Washington, D.C. 20549
______________________
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨
Yes
þ
No
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨
Yes
þ
No
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
þ
Yes
¨
No
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
þ
Yes
¨
No
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes
¨
þ
No
The aggregate market value of the voting
and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold
as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $953,896.44
million based on the June 30, 2016 closing price of $0.0002 per share.
Indicate the number of shares outstanding
of each of the registrant’s classes of common stock, as of the latest practicable date. 19,643,675,411 shares outstanding
as of March 20, 2017.
HEALTHIER CHOICES MANAGEMENT CORP.
CONSOLIDATED BALANCE SHEETS
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,366,272
|
|
|
$
|
27,214,991
|
|
Due from merchant credit card processor, net of reserves
|
|
|
30,272
|
|
|
|
9,475
|
|
Accounts receivable, net of allowance $ 33,367 and $76,694
|
|
|
25,798
|
|
|
|
105,992
|
|
Inventories
|
|
|
748,551
|
|
|
|
946,799
|
|
Prepaid expenses and vendor deposits
|
|
|
93,229
|
|
|
|
255,599
|
|
Current assets from discontinued operations
|
|
|
52,903
|
|
|
|
1,033,514
|
|
TOTAL CURRENT ASSETS
|
|
|
14,317,025
|
|
|
|
29,566,370
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation of $293,398 and $211,824 respectively
|
|
|
638,926
|
|
|
|
410,277
|
|
Intangible assets, net of accumulated amortization of $130,171 and $126,000, respectively
|
|
|
1,669,329
|
|
|
|
929,000
|
|
Goodwill
|
|
|
481,314
|
|
|
|
3,177,017
|
|
Other assets
|
|
|
128,157
|
|
|
|
165,198
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
17,234,751
|
|
|
$
|
34,247,862
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
520,586
|
|
|
$
|
394,723
|
|
Accrued expenses
|
|
|
779,676
|
|
|
|
1,225,632
|
|
Current portion of capital lease
|
|
|
53,054
|
|
|
|
60,871
|
|
Derivative liabilities - non consenting warrants
|
|
|
955,173
|
|
|
|
41,089,580
|
|
Derivative liabilities - consenting warrants
|
|
|
11,912,906
|
|
|
|
-
|
|
Current liabilities from discontinued operations
|
|
|
555,810
|
|
|
|
4,002,691
|
|
TOTAL CURRENT LIABILITIES
|
|
|
14,777,205
|
|
|
|
46,773,497
|
|
|
|
|
|
|
|
|
|
|
Capital lease, net of current portion
|
|
|
-
|
|
|
|
58,572
|
|
TOTAL LIABILITIES
|
|
|
14,777,205
|
|
|
|
46,832,069
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (SEE NOTE 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, $.001 par value, 1,000,000 shares authorized and designated, 0 and 1 share issued and outstanding, respectively, no liquidation value
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.0001 par value, 750,000,000,000 shares authorized,
14,213,861,174 issued and outstanding as of December 31, 2016 and 6 issued and outstanding as of December 31, 2015
|
|
|
1,421,386
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
3,782,818
|
|
|
|
846,943
|
|
Accumulated deficit
|
|
|
(2,746,658
|
)
|
|
|
(13,431,150
|
)
|
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
2,457,546
|
|
|
|
(12,584,207
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
$
|
17,234,751
|
|
|
$
|
34,247,862
|
|
See notes to consolidated financial statements
HEALTHIER
CHOICES MANAGEMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
For
the Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
SALES:
|
|
|
|
|
|
|
|
|
Vapor sales, net
|
|
$
|
6,722,052
|
|
|
$
|
5,252,611
|
|
Grocery sales, net
|
|
|
3,843,111
|
|
|
|
-
|
|
Total Sales
|
|
|
10,565,163
|
|
|
|
5,252,611
|
|
Cost of sales vapor
|
|
|
2,979,609
|
|
|
|
2,172,447
|
|
Cost of sales grocery
|
|
|
2,352,201
|
|
|
|
-
|
|
GROSS PROFIT
|
|
|
5,233,353
|
|
|
|
3,080,164
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
92,124
|
|
|
|
120,831
|
|
Selling, general and administrative
|
|
|
9,700,479
|
|
|
|
9,374,349
|
|
Impairment of goodwill and intangible assets
|
|
|
3,955,362
|
|
|
|
15,403,833
|
|
Retail store and kiosk closing costs
|
|
|
347,656
|
|
|
|
729,468
|
|
Total operating expenses
|
|
|
14,095,621
|
|
|
|
25,628,481
|
|
Operating loss
|
|
|
(8,862,268
|
)
|
|
|
(22,548,317
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
Amortization of debt discounts
|
|
|
21,599
|
|
|
|
(833,035
|
)
|
Amortization of deferred financing costs
|
|
|
-
|
|
|
|
(144,903
|
)
|
Gain on warrant repurchases
|
|
|
5,189,484
|
|
|
|
-
|
|
Loss on debt extinguishment
|
|
|
-
|
|
|
|
(1,497,169
|
)
|
Cost associated with underwriting offering
|
|
|
-
|
|
|
|
(5,279,003
|
)
|
Non-cash change in fair value of derivative liabilities
|
|
|
15,255,143
|
|
|
|
42,221,418
|
|
Stock-based expense in connection with waiver agreements
|
|
|
-
|
|
|
|
(3,748,062
|
)
|
Other income
|
|
|
640,000
|
|
|
|
-
|
|
Interest income
|
|
|
45,723
|
|
|
|
19,323
|
|
Interest expense
|
|
|
(15,386
|
)
|
|
|
(108,356
|
)
|
Interest expense-related party
|
|
|
-
|
|
|
|
(80,545
|
)
|
Total other income (expense)
|
|
|
21,136,563
|
|
|
|
30,549,668
|
|
Net income (loss) from continuing operations
|
|
|
12,274,295
|
|
|
|
8,001,351
|
|
Net income (loss) from discontinued operations
|
|
|
(1,589,803
|
)
|
|
|
(6,200,598
|
)
|
NET INCOME
|
|
|
10,684,492
|
|
|
|
1,800,753
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend
|
|
|
-
|
|
|
|
(38,068,021
|
)
|
NET INCOME (LOSS) ALLOCABLE TO COMMON SHAREHOLDERS
|
|
$
|
10,684,492
|
|
|
$
|
(36,267,268
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) PER SHARE-BASIC AND DILUTED:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
0.00
|
|
|
|
(5,011,111.67
|
)
|
Discontinued operations
|
|
|
0.00
|
|
|
|
(1,033,433.00
|
)
|
NET INCOME (LOSS) PER SHARE BASIC AND
DILUTED
|
|
$
|
0.00
|
|
|
$
|
(6,044,544.67
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
4,102,959,032
|
|
|
|
6
|
|
DILUTED
|
|
|
640,656,219,521
|
|
|
|
6
|
|
See notes to consolidated financial statements
HEALTHIER CHOICES
MANAGEMENT CORP.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2016
|
|
Series
A
Convertible
Preferred
Stock
|
|
|
Treasury
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance – December 31, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
2
|
|
|
$
|
-
|
|
|
$
|
16,043,713
|
|
|
$
|
(15,231,903
|
)
|
|
$
|
811,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with the Merger (See Note
3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
17,028,399
|
|
|
|
-
|
|
|
|
17,028,399
|
|
Issuance of common stock and warrants in connection with private
placement, net of offering costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
447,321
|
|
|
|
-
|
|
|
|
447,321
|
|
Reclassification of conversion option from liability to equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,300
|
|
|
|
-
|
|
|
|
13,300
|
|
Contribution of note and interest payable to Vaporin to capital
in connection with the Merger
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
354,029
|
|
|
|
-
|
|
|
|
354,029
|
|
Issuance of common stock in connection with consulting services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
143,000
|
|
|
|
-
|
|
|
|
143,000
|
|
Issuance of common stock in connection with delivery of restricted
stock units
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of common stock in connection with waiver deferral agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,328,196
|
|
|
|
-
|
|
|
|
1,328,196
|
|
Warrants issued or modified in connection with convertible note
payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
124,211
|
|
|
|
-
|
|
|
|
124,211
|
|
Issuance of common stock in connection with waiver agreement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
1,297,081
|
|
|
|
-
|
|
|
|
1,297,081
|
|
Issuance of Series A Units, Series A preferred stock and warrants
in connection with underwritten offering
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
940
|
|
|
|
-
|
|
|
|
940
|
|
Issuance of unit purchase option to underwriter in connection with
Series A Units, Series A preferred stock and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,552,418
|
|
|
|
-
|
|
|
|
1,552,418
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
582,356
|
|
|
|
-
|
|
|
|
582,356
|
|
Deemed dividend on issuance of Series A Units, Series A preferred
stock and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(38,068,021
|
)
|
|
|
-
|
|
|
|
(38,068,021
|
)
|
Net income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,800,753
|
|
|
|
1,800,753
|
|
Balance – December 31, 2015
|
|
|
1
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
6
|
|
|
$
|
-
|
|
|
$
|
846,943
|
|
|
$
|
(13,431,150
|
)
|
|
$
|
(12,584,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with
cashless exercise of Series A warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,619,771,345
|
|
|
|
1,561,977
|
|
|
|
|
|
|
|
-
|
|
|
|
1,561,977
|
|
Warrants exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,936,071
|
|
|
|
-
|
|
|
|
2,936,071
|
|
Purchase of treasury stock made in conjunction
with the sale of the wholesale business
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,405,910,203
|
)
|
|
|
(140,591
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(75,626
|
)
|
|
|
-
|
|
|
|
(216,217
|
)
|
Treasury stock cancellation
|
|
|
|
|
|
|
|
|
|
|
1,405,910,203
|
|
|
|
140,591
|
|
|
|
(1,405,910,203
|
)
|
|
|
(140,591
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of common stock in connection with
conversion of Series A convertible preferred stock
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,430
|
|
|
|
|
|
|
|
75,430
|
|
Net income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,684,492
|
|
|
|
10,684,492
|
|
Balance – December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
14,213,861,174
|
|
|
$
|
1,421,386
|
|
|
$
|
3,782,818
|
|
|
$
|
(2,746,658
|
)
|
|
$
|
2,457,546
|
|
See notes to consolidated financial statements
HEALTHIER
CHOICES MANAGEMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For
the year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,684,492
|
|
|
$
|
1,800,753
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
1,589,803
|
|
|
|
6,200,598
|
|
Change in allowances for bad debt
|
|
|
663,218
|
|
|
|
303,509
|
|
Depreciation and amortization
|
|
|
374,388
|
|
|
|
462,103
|
|
Loss on disposal of assets
|
|
|
103,312
|
|
|
|
463,840
|
|
Loss on debt extinguishment
|
|
|
-
|
|
|
|
1,497,169
|
|
Gain on warrant repurchases
|
|
|
(5,189,484
|
)
|
|
|
-
|
|
Accretion of discounts on note receivable from related party
|
|
|
(21,600
|
)
|
|
|
-
|
|
Accrued interest on notes receivable from related party
|
|
|
(11,634
|
)
|
|
|
|
|
Amortization of debt discounts
|
|
|
-
|
|
|
|
833,034
|
|
Amortization of deferred financing cost
|
|
|
-
|
|
|
|
144,903
|
|
Cost associated with Series A Units Offering
|
|
|
-
|
|
|
|
3,726,585
|
|
Write-down of obsolete and slow moving inventory
|
|
|
301,898
|
|
|
|
192,318
|
|
Stock-based compensation expense
|
|
|
75,430
|
|
|
|
725,356
|
|
Stock-based expense in connection with waiver agreements
|
|
|
-
|
|
|
|
3,748,062
|
|
Impairment of goodwill and intangible assets
|
|
|
3,955,362
|
|
|
|
15,403,833
|
|
Non-cash change in fair value of derivative liabilities
|
|
|
(15,255,143
|
)
|
|
|
(42,221,418
|
)
|
Unit purchase option granted for underwriters’ expense
|
|
|
-
|
|
|
|
1,552,419
|
|
Net cash used in discontinued operating activities
|
|
|
(3,739,171
|
)
|
|
|
(2,094,399
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Due from merchant credit card processors
|
|
|
(20,797
|
)
|
|
|
191,522
|
|
Accounts receivable
|
|
|
(197,908
|
)
|
|
|
(328,245
|
)
|
Inventories
|
|
|
(350,148
|
)
|
|
|
17,217
|
|
Prepaid expenses and vendor deposits
|
|
|
121,421
|
|
|
|
(64,499
|
)
|
Other assets
|
|
|
37,040
|
|
|
|
(56,101
|
)
|
Accounts payable
|
|
|
332,012
|
|
|
|
(1,192,155
|
)
|
Accrued expenses
|
|
|
(786,328
|
)
|
|
|
(812,971
|
)
|
Customer deposits
|
|
|
17,850
|
|
|
|
-
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(7,315,987
|
)
|
|
|
(9,506,567
|
)
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition of grocery store business
|
|
|
(2,910,612
|
)
|
|
|
-
|
|
Acquisition of vapor store businesses
|
|
|
-
|
|
|
|
(1,179,270
|
)
|
Cash received in connection with Merger
|
|
|
-
|
|
|
|
136,468
|
|
Proceeds from sale of tradename
|
|
|
100,000
|
|
|
|
-
|
|
Issuance of note receivable to related party in conjunction with sale of wholesale business
|
|
|
(500,000
|
)
|
|
|
-
|
|
Collection of note receivable
|
|
|
173,395
|
|
|
|
-
|
|
Collection of loan receivable
|
|
|
-
|
|
|
|
467,095
|
|
Purchases of tradename
|
|
|
(25,000
|
)
|
|
|
(20,000
|
)
|
Purchases of property and equipment
|
|
|
(25,299
|
)
|
|
|
(194,766
|
)
|
NET CASH USED IN INVESTING ACTIVITIES:
|
|
|
(3,187,516
|
)
|
|
|
(790,473
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from private placement of common stock and warrants, net of offering costs
|
|
|
-
|
|
|
|
2,941,960
|
|
Cost associated with Series A Units Offering
|
|
|
-
|
|
|
|
(3,726,585
|
)
|
Proceeds from Series A Units issuance
|
|
|
-
|
|
|
|
41,378,227
|
|
Payments for repurchase of Series A warrants
|
|
|
(3,278,827
|
)
|
|
|
-
|
|
Payment of offering costs in connection with convertible notes payable
|
|
|
-
|
|
|
|
(196,250
|
)
|
Proceeds from issuance of senior convertible notes payable
|
|
|
-
|
|
|
|
1,662,500
|
|
Principal payments on convertible debentures
|
|
|
-
|
|
|
|
(1,750,000
|
)
|
Principal payments on senior convertible notes payable to related parties
|
|
|
-
|
|
|
|
(1,250,000
|
)
|
Principal payments on notes payable to related party
|
|
|
-
|
|
|
|
(1,000,000
|
)
|
Principal payments on convertible notes payable
|
|
|
|
|
|
|
(567,000
|
)
|
Principal payments on term loan payable
|
|
|
-
|
|
|
|
(750,000
|
)
|
Principal payments of capital lease obligations
|
|
|
(66,389
|
)
|
|
|
(52,015
|
)
|
Proceeds from loan payable from Vaporin, Inc.
|
|
|
-
|
|
|
|
350,000
|
|
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
|
|
|
(3,345,216
|
)
|
|
|
37,040,837
|
|
|
|
|
|
|
|
|
|
|
(DECREASE) INCREASE IN CASH
|
|
|
(13,848,719
|
)
|
|
|
26,743,797
|
|
CASH — BEGINNING OF YEAR
|
|
|
27,214,991
|
|
|
|
471,194
|
|
CASH — END OF YEAR
|
|
$
|
13,366,272
|
|
|
$
|
27,214,991
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
15,386
|
|
|
$
|
251,920
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
2,791
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Deemed dividend
|
|
$
|
-
|
|
|
$
|
38,068,021
|
|
Embedded conversion feature recorded as debt discount and derivative liability
|
|
$
|
-
|
|
|
$
|
248,359
|
|
Warrants exercised
|
|
$
|
2,936,071
|
|
|
$
|
-
|
|
Recognition of debt discount in connection with convertible note issuance
|
|
$
|
-
|
|
|
$
|
100,800
|
|
Warrants issued as an offering costs
|
|
$
|
-
|
|
|
$
|
87,779
|
|
Contribution of note and interest payable to Vaporin to capital in connection with the Merger
|
|
$
|
-
|
|
|
$
|
354,029
|
|
|
|
FOR
THE YEAR ENDED
DECEMBER 31,
|
|
|
|
2016
|
|
|
2015
|
|
Purchase Price Allocation in connection with the Vaporin Inc. Merger:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
$
|
136,468
|
|
Accounts receivable
|
|
|
|
|
|
|
81,256
|
|
Merchant credit card processor receivable
|
|
|
|
|
|
|
201,141
|
|
Prepaid expense and other current assets
|
|
|
|
|
|
|
28,021
|
|
Inventory
|
|
|
|
|
|
|
981,558
|
|
Property and equipment
|
|
|
|
|
|
|
206,668
|
|
Accounts payable and accrued expenses
|
|
|
|
|
|
|
(779,782
|
)
|
Derivative liabilities
|
|
|
|
|
|
|
(49,638
|
)
|
Notes payable, net of debt discount of $54,623
|
|
|
|
|
|
|
(512,377
|
)
|
Notes payable – related party
|
|
|
|
|
|
|
(1,000,000
|
)
|
Net liabilities assumed
|
|
|
|
|
|
$
|
(706,685
|
)
|
|
|
|
|
|
|
|
|
|
Consideration:
|
|
|
|
|
|
|
|
|
Value of common stock issued
|
|
|
|
|
|
$
|
17,028,399
|
|
Excess of liabilities over assets assumed
|
|
|
|
|
|
|
706,685
|
|
Total consideration
|
|
|
|
|
|
|
17,735,084
|
|
Amount allocated to goodwill
|
|
|
|
|
|
|
(15,654,484
|
)
|
Amount allocated to identifiable intangible assets
|
|
|
|
|
|
|
(2,080,600
|
)
|
Remaining unallocated consideration
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Preliminary Purchase Price Allocation in connection with the grocery store acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount allocated to goodwill
|
|
|
|
|
|
$
|
1,977,533
|
|
Amount allocated to other assets
|
|
|
|
|
|
|
17,736
|
|
Amount allocated to Inventory
|
|
|
|
|
|
|
263,810
|
|
Purchase Price
|
|
|
|
|
|
|
2,259,079
|
|
Hold Back obligation
|
|
|
|
|
|
|
(860,000
|
)
|
Cash used in retail store acquisitions
|
|
|
|
|
|
$
|
1,399,079
|
|
|
|
|
|
|
|
|
|
|
Purchase Price Allocation in connection with the grocery store acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount allocated to goodwill
|
|
$
|
481,314
|
|
|
|
|
|
Property and equipment
|
|
|
500,225
|
|
|
|
|
|
Intangible assets – favorable lease
|
|
|
890,000
|
|
|
|
|
|
Intangible assets – customer relations
|
|
|
60,000
|
|
|
|
|
|
Intangible assets – tradenames and technology
|
|
|
824,500
|
|
|
|
|
|
Inventory
|
|
|
253,524
|
|
|
|
|
|
Accrued expenses
|
|
|
(98,951
|
)
|
|
|
|
|
Cash used in the grocery store acquisition
|
|
$
|
2,910,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Vapor Wholesale Inventory and Business
|
|
|
|
|
|
|
|
|
Consideration received:
|
|
|
|
|
|
|
|
|
Note receivable from related party, net of discount
|
|
$
|
356,895
|
|
|
|
|
|
Note receivable from related party, net of discount
|
|
|
470,485
|
|
|
|
|
|
Treasury stock
|
|
|
140,591
|
|
|
|
|
|
Total consideration
|
|
|
967,971
|
|
|
|
|
|
Assets and liabilities transferred:
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
(258,743
|
)
|
|
|
|
|
Accounts receivable, net
|
|
|
(244,735
|
)
|
|
|
|
|
Vendor deposits
|
|
|
(40,949
|
)
|
|
|
|
|
Accrued expenses
|
|
|
(35,273
|
)
|
|
|
|
|
Customer deposits
|
|
|
17,850
|
|
|
|
|
|
Loss on repurchase of treasury stock
|
|
|
61,850
|
|
|
|
|
|
Cash used in the sale of wholesale business
|
|
$
|
500,000
|
|
|
|
|
|
See notes to consolidated financial statements
HEALTHIER CHOICES
MANAGEMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. ORGANIZATION, GOING CONCERN, BASIS OF
PRESENTATION, AND RECENT DEVELOPMENTS
Organization
Healthier Choices Management Corp.
(the “Company” or “we”) is a holding company focused on providing consumers with healthier
daily choices with respect to nutrition and other lifestyle alternatives. The Company operates thirteen vape retail stores
in the Southeast of the United States of America. The Company offers e-liquids, vaporizers, e-cigarettes and related products
through its vape retail stores and online. The Company sold its wholesale business on July 31, 2016. The sale of the wholesale
business was not contemplated prior to July 1, 2016. The sale of the wholesale business qualifies as a discontinued operations
and accordingly the Company has excluded results for the wholesale business operations from the Company’s continuing operations
in the consolidating Statements of Operations for all periods.
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 Fort 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 products, the grocery store provides a fresh café
and an organic juice bar.
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 the 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 consolidated
financial statements do not necessarily purport to represent realizable or settlement values.
We had a large number of warrants outstanding
with features that made the warrants more debt like and possibly result in cash outflows and were thus classified as derivative
liabilities. Additionally, for the year ended December 31, 2015, the Company reported a net loss allocable to common stockholders
of approximately $36.3 million and had negative working capital of approximately $17.2 million. These factors raised substantial
doubt about our ability to continue as a going concern.
During 2016 and early 2017, we took steps
to mitigate these factors by:
|
·
|
increasing the
number of authorized shares to 750,000,000,000 shares so that there would be sufficient
shares available for issuance should all the warrant holders exercise;
|
|
·
|
entering into
a Fifth Amended and Restated Series A Warrant Standstill Agreement (the “Fifth
Amendment”) with warrant holders working to effectively eliminate the possibility
that warrant holders will exercise for anything other than shares, and
|
|
·
|
extending a tender
offer to repurchase its Series A warrants which resulted in 10,073,884 (on a pre-split
basis) of the warrants to be repurchased for $0.22 per warrant.
|
The steps above substantially lowered
our potential cash exposure. As a result, as of the date of the issuance of these financial statements, we believe our
plans have alleviated substantial doubt about the Company’s ability to sustain operations for the foreseeable future through
a year and a day from the issuance of these consolidated financial statements.
Sourcing and Vendors.
We
source from multiple suppliers. These suppliers range from small independent businesses to multinational conglomerates. As of
December 31, 2016, we purchased approximately 75% of the goods we sell from our top 20 suppliers. For the fiscal year ended December
31, 2016, approximately 40% of our total purchases were from one vendor.
Basis of Presentation and Principles of Consolidation
The Company’s consolidated financial
statements are prepared in accordance with GAAP. The 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 consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, Healthy Choice Markets, Inc. The Vape Store, Inc.
(“Vape Store”), Vaporin, Inc. (“Vaporin”), Smoke Anywhere U.S.A., Inc. (“Smoke”), Emagine
the Vape Store, LLC (“Emagine”), IVGI Acquisition, Inc., Vapormax Franchising LLC, Vaporin LLC, Vaporin Florida,
Inc., All intercompany accounts and transactions have been eliminated in consolidation.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Reclassifications
Certain prior period amounts in the consolidated
financial statements related to stock splits and the sale of discontinued operations 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.
Segment Reporting
Operating segments are identified as components
of an enterprise about which separate discrete financial information is available for evaluation by the operating decision makers,
or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s decision
making group are the senior executive management team. The Company and the decision-making group view the Company’s operations
and manage its business as two operating segments. All long-lived assets of the Company reside in the U.S.
Use of Estimates in the Preparation of the Financial
Statements
The preparation of consolidated financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the
reported amounts of net revenue and expenses during the reporting periods. Actual results could differ from those estimates. These
estimates and assumptions include allowances, reserves and write-downs of receivables and inventory, valuing equity securities
and hybrid instruments, share-based payment arrangements, deferred taxes and related valuation allowances, and the valuation of
the net assets acquired in acquisitions. 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 current discount offers, such as percentage discounts off current
purchases, inducement offers, such as offers for future discounts subject to a minimum current purchase, and other similar offers.
Current discount offers, when accepted by the Company’s customers, are treated as a reduction to the purchase price of the
related transaction, while inducement offers, when accepted by its customers, are treated as a reduction to the purchase price
of the related transaction based on estimated future redemption rates. Redemption rates are estimated using the Company’s
historical experience for similar inducement offers. The Company reports sales, net of current discount offers and inducement offers
on its consolidated statements of operations.
Shipping and Handling
Shipping charges billed to customers are
included in net sales and the related shipping and handling costs are included in cost of sales. For the years ended December
31, 2016 and 2015 shipping and handling costs of $105,486 and $132,331, were included in cost of sales, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid
instruments with an original maturity of three months or less, when purchased, to be cash and cash equivalents. The majority of
the Company’s cash and cash equivalents are concentrated in one large financial institution. The Company continually monitors
its positions with, and the credit quality of, the financial institutions with which it invests, as deposits are held in excess
of federally insured limits. The Company’s cash equivalent at December 31, 2016 and 2015 was a money market account. The
Company has not experienced any losses in such accounts.
Accounts Receivable and Concentration of Risk
Accounts receivable, net is stated at the
amount the Company expects to collect, or the net realizable value. The Company provides a provision for allowances that includes
returns, allowances and doubtful accounts equal to the estimated uncollectible amounts. The Company estimates its provision for
allowances based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably
possible that the Company’s estimate of the provision for allowances will change.
At December 31, 2016, accounts receivable
balances included a concentration from three customers with receivable balances ranging from approximately $9,000 to $24,000, all
of which are greater than 10% of the total net accounts receivable balance. At December 31, 2015, accounts receivable balances
included concentrations from four customers that had balances of an amount greater than 10%. The amounts ranged from $33,000 to
$84,000.
For the years ended December 31, 2016 and
2015, the Company had no customers with sales in excess of 10%.
Due from Merchant Credit Card Processor
Due from merchant credit card processor
represents monies held by the Company’s credit card processors. The funds are being held by the merchant credit card processors
pending satisfaction of their hold requirements and expiration of charge backs/refunds from customers.
Inventories
Inventories are stated at average
cost. If the cost of the inventories exceeds their net realizable value, provisions are recorded to write down excess inventory
to its net realizable value. The Company’s inventories consist primarily of merchandise available for resale. The Company’s
inventory consists of fresh produce, perishable grocery items and non-perishable consumable goods that are immediately available
for sale.
Property and Equipment
Property and equipment is stated at cost
less accumulated depreciation. Depreciation is calculated using the straight-line method over the expected useful life of the respective
asset, after the asset is placed in service. The Company generally uses the following depreciable lives for its major classifications
of property and equipment:
Description
|
|
Useful Lives
|
Warehouse fixtures
|
|
2 years
|
Signage
|
|
5 years
|
Furniture and fixtures
|
|
5 years
|
Computer hardware
|
|
3 years
|
Appliance
|
|
3-5 years
|
Cooler
|
|
5 years
|
Machinery
|
|
5-7 years
|
Displays
|
|
5-7 years
|
Leasehold improvements
|
|
Life of lease
|
Identifiable Intangible Assets and Goodwill
Identifiable intangible assets are recorded
at cost, or when acquired as part of a business acquisition, at estimated fair value. Certain identifiable intangible assets are
amortized over 5 and 10 years. Similar to tangible personal property and equipment, the Company periodically evaluates identifiable
intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Indefinite-lived intangible assets, such
as goodwill are not amortized. The Company assesses the carrying amounts of goodwill for recoverability on at least an annual basis
or when events or changes in circumstances indicate evidence of potential impairment exists, using a fair value based test. Application
of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on
internal forecasts, estimation of the long-term rate of growth for the businesses, and the useful life over which cash flows will
occur. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on
goodwill impairment for the Company.
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.
Advertising
The Company expenses advertising costs
as incurred.
Warranty Liability
The Company’s limited lifetime warranty
policy generally allows its end users of vape products and retailers to return defective purchased rechargeable products in exchange
for new products. The Company estimates a reserve for warranty liability and records that reserve amount as a reduction of revenues
and as an accrued expense on the accompanying consolidated balance sheets. The warranty claims and expenses were not deemed
material for the years ended December 31, 2016 and 2015.
Income Taxes
The Company uses the asset and liability
method of accounting for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). Under
this method, income tax expense is recognized as the amount of: (i) taxes payable or refundable for the current year and
(ii) future tax consequences attributable to differences between financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that
includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight
of available evidence it is more likely than not that some portion or all of the deferred tax assets will not be realized.
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 approximate fair value, as they bear terms
and conditions comparable to market, for obligations with similar terms and maturities.
ASC 820 defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes
a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value: Level 1 –
quoted prices in active markets for identical assets or liabilities; Level 2 – quoted prices for similar assets and liabilities
in active market or inputs that are observable; and Level 3 – inputs that are unobservable.
Stock-Based Compensation
The Company accounts for stock-based compensation
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 expense on the straight-line
basis over the period in which the Company expects to receive the benefit, which is generally the vesting period. The Company considers
many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. 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 in the balance sheet and are
measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related
to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or
loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market
data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument.
The Company estimates fair values of derivative
instruments and hybrid instruments using various techniques (and combinations thereof) that are considered to be consistent with
the objective of measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the
nature of the instrument, the market risks that it embodies and the expected means of settlement. For 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 Company’s 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 Company’s 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 Company’s common stock and decreases in trading fair value during a given financial quarter result
in the application of non-cash derivative gains.
Convertible Debt Instruments
The Company accounts for convertible debt
instruments when the Company has determined that the embedded conversion options should be bifurcated from their host instruments
in accordance with ASC 815. The Company records discounts to convertible notes for the fair value of bifurcated embedded conversion
options embedded in debt instruments and the relative fair value of freestanding warrants issued in connection with convertible
debt instruments. The Company amortizes the respective debt discount over the term of the notes, using the straight-line method,
which approximates the effective interest method over a short-term period.
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.
Treasury Stock
When the Company acquires its own common
stock (“treasury stock”), the consideration paid, including any directly attributable incremental costs (net of tax),
is deducted from equity. No gain is recognized on the purchase, sale, or cancellation of the treasury stock. When
a loss results from the purchase of treasury stock at a premium, the related costs are expensed in the period incurred. The difference
between the carrying amount and the consideration on sale is recognized as capital surplus.
Discontinued Operations
On July 31, 2016, the Company sold its
wholesale inventory and related operations. The sale of the wholesale business qualifies as discontinued operations and accordingly
the Company has excluded results for the wholesale business operations from the Company’s continuing operations in the consolidating Statements of Operations for all periods presented.
Adopted Accounting Pronouncements
In August 2014, FASB issued ASU No. 2014-15, “Presentation
of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 explicitly requires management to evaluate, at each
annual or interim reporting period, whether there are conditions or events that exist which raise substantial doubt about an entity’s
ability to continue as a going concern and to provide related disclosures. ASU 2014-15 is effective for annual periods ending after
December 15, 2016, and annual and interim periods thereafter, with early adoption permitted. The implementation of this update
did not have a material effect on the Company’s consolidated financial statements.
In July 2015, the FASB issued ASU No.
2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 requires an entity to
measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary
course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged
for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. It is effective for annual
reporting periods beginning after December 15, 2016 (see Note 4). The amendments should be applied prospectively with earlier
application permitted as of the beginning of an interim or annual reporting period. The implementation of this update did not
have a material effect on the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU No.
2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The
FASB issued this ASU as part of its ongoing Simplification Initiative, with the objective of reducing complexity in accounting
standards. The amendments in ASU 2015-17 require entities that present a classified balance sheet to classify all deferred tax
liabilities and assets as a noncurrent amount. This guidance does not change the offsetting requirements for deferred tax liabilities
and assets, which results in the presentation of one amount on the balance sheet. Additionally, the amendments in this ASU align
the deferred income tax presentation with the requirements in International Accounting Standards (IAS) 1, Presentation of Financial
Statements. The amendments in ASU 2015-17 are effective for financial statements issued for annual periods beginning after
December 15, 2016, and interim periods within those annual periods. The implementation of this update did not have a material effect
on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with
Customers,” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 - Revenue
Recognition and most industry-specific guidance throughout the ASC. The standard requires that an entity recognizes revenue to
depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company
expects to be entitled in exchange for those goods or services. ASU 2014-09 should be applied retrospectively to each prior reporting
period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial
application. To allow entities additional time to implement systems, gather data and resolve implementation questions, the FASB
issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, in August 2015, to defer
the effective date of ASU No. 2014-09 for one year, which is fiscal years beginning after December 15, 2017. Early adoption is
permitted commencing January 1, 2017. The Company is currently evaluating the impact of the adoption of ASU 2014-09 on its consolidated
financial statements or disclosures.
In February 2016, the FASB issued ASU No.
2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 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”). 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 consolidated financial statements
and 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 April 2016, the FASB issued 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 August 2016, the FASB issued ASU 2016-15
(Topic 230), “Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments”. The new standard
will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows.
The new standard is effective for fiscal years beginning after December 15, 2017. The Company will require adoption on a retrospective
basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as
of the earliest date practicable. The Company is currently evaluating the effect that adopting this new accounting guidance will
have on its consolidated cash flows and related disclosures.
In January 2017, the FASB issued ASU 2017-01,
“Business Combinations (Topic 805) Clarifying the Definition of a Business” (“ASU 2017-01”). The amendments
in ASU 2017-01 is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating
whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business
affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for
annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating
the impact of adopting this guidance.
In January 2017, the FASB issued ASU 2017-04,
“Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”).
ASU 2017-04 eliminates Step 2 along with amending other parts of the goodwill impairment test. Under ASU 2017-04, an entity should
perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount,
and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value
with the loss not exceeding the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual
periods beginning after December 15, 2019, and interim periods therein with early adoption permitted for interim or annual goodwill
impairment tests performed after January 1, 2017. At adoption, this update will require a prospective approach. The Company is
currently evaluating the impact of adopting this guidance.
Note 3. ACQUISITION AND DISPOSAL
MERGER WITH VAPORIN, INC.
On December 17, 2014, the Company entered
into the Merger Agreement with Vaporin pursuant to which Vaporin was to merge with and into the Company with 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 Company’s directors comprising the majority of
the board at the date of the Merger). The Merger closed on March 4, 2015 and the purchase price consideration paid by the Company
consisted of the following:
|
1.
|
100% of the issued and outstanding shares of Vaporin common
stock (including shares of common stock issued upon conversion of Vaporin preferred stock
immediately prior to the consummation of the merger in accordance with the Merger Agreement)
were converted into, and became 1.94 shares of the Company’s common stock
such that the former Vaporin stockholders collectively hold approximately 45% of the
then issued and outstanding shares of the Company’s common stock following consummation
of the Merger. The aggregate value of these shares issued was $14,949,328, or approximately
$7,700,000 per share, and was based on the closing price of the Company’s common
stock on March 4, 2015.
|
|
2.
|
100% of the issued shares of Vaporin restricted stock units
were converted into the right to receive 0.27 shares of the Company’s common
stock. The restricted stock units became fully-vested in connection with the Merger and
as a result, were included as a part of the Company’s purchase price as no further
services from the holders were
|
required to be provided to the Company.
The aggregate value of these shares issued was $2,079,071, or approximately $7,700,000 per share, and was based on the closing
price of the Company’s common stock on March 4, 2015. Based on the terms of the Merger Agreement, the Company agreed to
issue these in twelve equal monthly instalments, with the first delivery date being the date of the closing of the Merger, however,
all shares of common stock were delivered by February 4, 2016.
The Merger Agreement contained customary
conditions that were satisfied prior to the closing of the Merger, including the requirement for the Company to receive gross proceeds
from a $3.5 million equity offering. The Company incurred approximately $559,000 of acquisition costs in connection with the Merger
that were recorded to selling, general and administrative expenses.
The Merger was accounted for as a business
combination. Accordingly, the fair value of the purchase consideration issued to the sellers of Vaporin was allocated to fair value
of the net tangible assets acquired, with the resulting excess allocated to separately identifiable intangibles, and the remainder
recorded as goodwill. Goodwill recognized from the transactions mainly represented the expected operational synergies upon acquisition
of the combined entity and intangibles not qualifying for separate recognition. Goodwill is not expected to be deductible for income
tax purposes in the tax jurisdiction of the acquired business. The purchase price allocation was based, in part, on management’s
knowledge of Vaporin’s business and the results of a third-party appraisal commissioned by management.
Purchase Consideration
|
|
|
|
Value of consideration paid:
|
|
$
|
17,735,084
|
|
|
|
|
|
|
Tangible assets acquired and liabilities assumed at fair value
|
|
|
|
|
Cash
|
|
$
|
136,468
|
|
Accounts receivable
|
|
|
81,256
|
|
Merchant credit card processor receivable
|
|
|
201,141
|
|
Prepaid expense and other current assets
|
|
|
28,021
|
|
Inventory
|
|
|
981,558
|
|
Property and equipment
|
|
|
206,668
|
|
Accounts payable and accrued expenses
|
|
|
(779,782
|
)
|
Derivative Liabilities
|
|
|
(49,638
|
)
|
Notes payable, net of debt discount of $54,623
|
|
|
(512,377
|
)
|
Notes payable – related party
|
|
|
(1,000,000
|
)
|
Net liabilities assumed
|
|
$
|
(706,685
|
)
|
|
|
|
|
|
Consideration:
|
|
|
|
|
Value of common stock issued
|
|
$
|
17,028,399
|
|
Excess of liabilities over assets assumed
|
|
|
706,685
|
|
Total consideration
|
|
$
|
17,735,084
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
|
|
|
Trade names and technology
|
|
$
|
1,500,000
|
|
Customer relationships
|
|
|
488,274
|
|
Assembled workforce
|
|
|
92,326
|
|
Total Identifiable Intangible Assets
|
|
|
2,080,600
|
|
Goodwill
|
|
|
15,654,484
|
|
Total allocation to identifiable intangible assets and goodwill
|
|
$
|
17,735,084
|
|
In addition, in connection with the Merger,
an aggregate $354,029 of a note and interest payable by the Company to Vaporin was forgiven.
In connection with the Merger Agreement,
the Company also issued 0.0354 warrants to purchase the Company’s common stock to certain warrant holders of Vaporin as replacement
for warrants issued in connection with previous Vaporin note payable issuances. In addition, the Company also issued 0.0028 options
to purchase common stock to certain holders of Vaporin as replacement for options issued for services. The Company determined that
based on the remaining term of the warrants and options as well as the nature of the remaining services to be provided by the holders
that the value of the warrants and options at the date of the Merger was not material.
The accounting and reporting operations
of Vaporin were fully integrated into the Company on the date of the Merger and it is impracticable to separate.
In connection with the acquisition of Vaporin,
the Company acquired net deferred tax assets consisting of net operating loss carryforwards offset by the difference between the
book and tax basis of intangible assets acquired. At the acquisition date this net deferred tax asset was completely offset by
a valuation allowance as it was more likely than not that the Company’s would not have ability to use the deferred tax asset.
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 Year Ended
December 31,
|
|
|
|
2015
|
|
|
|
|
|
Vapor Sales
|
|
$
|
6,368,874
|
|
Net Loss from Continuing operations
|
|
$
|
(31,464,401
|
)
|
Net loss from discontinued operations
|
|
$
|
(6,200,598
|
)
|
Net loss allocable to common shareholders
|
|
|
(37,664,999
|
)
|
Net loss per share- basic and diluted
|
|
|
(6,292,880
|
)
|
Continuing operations
|
|
|
(1,240,119
|
)
|
Discontinued operations
|
|
|
(7,532,999
|
)
|
Weighted average number of shares outstanding
|
|
|
5
|
|
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.
The Joint Venture
On December 17, 2014, the Company and Vaporin
agreed to enter into the Joint Venture through Emagine, a Delaware limited liability company of which the Company and Vaporin are
50% members. The Operating Agreement provides that Vaporin will serve as the initial manager of Emagine and will manage the day-to-day
operations of Emagine, subject to certain customary limitations on managerial actions that require the unanimous consent of the
Company and Vaporin, including but not limited to making or guaranteeing loans, distributing cash or other property to the members
of Emagine, entering into affiliate transactions, amending or modifying limited liability company organizational documents, and
redeeming or repurchasing membership interests from any of the members. The results of operations of Emagine from January 1, 2015
through the date of the Merger were not material. In connection with the completion of the Merger on March 4, 2015, Emagine became
a wholly-owned subsidiary of the Company.
Retail 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 incurred aggregate cost of
$2,259,079 for the acquisitions after the Merger. Leasehold improvements and fixtures acquired were not considered material to
these purchases. 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 buyer and 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 and is re-measured with each reporting period. During the
year ended December 31, 2016, the Company made $220,000 of aggregate holdback payments. The remaining $640,000 balance
was eliminated as the business did not achieve the targeted net sales figure and the seller was therefore not entitled to the
holdback payment. Commissions and ancillary store closing costs totaling approximately $62,271 are expensed as incurred and reflected
in selling general and administrative expenses for the year ended December 31, 2015.
During
2016, after evaluating retail store operations, management decided to close two of its Atlanta area vape retail stores on February
15, 2016, and September 30, 2016, respectively, and five of its Florida retail vapor stores were closed between May 31 and September
30, 2016. An additional Georgia retail location was closed during the fourth quarter of 2016
.
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 is 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 requirement and accordingly the financial data available is incomplete, inconsistent, and the
presentation would not add value to pro-forma financial disclosure.
The Company entered into retail leases
for purchased retail locations and the resulting lease obligation are included in the Company’s commitments. The purchase
price allocations were based, on management’s knowledge of the retail businesses acquired.
Purchase Consideration
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,977,533
|
|
Other assets
|
|
|
17,736
|
|
Inventory
|
|
|
263,810
|
|
Total allocation to tangible assets and goodwill
|
|
|
2,259,079
|
|
Holdback obligation
|
|
|
(860,000
|
)
|
Cash used in retail store business acquisitions
|
|
$
|
1,399,079
|
|
Retail Kiosks
The Company opened eight mall retail kiosks
for its vaping products in October and November 2014. The Company’s management decided to close the kiosks after evaluating
the short-term performance of the locations and to focus expansion efforts on retail stores. During 2015 the Company closed all
of its mall kiosks. In connection with the kiosk closings, for the year ended December 31, 2015, the Company incurred $463,840
of loss on disposal of computer equipment, fixtures, and furniture and $265,627 of exit costs for settlement of non-cancellable
leases and license obligations. The loss on disposal and exit costs are included in selling, general and administrative expenses.
ADA’S Whole Food Market
On June 1, 2016, the Company’s wholly
owned subsidiary Healthy 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
Grocery Acquisition was accounted for under the acquisition method of accounting. Accordingly, the acquired assets and assumed
liabilities were recorded at their estimated fair values, and operating results for
Ada’s Whole Food Market are included
in the consolidated financial statements from the effective date of acquisition of June 1, 2016. The allocation of the purchase
price is summarized as follows:
Purchase Consideration
|
|
|
|
Cash paid:
|
|
$
|
2,910,612
|
|
|
|
|
|
|
Identifiable assets acquired and liabilities assumed at fair value
|
|
|
|
|
Property and equipment
|
|
|
500,225
|
|
Intangible assets - favorable lease
|
|
|
890,000
|
|
Intangible assets - tradenames and technology
|
|
|
820,000
|
|
Intangible assets - customer relationships
|
|
|
60,000
|
|
Intangible assets - website
|
|
|
4,500
|
|
Inventory
|
|
|
253,524
|
|
Accrued expenses
|
|
|
(98,951
|
)
|
Net indentifiable assets acquired
|
|
$
|
2,429,298
|
|
|
|
|
|
|
Total allocated to goodwill
|
|
$
|
481,314
|
|
Goodwill arising from the transaction mainly
consists of 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 favorable lease will be amortized on a straight-line basis over its expected useful life of 15.25 years, which represents the
remaining lease term. The tradename will be amortized on a straight-line basis over its expected useful life of ten years. Customer
relationships will be amortized on a straight-line basis over their expected useful lives of five years. The website will be amortized
on a straight-line basis over its expected useful life of three years.
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.
|
|
Year
Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Retail sales, net
|
|
$
|
6,722,052
|
|
|
$
|
6,368,874
|
|
Grocery sales, net
|
|
$
|
7,149,223
|
|
|
$
|
7,601,653
|
|
Net income (loss) from continuing operations
|
|
$
|
12,274,295
|
|
|
$
|
(30,608,739
|
)
|
Net income (loss) from discontinued operations
|
|
$
|
(1,589,803
|
)
|
|
$
|
(6,200,598
|
)
|
Net income (loss) allocable to common shareholders
|
|
$
|
10,684,492
|
|
|
$
|
(36,809,337
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.01
|
)
|
|
$
|
(6,121,748
|
)
|
Discontinued operations
|
|
$
|
(0.00
|
)
|
|
$
|
(1,240,119
|
)
|
Net loss allocable to common shareholders
|
|
$
|
(0.01
|
)
|
|
$
|
(7,361,867
|
)
|
Weighted average number of shares outstanding
|
|
|
2,506,158,054
|
|
|
|
5
|
|
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.
Sale of Wholesale Business
On July 29, 2016, the Company, entered
into an Asset Purchase Agreement (the “Wholesale Business 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 inventory and the related business operations (collectively, “Wholesale Business Assets”),
which previously operated at 3001 Griffin Road, Dania Beach, Florida 33312. The sale transaction was approved by the Company’s
Board of Director’s on July 26, 2016 and completed on July 31, 2016. The consideration for the Wholesale Business 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 payments 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 Wholesale Business 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.
The sale of the wholesale business qualifies
as discontinued operations and, accordingly, the Company has excluded results for the wholesale business operations from the Company’s
continuing operations in the consolidated statements of operations for all periods presented. The following table shows the results
of the Company’s wholesale operations included in the loss from discontinued operations.
|
|
Year
Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Wholesale vapor sales, net
|
|
$
|
3,135,158
|
|
|
$
|
5,497,422
|
|
|
|
|
|
|
|
|
|
|
Cost of sales – vapor wholesale
|
|
|
2,832,564
|
|
|
|
5,842,196
|
|
Expenses – selling general and administrative
|
|
|
1,262,547
|
|
|
|
3,955,824
|
|
Other Expense
|
|
|
629,850
|
|
|
|
1,900,000
|
|
Total
|
|
|
4,724,961
|
|
|
|
11,698,020
|
|
Loss from discontinued operations attributable to the wholesale business
|
|
$
|
(1,589,803
|
)
|
|
$
|
(6,200,598
|
)
|
The major classes of assets and liabilities
of discontinued operations on the balance sheet are as follow:
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
Assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
39,493
|
|
|
$
|
184,104
|
|
Due from merchant credit card processor, net
|
|
|
13,410
|
|
|
|
83,077
|
|
Inventories
|
|
|
-
|
|
|
|
583,007
|
|
Prepaid expenses and other
|
|
|
-
|
|
|
|
183,326
|
|
Current assets of discontinued operations
|
|
$
|
52,903
|
|
|
$
|
1,033,514
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
-
|
|
|
$
|
1,186,622
|
|
Accrued expenses
|
|
|
555,810
|
|
|
|
2,723,571
|
|
Customer deposits
|
|
|
-
|
|
|
|
92,498
|
|
Total current liabilities of discontinued operations
|
|
$
|
555,810
|
|
|
$
|
4,002,691
|
|
Note 4. INVENTORIES
Inventories are stated at average cost.
If the cost of the inventories exceeds their market value, provisions are recorded to write down excess inventory to its net realizable
value. The Company’s inventories consist primarily of merchandise available for resale.
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Vapor Business
|
|
$
|
399,702
|
|
|
$
|
946,799
|
|
Grocery Business
|
|
|
348,849
|
|
|
|
-
|
|
Total
|
|
$
|
748,551
|
|
|
$
|
946,799
|
|
Note 5. NOTES RECEIVABLE
On January 12, 2015, the Company entered
into an agreement with International Vapor Group, Inc. (“IVG”) whereby the Company agreed to reduce the $500,000 principal
amount of the loan receivable by $50,000 if IVG were to remit payment of all principal and interest accrued on the loan receivable
within one day. The Company included the write-down of the loan receivable in selling, general and administrative expenses on the
consolidated statement of operations for the year ended December 31, 2014. On January 13, 2015, IVG repaid the Company in full.
On July 29, 2016, the Company, entered
into an Asset Purchase Agreement (the “Wholesale Business 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 vapor inventory and the related business operations (collectively, “Wholesale Business
Assets”), which previously operated at 3800 North 28th Way, Hollywood, Florida 33020 and to purchase 1,405,910,203 shares
of the Company’s Common Stock held by Mr. Frija. The sale transaction was approved by the Company’s Board of Director’s
on July 26, 2016 and completed on July 31, 2016. The consideration for the Wholesale Business Assets is (i) the transfer
to the Company by Mr. Frija of
1,405,910,203 shares of the Company’s common stock that he had acquired on the open market; (ii) 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 payments commencing on October 28, 2016, with a balloon payment of
the remainder of principal and interest on July 29, 2017; (iii) 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 29th,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 37th month, a balloon payment for all remaining accrued interest and principal; and
(iv) 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 Wholesale Business Purchase Agreement, the
Company shall continue to collect the 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. The Company records all proceeds related to both notes as income from
discontinued operations as proceeds are received. The Company incurred costs to buy back it shares of its Common Stock in
conjunction with the sale of its wholesale vapor business. The costs include approximately $43,000 of discounts on the notes
receivable to related party, that were issued at below market rates, and $35,000 of professional fees. These costs were
recorded as incurred as selling general and administrative expense, a component of the loss from discontinued operations.
Note 6. PROPERTY & EQUIPMENT and
CAPITAL LEASE OBLIGATIONS
Property and equipment consists of the
following:
|
|
Year
Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Appliances
|
|
$
|
41,771
|
|
|
$
|
-
|
|
Computer hardware & equipment
|
|
|
139,312
|
|
|
|
160,278
|
|
Furniture and fixtures
|
|
|
242,005
|
|
|
|
243,380
|
|
Machinery
|
|
|
92,825
|
|
|
|
-
|
|
Displays
|
|
|
302,700
|
|
|
|
-
|
|
Warehouse equipment
|
|
|
20,872
|
|
|
|
20,872
|
|
Leasehold improvements
|
|
|
20,647
|
|
|
|
111,502
|
|
Signage
|
|
|
72,192
|
|
|
|
86,069
|
|
|
|
|
932,324
|
|
|
|
622,101
|
|
Less: accumulated depreciation and amortization
|
|
|
(293,398
|
)
|
|
|
(211,824
|
)
|
Total property and equipment
|
|
$
|
638,926
|
|
|
$
|
410,277
|
|
During the years ended December 31,
2016 and 2015, the Company incurred $193,562 and $239,335, respectively, of depreciation expense.
As a result of the Company’s wholly
owned subsidiary Healthy Choice Markets Inc., entering into a Business Sale Agreement with Ada’s Whole Food Market LLC (the
“Seller”), the Company recorded favorable operating lease intangible asset of $890,000. The remaining life of said
asset is 15 years and is being amortized on a straight line basis. Total accumulated amortization for the year ended December 31,
2016 was $33,859. Favorable lease terms, net of accumulated amortization, is reflected in other long-term assets on the consolidated
balance sheet.
Capital Lease Obligations
On October 1, 2014, the Company entered
into a capital lease obligation in connection with the acquisition of equipment software and licenses for its retail kiosk locations
in the principal amount of $179,359. Annual interest on the capital lease obligation is 15.8% and borrowings are to be repaid over
36 months maturing on October 17, 2017. During the year ended December 31, 2016, the Company incurred interest expense associated
with the capital lease obligation of $14,614. A portion of the retail kiosk equipment was returned to the vendor, the capital lease
obligation was adjusted, and the net book value of the equipment and software licenses was written off at a loss of $124,555 for
the year ended December 31, 2015. Depreciation expense of $44,840 was incurred during the year ended December 31, 2015 for equipment
held under capital lease obligations.
Future minimum lease payments under non-cancelable
capital leases that have initial or remaining term in excess of one year as of December 31, 2016, are $60,010 which consist of
$53,054 in principle, $3,560 in interest and $3,396 in taxes
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 business acquisitions. The Company
assesses the carrying value of its goodwill on at least an annual basis. At December 31, 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. The ceased 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. As a result of such analysis,
the Company concluded that goodwill related to the retail business was impaired for the years ended December 31, 2016 and 2015.
The changes in the carrying amount of goodwill
for the years ended December 31, 2016 and 2015 are as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Beginning balance
|
|
$
|
3,177,017
|
|
|
$
|
-
|
|
Goodwill from Merger
|
|
|
-
|
|
|
|
15,654,484
|
|
Goodwill from acquired retail businesses
|
|
|
-
|
|
|
|
1,977,533
|
|
Goodwill from acquired grocery business
|
|
|
481,314
|
|
|
|
-
|
|
Impairment of goodwill-retail business
|
|
|
(3,177,017
|
)
|
|
|
(14,455,000
|
)
|
Ending balance
|
|
$
|
481,314
|
|
|
$
|
3,177,017
|
|
The Company’s amortizable intangible
assets consist of the trade names and technology, customer relationships, and website that were capitalized in connection with
the completion of the Merger and retail store business acquisitions; it also includes a favorable lease acquired with the Ada’s
Whole Foods acquisition. Trade names and technology are amortized on a straight-line basis over their useful life of ten years.
Customer relationships are amortized on a straight-line basis over their useful lives of five years, the website is amortized on
a straight-line basis over its estimated useful life of three years and the favorable lease is amortized on a straight-line basis
based on the lease terms.
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.
Upon completion of the analysis as of December 31, 2016 and 2015, the Company determined that certain intangible assets were impaired.
Accordingly, the Company recorded an impairment charge of $778,345 and $948,833 during the years ended December 31, 2016 and 2015,
respectively. The changes in the carrying amount of intangible assets for the years ended December 31, 2016 and 2015 are
as follows:
|
|
Favorable
Lease
|
|
Trade
Names
and Technology
|
|
|
Customer
Relationships
|
|
|
Assembled
Workforce
|
|
|
Website
|
|
Total
|
|
Beginning
balance, January 1, 2015
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
$
|
-
|
|
Additions
from Merger
|
|
|
-
|
|
|
1,500,000
|
|
|
|
488,274
|
|
|
|
92,326
|
|
|
|
-
|
|
|
2,080,600
|
|
Additions
from acquisitions
|
|
|
-
|
|
|
20,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
20,000
|
|
Impairment
|
|
|
-
|
|
|
(465,000
|
)
|
|
|
(406,895
|
)
|
|
|
(76,938
|
)
|
|
|
-
|
|
|
(948,833
|
)
|
|
|
|
-
|
|
|
1,055,000
|
|
|
|
81,379
|
|
|
|
15,388
|
|
|
|
-
|
|
|
1,151,767
|
|
Accumulated
amortization
|
|
|
-
|
|
|
(126,000
|
)
|
|
|
(81,379
|
)
|
|
|
(15,388
|
)
|
|
|
-
|
|
|
(222,767
|
)
|
Ending balance,
December 31, 2015
|
|
$
|
-
|
|
$
|
929,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
$
|
929,000
|
|
Additions
from acquired grocery business
|
|
|
890,000
|
|
|
845,000
|
|
|
|
60,000
|
|
|
|
-
|
|
|
|
4,500
|
|
|
1,799,500
|
|
Sale of tradename
|
|
|
-
|
|
|
(100,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
(100,000
|
)
|
Impairment
|
|
|
-
|
|
|
(778,345)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
(778,345)
|
|
Accumulated
amortization
|
|
|
(33,859)
|
|
|
(139,092)
|
|
|
|
(7,000)
|
|
|
|
-
|
|
|
|
(875)
|
|
|
(180,826)
|
|
Ending balance,
December 31, 2016
|
|
$
|
856,141
|
|
$
|
756,563
|
|
|
$
|
53,000
|
|
|
$
|
-
|
|
|
$
|
3,625
|
|
$
|
1,669,329
|
|
The weighted-average remaining amortization
period of the Company’s amortizable intangible assets is approximately 30.44 years as of December 31, 2016. The estimated
future amortization of the intangible assets is as follows:
For the years ending December 31,
|
|
|
|
|
|
$
|
|
|
2017
|
|
|
222,793
|
|
2018
|
|
|
222,793
|
|
2019
|
|
|
221,918
|
|
2020
|
|
|
221,293
|
|
2021
|
|
|
196,794
|
|
Thereafter
|
|
|
583,738
|
|
Total
|
|
$
|
1,669,329
|
|
Note 8. ACCRUED EXPENSES
Accrued expenses are comprised of the following:
|
|
For
the Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accrued Board of Directors
|
|
$
|
29,000
|
|
|
$
|
-
|
|
Accrued Loyalty and Gift Cards
|
|
|
85,274
|
|
|
|
-
|
|
Accrued severance
|
|
|
37,440
|
|
|
|
51,145
|
|
Accrued payroll and related employee expenses
|
|
|
229,768
|
|
|
|
124,186
|
|
Accrued Delaware Franchise Tax
|
|
|
121,617
|
|
|
|
-
|
|
Accrued Litigation and Settlements
|
|
|
70,872
|
|
|
|
-
|
|
Accrued legal and professional fees
|
|
|
131,833
|
|
|
|
-
|
|
Accrued retail store hold back payments from acquisitions
|
|
|
-
|
|
|
|
860,000
|
|
Other accrued liabilities
|
|
|
73,872
|
|
|
|
190,301
|
|
Total
|
|
$
|
779,676
|
|
|
$
|
1,225,632
|
|
Note 9. NOTES PAYABLE
$567,000 Convertible Notes Payable
In 2015, Vaporin entered into a Securities
Purchase Agreement with certain accredited investors providing for the sale of $567,000 of Vaporin’s Convertible Notes (the
“Vaporin Notes”). The Vaporin Notes accrued interest on the outstanding principal at an annual rate of 10%. The principal
and accrued interest on the Notes were due and payable between January 20, 2016 and January 23, 2016. The Vaporin Notes were assumed
by the Company upon the closing of the Merger on March 4, 2015, at which time a debt discount of $54,623 was calculated. During
the year ended December 31, 2015, the Company recorded contractual interest expense of $29,853. The Company amortized $28,859 of
deferred debt discount, during year ended December 31, 2015 which is included in amortization of deferred debt discount on the
consolidated statements of operations. As of December 31, 2015, the Vaporin Notes were repaid in full, including $567,000 in principal
and $29,853 interest, and the Company recorded $25,764 of extinguishment loss.
$350,000 Convertible Notes Payable
On January 29, 2015, the Company issued
a $350,000 convertible promissory note (the “Note”) to Vaporin in consideration of a loan of $350,000 made by Vaporin
to the Company. The Note accrued interest on the outstanding principal at an annual rate of 12%. In connection with the completion
of the Merger on March 4, 2015, the $350,000 Note along with accrued interest of $4,029 was forgiven.
$1,000,000 Note Payable to a Related Party
On December 8, 2014, Emagine entered into
a Secured Line of Credit Agreement (the “Agreement”), effective as of December 1, 2014, with one affiliated stockholder
of the Company and two unaffiliated investors (the “Lenders”). The funds were used to purchase and/or open Vape Stores
similar to those operated by the Company. In connection with the completion of the Merger on March 4, 2015, Emagine became a wholly-owned
subsidiary of the Company, and the debt was assumed by the Company. For the year ended December 31, 2015, the company recorded
$60,285 of interest expense. On August 3, 2015, the Secured Line of Credit Agreement was repaid in full, including $1,000,000 in
principal and $80,548 interest.
$1,250,000 Senior Convertible Notes Payable to Related
Parties
On November 14, 2014, the Company entered
into securities purchase agreements with certain accredited investors who are also stockholders of Vaporin providing for the sale
of $1,250,000 in aggregate principal amount of the Company’s senior convertible notes
(the “$1,250,000 Senior Convertible
Notes”) and common stock purchase warrants to purchase up to an aggregate of 0.1624 shares of the Company’s
common stock with an exercise price of $14,000,000 per share. The $1,250,000 Senior Convertible Notes accrued interest
on the outstanding principal at an annual rate of 7% per annum. The principal and accrued interest on the Notes were due and payable
on November 14, 2015, the maturity date of the Notes.
The Notes were convertible into shares
of the Company’s common stock at any time, in whole or in part, at the option of the holder thereof at a conversion price
of $7,700,000 per share (the “Conversion Price”).
In connection with the sale and issuance
of the $1,250,000 Senior Convertible Notes, the Company also issued warrants to acquire an aggregate of 0.1624 shares of
the Company’s common stock. The Warrants are exercisable after 180 days from the date of issuance, or May 14, 2015, until
the fifth anniversary of such date of issuance at an exercise price of $14,000,000 per share (subject to certain customary
adjustments upon the occurrence of certain events, including but not limited to stock dividends, stock splits, subsequent rights
offerings of the Company, pro rata distributions of the Company, and in connection with a Fundamental Transaction. Palladium Capital
Advisors, LLC acted as the exclusive placement agent for the $1,250,000 Senior Convertible Notes and, as compensation therefor,
the Company paid Palladium Capital Advisors, LLC a placement agent fee of $62,500, included as part of financing fees described
above, and issued to them a common stock warrant to purchase up to 0.008 shares of our common stock at an initial exercise
price of $14,000,000 per share. The warrant is immediately exercisable and expires on November 14, 2019. The exercise price
and number of shares of common stock issuable under the warrant are subject to customary anti-dilutive adjustments for stock splits,
stock dividends, recapitalizations and similar transactions. At any time, the warrant may be exercised by means of a “cashless
exercise” and the Company will not receive any proceeds at such time.
On the date of the issuance of the $1,250,000
Senior Convertible Notes, the Company recorded a debt discount of $1,250,000, of which $701,250 was allocated on a relative fair
value basis to the warrants issued and the remaining $548,750 was allocated on a relative fair value basis to the conversion feature
embedded within the $1,250,000 Senior Convertible Notes. The debt discount was to be amortized using the effective interest method
over the life of the $1,250,000 Senior Convertible Note, as applicable, or until such time that the $1,250,000 Senior Convertible
Notes are converted, in full or in part, into shares of common stock of the Company with any unamortized debt discount continuing
to be amortized in the event of any partial conversion thereof and any unamortized debt discount being expensed at such time of
full conversion thereof.
As of December 31, 2015, the $1,250,000
Senior Convertible Notes were repaid in full, including $1,250,000 in principal and $62,549 of interest, and the Company recorded
an extinguishment loss of $548,130. During the year ended December 31, 2015, the Company amortized $81,473 of deferred financing
costs associated with the $1,250,000 Senior Convertible Notes. For the year ended December 31, 2015, the Company recorded $230,891
of interest expense and amortization expense of $729,167.
$1,750,000 Convertible Debenture
On June 25, 2015, the Company received
gross proceeds of $1,662,500 in connection with entering into a Securities Purchase Agreement, dated as of June 22, 2015, with
certain purchasers in exchange for the issuance of convertible notes with a face value of $1,750,000 (the “Debentures”),
interest accrued at 10% per annum and a final maturity date of December 22, 2015 (see Note 14- Certain Relationships
and Related Party Transactions – for details on related party purchasers). The $87,500 (or 5%) original issue discount was
recorded as a debt discount by the Company on the date the Debentures were issued and $19,542 was amortized using the effective
interest method over the life of the Debentures during the year ended December 31, 2015, which is included in amortization of
debt discounts on the consolidated statements of operations. Amounts of principal and accrued interest under the Debentures were
convertible into common stock of the Company at a price per share of $3,500,000. The conversion feature embedded within
the Debentures was determined to be a derivative instrument as the exercise price may be lowered if the Company issues securities
at a lower price in the future (see Note 11). The aggregate fair value of the embedded conversion feature was $248,359,
which was recorded as a derivative liability and a debt discount on the consolidated balance sheet on the date the Debentures
were issued. The Company amortized the debt discount using the effective interest method over the life of the Debentures. During
the year ended December 31, 2015, the Company recorded $459,144 of interest expense (inclusive of prepayment premiums) and amortized
$55,467 of the deferred debt discount.
The Company incurred aggregate cash offering
costs associated with the issuance of the Debentures of $196,250. Net proceeds to the Company from sale of the Debentures, after
payment of commissions and legal fees of the lead investor, were $1,466,250. For acting as placement agent in the offering of
the Debentures, the Company paid Chardan Capital Management, LLC (the “Placement Agent”) a fee equal to 10% of the
gross proceeds from the sale of the Debentures, and issued the Placement Agent 1,000 five-year warrants exercisable at $3,500,000
per share. The value of the warrants granted to the placement agent of $87,779 was recorded as deferred financing costs on
the Company’s consolidated balance sheet that was amortized over the term of the Debentures. During the year ended December
31, 2015, the Company amortized $63,430 of deferred financing costs associated with the Debentures.
As of December 31, 2015, the Debentures
were paid in full, including $1,750,000 in principal and $459,144 of interest and prepayment premiums, and the Company recorded
a $923,275 loss on debt extinguishment.
$1,000,000 Term Loan
On September 23, 2014, the Company entered
into a $1,000,000 term loan (the “Term Loan”) with Entrepreneur Growth Capital, LLC (the “Lender”) secured
by a promissory note (the “Secured Note”) and a security interest in substantially all of the Company’s assets.
Under the Secured Note, the principal amount of the Term Loan was payable in twelve successive monthly installments of $83,333.
The Term Loan bore interest at 14% per year, payable in arrears. The Company used the proceeds of the Term Loan for general working
capital purposes. The Company’s Chief Executive Officer and former executive officers personally guaranteed performance of
certain of the Company’s obligations under the Term Agreement. During the year ended December 31, 2015, the Company incurred
$45,092 of interest expense. The Term Loan was repaid in full on September 1, 2015.
Note 10. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases its Florida office and
warehouse facilities under a three-year lease. The lease provides for annual rental payments including taxes of $95,000 per year.
During the year ended December 31, 2015,
the Company closed eight kiosks. The Company settled the lease commitment with the landlords on all leases with payments totaling
$229,536. The landlords also kept the deposits on these leases in the amount of $23,500. These amounts were recorded in selling,
general and administrative expenses for a total amount of $265,627 during the year ended December 31, 2015.
During the year ended December 31, 2015,
the Company settled the lease commitment with the landlord of the retail store located in Ft. Lauderdale, FL. with a single payment
of $45,000. The landlord also kept the deposit on these leases in the amount of $8,309. Therefore, the Company incurred lease costs
in the total amount of $53,309 included in selling, general and administrative expenses, during the year ended December 31, 2015.
During the year ending 2016, the Company
closed seven of its retail Vape Stores. The majority of the Vape stores closed were in the Orlando, Florida area and the others
were in Georgia. The cost incurred with the closing of these stores amounted to $308.965. The landlords kept the deposits and the
store closure cost was recorded in selling, general and administrative expenses during the year ended December 31, 2016
Future minimum lease payments under non-cancelable
operating leases that have initial or remaining terms in excess of one year at December 31, 2016 are due as follows:
2017
|
|
$
|
702,791
|
|
2018
|
|
|
574,794
|
|
2019
|
|
|
410,880
|
|
2020
|
|
|
307,472
|
|
2021
|
|
|
128,113
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
2,124,050
|
|
Rent expense for the year ended December
31, 2016 and 2015 was $777,310 and $807,857, respectively, is included in selling, general and administrative expenses
in the accompanying consolidated statement of operations.
Employment Agreements
In December 2016, Gina Hicks resigned from
her position as the Chief Financial Officer of the Company and in December 2016, the Company appointed John A. Ollet to serve as
the Company’s new Chief Financial Officer.
On December 12, 2016, the Company entered
into a three-year employment agreement with John Ollet. Mr. Ollet’s initial base salary shall be $180,000, $190,000 and $200,000
in years one, two and three, respectively. Mr. Ollet shall be eligible to receive a one-time sign-on bonus of $5,500. Mr. Ollet
shall also be entitled to bonuses and other incentives at the discretion of the Company, based in part on Mr. Ollet’s performance.
Gina Hicks received severance compensation
and accrued vacation in the total amount of $46,154, which is divided into equal weekly payments that ends on March 7, 2017. As
of December 31, 2016, $37,440 of accrued severance was included in accrued expenses on the consolidated balance sheet.
On September 10, 2015, the Board of Directors
approved the decision to replace Mr. James Martin, the Company’s former Chief Financial Officer, with Ms. Gina Hicks. Mr.
Martin received severance compensation and accrued vacation in the total amount of $87,500, which is divided into equal weekly
payments that end on March 11, 2016. As of December 31, 2015, $33,642 of accrued severance was included in accrued expenses on
the consolidated balance sheet. The final payments for Jim Martin’s severance pay was paid in the first quarter of 2016.
On August 10, 2015, the Company entered
into three-year Employment Agreements with Jeffrey Holman, the Company’s Chief Executive Officer, and Gregory Brauser, the
Company’s President. Each of the Employment Agreements provide for an annual base salary of $300,000 and a target bonus in
an amount ranging from 20% to 200% of their base salaries subject to the Company meeting certain adjusted earnings before interest,
taxes depreciation and amortization (“Adjusted EBITDA”) performance milestones. Adjusted EBITDA is defined in the Employment
Agreements as earnings (loss) from continuing operations before interest expense, income taxes, collateral valuation adjustment,
bad debt expense, one-time expenses, depreciation and amortization and amortization of stock compensation or Adjusted EBITDA defined
in any filing of the Company with the SEC subsequent to the date of the Employment Agreements. Additionally, the Company approved
an immediate bonus of $100,000 to each of Mr. Holman and Mr. Brauser. Messrs. Holman and Brauser are also entitled to receive severance
payments, including 2 years of their then base salary and other benefits in the event of a change of control, termination by the
Company without cause, termination for good reason by the executive or non-renewal by the Company.
Effective April 25, 2014, Kevin Frija resigned
as the Company’s Chief Executive Officer and the Company’s Board of Directors appointed the Company’s President
and incumbent member of the Board, Jeffrey Holman, as the Company’s new Chief Executive Officer. In connection with Mr. Frija’
s resignation as Chief Executive Officer, the Board approved severance payments to Mr. Frija in an aggregate amount equal to one
year of base salary at the rate of $159,000 per annum payable in installments in accordance with the Company’s normal payroll
schedule conditioned upon his execution and delivery of a general release to the Company, and his compliance with the non-solicitation,
confidentiality and non-competition covenants of his Employment Agreement dated February 27, 2012 with the Company until April
24, 2015 in certain respects and indefinitely in other respects. During the year ended December 31, 2014 the Company accrued severance
expense in the amount of $167,003, which is included as part of the selling, general and administrative expenses in accompanying
consolidated statements of operations in connection with Mr. Frija’ s resignation. During the year ended December 31, 2015
$77,028 was paid to Mr. Frija.
The last payment to Mr. Frija was in April 2015.
Legal Proceedings
From time to time the Company may be involved
in various claims and legal actions arising in the ordinary course of our business. With respect to legal costs, we record
such costs as incurred.
Fontem Matters
On June 22, 2012, Ruyan Investment (Holding)
Limited (“Ruyan”) filed a lawsuit against the Company alleging infringement of U.S. Patent No. 8,156,944 (the “944
Patent”). Ruyan also filed separate cases for patent infringement against nine other defendants asserting infringement of
the 944 Patent. Ruyan’s second lawsuit against the Company known as
Ruyan Investment (Holdings) Limited vs. Vapor Corp.
CV-12-5466
is pending in the United States District Court for the Central District of California. All of these lawsuits were
consolidated for discovery and pre-trial purposes.
On February 25, 2013, Ruyan’s second
patent infringement lawsuit against the Company as well as all of the other consolidated lawsuits were stayed as a result of the
Court granting a stay in one of the consolidated lawsuits. The Court granted the motion to stay Ruyan’s separate lawsuits
against the Company and the other defendants based on the filing of a request for inter partes reexamination of the 944 Patent
at the United States Patent and Trademark Office.
All reexamination proceedings of the 944
Patent had stayed by the United States Patent and Trademark Office Patent Trial and Appeal Board pending its approval of one or
more of them. On March 5, 2014, Fontem Ventures, B.V. and Fontem Holdings 1 B.V. (the successors to Ruyan) filed a complaint against
the Company alleging infringement of U.S. Patent No. 8,365,742, entitled “Aerosol Electronic Cigarette”, U.S. Patent
No. 8,375,957, entitled “Electronic Cigarette”, U.S. Patent No. 8,393,331, entitled “Aerosol Electronic
Cigarette” and U.S. Patent No. 8,490,628,
entitled “Electronic Atomization Cigarette. On April 8, 2014, plaintiffs amended their complaint to add U.S. Patent No. 8,689,805,
entitled “Electronic Cigarette.” The products accused of infringement by the plaintiff are various Krave, Fifty-one
and Hookah Stix products and parts. Eight other companies were also sued in separate lawsuits alleging infringement of one or more
of the patents listed above. The Company filed its Answer and Counterclaims on May 1, 2014.
On October 21, 2014, Fontem Ventures B.V.
and Fontem Holdings 1 B.V. filed a complaint against the Company in the U.S. District Court for the Central District of California,
captioned Fontem Ventures B.V., et al. v. Vapor Corp., No. 14-cv-8155. The complaint alleges infringement of United States Patent
No. 8,863,752, entitled “Electronic Cigarette”. The products accused of infringement by plaintiffs are various Krave
and Fifty-One products and parts On January 15, 2015, the Company filed its Answer and Counterclaims.
On December 2, 2014, Fontem Ventures B.V.
and Fontem Holdings 1 B.V. filed a complaint against the Company in the U.S. District Court for the Central District of California,
captioned Fontem Ventures B.V., et al. v. Vapor Corp., No. 14-cv-09267. The Complaint alleges infringement by the plaintiffs against
the Company relating to various Krave, Vapor X and Fifty-One products and parts. Fontem amended its complaint on December 16, 2014,
to allege infringement of United States Patent No. 8,910,641, entitled “Electronic Cigarette” against the same products.
On January 15, 2015, the Company filed its Answer and Counterclaims. Fontem, by way of its expert, sought $1,982,504 in monetary
damages for alleged past infringement. All of the above referenced cases filed by Fontem were consolidated.
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.
During
the year ended December 31, 2016 and 2015, the Company recorded $117,525 and $1,225,632 of accrued expense, respectively.
As of December 31, 2016, the Company has made royalty payments in the amount of $1,829,242.
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 the Company, 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. 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
December 31, 2015.
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 consolidated financial position, liquidity or results of
operations in any future reporting periods. 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 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 sought 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 sought aggregate damages of approximately $603,000. Between June 17, 2016 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.
Purchase Commitments
At December 31, 2016 and 2015, the Company
had vendor deposits of $7,000 and $127,609, respectively, and which are included as a component of prepaid expenses and vendor
deposits on the consolidated balance sheets included herewith.
Note 11. STOCKHOLDERS’ EQUITY
(DEFICIT)
Amendments to Certificate of Incorporation
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 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. Each share entitles the holder to one vote.
All warrant, convertible preferred stock,
option, common stock shares and per share information included in these consolidated financial statements
gives retroactive effect to the aforementioned reverse splits of the Company’s common stock.
Equity Plans
On July 7, 2015, the stockholders approved
the 2015 Equity Incentive Plan (the “2015 Plan”), which is a broad-based plan and awards granted may be restricted
stock, restricted stock units, options and stock appreciation rights. On November 21, 2016, the 2015 Plan was amended to increase
the number of shares of common stock available for grants to 100,000,000,000. The 2015 Plan had 94,998,999,996 shares of common
stock available for grant as of December 31, 2016.
The Company’s 2009 Equity Incentive
Plan (the “2009 Plan”) was duly adopted by the stockholders on November 24, 2009. The 2009 Plan provides for the granting
of incentive stock options to employees, the granting of non-qualified stock options to employees, non-employee directors and consultants,
and the granting of restricted stock to employees, non-employee directors and consultants in connection with their retention and/or
continued employment by the Company. Options issued under the 2009 Plan generally have a ten-year term and generally become exercisable
over a four-year period. Shares subject to awards that expire unexercised or are forfeited or terminated will again become available
for issuance under the 2009 Plan. No participant in the 2009 Plan can receive option grants and/or restricted shares for more than
20% of the total shares subject to the 2009 Plan. The 2009 Plan had no shares of common stock available for grant as of December
31, 2016.
Preferred Stock
The Company’s amended and restated
articles of incorporation authorizes the Company’s Board of Directors to issue up to 1,000,000 shares of “blank check”
preferred stock, having a $0.001 par value, in one or more series without stockholder approval. Each such series of preferred stock
may have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges
as determined by the Company’s Board of Directors. See below for details associated with the designation of the 1,000,000
shares of the Series A preferred stock.
Series A Unit Public Offering
On July 29, 2015, the Company closed a
public offering of Units for gross proceeds of approximately $41.4 million and net proceeds of approximately $38.7 million. On
January 25, 2016, the Units automatically separated into an aggregate of 0.672 shares of Series A.
Preferred Stock, which were convertible
in to an aggregate of 27 shares of common stock, and five-year Series A Warrants, exercisable into 54 shares of common stock. Except
in the event of a “cashless exercise” as described below, each Series A Warrant is exercisable into one share of common
stock at an exercise price of $1,736,000 per share and expires on July 23, 2020. See the Warrants section of this footnote
for details related to 2016 warrant activity.
The Series A Preferred Stock (a) ranks
equal to the common stock on an as converted basis with regard to the payment of dividends or upon liquidation; (b) automatically
converts into common stock upon the consummation of a Fundamental Transaction, as defined; (c) has no voting rights, except related
to the amendment of the terms of the Series A preferred stock; and (d) has conversion limits whereby the holder may not beneficially
own in excess of 4.99% of the common stock. Through December 31, 2016, 0.630 shares of Series A Preferred Stock were converted
and the Company issued 26 shares of common stock to settle these conversions, leaving 0.042 shares of Series A Preferred
Stock outstanding.
The Series A warrants were originally
determined to be derivative liabilities because there is a potential cash settlement provision which isn’t under the
Company’s control (see Note 12). Utilizing a Monte Carlo valuation method, the issuance date value of the Series A
warrant liabilities was calculated to be $79.4 million. Since the value of the Series A warrant liabilities exceeded the gross
proceeds from the public offering, the Company recorded a $38.1 million deemed dividend on the preferred stock. Each Series A
warrant may be exercised on a cashless basis for the Black Scholes value defined in the warrant agreement. The number of shares
of common stock that the Company will issue in connection with the exercise of the Series A warrants is primarily based on the
closing bid price of the common stock two days prior to the date of the exercise. If (a) all of the warrants were exercised simultaneously
when the Company’s common stock traded below a certain price per share, or (b) the Company does not continue to meet certain
Equity Conditions (as defined), the Company may not have sufficient authorized common stock and could be required to use cash
to pay warrant holders.
In
connection with the closing of this offering, the Company incurred $4,779,003 of issuance costs, including cash underwriting fees
of $2,722,687, other cash costs of approximately $503,898, and the issuance date value of $1,552,418 (utilizing the Black-Scholes-Merton
valuation model) of the underwriter’s five-year Series A unit purchase option, which gives the underwriter the option to
purchase 0.034 shares of Series A Convertible Preferred Stock, which were convertible into 1 share of common stock, plus Series
A Warrants, which would be currently exercisable into an aggregate of approximately 40,813,223,000 shares of common stock. The
shares issuable upon the exercise of the Series A Warrants are calculated (1) using a Black Scholes Value of $1,519,297
per share and a closing stock bid 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. All of the issuance
costs were allocated to the Series A warrant liabilities because no carrying value was attributed to the Series A preferred stock
and, as a result, the issuance costs were expensed immediately.
In
connection with the closing of this offering, on August 3, 2015, the Company paid Chardan Capital Markets, LLC (“Chardan”)
$500,000 in satisfaction of an agreement between Chardan and the Company pursuant to which Chardan waived certain rights to participate
in the public offering that were granted to Chardan under its previous agreements with the Company. The $500,000 cost was recorded
in other expenses on the consolidated statement of operations for the year ended December 31, 2015.
Common Stock
Issuance of Common Stock
On February 3, 2014, the Company entered
into a consulting agreement (the “Consulting Agreement”) with Knight Global Services, LLC (“Knight Global”)
pursuant to which the Company retained Knight Global to assist the Company with increasing awareness of its electronic cigarette
brands as well as assisting the Company to expand and diversify its relationships with large retailers and national chains. Knight
Global is a wholly owned subsidiary of Knight Global, LLC of which Ryan Kavanaugh is an investor and principal. Effective March
5, 2014, the Board of Directors of the Company elected Mr. Kavanaugh as a member of the Board of Directors in accordance with the
Consulting Agreement. Knight Global serves as the family office for Mr. Kavanaugh.
Under the terms of the Consulting Agreement,
the Company issued to Mr. Kavanaugh 0.057 shares of its common stock, of which 0.007 shares vested immediately while the remaining
0.050 shares vest in installments of 0.007 shares per quarterly period beginning on the 90th day following February 3, 2014 and
each ensuing quarterly period thereafter so long as the Consulting Agreement has not been terminated and during each quarterly
period Knight Global has presented the Company with a minimum of six (6) bona fide opportunities for activities specified in the
Consulting Agreement that are intended to increase awareness of the Company’s electronic cigarettes. In addition, during
the term of the Consulting Agreement, which is 2 years, and during an 18-month post-termination period, the Company has agreed
to pay Knight Global commissions payable in cash equal to 6% of “net sales” (as defined in the Consulting Agreement)
of its products to retailers introduced by Knight Global and to retailers with which the Company has existing relationships and
with which Knight Global is able, based on its verifiable efforts, to increase net sales of the Company’s products.
The grant date fair value of the common
shares issued on February 3, 2014 was $3,080,000 based on closing price per share of the Company’s common stock, as reported
on the OTC Bulletin Board, on February 3, 2014. On January 24, 2015, the Company and Knight Global mutually agreed to terminate
the Consulting Agreement as it was in the best interests of both parties to do so. As a result of such termination, the Company
cancelled 0.021 shares that were not vested that had been previously issued to Mr. Kavanaugh. In addition, on January 24, 2015,
the Company received notice from Ryan Kavanaugh, a director of the Company that he had resigned from the Company’s board
of directors, effective immediately.
During the year ended December 31,
2015, the Company recognized Knight Global stock-based compensation of $1,602,933, which was
included in selling, general and administrative expense.
Private Placement of Common Stock
In connection with the Merger, on March
3, 2015, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain accredited
investors providing for the sale 0.490 shares of the Company’s common stock for aggregate gross proceeds of $3,500,960. The
Company also issued five-year Warrants to purchasers of the shares to acquire an aggregate of 0.392 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 is not in the Company’s control and as a result, the issuance date fair value of $2,494,639
was recorded as a derivative liability. The shares and Warrants were issued and sold through an exempt private security offering
to certain accredited investors. The Company incurred aggregate offering costs of $559,000 in connection with the private placement,
of which $350,000 was paid to Palladium Capital Advisors, the Company’s placement agent. The initial Form S-3 was filed on
April 17, 2015 and was declared effective by the SEC on June 5, 2015, thus meeting the requirements of the Purchase Agreement.
Shares Issued in Connection with Waiver Agreements
On June 19, 2015, the Company entered into
agreements (the “Waivers”), with certain investors in each of its private placement offerings under the Securities
Purchase Agreement dated March 3, 2015 (the “2015 Agreement”) and the Securities Purchase Agreement dated November
14, 2014 (the “2014 Agreement,” and with the 2015 Agreement, the “Agreements”). Under the terms of the
Waivers, the signatories thereto (the “Prior Investors”) agreed to amend the Agreements and waive or modify certain
terms thereunder, including certain restrictions on the completion of subsequent securities offerings by the Company. In exchange,
the Company agreed to issue the Prior Investors a total of 0.463 shares of common stock (including 0.101 shares issued to the lead
investor under each of the Agreements in its capacity as lead investor) and 0.426 five-year warrants exercisable at $3,535,000
per share. The grant date fair value of the common stock and warrants issued with the Waivers was $1,328,196 and $1,086,354, respectively,
and was recorded in other expenses on the consolidated statement of operations for the year ended December 31, 2015.
The warrants issued in connection with
the Waivers were determined to be derivative instruments because (a) their exercise prices may be lowered if the Company issues
securities at a lower price in the future; and (b) there is a potential cash settlement provision which is not in the Company’s
control (see Note 12). The aggregate fair value of the warrants was $1,086,354 and was recorded as a derivative liability
on the consolidated balance sheet on the date the warrants were issued. The Waivers also resulted in the equity warrants issued
pursuant to the 2014 Agreement having their exercise priced adjusted from $14,000,000 to $1,540,000 per share. The Company
recognized a 2015 charge of $36,432 for the incremental value of the modified warrants as compared to the original warrants.
In the event that, prior to November 14,
2015, the Company issued shares of common stock, or securities convertible into common stock, at an effective price per share of
less than $3,780,000, the Prior Investors were entitled to the issuance of additional shares (the “Additional Shares”),
the exact amount of which depended on the effective price per share of such subsequent issuance. The Company could not issue any
Additional Shares of common stock requiring stockholder approval under the Rules of the Nasdaq Stock Market without receipt of
such approval.
Subsequently the Company issued shares
of common stock in connection with a registered public offering on July 29, 2015. This effectively triggered the need to issue
Additional Shares that were calculated by the Company as 1.855 common shares. Pursuant to the Rules of the Nasdaq Stock Market,
the Company needed to seek stockholder approval before issuing 1.285 of these shares and such approval was obtained on October
16, 2015. The Company recognized a 2015 charge of $1,297,081 in connection with the issuance of the Additional Shares.
Warrants
Through
December 31, 2016, Series A Warrants to purchase 4 shares of common stock have been exercised through the cashless exercise provision
in the Series A Warrants, resulting in the issuance of 15,619,771,347 shares of the Company’s common stock. In addition,
Series A Warrants to purchase 8 shares of common stock were repurchased, which could have resulted in the issuance of approximately
116,704,766,499 shares of the Company’s common stock if such Series A Warrants had not been repurchased as of the
date of this report. As of December 31, 2016, Series A Warrants to purchase 42 shares of common stock remained outstanding, they
have a remaining weighted average term of 3.6 years and they currently have the potential to result in the issuance of approximately
634,754,364,551 shares of common stock. The shares issuable upon the exercise of the Series A Warrants are calculated (1)
using a Black Scholes Value of $1,519,297 per share and a closing stock bid 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. See Note 16 – Subsequent Events for details related to the January 2017 repurchase of Series
A Warrants via a tender offer.
Holders
(the “Holders”) of approximately 90% of the Series A Warrants are subject to the Amended and Restated Standstill Agreements
(the “Standstill Agreements). These Standstill Agreements permit the Holders to effect a “cashless” exercise
of the Series A Warrants only on dates when the closing bid price used to determine the “net number” of shares to be
issued upon exercise is at or above $0.0001 per share. Pursuant to the terms of the Standstill Agreements, the Holders agreed in
certain circumstance to receive only common stock (and not cash) pursuant to such cashless 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 Company common stock to be listed or quoted on an eligible national securities
exchange.
A summary of warrant activity for the years ended December 31,
2016 and 2015 is presented below:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Term
(Yrs)
|
|
|
Value
|
|
Outstanding at January 1, 2015
|
|
|
-
|
|
|
$
|
14,083,400
|
|
|
|
|
|
|
|
|
|
Warrants granted
|
|
|
54
|
|
|
|
1,803,600
|
|
|
|
|
|
|
|
|
|
Warrants exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Warrants assumed in Merger
|
|
|
-
|
|
|
|
36,711,600
|
|
|
|
|
|
|
|
|
|
Warrants forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
54
|
|
|
$
|
1,736,000
|
|
|
|
|
|
|
|
|
|
Warrants granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Warrants exercised
|
|
|
(5
|
)
|
|
|
1,736,000
|
|
|
|
|
|
|
|
|
|
Warrants repurchased
|
|
|
(7
|
)
|
|
|
1,736,000
|
|
|
|
|
|
|
|
|
|
Warrants forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
42
|
|
|
$
|
1,736,000
|
|
|
|
3.6
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
|
|
42
|
|
|
$
|
1,736,000
|
|
|
|
3.6
|
|
|
$
|
-
|
|
See
Note 12 – Fair Value Measurements for additional details related to the Series A Warrants that were exchanged
Compensatory Common Stock Summary
During the years ended December
31, 2016 and 2015, the Company recognized stock-based compensation expense related to compensatory Common Stock in the amount
of $75,000 and $582,000, respectively. Stock-based compensation expense is included as part of selling, general
and administrative expense in the accompanying consolidated statements of operations.
A summary of compensatory common stock activity for the years
ended December 31, 2016 and 2015 is presented below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
|
Total
|
|
|
|
Number
|
|
|
Fair Value
|
|
|
Issuance Date
|
|
|
|
of
Shares
|
|
|
per
share
|
|
|
Fair
Value
|
|
Non-vested, January 1, 2015
|
|
|
0.0
|
|
|
$
|
53,900,000
|
|
|
$
|
1,540,000
|
|
Granted
|
|
|
0.3
|
|
|
|
7,336,843
|
|
|
|
2,439,736
|
|
Vested
|
|
|
(0.3
|
)
|
|
|
8,385,754
|
|
|
|
(2,668,736
|
)
|
Forfeited
|
|
|
(0.0
|
)
|
|
|
47,240,000
|
|
|
|
(1,181,000
|
)
|
Non-vested, December 31, 2015
|
|
|
-
|
|
|
$
|
7,280,000
|
|
|
$
|
130,000
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(0.0
|
)
|
|
|
7,280,000
|
|
|
|
(130,000
|
)
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-vested, December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Stock Options
During December 2016, the Company granted
options for the purchase of 5,001,000,004 shares of its common stock to employees, at an aggregate grant date value of
$500,100 or $0.0001 per option share.
The fair value of employee stock options
was estimated using the following Black-Scholes assumptions:
|
|
For the Year Ended
|
|
|
December
31,
|
|
|
2016
|
|
2015
|
Expected term (years)
|
|
5 - 6 years
|
|
n/a
|
Risk free interest rate
|
|
1.98% - 2.03%
|
|
n/a
|
Dividend yield
|
|
0%
|
|
n/a
|
Volatility
|
|
428.10%
|
|
n/a
|
A summary of option activity during the
years ended December 31, 2016 and 2015 is as follows:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
(Yrs)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2015
|
|
|
0.192
|
|
|
$
|
5,101,040
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options replaced in merger
|
|
|
0.003
|
|
|
$
|
7,860,000
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited or expired
|
|
|
(0.167
|
)
|
|
$
|
4,618,600
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
0.028
|
|
|
$
|
5,101,040
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
5,001,000,004.000
|
|
|
|
0.0001
|
|
|
|
|
|
|
|
|
|
Options replaced in merger
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited or expired
|
|
|
(0.017
|
)
|
|
|
11,625,400
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
5,001,000,004.011
|
|
|
$
|
0.0001
|
|
|
|
10.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
|
|
0.011
|
|
|
$
|
20,505,301
|
|
|
|
4.80
|
|
|
$
|
-
|
|
The following table presents additional
information related to options as of December 31, 2016:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
Range of
|
|
|
Average
|
|
|
Outstanding
|
|
|
Average
|
|
|
Average
|
|
|
Exercisable
|
|
Exercise
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Remaining Life
|
|
|
Number of
|
|
Price
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
In
Years
|
|
|
Options
|
|
$0.0001
|
|
|
$
|
0.0001
|
|
|
|
5,001,000,004.000
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
$
7,000,000-$13,999,800
|
|
|
$
|
8,380,200
|
|
|
|
0.006
|
|
|
$
|
8,380,200
|
|
|
|
5.6
|
|
|
|
0.006
|
|
$14,000,000
|
|
|
$
|
14,000,000
|
|
|
|
0.002
|
|
|
$
|
14,000,000
|
|
|
|
2.5
|
|
|
|
0.002
|
|
$
30,449,800-$67,410,000
|
|
|
$
|
45,000,600
|
|
|
|
0.003
|
|
|
$
|
45,000,600
|
|
|
|
4.4
|
|
|
|
0.003
|
|
|
|
|
|
|
|
|
|
|
5,001,000,004.011
|
|
|
|
|
|
|
|
4.8
|
|
|
|
0.011
|
|
During the years ended December 31, 2016
and 2015, the Company recognized stock-based compensation expense of $13,636 and $288, respectively, in connection with the amortization
of stock options, net of recovery of stock-based charges for forfeited stock options. Stock-based compensation expense is included
as part of selling, general and administrative expense in the accompanying consolidated statements of operations. There were no
options granted during the year ended December 31, 2015. The weighted average grant date fair value of options granted during the
year ended December 31, 2016 was $0.0001 per share.
At December 31, 2016, the amount of unamortized
stock-based compensation expense on unvested stock options granted to employees, directors and consultants was $486,464 which will
be amortized over a weighted average period of 1.7 years.
Income (Loss)
per Share
Basic income (loss) per share is
computed by dividing the net income (loss) available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted income (loss) per share is computed using the weighted average number of common
shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental
common shares issuable upon (a) the exercise of stock options (using the treasury stock method); (b) the conversion of Series
A convertible preferred stock; (c) the exercise of warrants (using the if-converted method); (d) the vesting of restricted stock
units; and (e) the conversion of convertible notes payable. Diluted income (loss) per share excludes the potential common
shares, as their effect is antidilutive. The following table summarizes the Company’s securities that have been excluded
from the calculation of basic and dilutive income (loss) per share as their effect would be anti-dilutive:
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
-
|
|
|
|
0
|
|
Series A convertible preferred stock
|
|
|
-
|
|
|
|
27
|
|
Warrants
|
|
|
-
|
|
|
|
55
|
|
Total
|
|
|
-
|
|
|
|
82
|
|
Shares used in calculating basic and
diluted net income (loss) per share are as follows:
|
|
Year
Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,102,959,032
|
|
|
|
6
|
|
Effect of exercise stock options
|
|
|
5,000,999,976
|
|
|
|
-
|
|
Effect of exercise warrants
|
|
|
631,552,260,513
|
|
|
|
-
|
|
Diluted
|
|
|
640,656,219,521
|
|
|
|
6
|
|
Significant dilution may
occur upon the exercise of the warrants or on the cashless exercise feature described and quantified in Note 11, Warrants
section.
On February 1, 2017, pursuant to the
2015 Plan, the Company issued a total of 77,000,000,000 options to purchase common stock to certain officers and directors. Twenty-five
percent of the options vested upon issuance and the remainder vest equally at the end of the next three calendar quarters.
Note 12. FAIR VALUE MEASUREMENTS
The fair value framework under the 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.
|
Nonfinancial assets such as goodwill, other intangible assets,
and long-lived assets held and used are measured at fair value when there is an indicator of impairment and recorded at fair value
only when impairment is recognized or for a business combination.
The following table presents nonfinancial assets measured and
recorded at fair value on a nonrecurring basis during the years ended December 31, 2016 and 2015:
|
|
2016
|
|
2015
|
Description
|
|
Fair Value
Measurements
Using
Significant
Unobservable Inputs
(Level 3)
|
|
Loss
|
|
Fair Value
Measurements
Using
Significant
Unobservable Inputs
(Level 3)
|
|
Loss
|
Goodwill
|
|
|
$
|
-
|
|
|
$
|
(3,177,017
|
)
|
|
$
|
3,177,017
|
|
|
$
|
(14,455,000
|
)
|
Intangible assets
|
|
|
|
-
|
|
|
|
(778,345
|
)
|
|
|
929,000
|
|
|
|
(948,833
|
)
|
Total
|
|
|
$
|
-
|
|
|
$
|
(3,955,362
|
)
|
|
$
|
4,106,017
|
|
|
$
|
(15,403,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the liabilities
measured at fair value on a recurring basis as of December 31, 2016:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
$
|
-
|
|
|
$
|
12,868,079
|
|
|
$
|
-
|
|
|
$
|
12,868,079
|
|
Total derivative liabilities
|
|
$
|
-
|
|
|
$
|
12,868,079
|
|
|
$
|
-
|
|
|
$
|
12,868,079
|
|
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’s
accounting and finance department and are approved by the Chief Financial Officer. 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 embedded conversion feature within the Debentures (see Note 9) and
the common stock purchase warrants (a) issued by the Company in connection with the Merger; (b) issued in connection with the
March 3, 2015 financing (see Note 3); (c) granted in connection with the Waivers (see Note 11); and (d) issued in
connection with the underwritten offering (see Note 3); 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”, 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.
The following tables summarizes the values
of certain assumptions used by the Company’s custom models to estimate the fair value of the embedded conversion options
and warrant liabilities during the years ended December 31, 2016 and 2015:
|
|
December
31, 2016
|
|
Stock price
|
|
$
|
0.00-756,000.00
|
|
Strike price
|
|
$
|
1,540,000 – $1,736,000
|
|
Remaining term (years)
|
|
|
3.42 - 4.29
|
|
Volatility
|
|
|
418 % -445
|
%
|
Risk-free rate
|
|
|
1.10% -1.15
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
2015
|
|
|
|
July
31,
|
|
|
July
29,
|
|
|
June
25,
|
|
|
March
3,
|
|
Stock price
|
|
$
|
1,218,000
|
|
|
$
|
1,400,000
|
|
|
$
|
2,380,000
|
|
|
$
|
7,700,000
|
|
Strike price
|
|
$
|
3,500,000
|
|
|
$
|
1,736,000
|
|
|
$
|
3,535,000
|
|
|
$
|
8,960,000
|
|
Remaining term (years)
|
|
|
0.40
|
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
5.00
|
|
Volatility
|
|
|
107
|
%
|
|
|
107
|
%
|
|
|
108
|
%
|
|
|
115
|
%
|
Risk-free rate
|
|
|
0.12
|
%
|
|
|
1.62
|
%
|
|
|
1.70
|
%
|
|
|
1.61
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
December
31, 2015
|
|
Stock price
|
|
$
|
756,000
|
|
Strike price
|
|
$
|
1,540,000
- 8,960,000
|
|
Remaining term (years)
|
|
|
4.17 - 4.58
|
|
Volatility
|
|
|
128
|
%
|
Risk-free rate
|
|
|
1.76
|
%
|
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 Year Ended
December 31, 2015
|
|
Balance at January 1, 2015
|
|
$
|
-
|
|
Issuance of Series A warrant liabilities
|
|
|
79,445,308
|
|
Issuance of other warrant liabilities and conversion options
|
|
|
3,878,990
|
|
Warrants issued in connection with the Waivers
|
|
|
(13,300
|
)
|
Change in fair value of derivative liabilities
|
|
|
(42,221,418
|
)
|
Balance at December 31, 2015
|
|
$
|
41,089,580
|
|
Cash paid to repurchase warrants
|
|
|
(3,278,827
|
)
|
Gain on repurchase of warrants
|
|
|
(5,189,484
|
)
|
Fair value of Series A Warrants repurchased
|
|
|
(8,468,311
|
)
|
Warrant exercises
|
|
|
(4,498,048
|
)
|
Change in fair value of derivative liabilities
|
|
|
(15,255,142
|
)
|
Reclassification of Series A warrant liability to additional paid in capital
|
|
|
—
|
|
Reclassification of Series A warrant liability to Level 2
|
|
|
(12,868,079
|
)
|
Balance at December 31, 2016
|
|
|
—
|
|
During the year ended December 31, 2016,
Series A warrants to purchase an aggregate of 4 and 7 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 $4,498,048, which was
reclassified to stockholders’ deficit. The exchanged warrants had an aggregate value at exchange date of $8,468,310 which
was derecognized and the Company paid $3,278,827 of cash plus Series B warrants with a nominal value, with a resulting
extinguishment gain of $5,189,484. The terms of the Series B warrant were agreed upon, but the warrants have not been issued.
During the year ended December 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.
As of December 31, 2016, the Company transferred
the remaining derivative liability related to its Series A Warrants out of Level 3 and into Level 2 in the fair value hierarchy.
Level 2 financial liabilities consist of derivative liabilities for which the determination of fair value is based on observable
inputs for the liability. Specifically, the Company determined that its offer to purchase its Series A Warrants for $0.22 per
warrant was the best indicator of the fair value of the derivative liability as of December 31, 2016. Accordingly, the Company
transferred $12,868,079 from the Level 3 fair value hierarchy to the Level 2 fair value hierarchy as of December 31, 2016.
The Company uses a sensitivity analysis
model to measure the impact of a 10% movement in the per share fair value per warrant. A hypothetical 10% change in the per share
fair value of the warrant as of December 31, 2016 would result in $1,286,808 recorded other income (expenses).
Note 13. INCOME TAXES
The Company did not have a provision for income taxes (current or deferred tax expense) for tax year ended
December 31, 2016 and December 31, 2015. The following is a reconciliation of the expected tax expense (benefit) at the U.S. statutory
rate to the actual tax expense (benefit) reflected in the accompanying statement of operations:
|
|
For the Years Ended December 31,
|
|
|
2016
|
|
2015
|
U.S. federal statutory rate
|
|
|
3,632,727
|
|
|
|
612,254
|
|
State and local taxes, net of federal benefit
|
|
|
(227,984
|
)
|
|
|
(308,119
|
)
|
Change in fair value of derivatives
|
|
|
(5,186,749
|
)
|
|
|
(14,355,282
|
)
|
Settlement of warrants
|
|
|
(1,764,424
|
)
|
|
|
—
|
|
Goodwill impairment
|
|
|
1,080,186
|
|
|
|
4,914,700
|
|
Change in valuation allowance
|
|
|
2,756,495
|
|
|
|
5,525,665
|
|
True-up & deferred adjustment
|
|
|
(220,327
|
)
|
|
|
110,006
|
|
Stock based compensation
|
|
|
15,826
|
|
|
|
(144,770
|
)
|
Other permanent items
|
|
|
(214,142
|
)
|
|
|
71,623
|
|
Forfeitures & expiration of stock comp
|
|
|
118,691
|
|
|
|
356,090
|
|
Stock issuance costs & compensation wavers
|
|
|
78,640
|
|
|
|
2,830,944
|
|
Change in tax rate
|
|
|
(36,381
|
)
|
|
|
468,571
|
|
Other
|
|
|
(32,558
|
)
|
|
|
(81,682
|
)
|
|
|
|
0
|
|
|
|
0
|
|
As of December 31, 2016 and 2015, the Company’s deferred
tax assets and liabilities consisted of the effects of temporary differences attributable to the following:
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
2016
|
|
2015
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
NOL & AMT credit carryforward
|
|
$
|
15,853,308
|
|
|
$
|
13,560,973
|
|
Inventory reserves and allowances
|
|
|
504,104
|
|
|
|
122,782
|
|
Accrued expenses & deferred income
|
|
|
35,413
|
|
|
|
771,803
|
|
Charitable contribution
|
|
|
2,110
|
|
|
|
1,409
|
|
Stock based compensation
|
|
|
46,168
|
|
|
|
149,793
|
|
Net book value of intangible assets
|
|
|
931,417
|
|
|
|
—
|
|
Net book value of fixed assets
|
|
|
24,010
|
|
|
|
5,533
|
|
Total current deferred tax assets
|
|
|
17,396,530
|
|
|
|
14,612,293
|
|
Current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Net book value of intangible assets
|
|
|
—
|
|
|
|
(277,903
|
)
|
Total current deferred tax liabilities
|
|
|
—
|
|
|
|
(277,903
|
)
|
Net current deferred tax assets
|
|
|
17,396,530
|
|
|
|
14,334,390
|
|
Valuation allowance
|
|
|
(17,396,530
|
)
|
|
|
(14,334,390
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
In assessing the realization of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this assessment. After consideration of all of the positive
and negative evidence available, management has determined that a valuation allowance of $17,396,530 and $14,334,390 are required
at December 31, 2016 and 2015, respectively, to reduce the deferred tax assets to amounts that are more likely than not to be
realized. Should the factors underlying management’s analysis change, future valuation adjustments to the Company’s
net deferred tax assets may be necessary.
At December 31, 2016 the Company had U.S.
federal and state net operating loss carryforwards (“NOLS”) of $43,058,505 and $31,760,278, respectively. These NOLs
expire beginning in 2030. Utilization of our NOLS may be subject to an annual limitation under section 382 and similar state provisions
of the Internal Revenue Code due to changes of ownership that may have occurred or that could occur in the future, as defined
under the regulations.
As required by the provisions of ASC 740,
the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold,
the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax authority. Differences between tax positions taken or expected
to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized
benefits.” A liability is recognized (or amount of NOL or amount of tax refundable is reduced) for an unrecognized tax benefit
because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not
recognized as a result of applying the provisions of ASC 740.
If applicable, interest costs and penalties related to unrecognized tax benefits are required to be calculated
and would be classified as interest and penalties in general and administrative expense in the statement of operations. As of
December 31, 2016 and 2015, no liability for unrecognized tax benefit was required to be reported. No interest or penalties were
recorded during the years ended December 31, 2016 and 2015. The Company does not expect any significant changes in its unrecognized
tax benefits in the next year. The Company files U.S. federal and Alabama, Connecticut, Florida, Georgia, Massachusetts, New York,
North Carolina, and Tennessee state income tax returns. As of December 31, 2016, the Company’s U.S. and state tax returns
remain subject to examination by tax authorities beginning with the tax year ended December 31, 2013.
Note 14. CERTAIN RELATIONSHIPS AND
RELATED PARTY TRANSACTIONS
On July 29, 2016, the Company, entered
into an Asset Purchase Agreement (the “Wholesale Business 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 vapor inventory and the related business operations (collectively, “Wholesale Business
Assets”), which previously operated at 3001Griffin Road, Dania Beach, FL 33012 and to purchase 1,405,910,203 shares of the
Company’s Common Stock held by Mr. Frija. The sale transaction was approved by the Company’s Board of Director’s
on July 26, 2016 and completed on July 31, 2016. The consideration for the Wholesale Business Assets is (i) the transfer to the
Company by Mr. Frija of 1,405,910,203 shares of the Company’s common stock that he had acquired on the open market; (ii)
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 payments commencing on October 28, 2016, with a balloon
payment of the remainder of principal and interest on July 29, 2017; (iii) 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; and (iv) 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 Wholesale Business Purchase Agreement,
the Company shall continue to collect the 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. The Company incurred costs to buy back it shares of its Common Stock in conjunction with the sale of its wholesale vapor
business. The costs include approximately $43,000 of discounts on the notes receivable to related party, that were issued at below
market rates, and $35,000 of professional fees. These costs were recorded as incurred as selling general and administrative expense,
a component of the loss from discontinued operations.
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.
As of June 22, 2015, Mr. Michael
Brauser, the father of the Company’s President, loaned the Company $400,000, through a company he jointly manages, on identical
terms as other investors in the offering (see Note 9 - Notes Payable). The Debentures: (i) mature December 22,
2015, (ii) accrue interest at 10% per year, (iii) are convertible into common stock at $3,500,000 per share and (iv) are
secured by a second lien on substantially all of the Company’s assets. The Debentures, accrued interest, and prepayment
penalties were repaid on July 31, 2015. The company Mr. Brauser jointly manages, received $104,932 of aggregated prepayment
penalties and interest.
In November 2014 and March 2015,
the Company had engaged in two private placements each of which precluded the Company from using capital or otherwise issuing
shares of common stock or common stock equivalents below $14,000,000 and $7,140,000, respectively. In order to raise
further capital in the June 2015 private placement, the Company was required to enter into agreements with prior investors
(including Mr. Michael Brauser and Alpha Capital Anstalt, a then 5% holder) modifying these covenants. In connection with
these modifications, Mr. Brauser received 0.0447 shares of common stock and 0.0527 warrants, a company which Mr. Brauser
(the father of the Company’s President) jointly manages received 0.0040 shares and 0.0047 warrants and another company,
Alpha Capital Anstalt, which acted as the lead investor in the November 2014 and March 2015 private placements, received
0.1879 shares of common stock and 0.1018 warrants, at an aggregate cost of approximately $59,600 to the Company.
The Company issued shares of common stock
in connection with a registered public offering on July 29, 2015. This effectively triggered the need to issue additional shares
under the agreements with prior investors (including Mr. Michael Brauser and Alpha Capital Anstalt). Pursuant to the Rules of the
Nasdaq Stock Market, the Company needed to seek stockholder approval before issuing a number of these Waiver shares and such approval
was obtained on October 16, 2015. On August 18, 2015 and November 10, 2015, the Company issued shares of common stock to certain
investors under Waiver agreements. Mr. Brauser received 0.1924 of common stock, a company which Mr. Brauser jointly manages received
0.0171 shares and another company, Alpha Capital Anstalt, which acted as the lead investor in the November 2014 and March 2015
private placements, received 0.4810 shares of common stock, at an aggregate cost of approximately $504,000 to the Company.
On March 27, 2015, Harlan Press notified
the Company of his intention to resign from the Company, effective April 10, 2015. Mr. Press previously served as Chief Financial
Officer of the Company. In connection with the Company’s previously disclosed merger with Vaporin, Inc. in March 2015,
Mr. Press was appointed Vice-President of Finance of the Company. Mr. Press received severance compensation and accrued vacation
in accordance with his employment agreement in the total amount of $159,810, which is divided into equal weekly payments
that ended on January 29, 2016. As of December 31, 2016, $17,503 of accrued expenses was paid to Mr. Press.
During 2015, the Company purchased, 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 15% beneficial ownership interest. During the twelve months ended December 31, 2016,
the Company made approximately $_356,000 or_23% of its purchases of e-liquid from Liquid Science for its continuing operations.
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 in July 2016. Pursuant to the royalty agreement between the Company and Liquid
Science, as consideration for use of a Company trademark, Liquid science paid 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
On August 13, 2015, the Company entered
into consulting agreements with each of GRQ Consultants, Inc. and Grander Holdings, Inc. GRQ Consultants, Inc. will primarily focus
on investor relations and presenting the Company and its business plans, strategy and personnel to the financial community. Grander
Holdings, Inc. will primarily assist the Company in further developing and executing its acquisitions strategy, focusing on the
Company’s “The Vape Store” properties. Mr. Michael Brauser is the Chief Executive Officer of Grander Holdings,
Inc. Pursuant to the agreements, each consultant received an initial fee of $50,000, payable immediately, and $20,000 monthly throughout
the 12-month term of each agreement. The Company made payments of $130,000 each to Grander Holdings, Inc. and GRQ Consultants,
Inc. during the year ended December 31, 2015. The consulting agreements with Grander Holdings, Inc. and GRQ Consultants were terminated
effective February 29, 2016.
Note 15. 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 and added a reportable segment.
On July 31, 2016, the Company sold its wholesale inventory and related operations. The Company has excluded the results for the
wholesale business, as discontinued operations, from the Company’s continuing operations for all periods presented. 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:
|
|
Year
Ended
|
|
|
|
Net
Sales
|
|
|
Segment Gross Profit
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
Vapor
|
|
$
|
6,722,052
|
|
|
$
|
5,252,611
|
|
|
$
|
3,742,443
|
|
|
$
|
3,080,164
|
|
Grocery
|
|
|
3,843,111
|
|
|
|
-
|
|
|
|
1,490,910
|
|
|
|
-
|
|
Total
|
|
$
|
10,565,163
|
|
|
$
|
5,252,611
|
|
|
|
5,233,353
|
|
|
|
3,080,164
|
|
Corporate expenses
|
|
|
|
|
|
|
|
|
|
|
14,095,621
|
|
|
|
25,628,481
|
|
Operating income loss
|
|
|
|
|
|
|
|
|
|
|
(8,862,268
|
)
|
|
|
(22,548,317
|
)
|
Corporate other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
21,136,563
|
|
|
|
30,549,668
|
|
Net income (loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
12,274,295
|
|
|
$
|
8,001,351
|
|
Net loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(1,589,803
|
)
|
|
|
(6,200,598
|
)
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
10,684,492
|
|
|
|
1,800,753
|
|
Deemed Dividend
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(38,068,021
|
)
|
Net income (loss) allocable to common stockholders
|
|
|
|
|
|
|
|
|
|
$
|
10,684,492
|
|
|
$
|
(36,267,268
|
)
|
For the year ended December 31, 2016 depreciation
and amortization was $174,376 and $200,012 for Vapor and Grocery, respectively.
NOTE 16. SUBSEQUENT EVENTS
The Company evaluates events that have
occurred after the balance sheet date but before the consolidated financial statements are issued. Based upon the evaluation, the
Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in
the accompanying consolidated financial statements other than those set forth below.
On February 1, 2017, pursuant to the 2015
Plan, the Company issued a total of 77,000,000,000 options to purchase common stock to certain officers and directors. Twenty-five percent of the options vested upon issuance and the remainder vest equally at the end of the next three
calendar quarters.
On January 31, 2017, the Company entered
into a new employment agreement (the “Employment Agreement”) with the Company’s President and Chief Operating
Officer, Christopher Santi. Pursuant to the Employment Agreement, Mr. Santi will continue to be employed as the Company’s
President and Chief Operating Officer for a three-year term beginning January 30, 2017, and, unless sooner terminated as provided
therein, ending January 29, 2020; provided that such term of employment shall automatically extend for successive one-year periods
unless either party gives at least thirty days’ advance written notice of its intention not to extend the term of employment.
Mr. Santi will receive a base salary of $225,000, increasing to $250,000 and $275,000, respectively, for the second and third years
of the Employment Agreement. Mr. Santi shall be eligible to earn an annual bonus at the discretion of the Company’s Board
of Directors. During the employment period, Mr. Santi’s employment with the Company may be terminated by the Company for
Cause (as defined in the Employment Agreement) or by Mr. Santi at any time and for any reason. In the event that Mr. Santi’s
employment is terminated by the Company for any reason other than for Cause or following a Change of Control (as defined in the
Employment Agreement), then the Company shall pay to Mr. Santi (i) his accrued but unpaid salary and (ii) severance payments for
the applicable Severance Period (as defined in the Employment Agreement). The Employment Agreement also contains customary non-competition,
non-solicitation and confidentiality provisions.
On December 7, 2016, the Company filed
a Tender Offer Statement on Schedule TO pursuant to which the Company offered to purchase up to 32,262,152 Series A warrants for
$0.22 per warrant in cash from all holders of its outstanding Series A warrants. The Tender Offer expired on January 17, 2017.
As a result of the Tender Offer, a total of 10,073,884 Series A warrants were tendered for a total purchase price of approximately
$2.16 million.
The above warrant amounts are not reflective of the stock splits
that occurred during the calendar year 2016.
On March 3, 2017, the Company filed
a Certificate of Amendment to its Certificate of Incorporation (as amended) to effect a change of its corporate name to Healthier
Choices Management Corp.
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 23, 2017.
|
Healthier Choices Management Corp.
|
|
|
|
|
By:
|
/s/
Jeffrey Holman
|
|
|
Jeffrey Holman
|
|
|
Chief Executive Officer
(Principal Executive Officer)
|
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Jeffrey Holman
|
|
Principal Executive Officer
|
|
March 23, 2017
|
Jeffrey Holman
|
|
and Director
|
|
|
|
|
|
|
|
/s/ John A. Ollet
|
|
Chief Financial Officer
|
|
March 23, 2017
|
John A. Ollet
|
|
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/ Clifford J. Friedman
|
|
Director
|
|
March 23, 2017
|
Clifford J. Friedman
|
|
|
|
|
|
|
|
|
|
/s/
Anthony Panariello
|
|
Director
|
|
March 23, 2017
|
Anthony Panariello
|
|
|
|
|
EXHIBIT INDEX
Exhibit
|
|
|
|
Incorporated
by Reference
|
|
Filed or
Furnished
|
No.
|
|
Exhibit
Description
|
|
Form
|
|
Date
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
1.1
|
|
Form of Underwriting Agreement
|
|
S-1
|
|
7/10/15
|
|
1.1
|
|
|
2.1(a)
|
|
Business Sale Offer and Acceptance Agreement, dated April 11, 2016, by and between Vapor Corp. and Ada’s Whole Food Market LLC
|
|
8-K
|
|
5/23/16
|
|
2.1
|
|
|
2.1(b)
|
|
Asset Purchase Agreement, dated July 29, 2016, by and between Vapor Corp. and VPR Brands, L.P.
|
|
8-K
|
|
8/3/16
|
|
1.1
|
|
|
3.1
|
|
Certificate of Incorporation
|
|
10-Q
|
|
11/16/15
|
|
3.1
|
|
|
3.1(a)
|
|
Certificate of Amendment to Certificate of Incorporation
|
|
8-K
|
|
3/03/17
|
|
3.1
|
|
|
3.1(b)
|
|
Certificate of Amendment to Certificate of Incorporation
|
|
S-1
|
|
7/10/15
|
|
3.2
|
|
|
3.1(c)
|
|
Certificate of Amendment to Certificate of Incorporation
|
|
S-4
|
|
12/11/15
|
|
3.2
|
|
|
3.1(d)
|
|
Certificate of Amendment to Certificate of Incorporation
|
|
8-K
|
|
2/2/16
|
|
3.1
|
|
|
3.1(e)
|
|
Certificate of Amendment to Certificate of Incorporation
|
|
8-K
|
|
3/9/16
|
|
3.1
|
|
|
3.1(f)
|
|
Certificate of Amendment to Certificate of Incorporation
|
|
8-K
|
|
6/1/16
|
|
3.1
|
|
|
3.1(g)
|
|
Certificate of Amendment to Certificate of Incorporation
|
|
8-K
|
|
8/5/16
|
|
3.1
|
|
|
3.1(h)
|
|
Certificate of Designation of Series A Preferred Stock
|
|
S-1
|
|
7/10/15
|
|
3.4
|
|
|
3.1(i)
|
|
Certificate of Correction to the Certificate of Designation of Series A Preferred Stock
|
|
8-A12B
|
|
7/27/15
|
|
3.5
|
|
|
3.2
|
|
Bylaws
|
|
8-K
|
|
12/31/13
|
|
3.4
|
|
|
4.1
|
|
Form of Series A Warrant
|
|
S-1
|
|
7/10/15
|
|
4.2
|
|
|
4.2
|
|
Form of Unit Purchase Agreement
|
|
S-1
|
|
7/10/15
|
|
4.3
|
|
|
4.3
|
|
Form of Exchange Warrant
|
|
S-4
|
|
12/11/15
|
|
4.2
|
|
|
10.1
|
|
Form of Securities Purchase Agreement dated January 20, 2015
|
|
8-K
|
|
1/26/15
|
|
10.1
|
|
|
10.2
|
|
Form of Note dated January 20, 2015
|
|
8-K
|
|
1/26/15
|
|
10.2
|
|
|
10.3
|
|
Form of Convertible Note dated January 29, 2015
|
|
8-K
|
|
2/03/15
|
|
10.1
|
|
|
10.4
|
|
Form of Securities Purchase Agreement dated March 3, 2015
|
|
8-K
|
|
3/05/15
|
|
10.1
|
|
|
10.5
|
|
2015 Equity Incentive Plan
|
|
S-1
|
|
6/01/15
|
|
10.28
|
|
|
10.6
|
|
Form of Securities Purchase Agreement dated June 22, 2015
|
|
8-K
|
|
6/25/15
|
|
10.1
|
|
|
10.7
|
|
Form of Security Agreement dated June 22, 2015
|
|
8-K
|
|
6/25/15
|
|
10.2
|
|
|
10.8
|
|
Form of Debenture dated June 22, 2015
|
|
8-K
|
|
6/25/15
|
|
10.3
|
|
|
10.9
|
|
Form of Letter Agreement dated June 19, 2015
|
|
8-K
|
|
6/25/15
|
|
10.4
|
|
|
10.10
|
|
Form of Letter Agreement dated June 19, 2015
|
|
8-K
|
|
6/25/15
|
|
10.5
|
|
|
10.11
|
|
Form of Warrant dated June 22, 2015
|
|
8-K
|
|
6/25/15
|
|
10.6
|
|
|
10.12
|
|
Form of Registration Rights Agreement dated June 22, 2015
|
|
8-K
|
|
6/25/15
|
|
10.7
|
|
|
10.13
|
|
Employment Agreement with Gina Hicks*
|
|
8-K
|
|
9/16/15
|
|
10.1
|
|
|
10.14
|
|
Employment Agreement with Jeffrey Holman*
|
|
10-Q
|
|
11/16/15
|
|
10.1
|
|
|
10.15
|
|
Employment Agreement with Gregory Brauser*
|
|
10-Q
|
|
11/16/15
|
|
10.2
|
|
|
10.16
|
|
Employment Agreement with Christopher Santi*
|
|
8-K
|
|
2/1/17
|
|
10.1
|
|
|
10.17
|
|
Form of Fifth Amended and Restated Series A Standstill Agreement
|
|
|
|
|
|
|
|
Filed
|
10.18
|
|
Executive Service Consulting Agreement, dated April 11, 2016, by and between Gregory Brauser and Vapor Corp.
|
|
8-K
|
|
4/11/16
|
|
10.1
|
|
|
10.19
|
|
Amendment to Vapor Corp. 2015 Equity Incentive Plan
|
|
8-K
|
|
2/8/17
|
|
4.2
|
|
|
21.1
|
|
List of Subsidiaries
|
|
|
|
|
|
|
|
Filed
|
23.1
|
|
Consent of Morrison, Brown, Argiz & Farra, LLC
|
|
|
|
|
|
|
|
Filed
|
23.2
|
|
Consent of Marcum L.L. P
|
|
|
|
|
|
|
|
Filed
|
31.1
|
|
Certification of Principal Executive Officer (302)
|
|
|
|
|
|
|
|
Filed
|
31.2
|
|
Certification of Principal Financial Officer (302)
|
|
|
|
|
|
|
|
Filed
|
32.1
|
|
Certification of Principal Executive Officer and Principal Financial Officer (906)
|
|
|
|
|
|
|
|
Furnished**
|
101.INS
|
|
XBRL Instance Document
|
|
|
|
|
|
|
|
Filed
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
|
|
|
|
Filed
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Link base Document
|
|
|
|
|
|
|
|
Filed
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Link base Document
|
|
|
|
|
|
|
|
Filed
|
101.LAB
|
|
XBRL Taxonomy Extension Label Link base Document
|
|
|
|
|
|
|
|
Filed
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Link base Document
|
|
|
|
|
|
|
|
Filed
|
* Management contract or compensatory plan
or arrangement.
** This exhibit is being furnished rather
than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.
Copies of this report (including the financial
statements) and any of the exhibits referred to above will be furnished at no cost to our stockholders who make a written request
to our Corporate Secretary at 3800 North 28th Way, Hollywood, Florida 33020.
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