As
filed with the Securities and Exchange Commission on July 23 , 2015
Registration
Statement No. 333-204599
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
Amendment
No. 3 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] |
CALCULATION
OF REGISTRATION FEE
Title of Each Class of
Securities to be Registered |
|
Proposed
Maximum
Aggregate
Offering Price (1) |
|
|
Amount of
Registration Fee (2) |
|
Units, each consisting of one-fourth share of Series A Convertible
Preferred Stock, par value $0.001 per share, and Series A Warrants, each to purchase one share of Common Stock (3) |
|
$ |
35,000,000 |
|
|
|
4,067.00 |
|
Series A Convertible Preferred Stock, par value $0.001 per share (4) |
|
|
|
|
|
|
|
|
Shares of Common Stock underlying the Series A Convertible Preferred Stock (4)(5) |
|
|
|
|
|
|
|
|
Series A Warrants, each to purchase one share of Common Stock (6) |
|
|
|
|
|
|
|
|
Shares of Common Stock underling the Series A Warrants (3) |
|
$ |
91,200,000 |
|
|
|
10,597.44 |
|
Representative’s Unit Purchase Option to purchase Units (6) |
|
|
|
|
|
|
|
|
Units underlying the Unit Purchase Option |
|
$ |
2,187,500 |
|
|
|
254.19 |
|
Series A Convertible Preferred Stock underlying Units underlying the Unit Purchase Option
(4) |
|
|
|
|
|
|
|
|
Shares of Common Stock underlying the Series A Convertible Preferred Stock underlying
Units underlying the Unit Purchase Option (4)(5) |
|
|
|
|
|
|
|
|
Series A Warrants underlying Units underlying the Unit Purchase Option (6) |
|
|
|
|
|
|
|
|
Shares of Common Stock underlying the Series A Warrants underlying Units underlying the
Unit Purchase Option (3) |
|
$ |
4,560,000 |
|
|
|
529.87 |
|
Total Registration Fee |
|
$ |
132,947,500 |
|
|
$ |
15,448.50 |
|
(1) |
Estimated solely for the purpose of computing the amount
of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. |
|
|
(2) |
Calculated pursuant to Rule 457(o) based on an estimate of
the proposed maximum aggregate offering price of the securities registered hereunder to be sold by the registrant. Includes $9,000 which was previously paid. |
|
|
(3) |
Estimated pursuant to Rule 457(a) under the Securities Act.
|
|
|
(4) |
No registration fee pursuant to Rule 457(i) under the Securities
Act. |
|
|
(5) |
Pursuant to Rule 416 under the Securities Act, the shares
of Common Stock registered hereby also include an indeterminate number of additional shares of Common Stock as may from time
to time become issuable by reason of stock splits, stock dividends, recapitalizations or similar transactions. |
|
|
(6) |
No registration fee pursuant to Rule 457(g) under the Securities
Act. |
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 23 , 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 10
shares of common stock and 20 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 10 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 22 , 2015, the last reported
sales price of our common stock on the Nasdaq Capital Market was $1.11 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 10 shares of common stock and 20 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
10 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 38 ,000,000 shares of common stock issuable upon the full conversion of the
Series A Convertible Preferred Stock offered hereby and up to 76 ,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 1,900 ,000 shares of common stock issuable upon the full conversion of the Series
A Convertible Preferred Stock offered hereby and up to 3,800 ,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 |
|
|
|
|
● |
76 ,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;
and |
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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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incur
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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litigation
costs; and |
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the
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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effectively
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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restrictions
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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quarterly operating and financial results; |
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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 continues to stock 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 38 ,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 July 21,
2015 , we would be obligated to issue approximately 1. 7 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 38 ,000,000 shares of common stock issuable upon the full conversion of the Series A Convertible Preferred Stock
offered hereby and up to 76 ,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 1,900 ,000 shares of common stock issuable upon the full conversion of the Series
A Convertible Preferred Stock offered hereby and up to 3,800,000 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 10 shares of common stock and 20
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 | |
$ | (0.029 | ) | |
| | |
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 38 ,000,000 shares of common stock issuable upon the full conversion of the
Series A Convertible Preferred Stock offered hereby and up to 76 ,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 1,900 ,000 shares of common stock issuable upon the full conversion of the Series
A Convertible Preferred Stock offered hereby and up to 3,800 ,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, 077 ,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 $ 1 ,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:
|
● |
the
levying of substantial and increasing tax and duty charges; |
|
|
|
|
● |
restrictions
or bans on advertising, marketing and sponsorship; |
|
|
|
|
● |
the
display of larger health warnings, graphic health warnings and other 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 11 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) | |
| 46,895 | | |
* |
| |
* |
|
| |
| | | |
|
| |
|
|
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. The shares of common stock owned by Mr. Frija are based on the Company’s transfer agent records. |
|
|
(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. Does not include 6,924 shares of common stock underlying restricted stock
units which have vested but have not been delivered. |
|
|
(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 2020.
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 20 Series A Warrants.
Each one-fourth share of Series A Convertible Preferred Stock will be convertible into 10 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 10 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 10 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 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 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 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. 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 23 , 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
23, 2015 |
Jeffrey
Holman |
|
|
|
|
|
|
|
|
|
/s/
James Martin |
|
Chief
Financial Officer (Principal Financial Officer) and |
|
July
23, 2015 |
James
Martin |
|
Chief
Accounting Officer (Principal Accounting Officer) |
|
|
|
|
|
|
|
/s/
Gregory Brauser |
|
Director |
|
July
23, 2015 |
Gregory
Brauser |
|
|
|
|
|
|
|
|
|
/s/
William Conway III
|
|
Director
|
|
July
23, 2015 |
William
Conway III
|
|
|
|
|
|
|
|
|
|
/s/
Daniel MacLachlan
|
|
Director
|
|
July
23, 2015 |
Daniel
MacLachlan |
|
|
|
|
|
|
|
|
|
/s/
Nikhil Raman |
|
Director
|
|
July
23, 2015 |
Nikhil
Raman |
|
|
|
|
EXHIBIT
INDEX
Exhibit
Number |
|
Description
of Exhibit |
|
|
|
1.1 Ω |
|
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 Ω |
|
Certificate of Amendment
to the Certificate of Incorporation |
|
|
|
3.3 |
|
Bylaws
(3) |
|
|
|
3.4 Ω |
|
Certificate
of Designation for Series A Convertible Preferred Stock |
|
|
|
4.1 |
|
Specimen
Common Stock Certificate (3) |
|
|
|
4.2 Ω |
|
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 |
|
|
|
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
5.1
OPINION
AND CONSENT OF
Nason,
Yeager, Gerson, White & Lioce, P.A.
July
23, 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
|
(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 10 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) 20 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 |
|
|
|
|
(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:
|
1. |
The
Units, when issued, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance
with their terms. |
|
|
|
|
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. |
|
|
|
|
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. |
|
|
|
|
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. |
|
|
|
|
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. |
|
|
|
|
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. |
|
|
|
|
7. |
The
Representative’s Units, when issued, will constitute valid and binding obligations of the Company, enforceable against
the Company in accordance with their terms. |
|
|
|
|
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. |
|
|
|
|
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. |
|
|
|
|
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. |
|
|
|
|
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. |
|
(a) |
Our
opinions set forth in paragraphs 1, 2, 6, 7 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). |
|
|
|
|
(b) |
Our
opinions set forth in paragraphs 1, 2, 6, 7 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. |
|
|
|
|
(c) |
Our
opinions set forth in paragraphs 1, 2, 6, 7 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. |
|
|
|
|
(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. |
|
|
|
|
(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.
|
Very
truly yours, |
|
|
|
/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. 3
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 |
|
Marcum LLP |
|
New York, NY |
|
July 23 , 2015
|
|
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 3 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 |
|
RBSM, LLC |
|
Las Vegas,
NV |
|
July 23 ,
2015 |
|
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