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 retailer of vaporizers, e-liquids and electronic cigarettes. The Company operates
fourteen vape retail stores in the Southeast of the United States of America. Vapor offers e-liquids, vaporizers, e-cigarettes
and related products through its vape retail stores and online.
On June 1, 2016, the Company acquired
the business assets of Ada’s Whole Food Market LLC, a natural and organic grocery store, through its wholly owned subsidiary
Healthy Choice Markets, Inc. The grocery store has been a leader in the natural grocery market in the Ft. Myers, Florida for the
past 40 years, offering fresh, natural and organic products and specializing in facilitating a healthy, well balanced lifestyle.
In addition to a comprehensive selection of vitamins and health & beauty, the grocery store provides a fresh café and
an organic juice bar.
Going Concern and Liquidity
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 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”). Collectively, the Units consisted of Series A Convertible Preferred
Stock (the “Series A Preferred Stock”) convertible into shares of common stock and Series A Warrants exercisable into
54 shares of common stock (the “Series A Warrants”). The Units separated into the Series A Preferred Stock and Series
A Warrants as of January 25, 2016. See Note 9- Stockholders’ Deficit – 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
bid price of the Common Stock two trading days prior to the date of exercise.
On May 2, 2016, the OTCBQB staff 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 OTCQB Standards – has been provided a grace period, through October 31,
2016, to regain compliance with the minimum bid price requirement. If the Company’s common stock bid price does not close
at or above $0.01 for a period of ten consecutive trading days prior to October 31, 2016, the Company will be moved
to the OTC Pink marketplace.
If a delisting from OTCQB took place, the
Company would no longer
meet the “Equity Conditions” required to issue Common Stock to fulfill a cashless exercise pursuant
to Section 1(d) of the Series A Warrants. If the Company fails to meet certain conditions set forth in the Series A Warrants,
the Company may be required to elect to make cash payments to satisfy its obligations pursuant to the Series A Warrants.
On June 24, 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. On August 4, 2016 an amendment to the Company’s Amended and Restated
Certificate of Incorporation was filed to increase the number of shares of the authorized common stock from 5,000,000,000 to 750,000,000,000.
If all of the warrants were exercised simultaneously at stock price lower than $0.0001, then the Company would not have sufficient
authorized common stock to satisfy all the warrant exercises and it may be required to use cash to pay warrant holders. Since
we cannot predict the future stock price and when the warrant holders will exercise warrants and sell the underlying common shares,
management cannot predict if the Company will have sufficient cash resources to satisfy its obligation to the current warrant
holders. The amounts payable to the holders of the Series A Warrants if all such warrants were fully exercised as of
August 12, 2016 on a cashless basis would be approximately $72.1 million, using a Black Scholes Value of approximately
$1,515,080 per Series A Warrant.
The Company reported a net loss of approximately
$17.4 million for the six months ended June 30, 2016. The Company also had negative working capital of approximately $31 million
and a stockholders’ deficit of approximately $25.7 million as of June 30, 2016. The Company expects to continue incurring
operating losses for the foreseeable future and may need to satisfy 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., Vaporin Florida, Inc., and Health Choice Markets, 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. On June 1, 2016, the Company filed an amendment to its Certificate of Incorporation to
effectuate a one-for-twenty thousand reverse stock split to its Common Stock. On August 4, 2016 the Company filed an amendment
to its Amended and Restated Certificate of Incorporation to increase the number of shares of the authorized common
stock from 5,000,000,000 to 750,000,000,000. 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 splits of the Company’s Common Stock. See Note 9- Stockholders’ Deficit 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 and six months ended June 30, 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, and the valuation of assets and liabilities in business combinations. 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.
Vapor 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. Vapor 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. Vapor 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 vapor product 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.
Grocery merchandise sales are recognized
at the point of sale to the customer. Sales tax is excluded from revenue. Discounts provided to customers through in-store and
manufacturers coupons and loyalty programs are recognized as a reduction of sales as the products are sold.
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
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 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 April 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-10 (Topic 606) “Revenue
from Contracts with Customers: Identifying Performance Obligations and Licensing” (“ASU2-16-10”). ASU 2016-10
clarifies the principle for determining whether a good or service is “separately identifiable” from other promises
in the contract and, therefore, should be accounted for as a separate performance obligation. In that regard, ASU 2016-10 requires
that an entity determine whether its promise is to transfer individual goods or services to the customer, or a combined item (or
items) to which the individual goods and services are inputs. In addition, ASU 2016-10 categorizes intellectual property, or IP,
into two categories: “functional” and “symbolic.” Functional IP has significant standalone functionality.
All other IP is considered symbolic IP. Revenue from licenses of functional IP is generally recognized at a point in time, while
revenue from licenses of symbolic IP is recognized over time. ASU 2016-10 has the same effective date and transition requirements
as ASU 2014-09, as amended by ASU 2015-14. The Company is currently evaluating the effect that adoption of ASU 2016-10 will have
on its consolidated financial statements or disclosures
.
In March 2016, the FASB issued
ASU 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 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”). The effective date and transition
requirements for the amendment 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.
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.
Note 3. ACQUISITION OF ADA’S WHOLE FOOD MARKET
On June 1, 2016, the Company’s wholly
owned subsidiary Health Choice Markets Inc., entered into a Business Sale Agreement with Ada’s Whole Food Market LLC (the
“Seller”) to purchase the certain operating assets and assumed certain payables and a
store lease obligation related to that constituted the business of Ada’s Natural Market grocery store (the “Grocery
Acquisition”). The Company operates the grocery store under the same name, location, and
management. The Company also entered into an employment agreement with the store manager.
The purchase consideration paid to the
Seller was allocated to the preliminary fair value of the net tangible assets acquired, with the remainder recorded as
goodwill on a preliminary basis. Goodwill recognized from the transaction 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 preliminary purchase price allocation
was based, in part, on management’s knowledge of Ada’s Natural Market business and the results of a third party appraisal
commissioned by management for equipment.
Purchase Consideration
|
|
|
|
|
Consideration paid:
|
|
$
|
2,910,612
|
|
|
|
|
|
|
Tangible assets acquired and liabilities assumed at fair value
|
|
|
|
|
Property and equipment
|
|
$
|
500,225
|
|
Leasehold improvements
|
|
|
457,101
|
|
Inventory
|
|
|
253,524
|
|
Accrued expenses
|
|
|
(34,921
|
)
|
Net tangible assets acquired
|
|
$
|
1,175,929
|
|
|
|
|
|
|
Total preliminary allocation to goodwill
|
|
$
|
1,734,683
|
|
The following presents the unaudited pro-forma
combined results of operations of the Company with Ada’s Whole Food Market and Vaporin as if both Acquisitions occurred
on January 1, 2015.
|
|
For
the Three Months Ended
June 30,
|
|
|
For
the Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale sales, net
|
|
$
|
1,369,415
|
|
|
$
|
2,050,463
|
|
|
$
|
3,259,192
|
|
|
$
|
3,368,754
|
|
Retail sales, net
|
|
$
|
1,577,963
|
|
|
$
|
960,840
|
|
|
$
|
3,424,414
|
|
|
$
|
2,227,433
|
|
Grocery sales, net
|
|
$
|
1,749,374
|
|
|
$
|
1,879,628
|
|
|
$
|
3,812,070
|
|
|
$
|
4,231,757
|
|
Net loss
|
|
$
|
(1,074,061
|
)
|
|
$
|
(2,828,686
|
)
|
|
$
|
(17,105,232
|
)
|
|
$
|
(7,576,596
|
)
|
Net loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(565,737.20
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(1,894,149.00
|
)
|
Weighted average number of shares outstanding
|
|
|
380,825,178
|
|
|
|
5
|
|
|
|
190,412,816
|
|
|
|
4
|
|
The unaudited pro-forma results of operations
are presented for information purposes only and are based on estimated financial operations. 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, 2015 or to project potential operating results as of any future date or for any future periods.
Note 4. SEGMENT INFORMATION
Prior to the second quarter of 2016, the
Company had a single reportable business segment, as it was a distributor and retailer of vapor products including vaporizers,
e-liquids and electronic cigarettes. On June 1, 2016, the Company completed the Grocery Acquisition (See Note 3) and added a reportable
segment. Management determines the reportable segments based on the internal reporting used by our Chief Operating Decision Makers
to evaluate performance and to assess where to allocate resources. The Company evaluates segment performance based on the segment
gross profit before corporate expenses. Summarized below are the Net Sales and Segment Operating Profit for each reporting segment:
|
|
Three Months Ended
|
|
|
|
Net
Sales
|
|
|
Segment Gross Profit
|
|
|
|
June
30, 2016
|
|
|
June
30, 2015
|
|
|
June
30, 2016
|
|
|
June
30, 2015
|
|
Vapor
|
|
$
|
2,947,378
|
|
|
$
|
3,011,303
|
|
|
$
|
782,398
|
|
|
$
|
1,359,698
|
|
Grocery
|
|
|
510,256
|
|
|
|
-
|
|
|
|
197,990
|
|
|
|
-
|
|
Total
|
|
$
|
3,457,634
|
|
|
$
|
3,011,303
|
|
|
|
980,388
|
|
|
|
1,359,698
|
|
Corporate Expenses
|
|
|
|
|
|
|
|
|
|
|
5,029,219
|
|
|
|
3,601,702
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
(4,048,831
|
)
|
|
|
(2,242,004
|
)
|
Other Income (Expense)—Net
|
|
|
|
|
|
|
|
|
|
|
2,859,685
|
|
|
|
(781,578
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
$
|
(1,189,146
|
)
|
|
$
|
(3,023,582
|
)
|
|
|
Six Months Ended
|
|
|
|
Net
Sales
|
|
|
Segment Operating Profit
|
|
|
|
June
30, 2016
|
|
|
June
30, 2015
|
|
|
June
30, 2016
|
|
|
June
30, 2015
|
|
Vapor
|
|
$
|
6,683,606
|
|
|
$
|
4,479,924
|
|
|
$
|
2,268,664
|
|
|
$
|
1,177,209
|
|
Grocery
|
|
|
510,256
|
|
|
|
-
|
|
|
|
197,990
|
|
|
|
-
|
|
Total
|
|
$
|
7,193,862
|
|
|
$
|
4,479,924
|
|
|
|
2,466,654
|
|
|
|
1,177,209
|
|
Corporate Expenses
|
|
|
|
|
|
|
|
|
|
|
7,924,848
|
|
|
|
6,950,068
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
(5,458,194
|
)
|
|
|
(5,772,859
|
)
|
Other Income (Expense)—Net
|
|
|
|
|
|
|
|
|
|
|
(11,917,852
|
)
|
|
|
(943,128
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
$
|
(17,376,046
|
)
|
|
$
|
(6,715,987
|
)
|
For the three months ended June 30, 2016
depreciation and amortization was $ 61,881 and $17,453 for Vapor and Grocery, respectively. For the six months ended June 30,
2016 depreciation and amortization was $132,627 and $17,453 for Vapor and Grocery, respectively. For the three months ended June
30, 2016, the Company had impairment of goodwill and intangible assets of $1,977,829 and $0 for Vapor and Grocery, respectively.
Note 5. 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, 2015.
|
|
For
the Six Months
Ended June 30, 2015
|
|
|
|
|
|
Wholesale and online revenues
|
|
$
|
3,368,754
|
|
Retail revenues
|
|
$
|
2,227,433
|
|
Net loss
|
|
$
|
(8,113,718
|
)
|
Net loss per share
|
|
$
|
(2,028,429.50
|
)
|
Weighted Average number of shares outstanding
|
|
|
4
|
|
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, 2015 or to project potential operating
results as of any future date or for any future periods.
Note 6. RETAIL VAPOR STORES AND KIOSKS
Retail Stores
During 2015, the Company acquired the
assets and business operations of established retail vapor stores. The purchase prices were generally allocated to inventory,
leasehold improvements, fixtures, security deposits, intangible assets, and goodwill. No liabilities were assumed from
the sellers and the Company has no obligation to retain existing employees.
The Company holds back a portion of the
sellers’ purchase price for three to six months during the operational transition period (the “hold back period”).
If the stores’ gross minimum revenues during the holdback period do not reach an amount agreed upon by the Company
and the respective seller at closing, then the hold back amount due to the seller is reduced in the final settlement. The
holdback 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 six months ended June 30,
2016, the Company made $220,000 of aggregate holdback payments and the remaining holdback amount as of June 30, 2016 included
in accrued expenses is $640,000.
The accounting and reporting of the acquired
vape retail store operations were fully integrated into the Company at dates of the individual acquisitions and it is impracticable
to separate them. 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 vape 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 vape retail stores
on February 15, 2016 and five of its Orlando, Florida retail vapor stores were closed between May 31, and June 30, 2016. In connection
with the vape retail store closing, for the six months ended June 30, 2016, the Company incurred approximately $333,259 of exit
costs including $175,707 of settlement of non-cancellable lease obligations, and $101,768 of loss on abandonment or disposal of
property and equipment, and $56,795 loss on write-off of inventory and employee severance costs.
Note 7. GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the premium paid over
the fair value of the intangible and net tangible assets acquired in the Merger and other retail and grocery store business acquisitions.
The Company assesses the carrying value of its goodwill on at least an annual basis. At December 31, 2015 and June 30, 2016, management
assessed relevant events and circumstances in evaluating whether it was more likely than not that its fair values were less than
the respective carrying amounts of the acquired subsidiaries pursuant to ASC 350, “Intangibles, Goodwill and Other”.
The Company then evaluated the carrying value of its goodwill by estimating the fair value of its consolidated business operations
through the use of discounted cash flow models, which required management to make significant judgments as to the estimated future
cash flows. During the fourth quarter of 2015, the Company revised its plans to increase the number of vape retail stores due
to changes in the industry and increasing federal and state regulations that may potentially reduce both wholesale and retail
revenues. The ceased vape retail store expansion plan and potential reduction in revenue resulting from pending regulations adversely
impacted the Company’s projected cash flows and profits. Accordingly, the Company’s goodwill was evaluated for impairment.
During
the six months ended June 30, 2016, the
Company’s wholesale and online operations did not generate positive cash flows and are projected to continue incurring operating
losses for the foreseeable future. As a result of such analyses, the Company concluded that goodwill was impaired and recorded
an impairment charges of $1,199,484 for the six months ended June 30, 2016.
The changes in the carrying amount of goodwill for the six
months ended June 30, 2016 and the year ended December 31, 2015 are as follows:
|
|
June
30,
2016
|
|
Beginning balance
|
|
$
|
3,177,017
|
|
Goodwill recognized from the Merger
|
|
|
-
|
|
Goodwill recognized from acquired retail businesses
|
|
|
-
|
|
Goodwill recognized from acquired grocery store business
|
|
|
1,734,683
|
|
Impairment of goodwill
|
|
|
(1,199,484
|
)
|
|
|
|
|
|
Ending balance
|
|
$
|
3,712,216
|
|
The Company records an impairment charge
on its intangible assets if it determines that their carrying value may not be recoverable. The carrying value is not recoverable
if it exceeds the undiscounted cash flows resulting from the use of the asset and its eventual disposition. When the Company determines
that the carrying value of its intangible assets may not be recoverable, the Company measures the potential impairment based on
a projected discounted cash flow method using a discount rate determined by its management to be commensurate with the risk inherent
in its current business model. An impairment loss is recognized only if the carrying amount of the intangible assets exceeds its
estimated fair value. An impairment charge is recorded to reduce the pre-impairment carrying amount of the intangible assets to
their estimated fair value. Determining the fair value is highly judgmental in nature and requires the use of significant estimates
and assumptions considered to be Level 3 fair value inputs, including anticipated future revenue opportunities, operating margins,
and discount rates, among others. The estimated fair value of the intangible assets was determined based on the income approach,
as it was deemed to be most indicative of the Company’s fair value in an orderly transaction between market participants.
During the six months ended June 30, 2016, the Company determined its trade names and technology carrying value exceeded the potential
cash flow from their disposition. The Company recorded an impairment charge of $778,345. Subsequent to June 30, 2016, the Company
entered into a sale and license agreement for its trade names for consideration of $100,000. The changes in the carrying amount
of intangible assets for the six months ended June 30, 2016 are as follows:
|
|
Trade Names
and Technology
|
|
|
Customer
Relationships
|
|
|
Assembled
Workforce
|
|
|
Total
|
|
Beginning balance, January 1, 2016
|
|
$
|
929,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
929,000
|
|
Accumulated amortization
|
|
|
(50,655
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(50,655
|
)
|
Impairment
|
|
|
(778,345
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(778,345
|
)
|
Ending balance, June 30, 2016
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
100,000
|
|
Note 8. ACCRUED EXPENSES
Accrued expenses are comprised of the
following:
|
|
June
30, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
Commissions payable
|
|
$
|
53,499
|
|
|
$
|
196,096
|
|
Retirement plan contributions
|
|
|
77,002
|
|
|
|
77,861
|
|
Accrued severance
|
|
|
-
|
|
|
|
51,145
|
|
Accrued customer returns
|
|
|
312,647
|
|
|
|
435,832
|
|
Accrued payroll
|
|
|
81,289
|
|
|
|
46,325
|
|
Accrued settlements and royalty fees
|
|
|
160,980
|
|
|
|
1,900,000
|
|
Accrued legal and professional fees
|
|
|
189,570
|
|
|
|
191,643
|
|
Accrued vape retail store hold back payments from acquisitions
|
|
|
640,000
|
|
|
|
860,000
|
|
Other accrued liabilities
|
|
|
143,766
|
|
|
|
187,209
|
|
Total
|
|
$
|
1,658,753
|
|
|
$
|
3,946,111
|
|
See Note 6 - Retail Stores and Kiosks
for more information related to accrued vape retail store hold back payments from acquisitions. See Note 11 – Commitments
and Contingencies – Legal Proceedings for additional information related to the accrual of legal settlements and royalty
fees.
Note 9. 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 Board.
On June 1, 2016, the Board effected a reverse stock split of the Common Stock at a ratio of 1-for-20,000.
Series A Preferred Stock Conversions
On January 25, 2016, the Units sold pursuant
to the Company’s July 2015 registered offering automatically separated into 1 share of Series A Preferred Stock and Series
A Warrants, exercisable into 54 shares of common stock. From January 25, 2016 through June 30, 2016, 1 share of Series A Preferred
Stock was converted and the Company issued 26 shares of Common Stock to settle these conversions.
Compensatory Common Stock Summary
The Company did not recognize stock-based
compensation expense related to compensatory Common Stock three months ended June 30, 2016 and 2015. During the six months ended
June 30, 2016 and 2015, the Company recognized stock-based compensation expense related to compensatory Common Stock in the amount
of $52,000 and $465,067, respectively. Stock-based compensation expense is included as part of selling, general and administrative
expense in the accompanying condensed consolidated statements of operations. As of June 30, 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 six months ended June 30, 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
|
|
|
3
|
|
|
$
|
43,333
|
|
|
$
|
130,000
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(3
|
)
|
|
|
(43,333
|
)
|
|
|
(130,000
|
)
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Non-vested, June 30, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Warrants
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 3, 2016, the Series A Warrant Standstill
Agreements (the “Amended Standstill Agreements”) were amended and restated pursuant to which, among other things,
each holder of the Series A Warrants 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 70 for 1 reverse stock split. Pursuant to the terms of the Amended Standstill Agreements, the holders agree to receive
only common stock (and not cash) pursuant to any exercise of their Series A Warrants until the date of the 20,000 for 1 reverse
stock split. For the period through the Standstill Date, the number of Series A Warrants the Holders would have been permitted
to exercise will roll over and cumulated and was exercisable after the Standstill Date. More than 85% of the Series A Warrants
are subject to the Amended Standstill Agreement.
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 received the necessary approval
from FINRA to implement a reverse stock
split filed an amendment to its Certificate of Incorporation to effectuate a one-for-twenty thousand reverse stock split to its
Common Stock on June 1, 2016.
On June 21, 2016,
the Series A Warrant Standstill Agreements were amended and restated to permit the repurchase or exchange of the Series A Warrants
in certain additional circumstances (the “Amended Standstill Agreements”). These circumstances include the repurchase
of the Series A Warrants below a certain price per warrant and pursuant to the terms of the recently announced exchange offer
for the Series A Warrants. In addition, pursuant to the terms of the Amended Standstill Agreements, the Holders agreed in certain
circumstance to receive only common stock (and not cash) pursuant to an exercise pursuant to Section 1(d) of their Series A Warrants.
Those circumstances include if the Company is deemed not to meet the "Equity Conditions" of the Series A Warrants because
of the failure of the closing price of the Company Common Stock to be at or above $0.01 per share.
On June 24, 2016, the Company determined
that it had insufficient shares of Common Stock authorized to allow for the exercise of its warrants or stock options,
or allow the conversion of preferred stock. On August 4, 2016, the Company received the approval from its stockholders to increase
the authorized common stock to 750 billion shares and the Certificate of Amendment to the Company’s Certificate of Incorporation
was filed. If all of the warrants were exercised simultaneously at stock price lower than $0.0001, then the Company would not
have sufficient authorized common stock to satisfy all the warrant exercises and it may be required to use cash to pay warrant
holders. Since we cannot predict the future stock price and when the warrant holders will exercise warrants and sell the underlying
common shares, management cannot predict if the Company will have sufficient cash resources to satisfy its obligation to the current
warrant holders. If all of the outstanding Series A Warrants were fully exercised on June 30, 2016, the amounts payable to
the holders of the Series A Warrants would be approximately $72.3 million, using a Black Scholes Value of $1,514,637 per
Series A Warrant. The approximately 723 billion shares issuable upon full exercise of the Company’s 48
outstanding Series A Warrants is calculated (1) using a Black Scholes Value of $1,514,637 per share and a closing stock price of $0.0001 per share and (2) assuming
the Company delivers only common stock upon exercise of the Series A Warrants and not cash payments as permitted under the terms
of the Series A Warrants.
A summary of warrant activity for the six months ended June
30, 2016 is presented below:
|
|
Number
of
Warrants
|
|
Outstanding at January 1, 2016
|
|
|
54
|
|
Warrants granted
|
|
|
-
|
|
Warrants exercised
|
|
|
(4
|
)
|
Warrants exchanged
|
|
|
(2
|
)
|
Warrants forfeited or expired
|
|
|
-
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
48
|
|
|
|
|
|
|
Exercisable at June 30, 2016
|
|
|
48
|
|
See Note 10 – Fair Value Measurements
for additional details related to the Series A Warrants that were exercised or exchanged during the six months ended June 30,
2016. The remaining Series A Warrants purchase 48 shares of common stock have an exercise price of $1,736,000 per warrant and
have a remaining term of 4.1 years at June 30, 2016.
Stock-Based Compensation
Stock Options
During the three months ended June 30,
2016 and 2015, the Company recognized stock-based compensation expense in the amount of $5,389 and $30,689, respectively. During
the six months ended June 30, 2016 and 2015, the Company recognized stock-based compensation expense of $12,175 and $73,196, 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 condensed consolidated statements of operations. At June 30, 2016, the
amount of unamortized stock-based compensation expense associated with unvested stock options granted to employees, directors
and consultants was approximately $22,000 which will be amortized over a weighted average period of 1.1 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 six months ended June 30, 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:
|
|
June
30, 2016
|
|
|
June
30, 2015
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
48
|
|
|
|
-
|
|
Total
|
|
|
48
|
|
|
|
-
|
|
Note 10. 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 June 30, 2016:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
47,314,427
|
|
|
$
|
47,314,427
|
|
Total derivative liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
47,314,427
|
|
|
$
|
47,314,427
|
|
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 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 six months ended June 30, 2016,
Series A warrants to purchase an aggregate of 4 and 2 shares of Common Stock which had been accounted for as a derivative liability
were exercised and exchanged, respectively. The exercised warrants had an aggregate exercise date value of $4,238,561 which was
reclassified to stockholders’ deficit. The exchanged warrants had an aggregate value at exchange date of $3,213,589 which
was derecognized and the Company paid $1,461,326 of cash plus Series B warrants with a nominal value, with a resulting extinguishment
gain of $1,752,263. The terms of the Series B warrant were set, but the warrants have not been issued. During the six months ended
June 30, 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.
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 six months ended June 30:
|
|
June
30, 2016
|
|
Stock price
|
|
$
|
0.00-756,000.00
|
|
Strike price
|
|
$
|
1,540,000 – $1,736,000
|
|
Remaining term (years)
|
|
|
3.67 - 4.54
|
|
Volatility
|
|
|
126 % -1202
|
%
|
Risk-free rate
|
|
|
0.71% -1.46
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
June
30, 2015
|
|
Stock price
|
|
$
|
2,254,000
|
|
Strike price
|
|
$
|
1,680,000-$3,500,000
|
|
Remaining term (years)
|
|
|
0.50 – 5.00
|
|
Volatility
|
|
|
108
|
%
|
Risk-free rate
|
|
|
0.03% -2.82
|
%
|
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 Six Months
Ended
June 30, 2016
|
|
|
For
the Six Months
Ended
June 30, 2015
As Revised
|
|
Balance at January 1,
|
|
$
|
41,089,580
|
|
|
$
|
-
|
|
Warrants issued
|
|
|
-
|
|
|
|
835,329
|
|
Warrant exercises
|
|
|
(4,238,561
|
)
|
|
|
-
|
|
Warrants exchanged
|
|
|
(3,213,588
|
)
|
|
|
-
|
|
Embedded conversion options issued
|
|
|
-
|
|
|
|
248,359
|
|
Change in fair value of derivative liabilities
|
|
|
13,676,996
|
|
|
|
2,195,267
|
|
Ending balance
|
|
$
|
47,314,427
|
|
|
$
|
3,058,955
|
|
Note 11. 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 June 30, 2016, the Company paid $80,000 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 six months ended June 30, 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 vape 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 had a beneficial ownership interest. During the six months ended June 30, 2016, the
Company made approximately $168,200 or 48% of its purchases of e-liquid from Liquid Science for its wholesale, online and vape
retail store operations, which purchases equaled approximately $353,000 in the aggregate. The Company did not make any purchases
from Liquid Science during the six months ended June 30, 2015. Jeffrey Holman sold his ownership interest in Liquid Science, Inc.
in April 2016. During 2016, the Company received royalty income from Liquid Science pursuant to the terms of a royalty agreement;
approximately $52,000 received during the three months ended March 31, 2016 and $42,000 of royalty income received subsequent
to June 30, 2016. Pursuant to the royalty agreement between the Company and Liquid Science, as consideration for use of a Company
trademark, Liquid science would pay a 15% royalty on sales of licensed products sold directly to consumers. The royalty revenue
was recorded when received. On July 21, 2016, Liquid Science entered into an asset purchase and license agreement with the Company,
whereby the Company irrevocably sold, assigned, transferred, certain trademark, intellectual property, formulations, technology
and granted rights to sell and distribute certain brand named products internationally. In conjunction with the sale, the royalty
agreement between the Company and Liquid Science was terminated.
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 for the three months and the six
months ended June 30, 2016. The settlement payment was made on May 2, 2016.
Other Matters
On March 2, 2016, Hudson Bay Master Fund
Ltd. (“HB”), filed an action 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. This action alleged 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 action by HB (the “HB Settlement”). The HB Settlement provided, among other things,
that the parties would enter into and file a stipulation of discontinuance that provides for the dismissal of the action against
the Company (the “HB Stipulation”). This action by HB was dismissed with prejudice.
On June 2, 2016, four Series A Warrant
holders, filed an action against the Company in the Supreme Court of the State of New York, County of New York, captioned Empery
Asset Master, LTD, Empery Tax Efficient, LP, Empery Tax Efficient II, LP and Intracoastal Capital, LLC versus Vapor Corp., Index
No. 652950/2016. This action alleged that the Company failed to timely effect exercises of its Series A Warrants delivered by
the plaintiffs and seeks aggregate damages of approximately $603,000. Between June 17 and June 22, 2016, solely to avoid the costs,
risks and uncertainties inherent in litigation, the Company entered into settlement agreements with respect to all claims included
in the Complaints (the “Settlements”). The Settlements provide, 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”), and
the holders would surrender the balance of their Series A Warrant upon receipt of settlement payments. These actions were dismissed
with prejudice.
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 June 30, 2016 and December 31, 2015,
the Company had vendor deposits of approximately $34,900 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 12. 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 July 21, 2016, Liquid Science entered
into an asset purchase and license agreement with the Company, whereby the Company irrevocably sold, assigned, transferred, certain
trademark, intellectual property, formulations, technology and granted rights to sell and distribute certain brand named products
internationally. In conjunction with the sale, the royalty agreement between the Company and Liquid Science was terminated.
On July 29, 2016, the Company,
entered into an Asset Purchase Agreement (the “Purchase Agreement”) with VPR Brands, L.P. (the
“Purchaser”) and the Purchaser’s Chief Executive Officer, Kevin Frija (the former Chief Executive Officer
of the Company) pursuant to which the Company sold its wholesale operations and inventory related thereto (collectively,
“Assets”), which business is operated at 3001 Griffin Road, Dania Beach, Florida 33312. The transactions
contemplated by the Purchase Agreement closed on July 29, 2016. The consideration for the Assets is (i) a secured, one-year
promissory note in the principal amount of $370,000 (the “Acquisition Note”) bearing an interest rate of 4.5%,
which payments thereunder are $10,000 monthly, with such payment s commencing on October 28, 2016, with a balloon payment of
the remainder of principal and interest on July 29, 2017; (ii) A secured, 36-month promissory note in the principal amount of
$500,000 bearing an interest rate of prime plus 2%, resetting annually on July 29
th
,which payments thereunder are
$14,000 per month, with such payments deferred and commencing on January 26, 2017, with subsequent installments payable on
the same day of each month thereafter and in the 37
th
month, a balloon payment for all remaining accrued interest
and principal; (iii) the assumption by the Purchaser of certain liabilities related to the Company’s wholesale
operations, including but not limited to the month-to-month lease for the premises. Pursuant to the Purchase Agreement, the
Company shall continue to own its accounts receivable from its wholesale operations as of July 29, 2016. The Company agreed
to use its commercially reasonable efforts, consistent with standard industry practice, to collect such accounts receivable,
and any and all amounts so collected (i) up to $150,000 (net of any refunds) in the aggregate shall be credited against
payment of the Acquisition Note; and (ii) in excess of $150,000 (up to $95,800) will be transferred to the
Purchaser’s Chief
Executive Officer as additional consideration
for the transfer to the Company by Mr. Frija of 1,405,910,203 shares of the Company’s common stock (the “Retired Shares”)
that he had acquired on the open market.
On August 4, 2016 an amendment to the Company’s Amended
and Restated Certificate of Incorporation was filed to increase the number of shares of the authorized common stock from 5,000,000,000
to 750,000,000,000.
Subsequent to June 30, 2016, the Company entered into agreements to repurchases of Series A Warrants that
had an aggregate exercise date value of approximately $470,667. The exchanges will be derecognized and result in an extinguishment
gain of approximately $267,200.
NOTE 13. REVISION OF INTERIM FINANCIAL STATEMENTS
On March 3, 2015, the Company entered into
a Securities Purchase Agreement with certain accredited investors and issued five-year Warrants to purchasers of the shares to
acquire an aggregate of 549,169 shares of the Company’s Common Stock with an exercise price of $8,960,000 per share. The
Warrants were deemed to be derivative liabilities due to a potential cash settlement provision which isn’t under the Company’s
control and as a result, the issuance date fair value of $2,494,639 should have been recorded as a derivative liability and a
reduction of additional paid in capital at March 31, 2015. During the three months ended March 31, and June 30, 2015 the Company
should have recorded the change in the fair value of the derivative liabilities resulting in gains of $288,791 and $1,744,430,
respectively. The Company recorded the warrant derivative liability at September 30, 2015 and the net change in the fair value
of the related derivative liability was recorded in the three months ended September 30, 2015 (See Note 8).
The adjustments
made in revising the Company’s previously issued interim unaudited condensed consolidated financial statements include adjustments
to record the derivative liability at March 31, 2015 and June 30, 2015 and to correct the amount reported for the change in the
fair value of the derivative liabilities in the Statements of Operations for the three months ended March 31, 2015 and for the
three and six months ended June 30, 2015.
Management has evaluated the effect of
the errors and determined that they are qualitatively immaterial to the Company’s condensed consolidated financial position
and results of operations as of March 31, 2015 and for the three months then ended, and as of June 30, 2015 and for the three
and six months then ended, and, therefore, amendments of the previously filed quarterly reports on Form 10-Q are not considered
necessary. However, if the adjustments to correct the cumulative errors had been recorded in the first and second quarters of
2015, the Company believes the impact would have been significant to the first and second quarters of 2015 and would impact comparisons
to prior periods. In accordance with guidelines issued in Staff Accounting Bulletin No. 108, the Company had recorded adjustments
in the current quarter’s beginning additional paid in capital, current liabilities and accumulated deficit accounts to correct
this error. We have also revised in this current Form 10-Q filing, and have revised filings of our Form 10-Q, the
previously reported unaudited interim condensed consolidated financial statements for the first and second quarters of 2015 on
Form 10-Q for these amounts.
The following table sets forth the revised
prior period balances reported in our comparative financial statements as if adjustments had been made:
|
|
June 30, 2015
|
|
|
Amounts previously
reported
|
|
Adjustment
|
|
As Revised
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
$
|
4,897,017
|
|
|
$
|
—
|
|
|
$
|
4,897,017
|
|
TOTAL ASSETS
|
|
$
|
23,368,586
|
|
|
$
|
—
|
|
|
$
|
23,368,586
|
|
TOTAL CURRENT LIABILITIES
|
|
$
|
8,909,594
|
|
|
$
|
476,175
|
|
|
$
|
9,385,769
|
|
TOTAL LIABILITIES
|
|
$
|
9,012,599
|
|
|
$
|
476,175
|
|
|
$
|
9,488,774
|
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
$
|
14,355,987
|
|
|
$
|
(476,175
|
)
|
|
$
|
13,879,812
|
|
|
|
For the
Six Months Ended
June 30, 2015
|
|
For the
Three Months Ended
June 30, 2015
|
|
|
Amounts
previously
reported
|
|
Adjustment
|
|
As Revised
|
|
Amounts
previously
reported
|
|
Adjustment
|
|
As Revised
|
Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(5,772,859
|
)
|
|
$
|
—
|
|
|
$
|
(5,772,859
|
)
|
|
$
|
(2,242,004
|
)
|
|
$
|
—
|
|
|
$
|
(2,242,004
|
)
|
Total other (expense) income
|
|
|
(2,961,592
|
)
|
|
|
2,018,464
|
|
|
|
(943,128
|
)
|
|
|
(2,511,251
|
)
|
|
|
1,729,673
|
|
|
|
(781,578
|
)
|
Loss before income tax benefit
|
|
|
(8,734,451
|
)
|
|
|
2,018,464
|
|
|
|
(6,715,987
|
)
|
|
|
(4,753,255
|
)
|
|
|
1,729,673
|
|
|
|
(3,023,582
|
)
|
Income tax benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
NET INCOME (LOSS)
|
|
$
|
(8,734,451
|
)
|
|
$
|
2,018,464
|
|
|
$
|
(6,715,987
|
)
|
|
$
|
(4,753,255
|
)
|
|
$
|
1,729,673
|
|
|
$
|
(3,023,582
|
)
|
Deemed dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
NET INCOME (LOSS) ALLOCABLE TO COMMON SHAREHOLDERS
|
|
$
|
(8,734,451
|
)
|
|
$
|
2,018,464
|
|
|
$
|
(6,715,987
|
)
|
|
$
|
(4,753,255
|
)
|
|
$
|
1,729,673
|
|
|
$
|
(3,023,582
|
)
|
LOSS PER SHARE - BASIC AND DILUTED
|
|
$
|
(2,183,613
|
)
|
|
|
|
|
|
$
|
(1,678,997
|
)
|
|
$
|
(950,651
|
)
|
|
|
|
|
|
$
|
(604,716
|
)
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC AND DILUTED
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
|
|
For
the Six Months Ended June 30, 2015
|
|
|
Amounts
previously reported
|
|
Adjustment
|
|
As
Revised
|
Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(8,734,451
|
)
|
|
$
|
2,018,464
|
|
|
$
|
(6,715,987
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
3,922,257
|
|
|
|
(2,018,464
|
)
|
|
|
1,903,793
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
$
|
(3,795,239
|
)
|
|
$
|
—
|
|
|
$
|
(3,795,239
|
)
|
NET CASH USED BY INVESTING ACTIVITIES:
|
|
$
|
448,344
|
|
|
$
|
—
|
|
|
$
|
448,344
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
$
|
4,245,791
|
|
|
$
|
—
|
|
|
$
|
4,245,791
|
|