THE REGISTERED HOLDER TO EXCHANGE THIS
WARRANT
TO PURCHASE COMMON STOCK FOR COMMON STOCK IN A
CASHLESS
EXERCISE PURSUANT TO SECTION 1(d) OF THE WARRANT
Capitalized
terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant.
Net Number
= (A x B)/C = shares of Common Stock
For purposes
of the foregoing formula:
A= the total
number of shares with respect to which this Warrant is then being exercised = .
B= Black
Scholes Value = .
C=
the Closing Bid Price of the Common Stock as of two (2) Trading Days prior to the time of such exercise = .
Date: , |
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Name
of Registered Holder |
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Annex
A-1
EXHIBIT
B
ACKNOWLEDGMENT
The
Company hereby acknowledges this Exercise Notice and hereby directs Equity Stock Transfer Co. to issue the above indicated number
of shares of Common Stock.
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VAPOR
CORP. |
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By:
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Name: |
Jeffrey E. Holman |
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Title: |
Chief Executive Officer |
Exhibit
B-1
Exhibit
4.3
THE
REGISTERED HOLDER OF THIS UNIT PURCHASE OPTION BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS
UNIT PURCHASE OPTION EXCEPT AS HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS UNIT PURCHASE OPTION AGREES THAT IT WILL NOT
SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE, OR BE THE SUBJECT OF ANY HEDGING, SHORT SALE, DERIVATIVE, PUT, OR CALL TRANSACTION
THAT WOULD RESULT IN THE EFFECTIVE ECONOMIC DISPOSITION OF THIS UNIT PURCHASE OPTION, FOR A PERIOD OF ONE HUNDRED EIGHTY (180)
DAYS FOLLOWING THE EFFECTIVE DATE (DEFINED BELOW) TO ANYONE OTHER THAN (I) DAWSON JAMES SECURITIES, INC. OR AN UNDERWRITER OR
A SELECTED DEALER IN CONNECTION WITH THE OFFERING (DEFINED BELOW), OR (II) A BONA FIDE OFFICER OR PARTNER OF DAWSON JAMES SECURITIES,
INC. OR OF ANY SUCH UNDERWRITER OR SELECTED DEALER.
UNIT
PURCHASE OPTION
FOR
THE PURCHASE OF [●] UNITS
OF
VAPOR CORP.
1.
Unit Purchase Option.
THIS
CERTIFIES THAT, in consideration of $100.00 duly paid by or on behalf of Dawson James Securities, Inc. (“Dawson”
or “Holder”), as registered owner of this Unit Purchase Option, to Vapor Corp. (the “Company”),
Holder is entitled, at any time or from time to time over a four and one-half year period commencing on the 180th day
after the effective date (the “Effective Date”) of the registration statement (the “Registration Statement”)
pursuant to which certain units are offered for sale to the public (the “Offering”) (the “Commencement
Date”), and at or before 5:00 p.m., Eastern Time, on the fifth anniversary of the Effective Date (the “Expiration
Date”), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to [●] units (the
“Units”) of the Company, each Unit consisting of one-fourth share of Series A Convertible Preferred
Stock (the “Preferred Stock”) which is convertible into [___] shares of the Company’s common stock,
par value $0.001 per share (the “Shares”) and [___] Series A Warrants, each to purchase one Share
(the “Warrant(s)”). Each Warrant is the same as the warrants included in the Units being registered for sale
to the public (the “Public Warrants”) under the Securities Act of 1933, as amended (the “Act”).
If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Unit Purchase Option may
be exercised on the next succeeding day which is not such a day in accordance with the terms herein. During the period ending
on the Expiration Date, the Company agrees not to take any action that would terminate the Unit Purchase Option. This Unit Purchase
Option is initially exercisable at $[●] per Unit (or 125% of the public offering price of the Units being sold in the Offering)
so purchased; provided, however, that upon the occurrence of any of the events specified in Section 5 hereof, the rights granted
by this Unit Purchase Option, including the exercise price per Unit and the number of Units (and Preferred Stock and Warrants)
to be received upon such exercise, shall be adjusted as therein specified. The term “Exercise Price” shall
mean the initial exercise price or the adjusted exercise price, depending on the context.
2.
Exercise.
(a)
Exercise Procedure. In order to
exercise this Unit Purchase Option, the exercise form attached hereto must be duly executed and completed and delivered to the
Company, together with this Unit Purchase Option and payment of the Exercise Price for the Units being purchased payable in cash
or by certified check or official bank check. If the subscription rights represented hereby shall not be exercised at or before
5:00 p.m., Eastern time, on the Expiration Date, this Unit Purchase Option shall become and be void without further force or effect,
and all rights represented hereby shall cease and expire.
(b)
Legend. If required by applicable
law at the time of any exercise, each certificate for the securities purchased under this Unit Purchase Option shall bear a legend
as follows unless such securities have been registered under the Act:
“The
securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “Act”)
or applicable state law. The securities may not be offered for sale, sold or otherwise transferred except pursuant to an effective
registration statement under the Act, or pursuant to an exemption from registration under the Act and applicable state law.”
(c)
Cashless Exercise.
(i)
In lieu of the payment of the Exercise Price multiplied by the number of Units for which this Unit Purchase Option is exercisable
(and in lieu of being entitled to receive Preferred Stock and Warrants) in the manner required by Section 2(a), the Holder shall
have the right (but not the obligation) to convert any exercisable but unexercised portion of this Unit Purchase Option into Units
consisting of Preferred Stock (or the equivalent number of Shares underlying the Preferred Stock if the Preferred Stock is then
convertible into Shares) and Warrants (the “Conversion Right”) as follows: upon exercise of the Conversion
Right, the Company shall deliver to the Holder (without payment by the Holder of any of the Exercise Price in cash) that number
of shares of Preferred Stock (or the equivalent number of Shares underlying the Preferred Stock if the Preferred Stock is then
convertible into Shares) and Warrants comprising that number of Units equal to the quotient obtained by dividing (x) the “Value”
(as defined below) of the portion of the Unit Purchase Option being converted by (y) the Current Market Value (as defined below).
The “Value” of the portion of the Unit Purchase Option being converted shall equal the remainder derived from subtracting
(a) (i) the Exercise Price multiplied by (ii) the number of Units underlying the portion of this Unit Purchase Option being converted
from (b) the Current Market Value of a Unit multiplied by the number of Units underlying the portion of the Unit Purchase Option
being converted. As used herein, the term “Current Market Value” per Unit at any date means the remainder derived
from subtracting (x) the exercise price of the Warrants multiplied by the number of shares of Shares issuable upon exercise of
the Warrants underlying one Unit from (y) the Current Market Price of the Shares multiplied by the number of Shares underlying
the Warrants and shares of the Preferred Stock underlying one Unit (which shall be equal to the Shares underlying the Preferred
Stock included in such Unit). The “Current Market Price” of a Share shall mean (i) if the Shares are listed on a national
securities exchange or quoted the OTC Markets (or any successor exchange or entity), the closing or last sale price of the Shares
in the principal trading market for the Shares as reported by the exchange or the OTC Markets, as the case may be; (ii) if the
Shares are not listed on a national securities exchange or quoted on the OTC Markets, but is traded in the residual over-the-counter
market, the closing bid price for the Shares on the last trading day preceding the date in question for which such quotations
are reported by a recognized publisher of such quotations; and (iii) if the fair market value of the Shares cannot be determined
pursuant to clause (i) or (ii) above, such price as the Board of Directors of the Company shall determine, in good faith.
(ii)
The Cashless Exercise Right may be exercised by the Holder on any business day on or after the Commencement Date and not later
than the Expiration Date by delivering the Unit Purchase Option with the duly executed exercise form attached hereto with the
cashless exercise section completed to the Company, exercising the Cashless Exercise Right and specifying the total number of
Units the Holder will purchase pursuant to such Cashless Exercise Right.
3.
Transfer.
(a)
Restrictions—General. The registered Holder of this Unit Purchase Option, by its acceptance hereof, agrees that it will
not sell, transfer, assign, pledge or hypothecate, or be the subject of any hedging, short sale, derivative, put, or call
transaction that would result in the effective economic disposition of, this Unit Purchase Option (or any securities
underlying this Unit Purchase Option) for a period of one hundred eighty (180) days following the Effective Date to anyone
other than (i) Dawson or an underwriter or a selected dealer in connection with the Offering, or (ii) a bona fide
officer or partner of Dawson or of any such underwriter or selected dealer. In order to make any permitted assignment, the
Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with the Unit
Purchase Option and payment of all transfer taxes, if any, payable in connection therewith. The Company shall within three
business days transfer this Unit Purchase Option on the books of the Company and shall execute and deliver a new Unit
Purchase Option or Unit Purchase Options of like tenor to the appropriate assignee(s) expressly evidencing the right to
purchase the aggregate number of Units purchasable hereunder or such portion of such number as shall be contemplated by any
such assignment.
(b)
Restrictions—Securities. The
securities evidenced by this Unit Purchase Option shall not be transferred unless and until (i) the Company has received
the opinion of counsel for the Company (at the Company’s expense) that the securities may be transferred pursuant to an
exemption from registration under the Act and applicable state securities laws, the availability of which is established to the
reasonable satisfaction of the Company, or (ii) a registration statement or a post-effective amendment to the Registration
Statement relating to such securities has been filed by the Company and declared effective by the Securities and Exchange Commission
(the “Commission”) and compliance with applicable state securities law has been established.
4.
New Purchase Options to be Issued.
(a)
Partial Exercise. Subject
to the restrictions in Section 3 hereof, this Unit Purchase Option may be exercised or assigned in whole or in part. In the event
of the exercise or assignment hereof in part only, upon surrender of this Unit Purchase Option for cancellation, together with
the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price, the Company shall cause to be delivered
to the Holder without charge a new Unit Purchase Option of like tenor to this Unit Purchase Option in the name of the Holder evidencing
the right of the Holder to purchase the number of Units purchasable hereunder as to which this Unit Purchase Option has not been
exercised or assigned.
(b)
Loss, Theft, Destruction.
Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Unit Purchase
Option and of reasonably satisfactory indemnification or the posting of a bond, the Company shall execute and deliver a new Unit
Purchase Option of like tenor and date. Any such new Unit Purchase Option executed and delivered as a result of such loss, theft,
mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.
5.
Adjustments.
(a)
Exercise Price and Number of Securities.
The Exercise Price and the number of Units underlying the Unit Purchase Option shall be subject to adjustment from time to time
as hereinafter set forth (all references to Shares below shall represent the number of Shares underlying the Preferred Stock in
the Unit to the extent the Preferred Stock is then outstanding):
(i)
If after the date hereof, and subject to the provisions of Section 5(c) below, the number of outstanding Shares is increased by
a stock dividend payable in Shares or by a split-up of Shares or other similar event, then, on the effective date thereof, the
number of Shares underlying each of the Units purchasable hereunder shall be increased in proportion to such increase in outstanding
shares. In such case, the number of Shares, and the exercise price applicable thereto, underlying the Warrants underlying each
of the Units purchasable hereunder shall be adjusted in accordance with the terms of the Warrants. For example, if the Company
declares a two-for-one stock dividend and immediately prior to such dividend this Unit Purchase Option is for the purchase of
one Unit at $10.00 per whole Unit (with each Warrant underlying the Units being exercisable for $12.50 per share), upon effectiveness
of the dividend, this Unit Purchase Option will be adjusted to allow for the purchase of one Unit at $10.00 per Unit, each Unit
entitling the holder to receive two Shares and two Warrants (each Warrant exercisable for $6.25 per share).
(ii)
If after the date hereof, and subject to the provisions of Section 5(c), the number of outstanding Shares is decreased by a consolidation,
combination or reclassification of the Shares or other similar event, then, on the effective date thereof, the number of Shares
underlying each of the Units purchasable hereunder shall be decreased in proportion to such decrease in outstanding shares. In
such case, the number of Shares, and the exercise price applicable thereto, issuable upon exercise of the Warrants included in
each of the Units purchasable hereunder shall be adjusted in accordance with the terms of the Warrants. For example, if the Company
effects a one-for-two stock reverse stock split and immediately prior to such stock split this Unit Purchase Option is for the
purchase of one Unit at $10.00 per whole Unit (with each Warrant underlying the Units being exercisable for $12.50 per share),
upon effectiveness of the stock split, this Unit Purchase Option will be adjusted to allow for the purchase of one Unit at $10.00
per Unit, each Unit entitling the holder to receive 0.5 Shares and 0.5 Warrants (each Warrant exercisable for $25.00 per share).
(iii)
In case of any reclassification or reorganization of the outstanding Shares other than a change covered by Section 5(a)(i) or
5(a)(ii) hereof or that solely affects the par value of such Shares, or in the case of any merger or consolidation of the Company
with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and
that does not result in any reclassification or reorganization of the outstanding Shares), or in the case of any sale or conveyance
to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with
which the Company is dissolved, the Holder of this Unit Purchase Option shall have the right thereafter (until the expiration
of the right of exercise of this Unit Purchase Option) to receive upon the exercise hereof, for the same aggregate Exercise Price
payable hereunder immediately prior to such event plus the aggregate exercise price of the Shares underlying the Warrants immediately
prior to such event, the kind and amount of shares of stock or other securities or property (including cash) receivable upon such
reclassification, reorganization, merger or consolidation, or upon a dissolution following any such sale or transfer, by a Holder
of the number of Shares of the Company obtainable upon exercise of this Unit Purchase Option and the underlying Warrants immediately
prior to such event; and if any reclassification also results in a change in Shares covered by Section 5(a)(i) or 5(a)(ii), then
such adjustment shall be made pursuant to Sections 5(a)(i) or 5(a)(ii) and this Section 5(a)(iii). The provisions of this Section
5(a)(iii) shall similarly apply to successive reclassifications, reorganizations, mergers or consolidations, sales or other transfers.
(iv)
This form of Unit Purchase Option need not be changed because of any change pursuant to this Section 5, and Unit Purchase Options
issued after such change may state the same Exercise Price and the same number of Units as are stated in the Unit Purchase Options
initially issued pursuant to this Agreement. The acceptance by any Holder of the issuance of new Unit Purchase Options reflecting
a required or permissive change shall not be deemed to waive any rights to an adjustment occurring after the Commencement Date
or the computation thereof.
(b)
Substitute Unit Purchase Option. In case of any consolidation
of the Company with, or merger of the Company with, or merger of the Company into, another corporation (other than a consolidation
or merger which does not result in any reclassification or change of the outstanding Shares), the corporation formed by such consolidation
or merger shall execute and deliver to the Holder a supplemental Unit Purchase Option providing that the holder of each Unit Purchase
Option then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such Unit Purchase
Option) to receive, upon exercise of such Unit Purchase Option, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number of Shares of the Company for which such Unit
Purchase Option might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental
Unit Purchase Option shall provide for adjustments which shall be identical to the adjustments provided in this Section 5. The
above provision of this Section 5 shall similarly apply to successive consolidations or mergers.
(c)
Fractional Interests. The Company shall not be required to
issue certificates representing fractions of Shares or Warrants upon the exercise of the Unit Purchase Option, nor shall it be
required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up to the nearest whole number of Warrants, Shares or other securities,
properties or rights.
6.
Reservation and Listing. The Company shall at all times reserve and keep available out of
its authorized Shares, solely for the purpose of issuance upon conversion of the Preferred Stock or exercise of the Warrants underlying
the Unit Purchase Option, such number of Shares or other securities, properties or rights as shall be issuable upon the conversion
or exercise thereof. The Company covenants and agrees that, upon conversion of the Preferred Stock underlying the Unit Purchase
Option, all Shares issuable upon such conversion shall be duly and validly issued, fully paid and non-assessable and not subject
to preemptive rights of any stockholder. The Company further covenants and agrees that upon exercise of the Warrants underlying
the Unit Purchase Option and payment of the respective Warrant exercise price therefor, all Shares and other securities issuable
upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any
stockholder. As long as the Unit Purchase Option shall be outstanding, the Company shall use its best efforts to cause all (i)
Units issuable upon exercise of the Unit Purchase Option, (ii) Shares issuable upon conversion of the Preferred Stock included
in the Units issuable upon exercise of the Unit Purchase Option, and (iii) Shares issuable upon exercise of the Warrants included
in the Units issuable upon exercise of the Unit Purchase Option to be listed (subject to official notice of issuance) on all securities
exchanges (or, if applicable on the OTC Markets or any successor trading market) on which the Shares issued to the public in connection
with the Offering may then be listed and/or quoted; provided, however, that the Company shall only be required to comply with
(i) above to the extent the Units issued to the public in the Offering are still listed on a securities exchange.
7.
Certain Notice Requirements.
(a)
Right to Notice. Nothing herein shall be construed as conferring upon the Holders the right to vote or consent as a stockholder
for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however,
at any time prior to the expiration of the Unit Purchase Option and its exercise, any of the events described in Section 7(b)
shall occur, then, in one or more of said events, the Company shall give written notice of such event at least fifteen days prior
to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled
to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed
dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer
books, as the case may be. Notwithstanding the foregoing, the Company shall deliver to each Holder a copy of each notice given
to the other stockholders of the Company at the same time and in the same manner that such notice is given to all stockholders,
even if less than fifteen days.
(b)
Enumerated Events. The Company shall be required to give the notice described in this Section 7 upon one or more of the
following events: (i) if the Company shall take a record of the holders of its Shares for the purpose of entitling them to receive
a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained
earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, or (ii) the Company
shall offer to all the holders of its Shares any additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor, or (iii) a
dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all
or substantially all of its property, assets and business shall be proposed.
(c)
Change in Exercise Price. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant
to Section 5 hereof, send notice to the Holders of such event and change (the “Price Notice”). The Price Notice
shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate
by the Company’s President and Chief Financial Officer.
(d)
Notice Delivery. All notices, requests, consents and other
communications under this Unit Purchase Option shall be in writing and shall be deemed to have been duly made when hand delivered,
or mailed by express mail or private courier service: (i) If to the registered Holder of the Unit Purchase Option, to the address
of such Holder as shown on the books of the Company, or (ii) If to the Company, to the following address or to such other address
as the Company may designate by notice to the Holders:
Vapor
Corp.
3001
Griffin Road
Dania
Beach, Florida 33312
Attn: Chief Financial Officer
8.
Registration Rights.
(a)
Demand Registration.
(i)
Grant of Right. The Company, upon written demand (a “Demand Notice”) of the Holder(s) of at least 51%
of the Units (“Majority Holders”), agrees to register, on one occasion, all or any portion of the Preferred
Stock, Shares underlying the Preferred Stock, Warrants, and Shares underlying the Warrants (collectively, the “Registrable
Securities”). On such occasion, the Company will file a registration statement with the Commission covering the Registrable
Securities within sixty (60) days after receipt of a Demand Notice and use commercially reasonable efforts to have the registration
statement declared effective promptly thereafter, subject to compliance with review by the Commission; provided, however, that
the Company shall not be required to comply with a Demand Notice if the Company has filed a registration statement with respect
to which the Holder is entitled to piggyback registration rights pursuant to Section 8(a) hereof and either: (i) the Holder has
elected to participate in the offering covered by such registration statement or (ii) if such registration statement relates to
an underwritten primary offering of securities of the Company, until the offering covered by such registration statement has been
withdrawn or until thirty (30) days after such offering is consummated. The demand for registration may be made at any time during
a period of five (5) years beginning on the Effective Date. The Company covenants and agrees to give written notice of its receipt
of any Demand Notice by any Holder(s) to all other registered Holders of the Unit Purchase Option and/or the Registrable Securities
within ten (10) days after the date of the receipt of any such Demand Notice. Notwithstanding the foregoing, unless the offering
contemplated under the registration statement pursuant to this Section 8(a)(i) is an underwritten public offering, if there is
already an effective registration statement (including the Registration Statement) covering the issuance of the Registrable Securities,
the Company shall not be required to comply with the terms of this Section 8(a)(i).
(ii)
Terms. The Company shall bear all fees and expenses attendant to the registration of the Registrable Securities pursuant
to Section 8(a), but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected
by the Holders to represent them in connection with the sale of the Registrable Securities. The Company agrees to use commercially
reasonable efforts to cause the filing required herein to become effective promptly and to qualify or register the Registrable
Securities in such states as are reasonably requested by the Holder(s); provided, however, that (A) in no event shall the Company
be required to register the Registrable Securities in a state in which such registration would cause the Company to be obligated
to register or license to do business in such state or submit to general service of process in such state; or (B) if the Registrable
Securities are not “covered securities” within the meaning of the National Securities Markets Improvement Act of 1996,
the Company shall not be obligated to register or qualify the securities in any state which applies a merit review standard. The
Company shall cause any registration statement filed pursuant to the demand right granted under Section 8(a) to remain effective
for a period of at least twelve (12) consecutive months after the date that the Holders of the Registrable Securities covered
by such registration statement are first given the opportunity to sell all of such securities. The Holders shall only use the
prospectuses provided by the Company to sell the shares covered by such registration statement, and will immediately cease to
use any prospectus furnished by the Company if the Company advises the Holder that such prospectus may no longer be used due to
a material misstatement or omission. Notwithstanding the provisions of this Section 8(a), the Holder shall be entitled to a demand
registration under Section 8(a) on only one (1) occasion and such demand registration right shall terminate on the fifth anniversary
of the Effective Date in accordance with FINRA Rule 5110(f)(2)(G)(iv).
(b)
“Piggy-Back” Registration. The
registration rights contained in this Section 8(b) shall not apply to a registration statement on Form S-3 which the Company is
obligated to file for investors in private placements completed prior to the date of this Unit Purchase Option.
(i)
Grant of Right. In addition to the demand right of registration described in Section 8(a) hereof, the Holder shall have
the right to include the Registrable Securities as part of any other registration of securities filed by the Company (other than
in connection with a transaction contemplated by Rule 145(a) promulgated under the Securities Act or pursuant to Form S-8 or any
equivalent form); provided, however, that if, solely in connection with any primary underwritten public offering for the account
of the Company, the managing underwriter(s) thereof shall, in its reasonable discretion, impose a limitation on the number of
shares of common stock which may be included in the Registration Statement because, in such underwriter(s)’ judgment, marketing
or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to
include in such Registration Statement only such limited portion of the Registrable Securities with respect to which the Holder
requested inclusion hereunder as the underwriter shall reasonably permit. Any exclusion of Registrable Securities shall be made
pro rata among the Holders seeking to include Registrable Securities in proportion to the number of Registrable Securities sought
to be included by such Holders; provided, however, that the Company shall not exclude any Registrable Securities unless the Company
has first excluded all outstanding securities, the holders of which are not entitled to inclusion of such securities in such Registration
Statement or are not entitled to pro rata inclusion with the Registrable Securities.
(ii)
Terms. The Company shall bear all fees and expenses attendant to registering the Registrable Securities pursuant to Section
8(b) hereof, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by
the Holders to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration,
the Company shall furnish the then Holders of outstanding Registrable Securities with not less than thirty (30) days written notice
prior to the proposed date of filing of such registration statement. Such notice to the Holders shall continue to be given for
each registration statement filed by the Company until such time as all of the Registrable Securities have been sold by the Holder.
The holders of the Registrable Securities shall exercise the “piggy-back” rights provided for herein by giving written
notice within ten (10) days of the receipt of the Company’s notice of its intention to file a registration statement. Except
as otherwise provided in this Unit Purchase Option, there shall be no limit on the number of times the Holder may request registration
under this Section 8(b); provided, however, that such “piggy-back” registration rights shall terminate on the seventh
anniversary of the Effective Date in accordance with FINRA Rule 5110(f)(2)(G)(v).
(c)
General Terms.
(i)
Indemnification. The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration
statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Securities Act
or Section 20(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), against all loss, claim,
damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange
Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions
pursuant to which the Company has agreed to indemnify the Underwriters under the Underwriting Agreement between Dawson (as Representative
of the several Underwriters named on Schedule 1 attached thereto) and the Company, dated as of [●], 2015 (the “Underwriting
Agreement”). The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their
successors and assigns, shall severally, and not jointly, indemnify the Company, its directors, its officers who signed the registration
statement and persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably
incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Securities
Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or
assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the
provisions contained in the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company and
such persons.
(ii)
Exercise of Unit Purchase Option. Nothing contained in this Unit Purchase Option shall be construed as requiring the Holder(s)
to exercise their Unit Purchase Option prior to or after the initial filing of any registration statement or the effectiveness
thereof.
(iii)
Documents Delivered by Company. The Company shall furnish to each underwriter participating in any of the foregoing underwritten
offerings, if any, a signed counterpart, addressed to such underwriter, of: (i) an opinion of counsel to the Company, dated the
effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion
dated the date of the closing under any underwriting agreement related thereto), and (ii) a “cold comfort” letter
dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a
letter dated the date of the closing under the underwriting agreement) signed by the independent registered public accounting
firm which has issued a report on the Company’s financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and,
in the case of such accountants’ letter, with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer’s counsel and in accountants’ letters delivered to underwriters in underwritten
public offerings of securities. The Company shall also deliver promptly to each Holder participating in the offering requesting
the correspondence and memoranda described below and to the managing underwriter, if any, copies of all correspondence between
the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff
with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance
notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to
comply with applicable securities laws or rules of FINRA. Such investigation shall include access to books, records and properties
and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent
and at such reasonable times as any such Holder shall reasonably request.
(iv)
Underwriting Agreement. The Company shall enter into an underwriting agreement with the managing underwriter(s), if any,
selected by any Holders whose Registrable Securities are being registered pursuant to this Section 8, which managing underwriter(s)
shall be reasonably satisfactory to the Company. Such agreement shall be reasonably satisfactory in form and substance to the
Company, Dawson and such managing underwriter(s), and shall contain such representations, warranties and covenants by the Company
and such other terms as are customarily contained in agreements of that type used by the managing underwriter(s). The Holders
shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their
option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters
shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties
to or agreements with the Company or the underwriters except as they may relate to such Holders, their Shares and their intended
methods of distribution.
(v)
Documents to be Delivered by Holder(s). Each of the Holder(s) participating in any of the foregoing offerings shall furnish
to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling
security holders.
(vi)
Damages. Should the registration or the effectiveness thereof required by Sections 8(a) and 8(b) hereof be delayed by the
Company or the Company otherwise fails to comply with such provisions, the Holder(s) shall, in addition to any other legal or
other relief available to the Holder(s), be entitled to obtain specific performance or other equitable (including injunctive)
relief against the threatened breach of such provisions or the continuation of any such breach, without the necessity of proving
actual damages and without the necessity of posting bond or other security.
9.
Miscellaneous.
(a)
Amendments. The Company and Dawson may from time to time
supplement or amend this Unit Purchase Option without the approval of any of the Holders in order to cure any ambiguity, to correct
or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make
any other provisions in regard to matters or questions arising hereunder that the Company and Dawson may deem necessary or desirable
and that the Company and Dawson deem shall not adversely affect the interest of the Holders. All other modifications or amendments
shall require the written consent of and be signed by the party against whom enforcement of the modification or amendment is sought.
(b)
Headings. The headings contained herein are for the sole
purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms
or provisions of this Unit Purchase Option.
(c)
Entire Agreement. This Unit Purchase Option (together with
the other agreements and documents being delivered pursuant to or in connection with this Unit Purchase Option) constitutes the
entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings
of the parties, oral and written, with respect to the subject matter hereof.
(d)
Binding Effect. This Unit Purchase Option shall inure solely
to the benefit of, and shall be binding upon, the Holder and the Company and their permitted assignees, respective successors,
legal representative and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy
or claim under or in respect of or by virtue of this Unit Purchase Option or any provisions herein contained.
(e)
Governing Law. This Unit Purchase Option shall be governed
by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws.
The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Unit
Purchase Option shall be brought and enforced in the courts of the State of New York or of the United States of America for the
Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company
hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or
summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section 7 hereof. Such mailing shall be deemed personal
service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company and the Holder agree that
the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’
fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor.
(f)
Waivers. The failure of the Company or the Holder to at any
time enforce any of the provisions of this Unit Purchase Option shall not be deemed or construed to be a waiver of any such provision,
nor to in any way affect the validity of this Unit Purchase Option or any provision hereof or the right of the Company or any
Holder to thereafter enforce each and every provision of this Unit Purchase Option. No waiver of any breach, non-compliance or
non-fulfillment of any of the provisions of this Unit Purchase Option shall be effective unless set forth in a written instrument
executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach,
non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance
or non-fulfillment.
(g)
Counterparts. This Unit Purchase Option may be executed in
one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an
original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or
more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto.
(h)
Exchange Agreement. As
a condition of the Holder’s receipt and acceptance of this Unit Purchase Option, Holder agrees that, at any time prior to
the complete exercise of this Unit Purchase Option by Holder, if the Company and Dawson enter into an agreement (the “Exchange
Agreement”) pursuant to which they agree that all outstanding Unit Purchase Options will be exchanged for securities
or cash or a combination of both, then Holder shall agree to such exchange and become a party to the Exchange Agreement.
[Balance
of page intentionally left blank]
IN
WITNESS WHEREOF, the Company has caused this Unit Purchase Option to be signed by its duly authorized officer as of the [●] day
of [●], 2015.
|
Vapor Corp. |
|
|
|
By: |
|
|
Name: |
Jeffrey Holman |
|
Title: |
Chief Executive Officer |
Form
To Be Used To Exercise Unit Purchase Option
Vapor Corp.
3001 Griffin
Road
Dania Beach,
Florida 33312
Attn: Chief Financial Officer
Date: ______,
2015
The
undersigned hereby elects irrevocably to exercise all or a portion of the within Unit Purchase Option and to purchase Units of
Vapor Corp., and hereby makes payment of $ (at the rate of $ per Unit) in payment of the Exercise Price pursuant thereto. Please
issue the Shares and Warrants as to which this Unit Purchase Option is exercised in accordance with the instructions given below.
Or
The
undersigned hereby elects irrevocably to convert its right to purchase Units purchasable under the within Unit Purchase Option
by surrender of the unexercised portion of the attached Unit Purchase Option (with a “Value” based of $ based on a
“Market Price” of $ ). Please issue the securities comprising the Units as to which this Unit Purchase Option is exercised
in accordance with the instructions given below.
INSTRUCTIONS
FOR REGISTRATION OF SECURITIES
Name: |
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(Print in Block Letters) |
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Address: |
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NOTICE:
THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE WITHIN UNIT PURCHASE OPTION IN EVERY
PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A BANK, OTHER THAN A SAVINGS
BANK, OR BY A TRUST COMPANY OR BY A FIRM HAVING MEMBERSHIP ON A REGISTERED NATIONAL SECURITIES EXCHANGE.
Form
To Be Used To Assign Unit Purchase Option
ASSIGNMENT
(To
be executed by the registered Holder to effect a transfer of the within Unit Purchase Option)
FOR
VALUE RECEIVED, does hereby sell, assign and transfer unto the right to purchase Units of Vapor Corp., (the “Company”)
evidenced by the within Unit Purchase Option and does hereby authorize the Company to transfer such right on the books of the
Company.
Dated: _________,
2015
NOTICE:
THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE WITHIN UNIT PURCHASE OPTION IN EVERY
PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A BANK, OTHER THAN A SAVINGS
BANK, OR BY A TRUST COMPANY OR BY A FIRM HAVING MEMBERSHIP ON A REGISTERED NATIONAL SECURITIES EXCHANGE.
Exhibit
5.1
OPINION
AND CONSENT OF
Nason,
Yeager, Gerson, White & Lioce, P.A.
July
10 , 2015
Vapor
Corp.
3001
Griffin Road
Dania
Beach, Florida 33312
Re:
Registration Statement on Form S-1
Ladies
and Gentlemen:
We
have acted as counsel to Vapor Corp., a Delaware corporation (the “Company”), in connection with a Registration
Statement on Form S-1 (File No. 333-204599), (the “Registration Statement”), filed by the Company with the
Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933 (the “Securities
Act”), relating to the offer and sale by the Company of
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(i) |
3,800,000
units (the “Units”), with each Unit consisting of (A) one-fourth
of a share of the Company’s Series A Convertible Preferred Stock, par value
$0.001 per share (the “Preferred Stock”), with each share of Preferred
Stock convertible into five shares of the Company’s Common Stock, par value
$0.001 per share (the “Common Stock”; and the shares of Common Stock
issuable upon conversion of the Preferred Stock, the “Preferred Shares”)
and (B) 10 Series A Warrants, (the Series A Warrants collectively, the “Series
A Warrants”), with each Series A Warrant to purchase one share of Common Stock
(the shares of Common Stock issuable upon exercise of the Series A Warrants, the “Warrant
Shares”), and
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(ii) |
a
Unit Purchase Option (the “Unit Purchase Option”) to be issued to the representative of the underwriters
in the offering contemplated by the Registration Statement to purchase a number of Units (the “Representative’s
Units”) equal to an aggregate of 5% of the Units sold pursuant to the Registration Statement (the Preferred Stock
underlying the Representative’s Units, the “Representative’s Stock”; the shares of Common Stock
issuable upon conversion of the Representative’s Preferred Stock, the “Representative’s Preferred Shares”;
the Series A Warrants underlying the Representative’s Units, the “Representative’s Warrants”;
and the shares of Common Stock issuable upon exercise of the Representative’s Warrants, the “Representative’s
Warrant Shares” and, together with the Representative’s Preferred Shares, the “Representative’s
Shares”). |
We
have examined such documents and have reviewed such questions of law as we have considered necessary or appropriate for the purposes
of our opinions set forth below. In rendering our opinions set forth below, we have assumed the authenticity of all documents
submitted to us as originals, the genuineness of all signatures and the conformity to authentic originals of all documents submitted
to us as copies. We have also assumed the legal capacity for all purposes relevant hereto of all natural persons and, with respect
to all parties to agreements or instruments relevant hereto other than the Company, that such parties had the requisite power
and authority (corporate or otherwise) to execute, deliver and perform such agreements or instruments, that such agreements or
instruments have been duly authorized by all requisite action (corporate or otherwise), executed and delivered by such parties
and that such agreements or instruments are the valid, binding and enforceable obligations of such parties. We have further assumed
that the Units will be priced by the Pricing Committee established by the authorizing resolutions adopted by the Company’s
Board of Directors in accordance with such resolutions. As to questions of fact material to our opinions, we have relied upon
certificates or comparable documents of officers and other representatives of the Company and of public officials.
Based
on the foregoing, we are of the opinion that:
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1. |
The Units, when
issued, delivered and paid for as described in the Registration Statement, will be validly issued, fully paid and non-assessable.
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2. |
The Series A Warrants,
when duly executed by the Company and duly delivered to the purchasers thereof against payment therefor as described in the
Registration Statement, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance
with their terms. |
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3. |
The Warrant Shares
have been duly authorized and if, as, and, when the Warrant Shares are issued and delivered by the Company upon exercise of
the Warrant Shares in accordance with the terms thereof and the Company’s Certificate of Incorporation, including, without
limitation, the payment in full of applicable consideration, the Warrant Shares, will be validly issued, fully paid, and non-assessable.
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4. |
The shares of
Preferred Stock, when issued, delivered and paid for as described in the Registration Statement, will be validly issued, fully
paid and non-assessable. |
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5. |
The Preferred
Shares have been duly authorized and, upon issuance and delivery as described in accordance with the Certificate of Designation
of the Series A Convertible Preferred Stock (the “Certificate of Designation”) to be filed in connection
with the offering contemplated by the Registration Statement and the Certificate of Incorporation, will be validly issued,
fully paid and non-assessable. |
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6. |
The Unit Purchase
Option, when duly executed by the Company and duly delivered to the purchasers thereof against payment therefor as described
in the Registration Statement, will constitute the valid and binding obligation of the Company, enforceable against the Company
in accordance with its terms. |
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7. |
The Representative’s
Units, when issued, delivered and paid for as described in the Registration Statement, will be validly issued, fully paid
and non-assessable. |
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8. |
The Representative’s
Warrants, when duly executed by the Company and duly delivered to the purchasers thereof against payment therefor as described
in the Registration Statement, will constitute valid and binding obligations of the Company, enforceable against the Company
in accordance with their terms. |
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9. |
The Representative’s
Warrant Shares have been duly authorized and if, as, and when the Representative’s Warrant Shares are issued and delivered
by the Company upon exercise of the Representative’s Warrant Shares in accordance with the terms thereof and the Certificate
of Incorporation, including, without limitation, the payment in full of applicable consideration, the Representative’s
Warrant Shares will be validly issued, fully paid, and non-assessable. |
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10. |
The shares of
Representative’s Preferred Stock, when issued, delivered and paid for as described in the Registration Statement, will
be validly issued, fully paid and non-assessable. |
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11. |
The Representative’s
Preferred Shares have been duly authorized and, upon issuance and delivery as described in accordance with the Certificate
of Designation to be filed in connection with the offering contemplated by the Registration Statement and the Certificate
of Incorporation, will be validly issued, fully paid and non-assessable. |
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(a) |
Our opinions set
forth in paragraphs 2, 6 and 8 above are subject to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium
or similar law relating to or affecting creditors’ rights generally (including, without limitation, fraudulent conveyance
laws). |
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(b) |
Our opinions set
forth in paragraphs 2, 6 and 8 above are subject to the effect of general principles of equity, including, without limitation,
concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance
or injunctive relief, regardless of whether considered in a proceeding in equity or at law. |
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(c) |
Our opinions set
forth in paragraphs 2, 6 and 8 above are subject to limitations regarding the availability of indemnification and contribution
where such indemnification or contribution may be limited by applicable law or the application of principles of public policy.
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(d) |
We express no
opinion as to the enforceability of (i) provisions that relate to choice of law, forum selection or submission to jurisdiction
(including, without limitation, any express or implied waiver of any objection to venue in any court or of any objection that
a court is an inconvenient forum) to the extent that the validity, binding effect or enforceability of any such provision
is to be determined by any court other than a state court of the State of Florida, (ii) waivers by the Company of any statutory
or constitutional rights or remedies, (iii) terms which excuse any person or entity from liability for, or require the Company
to indemnify such person or entity against, such person’s or entity’s negligence or willful misconduct or (iv)
obligations to pay any prepayment premium, default interest rate, early termination fee or other form of liquidated damages,
if the payment of such premium, interest rate, fee or damages may be construed as unreasonable in relation to actual damages
or disproportionate to actual damages suffered as a result of such prepayment, default or termination. |
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(e) |
We draw your attention
to the fact that, under certain circumstances, the enforceability of terms to the effect that provisions may not be waived
or modified except in writing may be limited. |
Our
opinions expressed above are limited to the laws of the State of Florida and the Delaware General Corporation Law.
We
hereby consent to the filing of this opinion as an exhibit to the Registration Statement, and to the reference to our firm under
the heading “Legal Matters” in the prospectus constituting part of the Registration Statement. In giving this consent,
we do not admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act or
the rules and regulations of the Commission thereunder.
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Very
truly yours, |
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/s/
Nason, Yeager, Gerson, White & Lioce, P.A. |
Exhibit 23.1
Independent
Registered Public Accounting Firm’s Consent
We
consent to the inclusion in this Registration Statement of Vapor Corp. (the “Company”) on Amendment No. 1 to the Form
S-1 (File No. 333-204599 ) of our report dated March 31, 2015 (except for Note 14, as to which the date is July 10, 2015) ,
which includes an explanatory paragraph as to the Company’s ability to continue as a going concern, with respect to our
audits of the consolidated financial statements of Vapor Corp. as of December 31, 2014 and 2013 and for the years then, which
report appears in the Prospectus, which is part of this Registration Statement. We also consent to the reference to our Firm under
the heading “Experts” in such Prospectus.
/s/
Marcum LLP |
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Marcum LLP |
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New York, NY |
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July 10 , 2015
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Exhibit 23.2
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We
consent to the inclusion in this Registration Statement of Vapor Corp. (the “Company”) on Amendment No 1 to Form S-1
of our report on the audit of Vaporin, Inc. dated May 12, 2015, which includes an explanatory paragraph as to the Company’s
ability to continue as a going concern, with respect to our audit of the financial statements of Vaporin Corp. as of December
31, 2014 which report appears in the Prospectus, which is part of this Registration Statement. We also consent to the reference
to our Firm under the heading “Experts” in such Prospectus.
/s/
RBSM, LLC |
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RBSM, LLC |
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Las Vegas,
NV |
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July 10 ,
2015 |
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