NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
Note 1.
ORGANIZATION, GOING CONCERN, AND BASIS OF
PRESENTATION
Organization
Vapor Corp. (the “Company”
or “Vapor”)
is a distributor and retailer of vaporizers, e-liquids and electronic
cigarettes. The Company
operates nineteen retail stores in the Southeast of the
United
States of America.
Vapor also designs, markets, and distribute vaporizers, e-liquids, electronic cigarettes and accessories
under the Vapor X®, Hookah Stix®,
Vaporin™,
and Krave®, brands.
Vapor also designs and develops private label brands for distribution customers. Third party manufacturers produce Vapor’s
products to meet their design specifications.
Vapor offers e-liquids, vaporizers, e-cigarettes
and related products through our vape stores, online, 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, gas stations, drug stores,
convenience stores, and tobacco shops throughout the United States.
Going Concern and Liquidity
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 and do not include any adjustments that might result from the outcome of any uncertainties related to
our going concern assessment. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily
purport to represent realizable or settlement values. The unaudited condensed consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
In July 2015, the Company closed a registered
public offering of 3,761,657 Units (the “Units”). Each Unit consisted of 0.1429 shares of Series A Convertible
Preferred Stock (the “Series A Preferred Stock”) and 0.2857 Series A Warrants (the “Series A Warrants”).
The Units separated into the Series A Preferred Stock and Series A Warrants as of January 25, 2016. See Note 6- Stockholders’
Equity – Series A Unit Public Offering.
Holders of Series A Warrants may exercise
such 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
in the Series A Warrant) of the number of shares of the Company’s common stock (the “Common Stock”) 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 shares of Common Stock. The number of shares of
Common Stock that the Company is obligated to issue in connection with the exercise of the Series A Warrants is based on the closing
price of the Common Stock two trading days prior to the date of exercise. On May 4, 2016, the Company determined that it had insufficient
shares of Common Stock authorized to allow for the exercise of the Series A Warrants or stock options, or allow the conversion
of the Series A Preferred Stock. Accordingly, the Company currently is not permitted to elect to issue Common Stock in lieu of
cash payments to satisfy its obligations pursuant to a cashless exercise of the Series A Warrants. On March 21, 2016, the Company’s
stockholders approved a reverse stock split of the Common Stock at a ratio between 1-for-10,000 and 1-for-20,000, such ratio to
be determined by the Company’s Board of Directors (the “Board”). The Company is seeking the necessary approval
from the Financial Industry Regulatory Authority (“FINRA”) to implement the reverse stock split. In the event that
FINRA approves the reverse stock split and the split is effected, the Company would have sufficient authorized shares of Common
Stock to meet its obligations pursuant to its outstanding Series A Warrants, Series A Preferred Stock and stock options.
If all of the outstanding Series A Warrants
were fully exercised as of May 12, 2016, the amounts payable to the holders of the Series A Warrants that are exercised
on a cashless basis would be approximately $77.1 million, using a Black Scholes Value of $75.80 per Series A Warrant.
The Company reported a net loss of approximately
$16.2 million for the three months ended March 31, 2016. The Company also had negative working capital of approximately $31 million
and a stockholders’ deficit of approximately $26.5 million as of March 31, 2016. The Company expects to continue incurring
operating losses for the foreseeable future and may need to satisfy all exercises of Series A Warrants on a cashless basis. Accordingly,
the material uncertainty related to the exercise of Series A Warrants and the sufficiency of cash reserves to satisfy obligations
related to such exercises raises substantial doubt about the Company’s ability to continue as a going concern.
Basis of Presentation and Principles of Consolidation
The Company’s unaudited condensed
consolidated financial statements are prepared in accordance with GAAP. The unaudited condensed consolidated financial statements
include the accounts of all subsidiaries in which the Company holds a controlling financial interest as of the financial statement
date.
The unaudited condensed consolidated financial
statements include the accounts of Vapor and its wholly-owned subsidiaries, Vaporin, Inc. (“Vaporin”), The Vape Store,
Inc. (“Vape Store”), Smoke Anywhere U.S.A., Inc. (“Smoke”), Emagine the Vape Store, LLC (“Emagine”),
IVGI Acquisition, Inc., Vapormax Franchising LLC., Vaporin LLC., and Vaporin Florida, Inc. All intercompany accounts and transactions
have been eliminated in consolidation.
On February 1, 2016, the Company filed
an amendment to its Certificate of Incorporation to increase its authorized Common Stock to 5,000,000,000, and change the par value
to $0.0001. On March 4, 2016, the Company filed an amendment to its Certificate of Incorporation to effectuate a one-for-seventy
reverse stock split to its Common Stock. All warrant, convertible preferred stock, option, Common Stock shares and per share information
included in these unaudited condensed consolidated financial statements gives retroactive effect to the aforementioned reverse
split of the Company’s Common Stock. See Note 6- Stockholders’ Equity for additional details regarding the Company’s
authorized capital.
Unaudited Interim Financial Information
The unaudited condensed consolidated financial
statements have been prepared by the Company and reflect all normal, recurring adjustments that, in the opinion of management,
are necessary for a fair presentation of the interim financial information. The results of operations for the interim periods presented
are not necessarily indicative of the results to be expected for any subsequent quarter or for the year ending December 31, 2016.
Certain information and footnotes normally included in financial statements prepared in accordance with GAAP have been condensed
or omitted under the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed
consolidated financial statements for the three months ended March 31, 2016 and 2015 and notes included herein should be read in
conjunction with the audited consolidated financial statements and related notes thereto as of and for the year ended December
31, 2015 included in the Company’s Annual Report on Form 10-K for such year as filed with the SEC on April 8, 2016.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Reclassifications
Certain prior period amounts in the unaudited
condensed consolidated financial statements have been reclassified to conform to the current period’s presentation. No changes
to the Company’s net loss were made as a result of such reclassifications.
Use of Estimates in the Preparation
of the Financial Statements
The preparation of unaudited 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 unaudited 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, and deferred taxes and related
valuation allowances. 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 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 revenues are recorded at the point of sale when both title and risk of loss is transferred
to the customer. 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 discounts and rebates. Discounts
offered to wholesale and distributor customers are reflected as a reduction to the sales price. Rebate offers, when accepted
by customers, are generally calculated as a percentage of the product sold by the customer and are recorded as a reduction in
net sales.
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.
Fair Value Measurements
The Company applies the provisions of 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 and derivative liabilities. The carrying value of these instruments approximates fair value, as they bear terms
and conditions comparable to market value, 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
for employees and directors 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 an appropriate valuation model, whereby compensation cost is the fair value
of the award as determined by the valuation model at the grant date. The resulting amount is charged to expenses 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. Stock-based
compensation for non-employees is measured at the grant date, is re-measured at subsequent vesting dates and reporting dates, and
is amortized over the service period.
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 on 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 complex instruments, the
Company utilizes custom Monte Carlo simulation models. For less complex instruments, such as free-standing warrants, the Company
generally uses the Binomial Lattice 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 Binomial Lattice model or the Black-Scholes-Merton valuation model) are highly volatile and
sensitive to changes in the trading market price of the Common Stock. Since derivative financial instruments are initially and
subsequently carried at fair values, the Company’s net income (loss) going forward will reflect the volatility in these estimates
and assumption changes. Under ASC 815, increases in the trading price of the Common Stock and increases in fair value during a
given financial quarter result in the application of non-cash derivative losses. Conversely, decreases in the trading price of
the Common Stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative
gains.
Sequencing Policy
Under ASC 815-40-35, the Company has adopted
a sequencing policy whereby, in the event that reclassification of contracts from equity to assets or liabilities is necessary
pursuant to ASC 815 due to the Company's inability to demonstrate it has sufficient authorized shares, shares will be allocated
on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation
of shares.
Preferred Stock
The Company applies the accounting standards
for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Shares that
are subject to mandatory redemption (if any) are classified as liability instruments and
are measured at fair value. The Company classifies conditionally redeemable preferred shares, which include preferred shares that
feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain
events not solely within the Company’s control, as temporary equity. At all other times, preferred shares are classified
as stockholders' equity.
Recently Issued Accounting Pronouncements
In March 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Compensation
– Stock Compensation (Topic 718)” (“ASU 2016-09”). ASU 2016-09 requires an entity to simplify several aspects
of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning
after December 15, 2016, with early adoption permitted. The Company is currently evaluating ASU 2016-09 and its impact on its consolidated
financial statements or disclosures.
In February 2016, the FASB issued ASU No.
2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU The new standard establishes a right-of-use (ROU)
model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense
recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and annual
and interim periods thereafter, with early adoption permitted. A modified retrospective transition approach is required for lessees
for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact that the
adoption of this new standard will have on its consolidated financial statements.
In March 2016, the FASB issued ASU No.
2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus
Net). This ASU amends the principal versus agent guidance in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606),
which was issued in May 2014 (“ASU 2014-09”). Further, in April 2016, the FASB issued ASU No. 2016-10, Revenue from
Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This ASU also amends ASU 2014-09 and
is related to the identification of performance obligations and accounting for licenses. The effective date and transition requirements
for both of these amendments to ASU 2014-09 are the same as those of ASU 2014-09, which was deferred for one year by ASU No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. That is, the guidance under these standards
is to be applied using a full retrospective method or a modified retrospective method, as outlined in the guidance, and is effective
for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted
only for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The Company is currently
evaluating the provisions of each of these standards and assessing their impact on the Company’s condensed consolidated
financial statements and disclosures.
Note 3. MERGER WITH VAPORIN, INC.
On December 17, 2014, the Company entered
into an Agreement and Plan of Merger with Vaporin (the “Merger”) pursuant to which Vaporin was to merge
with and into the Company with the Company being the surviving and controlling entity (as a result of the stockholders
of the Company maintaining more than 50% ownership in the Company’s outstanding shares of Common Stock and the Vapor directors
comprising the majority of the board at the date of the Merger). The Merger closed on March 4, 2015 and was accounted for
as a business combination.
The following presents the unaudited pro-forma
combined results of operations of the Company with Vaporin as if the Merger occurred on January 1, 2014.
|
|
For
the Three Months
Ended
March 31, 2015
|
|
|
|
|
|
Wholesale and online revenues
|
|
$
|
1,318,291
|
|
Retail revenues
|
|
$
|
1,266,593
|
|
Net loss
|
|
$
|
(5,378,927
|
)
|
Net loss per share
|
|
$
|
(60.22
|
)
|
Weighted average number of shares outstanding
|
|
|
89,315
|
|
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.
Note 4. RETAIL STORES AND KIOSKS
Retail Stores
During 2015, the Company
acquired the assets and business operations of established retail stores. The purchase prices were generally
allocated to inventory, leasehold improvements, fixtures, security deposits, intangible assets, and goodwill. No liabilities
are assumed from the seller and the Company has no obligation to retain existing employees.
The Company holds back a portion of the
seller’s purchase price for three to six months during the operational transition period (the “hold back period”).
If the stores’ gross minimum revenues during the hold back period do not reach an amount agreed upon by the Company and
the seller at closing, then the hold back amount due to the seller is reduced in the final settlement. The hold back amount due
to sellers of $860,000 was recorded in accrued liabilities at December 31, 2015 as the achievement of the minimum revenue milestones
are considered probable. The hold back liability is considered contingent consideration recorded at fair value at each respective
acquisition date and is re-measured each reporting period. During the three months ended March 31, 2016, the Company made
$185,000 of aggregate holdback payments. Subsequent to March 31, 2016, the Company made $35,000 of aggregate holdback payments.
The accounting and reporting of the acquired
retail store operations were fully integrated into the Company at dates of the individual acquisitions and it is impracticable
to separate. Unaudited pro-forma combined results of operations of the Company are not presented, as it is unfeasible to obtain
complete, reliable and financial information prepared in accordance with GAAP. The prior owners of the retail store businesses
were individuals without reporting requirements and, accordingly, the financial data available is incomplete, inconsistent,
and the presentation would not add value to the Company’s pro-forma financial disclosure.
During the fourth quarter of 2015, the
Company ceased its plans to increase the number of retail stores due to adverse industry trends and increasing federal and state
regulations. After evaluating retail store operations, management decided to close one of its Atlanta area retail stores on February
15, 2016. In connection with the retail store closing, for the three months ended March 31, 2016, the Company incurred approximately
$7,800 of exit costs for settlement of non-cancellable lease obligations. The exit costs are included in selling, general and administrative
expenses.
Note 5. ACCRUED
EXPENSES
Accrued expenses are comprised of the following:
|
|
March
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Commissions payable
|
|
$
|
44,505
|
|
|
$
|
196,096
|
|
Retirement plan contributions
|
|
|
77,861
|
|
|
|
77,861
|
|
Accrued severance
|
|
|
-
|
|
|
|
51,145
|
|
Accrued customer returns
|
|
|
302,415
|
|
|
|
435,832
|
|
Accrued payroll
|
|
|
47,375
|
|
|
|
46,325
|
|
Accrued settlements and royalty fees
|
|
|
200,683
|
|
|
|
1,900,000
|
|
Accrued legal and professional fees
|
|
|
91,075
|
|
|
|
191,643
|
|
Accrued retail store hold back payments from acquisitions
|
|
|
675,000
|
|
|
|
860,000
|
|
Other accrued liabilities
|
|
|
147,075
|
|
|
|
187,209
|
|
Total
|
|
$
|
1,585,989
|
|
|
$
|
3,946,111
|
|
See Note 4 - Retail Stores and Kiosks for more information related
to accrued retail store hold back payments from acquisitions. See Note 8 – Commitments and Contingencies – Legal Proceedings
for additional information related for the accrual of legal settlement and royalty fees.
Note 6. STOCKHOLDERS’ DEFICIT
Reverse Splits
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. On February
1, 2016, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation
to (i) effect a reverse stock split of the Common Stock at a ratio between 1-for-10 and 1-for-70, such ratio to be determined
by the Board, (ii) reduce the par value of the Common Stock from $0.001 to $0.0001 and (iii) increase the number of authorized
shares of the Common Stock from 500,000,000 shares to 5,000,000,000 shares. Each share entitles the holder to one vote.
On March 8, 2016, the Board effected a reverse stock split of the Common Stock at a ratio of 1-for-70.
On March 21, 2016, the Company’s
stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a reverse
stock split of the Common Stock at a ratio between 1-for-10,000 and 1-for-20,000, such ratio to be determined by the Company’s
Board. The Board approved the reverse split on February 2, 2016 with ratio to be determined by the Company’s management.
The Company is seeking to effect a 1-for-20,000 reverse split and the action is pending approval by Financial Industry
Regulatory Authority (“FINRA”).
Series A Preferred Stock Conversions
On January 25, 2016, each Unit sold pursuant
to the Company’s July 2015 registered offering automatically separated into shares of Series A Preferred Stock and Series
A Warrants. From January 25, 2016 through March 31, 2016, 12,596 shares of Series A Preferred Stock have been converted and the
Company issued 512,100 shares of Common Stock to settle these conversions.
Compensatory Common Stock Summary
During the three months ended March 31,
2016 and 2015, the Company recognized stock-based compensation expense related to compensatory Common Stock in the amount of $52,000
and $322,067, respectively, which is included as part of selling, general and administrative expense in the accompanying consolidated
statements of operations. As of March 31, 2016, there was no unamortized expense remaining related to stock awards because the
remaining non-vested shares vested on April 1, 2016.
A summary of compensatory Common Stock
activity for the three months ended March 31, 2016 is presented below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
|
Total
|
|
|
|
Number of
|
|
|
Fair Value
|
|
|
Issuance Date
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Fair Value
|
|
Non-vested, January 1, 2016
|
|
|
357
|
|
|
$
|
364.00
|
|
|
$
|
130,000
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(213
|
)
|
|
|
364.00
|
|
|
|
(78,000
|
)
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Non-vested, March 31, 2016
|
|
|
144
|
|
|
$
|
364.00
|
|
|
$
|
52,000
|
|
Warrants
During the three months ended March 31,
2016, 41,548 Series A Warrants were exercised through the cashless exercise provision in the Series A Warrant resulting in the
issuance of 44.5 million shares of Common Stock.
A summary of warrant activity for the three months ended March
31, 2016 is presented below:
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Term (Yrs.)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2016
|
|
|
1,096,299
|
|
|
$
|
88.20
|
|
|
|
|
|
|
|
|
|
Warrants granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Warrants exercised
|
|
|
(41,548
|
)
|
|
|
86.80
|
|
|
|
|
|
|
|
|
|
Impact of reverse split rounding
|
|
|
37
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Warrants forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
1,054,788
|
|
|
$
|
87.94
|
|
|
|
4.5
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2016
|
|
|
1,054,788
|
|
|
$
|
87.94
|
|
|
|
4.5
|
|
|
$
|
-
|
|
The following table presents additional
information related to warrants as of March 31, 2016:
|
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
Average
|
|
|
|
|
Range of
|
|
Average
|
|
|
Outstanding
|
|
|
Average
|
|
|
Remaining
|
|
|
Exercisable
|
|
Exercise
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Number of
|
|
Price
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
In
Years
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$77.00 - $149.99
|
|
$
|
86.61
|
|
|
|
1,054,111
|
|
|
$
|
86.61
|
|
|
|
4.5
|
|
|
|
1,054,111
|
|
$150.00 - $699.99
|
|
|
205.83
|
|
|
|
205
|
|
|
|
205.83
|
|
|
|
2.7
|
|
|
|
205
|
|
$700.00 - $1799.99
|
|
|
761.88
|
|
|
|
187
|
|
|
|
761.88
|
|
|
|
3.6
|
|
|
|
187
|
|
$1800.00 - $4,633.68
|
|
|
4,495.43
|
|
|
|
285
|
|
|
|
4,495.43
|
|
|
|
1.6
|
|
|
|
285
|
|
|
|
|
|
|
|
|
1,054,788
|
|
|
|
|
|
|
|
4.5
|
|
|
|
1,054,788
|
|
Stock-Based Compensation
Stock Options
During the three months ended March 31,
2016 and 2015, the Company recognized stock-based compensation expense of $58,786 and $364,576, respectively, in connection
with the amortization of stock option expense. Stock-based compensation expense is included as part of selling, general and administrative
expense in the accompanying consolidated statements of operations. At March 31, 2016, the amount of unamortized stock-based compensation
expense associated with unvested stock options granted to employees, directors and consultants was $28,000 which will be amortized
over 1.2 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 shares of Common Stock outstanding
during the period. Diluted loss per share is computed using the weighted average number of shares of Common
Stock outstanding and, if dilutive, potential shares of Common Stock outstanding during the period. Potential
common shares consist of the incremental shares of Common Stock issuable upon (a) the exercise of stock options
(using the treasury stock method); (b) the vesting of restricted stock units; (c) the conversion of Series A Preferred Stock;
(d) the exercise of warrants (using the if-converted method), and (e) convertible notes payable. For the three months ended March
31, 2016 and 2015, diluted loss per share excludes the potential shares of Common Stock, 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, 2016
|
|
|
March
31, 2015
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
144
|
|
|
|
-
|
|
Stock options
|
|
|
558
|
|
|
|
3,495
|
|
Series A Preferred Stock
|
|
|
33,480
|
|
|
|
-
|
|
Senior convertible notes payable
|
|
|
-
|
|
|
|
5,125
|
|
Warrants
|
|
|
1,054,788
|
|
|
|
12,029
|
|
Total
|
|
|
1,088,970
|
|
|
|
20,649
|
|
Note 7. FAIR VALUE MEASUREMENTS
The fair value framework under FASB’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, 2016:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
53,616,983
|
|
|
$
|
53,616,983
|
|
Total derivative liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
53,616,983
|
|
|
$
|
53,616,983
|
|
The following table summarizes the liabilities
measured at fair value on a recurring basis as of December 31, 2015:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
41,089,580
|
|
|
$
|
41,089,580
|
|
Total derivative liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
41,089,580
|
|
|
$
|
41,089,580
|
|
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 and the use of at least one significant unobservable input. The development and determination
of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company.
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
to be derivative instruments if they (a) do not have fixed settlement provisions; or (b) have potential cash settlement provisions
which are not within the Company’s control. The Common Stock purchase warrants (a) issued by the Company in connection with
the Merger; (b) issued in connection with the 2015 private placement of Common Stock and warrants; (c) granted in connection with
certain 2015 waivers agreements; and (d) issued in connection with the July 2015 underwritten offering; have all been deemed to
be derivative liabilities. In accordance with FASB ASC Topic No. 815-40, “Derivatives and Hedging - Contracts in an Entity’s
Own Stock” (“ASC 815”), the embedded conversion options and the warrants were accounted for as derivative liabilities
at the date of issuance and adjusted to fair value through earnings at each reporting date. In accordance with ASC 815, the Company
has bifurcated the conversion feature of the convertible Debentures and warrant derivative instruments and recorded derivative
liabilities on their issuance date. The Company used a Monte Carlo model and a Binomial Lattice model to value the derivative liabilities.
These derivative liabilities are then revalued on each reporting date.
The Company’s derivative liabilities
are carried at fair value and were classified as Level 3 in the fair value hierarchy due to the use of unobservable inputs, including
the likelihood transactions limiting warrant holder payments, and factors limiting the exercise of warrants.
During the three months ended
March 31, 2016, Series A warrants to purchase an aggregate of 41,548 shares of Common Stock which had been accounted for as
a derivative liability were exercised. These warrants had an aggregate exercise date value of $2,254,636. During the
three months ended March 31, 2016, certain holders of Series A Warrants executed Standstill Agreements, which were
subsequently amended and restated whereby the holders agreed not to exercise Series A Warrants for a specified period of time
and under certain circumstances. See Note 9 – Subsequent Events.
The following tables summarizes the values
of certain assumptions used by the Company’s custom models to estimate the fair value of the warrant liabilities during the
three months ended March 31:
|
|
March 31,
2016
|
|
|
|
March 31,
2015
|
|
Stock price
|
|
$
|
.0001- 0.5400
|
|
|
|
$
|
385.00
|
|
Strike price
|
|
$
|
77.00 - 86.80
|
|
|
|
$
|
448.00
|
|
Remaining term (years)
|
|
|
3.92- 4.33
|
|
|
|
|
5.00
|
|
Volatility
|
|
|
126 % -177
|
%
|
|
|
|
115
|
%
|
Risk-free rate
|
|
|
1.20% -1.50
|
%
|
|
|
|
1.61
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
|
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, 2016
|
|
|
For
the Three Months Ended
March 31, 2015
|
|
Balance at January 1,
|
|
$
|
41,089,580
|
|
|
$
|
-
|
|
Private placement warrants
|
|
|
-
|
|
|
|
2,544,277
|
|
Exercise of Series A warrant liabilities
|
|
|
(2,254,636
|
)
|
|
|
-
|
|
Change in fair value of derivative liabilities
|
|
|
14,782,039
|
|
|
|
(250,826
|
)
|
Ending balance
|
|
$
|
53,616,983
|
|
|
$
|
2,293,451
|
|
Note 8. COMMITMENTS AND CONTINGENCIES
Employment and Consulting and Other
Related Party Agreements
On April 8, 2016, Gregory
Brauser informed the Board of his decision to resign from the Board and as President of the Company. Mr. Brauser’s resignation
was not due to any disagreement with the Company on any matters relating to the Company’s operations, policies or practices.
Through GAB Management Group, Inc., Mr. Brauser will serve as a consultant to the Company pursuant to an Executive
Services Consulting Agreement dated as of April 11, 2016 (the “Consulting Agreement”), the term of which
is two years. Under the Consulting Agreement, GAB Management Group, Inc., will receive the following benefits in connection with
consulting services that its principal, Mr. Brauser, will provide to the Company beginning on April 11, 2016: (1) an
engagement fee of $50,000 payable at the time the Consulting Agreement is executed, and (2) thereafter monthly installments of
$10,000 for 24 months. Subsequent to March 31, 2016, the Company paid $60,000 pursuant to the Consulting Agreement.
On August 13, 2015, the Company entered
into consulting agreements with each of GRQ Consultants, Inc. and Grander Holdings, Inc. Pursuant to its consulting agreement,
GRQ Consultants, Inc. was to primarily focus on investor relations and presenting the Company and its business plans, strategy
and personnel to the financial community. Pursuant to its consulting agreement, Grander Holdings, Inc. was to primarily assist
the Company in further developing and executing its acquisitions strategy, focusing on the Company’s “The Vape Store”
properties. Mr. Michael Brauser, who is the father of Gregory Brauser, is the Chief Executive Officer of Grander Holdings, Inc.
Pursuant to the foregoing agreements, each consultant received an initial fee of $50,000, payable upon execution, and would receive
$20,000 monthly throughout the 12-month term of each agreement if such consulting services continued. The Company made payments
of $40,000 each to Grander Holdings, Inc. and GRQ Consultants, Inc. during the three months ended March 31, 2016. The consulting
agreements with Grander Holdings, Inc. and GRQ Consultants were terminated amicably effective February 29, 2016, with
no requirement for additional payments.
During 2015, the Company purchased, at
rates comparable to market rates, e-liquids sold in its retail stores and wholesale operations, respectively from Liquid Science,
Inc., a company in which Jeffrey Holman (the Company’s Chief Executive Officer), Gregory Brauser (the Company’s former
President) and Michael Brauser each have a 15% beneficial ownership interest. During the three months ended March 31 2016,
the Company made approximately 44% of its purchases of e-liquid from Liquid Science for its wholesale and online operations, which
purchases equaled $264,401 in the aggregate. The Company did not make any purchases from Liquid Science during the three months
ended March 31, 2015. Jeffrey Holman sold his ownership interest in Liquid Science, Inc. in April 2016.
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.
Fontem Matters
Effective December 16, 2015, the Company
entered into a confidential Settlement Agreement and a non-exclusive royalty-bearing confidential Global License Agreement (“License
Agreement”) with Fontem Ventures B.V. (“Fontem”) resulting in the dismissal of all of the aforementioned patent
infringement cases by Fontem against the Company. The estimated settlement fee of approximately $1.7 million was included in selling,
general and administrative expenses and in accrued expense at December 31, 2015. On January 15, 2016, the Company made a payment
of $1.7 million under the terms of the Settlement and License Agreements. In connection with the License Agreement, Fontem granted
the Company a non-exclusive license to certain of its products. As consideration, the Company will make quarterly license and royalty
payments to Fontem based on the sale of qualifying products as defined in the License Agreement. The term of the License Agreement
will continue until all of the patents on the products subject to the agreement are no longer enforceable.
California Center for Environment Health
Matters
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 without warnings 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. On April 6, 2016, the Company and the plaintiff entered into
a settlement agreement, which required the Company to (1) make a payment of $45,000 and (2) comply with enhanced product labeling
requirements within a set implementation period as defined in the consent judgment. The settlement cost was included in selling,
general and administrative expenses and accrued expenses at March 31, 2016. The settlement payment was made on May 2, 2016.
Other Matters
On March 2, 2016, Hudson Bay Master Fund
Ltd., filed a complaint against the Company in the Supreme Court of the State of New York, County of New York, captioned Hudson
Bay Master Fund Ltd. versus Vapor Corp., Index No. 651094/2016. The Complaint alleges that the Company failed to timely
effect exercises of its Series A Warrants delivered by the plaintiff and seeks damages of $339,810. On May 10, 2016, solely
to avoid the costs, risks and uncertainties inherent in litigation, the Company entered into a settlement agreement with respect
to all claims included in the Complaint (the “Settlement”). The Settlement provides, among other things, that the
parties would enter into and file a stipulation of discontinuance that provides for the dismissal of the Complaint (the “Stipulation”).
Once the court enters the Stipulation, the Complaint will be dismissed with prejudice. The final terms of the Settlement will
not have a material adverse effect on the Company’s financial position or results of operations.
Future events or circumstances, currently
unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have
a material effect on the Company’s condensed consolidated financial position, liquidity or results of operations in any future
reporting periods.
Purchase Commitments
At March 31, 2016 and December 31, 2015,
the Company had vendor deposits of $154,075 and $310,936, respectively, and vendor deposits are included as a component of prepaid
expenses and vendor deposits on the 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 unaudited condensed consolidated financial statements other than those set forth below.
On May 2, 2016, the OTC Markets notified
the Company that, based upon its non-compliance with the minimum $0.01 bid price requirement for the prior 30 consecutive business
days, the Company – in accordance with the OTC Markets Listing Rules – is provided a grace period, through October
29, 2016, to regain compliance with the minimum bid price requirement.
On May 4, 2016, the Company determined
that it had insufficient shares of Common Stock authorized to allow for the exercise of Series A Warrants or stock options, or
allow the conversion of the Series A Preferred Stock. The Company is seeking the necessary approval from FINRA to implement a reverse
stock split that was previously approved by the Company’s stockholders. In the event that FINRA approves the reverse stock
split and the split is effected, the Company would have sufficient authorized shares of Common Stock to meet its obligations pursuant
to its outstanding warrants, Series A Preferred Stock and stock options.
From April 1, 2016 through May 10, 2016,
15,994 Series A Warrants were exercised through the cashless exercise provision in the Series A Warrant resulting in the issuance
of approximately 4,953,943,720 shares of the Common Stock. As of May 12, 2016, there were 4,999,106,905 shares of the Common
Stock issued and outstanding.
On May 4, 2016, the Company
determined it had insufficient shares of Common Stock available for future issuances. The Company currently is not permitted
to elect to issue Common Stock in lieu of cash payments to satisfy its obligations pursuant to a cashless exercise of the Series
A Warrants. If all of the outstanding Series A Warrants were fully exercised as of May 12, 2016, the amounts payable to
the holders of the Series A Warrants on a cashless basis would be approximately $77.1 million, using a Black Scholes Value of
$75.80 per Series A Warrant. On May 3, 2016, the Company entered into Third Amended and Restated Standstill Agreements with holders
of over 85% of the outstanding Series A Warrants, pursuant to which, among other things, the holders agreed not to exercise
their Series A Warrants pursuant to the "cashless exercise" provisions of the Series A Warrants prior to the earlier
of (1) June 2, 2016, or (2) the date the Company completes its previously approved reverse stock split.