Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is traded on the Over-the-Counter Bulletin Board market under the symbol VPCO. For purposes of this Item the existence of limited or sporadic quotations should not of itself be deemed to constitute an established public trading market.
Price Range of Common Stock
The price range per share of common stock presented below represents the highest and lowest sales prices for the Company’s common stock on the over-the-counter Bulletin Board market during each quarter of the two most recent years. The quotations listed below reflect sporadic trading activity in the company’s stock and does not represent the existence of an established public trading market for our securities.
Holders
As of March 31, 2011, there were 1,425 shareholders of record.
Dividends
The Company did not declare or pay cash dividends in either 2010 or 2009. The Company anticipates that for the foreseeable future it will retain any earnings for use in the operation of its business.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Our Management’s Discussion and Analysis should be read in conjunction with our financial statements included in this prospectus.
Forward-Looking Statements
This current report contains forward-looking statements and information relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, our management. When used in this report, the words “believe,” “anticipate,” “expect,” “estimate,” “intend”, “plan” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. These statements reflect management’s current view of us concerning future events and are subject to certain risks, uncertainties and assumptions, including among many others: a general economic downturn; a downturn in the securities markets; federal or state laws or regulations having an adverse effect on proposed transactions that we desire to effect; Securities and Exchange Commission regulations which affect trading in the securities of “penny stocks,”; and other risks and uncertainties. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected. The accompanying information contained herein, including, without limitation, the information set forth under the heading “Management’s Discussion and Analysis and Plan of Operation” identifies important additional factors that could materially adversely affect actual results and performance. You are urged to carefully consider these factors. All forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statement. The terms “Vapor Corp,” “Vapor,” “we,” “us,” “our,” and the “Company” refer to Vapor Corporation and the terms “Smoke Anywhere USA,” and “Smoke” refer to our wholly owned subsidiary Smoke Anywhere USA, Inc.”
Executive Overview
The Company designs, markets, and distribute electronic cigarettes, under the Fifty-One®, Krave®, EZ Smoker®, Smoke Star® and Green Puffer® brands. “Electronic cigarettes” or “e-cigarettes,” are battery-powered products that enable users to inhale nicotine vapor without fire, smoke, tar, ash, or carbon monoxide.
The Company participates directly in the highly competitive and fragmented e-cigarette market, but also faces competition from tobacco companies. Electronic cigarettes are relatively new products and the Company is continually working to introduce its product and brands to customers. The Company believes increased investment in marketing and advertising programs is critical to increasing product and brand awareness and that sales of its innovative and differentiated products are enhanced by knowledgeable salespersons who can convey the value and benefits electronic cigarettes have to offer over traditional tobacco burning cigarettes.
The Company’s business strategy leverages its unique ability to design market and develop multiple e-cigarette brands and to bring those brands to market through its multiple distribution channels. The Company sells its products through its online stores, its direct response television marketing efforts, to retail channels through its direct sales force, and through third-party wholesalers, retailers, and value-added resellers.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make significant estimates and judgments that affect the amounts reported in the consolidated financial statements and the accompanying notes. These items are regularly monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. The estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from the estimates.
Revenue Recognition
Net sales consist primarily of revenue from the sale of electronic cigarettes, replacement cartridges, components for electronic cigarettes and related accessories. We recognize revenue from product sales when the persuasive evidence of an arrangement exists, delivery has occurred and collect-ability is reasonably assured. Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded when the products are shipped and title passes to customers. Retail items sold to customers are made pursuant to sales contracts that generally provide for transfer of both title and risk of loss upon our delivery to the carrier. Return allowances, which reduce product revenue by our best estimate of expected product returns, are estimated using historical experience. Revenue from product sales and services rendered is recorded net of sales taxes.
Income Taxes
We record valuation allowances against our deferred tax assets. Realization of deferred tax assets (such as net operating loss carry-forwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our deferred tax asset, which increases our income tax expense in the period when such determination is made.
In addition, we do not plan to record U.S. income tax expense for foreign earnings that we have determined to be indefinitely reinvested offshore, thus reducing our overall income tax expense. The amount of earnings designated as indefinitely reinvested offshore is based upon the actual deployment of such earnings in our offshore assets and our expectations of the future cash needs of our U.S. and foreign entities. Income tax considerations are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore.
We carefully review all factors that drive the ultimate disposition of foreign earnings determined to be reinvested offshore, and apply stringent standards to overcoming the presumption of repatriation. Despite this approach, because the determination involves our future plans and expectations of future events, the possibility exists that amounts declared as indefinitely reinvested offshore may ultimately be repatriated. For instance, the actual cash needs of our U.S. entities may exceed our current expectations, or the actual cash needs of our foreign entities may be less than our current expectations. This would result in additional income tax expense in the year we determined that amounts were no longer indefinitely reinvested offshore. Conversely, our approach may also result in a determination that accumulated foreign earnings (for which U.S. income taxes have been provided) will be indefinitely reinvested offshore. In this case, our income tax expense would be reduced in the year of such determination.
On an interim basis, we estimate what our effective tax rate will be for the full fiscal year. The estimated annual effective tax rate is then applied to the year-to-date pre-tax income excluding infrequently occurring or unusual items, to determine the year-to-date tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate.
We account for uncertain tax positions on a quarterly basis, we reevaluate the probability that a tax position will be effectively sustained and the appropriateness of the amount recognized for uncertain tax positions based on factors including changes in facts or circumstances, changes in tax law, settled audit issues and new audit activity. Changes in our assessment may result in the recognition of a tax benefit or an additional charge to the tax provision in the period our assessment changes. We recognize interest and penalties related to income tax matters in income tax expense.
Other Contingencies
In the ordinary course of business, we are involved in legal proceedings regarding contractual and employment relationships, product liability claims, trademark rights, and a variety of other matters. We record contingent liabilities resulting from claims against us, including related legal costs, when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. If future adjustments to estimated probable future losses or actual losses exceed our recorded liability for such claims, we would record additional charges as other (income) expense, net during the period in which the actual loss or change in estimate occurred. In addition to contingent liabilities recorded for probable losses, we disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will materially exceed the recorded liability. Currently, we do not believe that any of our pending legal proceedings or claims will have a material impact on our financial position or results of operations.
Results of Operations for the Year ended December 31, 2010 Compared to the Year ended December 31,
During the year ended December 31, 2010, we had $10,917,101 in revenues. This was an increase of $2,959,854 or approximately 37% from the year ended December 31, 2009. Several factors contributed positively to these increases, including the following:
•
Greater consumer demand for our electronic cigarette products;
•
An increase in repeat orders from our distributors and wholesale customers;
•
Residual orders for replacement cartridges from our existing customer base;
•
Positive returns from an increase in our advertising and sales efforts.
Revenues did not increase proportionate to our cost of sales due to the fact that gross margins shrank as a result of a proportionate increase in lower margin sales and lower cost products to value added re-sellers such as wholesalers and distributors, over direct to consumer sales, through our online store and our direct response television marketing. Sales of lower price disposable electronic cigarettes were introduced in 2010, these products sell at a lower price point than the rechargeable models and at smaller margins. We believe the growth of our sales channel mix, represents a maturation of electronic cigarettes as a product category and we believe that future growth will come through an expansion of our distribution network, building towards the 150,000 locations that currently sell tobacco products.
Our operating expenses increased by $3,596,273 or 48.6% for the year ended December 31, 2010 to $11,016,789 from $7,420,516 form the year ended December 31, 2009. Operating expenses consists of: cost of sales and selling, general and administrative expenses.
Our cost of sales increased by $3,018,996 to $6,058,297 for the year ended December 31, 2010. This was an increase of 99%, as compared to operating expenses of $3,039,301 for the year ended December 31, 2009. The increase in our cost of sales is a result of an increase in units purchased for re-sale. For 2010 our cost of goods sold was approximately $5,049,079 or a112% increase in costs of goods sold over the $2,547, 780 we spent on inventory in 2009. The increase is attributable to an increase in the number of units purchased and not the cost of the units purchased, moreover costs per unit decreased year over year due in part to, a product mix that includes lower cost entry level products, efficiencies at our suppliers, industry pricing pressures and negotiations based on volume discounts.
Selling, general and administrative expenses for the year ended December 31, 2010 were $4,855,992 compared to selling general and administrative expenses of $4,381,215 for the year ended December 31, 2009. This increase included $124,214 in professional fees and lobbying costs incurred in our efforts to identify and comply with a yet to be established FDA regulatory framework for electronic cigarette products and a one time payment of, $288,000 paid ratably over 12 months to the former shareholders of Smoke Anywhere for services rendered during the transition period, $216,000 of which was paid in the fiscal year ended December 31, 2010. Excluding these items selling, general and administrative expenses increased by $134,563 or 3.07%.
During the year ended December 31, 2010, we had $0 in research and development costs. This was unchanged from the period ended December 31, 2009.
We had net loss of $28,225 for the year ended December 31, 2010, as compared to net income of $334,731 for the year ended December 31, 2009. The decrease in net income was due to the $340,214 we paid in consulting fees, $216,000 of which was a one time charge against earnings and we expect that the costs associated with our lobbying efforts will decrease and eventually end once the regulatory framework for electronic cigarettes is established.
Liquidity and Capital Resources
During the year ended December 31, 2010, we had total assets of $1,799,132 compared to $1,359,300 of total assets for the year ended December 31, 2009. This was an increase of $439,832 or 32% which is attributable to an increase in inventory, a cash reserve related to product sold and monies held by our credit card payment processor and an increase in accounts receivable as a result of year over year sales growth.
During the year ended December 31, 2010, we had total liabilities of $1,102,130 as compared to total liabilities of $655,823 for the year ended December 31, 2009. This was an increase of $446,307 or 68%. Liabilities for the period include monies due to factories for inventory, advertising and media purchases, insurance, accounting fees, unpaid commissions and unpaid consulting fees.
During the year ended December 31, 2010, we had retained earnings of $289,752 and total shareholders’ equity of $697,002, as compared to year ended December 31, 2009; we had retained earnings surplus of $317,977 and total shareholder’s equity of $703,477 which are decreases of $28,225 and $6,475, respectively.
Our net cash provided by operating activities was $64,893 for the year end December 31, 2010 which included net loss of $28,225, and accounts payable and other accrued liabilities of $444,832. Net cash used in operating activities for the year ended December 31, 2009 was $320,921, which included a net income of $334,731, and accounts payable and other accrued liabilities of $445,896. For the years ended December 31, 2010 and 2009, the acquisition and purchase of inventories in the amount of $97,397 and $816,099, respectively, and accounts payable and other accrued liabilities of $444,832 and $445,896, respectively.
Cash flows from operations were sufficient to fund our requirements during this period.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Item 9.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of December 31, 2010 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Inherent Limitations Over Internal Controls
The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s internal control over financial reporting includes those policies and procedures that:
(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act. Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based and has concluded that its internal control over financial reporting was effective as of December 31, 2010 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the fourth quarter of fiscal 2010, which were identified in connection with management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance.
Directors
The names of our director(s) and certain information about them, as of December 31, 2010, are set forth below:
Executive Officers
The names of our executive officer(s) and certain information about them, as of December 31, 2010, are set forth below:
Kevin Frija
Mr. Kevin Frija is the company’s CEO, CFO and Chairman of the Board of Directors, Mr. Frija is the Company’s sole executive officer and director and has been such, since June 9, 2009. Kevin has over 20 years of experience, particularly in the areas of sourcing, manufacturing, supply chain management, marketing, advertising, and licensing. Prior to Kevin’s involvement in the Company, Kevin operated and Ingear, Inc. a swim and resortwear company based in Miami, Florida. Kevin, currently and on a limited basis assists Ingear in a managerial capacity.
Board Committees
The Board does not have a standing Audit and Finance Committee (the “Audit Committee”), or Compensation Committee and Nominating and Corporate Governance Committee (the “Nominating Committee”). Since the Board is comprised solely of our sole executive officer, we do not have any independent board members nor an independent board.
Director Compensation
We do not currently have any non-employee directors and no additional compensation is currently paid to Mr. Frija in connection with his directorship over and above his employee based compensation.
Code of Ethics
The Company has a code of ethics, “Business Conduct: “Code of Conduct and Policy,” that applies to all of the Company’s employees, including its principal executive officer, principal financial officer and principal accounting officer, and the Board. A copy of this code is attached hereto as an exhibit to this Form 10-k and is available on the Company’s website at www.vapor-corp. The Company intends to disclose any changes in or waivers from its code of ethics by posting such information on its website or by filing a Form 8-K.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Arrangements with Named Executive Officers
Effective October 1, 2009 the Company entered into an employment agreement with Mr. Kevin Frija, PEO, PAO and president of the company. The agreement provides for the payment of $72,000 in annual cash compensation, a one time bonus of $48,000 payable ratably over a 12 month period and an award of 900,000 stock options which shall vest monthly on a pro-rata basis over 12 months, exercisable at $0.45 per share. Mr. Frija shall be eligible to participate in any employee benefit programs, stock option plan or other equity incentive or bonus plan that the company may subsequently adopt.
Outstanding Equity Awards at 2010 Year-End
The following table presents information regarding the outstanding equity awards held by each of the named executive officers as of December 31, 2010, including the vesting dates for the portions of these awards that had not vested as of that date.
Termination of Employment
In the event any of the Named Executive Officers or other covered employees or consultants, as determined by the company, are terminated without cause or if they should resign for “Good Reason,” those options, restricted stock, and restricted stock units outstanding that are not yet vested as of the date of such termination or resignation will vest in full. Generally, “Cause” is defined to include a felony conviction, willful disclosure of confidential information or willful and continued failure to perform his or her employment duties. “Good Reason” includes resignation of employment as a result of a substantial diminution in position or duties, or an adverse change in title or reduction in annual base salary.
Potential Payments Upon Termination or Change in Control
As noted above, the Company does not have employment agreements or severance arrangements with any of its named executive officers, and the Company does not maintain any other plans or arrangements that provide for any named executive officer to receive cash severance or other cash payments in connection with a termination of such officer’s employment with the Company and/or a change in control of the Company.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities authorized for issuance under equity compensation plans.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain beneficial owners. The following table provides the names and addresses of each person known to own directly or beneficially more than 5% of our outstanding Common Stock (as determined in accordance with Rule 13d-3 under the Exchange Act) as of December 31, 2010.
(1)
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and subject to the community property laws where applicable, to the Company’s knowledge the persons named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Unless otherwise indicated, the address for each person is the Company’s address at 3101 W. Hallandale Boulevard #100, Hallandale, Florida 33009.
(2)
On December 31, 20010 there were 60,135,344 shares of our common stock outstanding and no shares of preferred stock issued and outstanding.
(3)
In determining the percent of voting stock owned by a person (a) the numerator is the number of shares of common stock beneficially owned by the person, including shares the beneficial ownership of which may be acquired within 60 days upon the exercise of options or warrants or conversion of convertible securities, and (b) the denominator is the total of (i) the 60,135,344 shares of common stock and (ii) any shares of common stock which the person has the right to acquire within 60 days upon the exercise of options or warrants or conversion of convertible securities. Neither the numerator nor the denominator includes shares which may be issued upon the exercise of any other options or warrants or the conversion of any other convertible securities.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The Company has entered into indemnity agreements its sole officer and director which provides, among other things, that the Company will indemnify such officer or director, under the circumstances and to the extent provided for therein, for expenses, judgments, fines and settlements such officer or director may be required to pay in actions or proceedings which they are or may be made a party by reason of their position as a director, officer or other agent of the Company, and otherwise to the full extent permitted under Nevada law and the Amended and Restated Bylaws of the Company.
We currently contract for warehousing and certain fulfillment services with a company that is jointly owned by our president, Kevin Frija and our shareholder Jacob Levy. Services are rendered on an at will basis and can be cancelled at anytime without notice. We believe that we are receiving more favorable terms than we would be able to receive from an unrelated third party.
Director Independence
The company is currently traded on the FINRA (formerly NASD) Over the Counter Bulletin Board. The OTCBB does not have any director independence requirements. Mr. Frija is presently our sole executive officer and director and as such we do not have an independent board of directors.
We have entered into a letter agreement with our chief executive officer that. For a description of this agreement, see “-Executive Compensation.”
We have indemnification agreements with our current director, the directors of our wholly owned and operating subsidiary, our sole officer and some of our key employees.
Other than as described above under this section “Certain Relationships and Related Transactions,” since the beginning of our last fiscal year, we have not entered into any transactions, nor are there any currently proposed transactions, between us and a related party where the amount involved exceeds, or would exceed, $120,000, and in which any related person had or will have a direct or indirect material interest. We believe the terms of the transactions described above were comparable to terms we could have obtained in arm’s length dealings with unrelated third parties.
Item 14.
Item 14.
Principal Accounting Fees and Services.
AUDIT FEES
The aggregate fees billed by our auditors, Paritz & Co., P.A., for professional services rendered for the audit of our annual financial statements for fiscal year ended December 31, 2010 and review of our interim financial statements for the third quarter of 2010 was approximately $10,039.
The aggregate fees billed by our auditors for professional services rendered for the audit of our annual financial statements for fiscal year ended December 31, 2010 was approximately $6,274.
AUDIT RELATED FEES
During the last two fiscal years, no fees were billed or incurred for assurance or related services by our auditors that were reasonably related to the audit or review of financial statements reported above.
TAX FEES
Tax preparation fees billed for the fiscal years ended December 31, 2009 was approximately $1,980, We have not yet accrued any tax preparation fees for the Year ending December 31, 2010.
ALL OTHER FEES
During the last two fiscal years, no other fees were billed or incurred for services by our auditors other than the fees noted above.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report
(1) All financial statements
Index to Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2010 and December 31, 2009
Consolidated Statements of Operations for the two years ended December 31, 2010 and December 31, 2009
Consolidated Statements of Shareholders’ Equity for the two years ended December 31, 2010 and December 31, 2009
Consolidated Statements of Cash Flows for the two years ended December 31, 2010 and December 31, 2009
Notes to Consolidated Financial Statements
Reports of Paritz & Co., Independent Registered Public Accounting Firm
(2) Financial Statement Schedules
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
(b) Exhibits required by Item 601 of Regulation S-K
The information required by this Item is set forth on the exhibit index that follows the signature page of this report.
Paritz & Company, P.A.
VAPOR CORPORATION
(FORMERLY MILLER DIVERSIFIED CORPORATION)
CONSOLIDATED FINANCIAL STATEMENTS
WITH
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
YEARS ENDED DECEMBER 31, 2010 AND 2009
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
Board of Directors
Vapor Corporation
(formerly Miller Diversified Corporation)
Hallandale, Florida
We have audited the accompanying consolidated balance sheets of Vapor Corporation (formerly Miller Diversified Corporation) (the “Company”) as of December 31, 2010 and 2009 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vapor Corporation (formerly Miller Diversified Corporation), as of December 31, 2010 and 2009 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Hackensack, New Jersey
March 26, 2011
VAPOR CORPORATION
(FORMERLY MILLER DIVERSIFIED CORPORATION)
CONSOLIDATED BALANCE SHEETS
See notes to financial statements
VAPOR CORPORATION
(FORMERLY MILLER DIVERSIFIED CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
See notes to financial statements
VAPOR CORPORATION
(FORMERLY MILLER DIVERSIFIED CORPORATION)
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
See notes to financial statements
VAPOR CORPORATION
(FORMERLY MILLER DIVERSIFIED CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to financial statements
VAPOR CORPORATION
(FORMERLY MILLER DIVERSIFIED CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business description
Vapor Corporation (formerly Miller Diversified Corporation) (“Miller”) is the holding company for its wholly-owned subsidiary Smoke Anywhere U.S.A., Inc. (“Smoke”). The Company markets and distributes personal vaporizers under the Fifty-OneTM, KraveTM, EZ SmokerTM and Green PufferTM brands.
On September 1, 2009 Miller on entered into a definitive agreement with Smoke, a Florida Corporation, whereby Miller acquired 100% of the issued and outstanding shares of Smoke. As a result of the transaction, Smoke became a wholly-owned subsidiary of Miller. On November 5, 2009 Miller and Smoke completed, subject to certain post-closing undertakings, the transaction. For accounting purposes, this transaction is being accounted for as a reverse merger, since the stockholders of Smoke own a majority of the issued and outstanding shares of common stock of Miller and the directors and executive officers of Smoke now own and control in excess of 80% of Miller’s outstanding stock.
The merger has been accounted for as a reverse merger under the acquisition method of accounting because there was a change of control. Accordingly, Smoke is treated as the continuing entity for accounting purposes, whereas the entity formally known as Miller is the legal surviving entity.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period. Actual results could differ from those estimates.
Cash
The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company’s accounts at these institutions may, at times, exceed the Federally insured limits. The Company has not experienced any losses in such accounts.
Inventories
Inventories, consisting of merchandise purchased for resale, are valued at the lower of cost (determined on the first-in, first-out basis) or market (replacement cost).
Revenue recognition
The Company recognizes revenue from product sales or services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured.
Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded when the products are shipped and title passes to customers. Retail sales to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss upon the Company’s delivery to the carrier. Return allowances, which reduce product revenue, are estimated using historical experience. Revenue from product sales and services rendered is recorded net of sales and consumption taxes.
The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases, inducement offers, such as offers for future discounts subject to a minimum current purchase, and other similar offers. Current discount offers, when accepted by the Company’s customers, are treated as a reduction to the purchase price of the related transaction, while inducement offers, when accepted by its customers, are treated as a reduction to purchase price based on estimated future redemption rates. Redemption rates are estimated using the Company’s historical experience for similar inducement offers. Current discount offers and inducement offers are presented as a net amount in “net sales.”
Advertising
The Company expenses advertising as incurred. As of December 31, 2010 and 2009, the Company incurred advertising expenses of $1,830.000 and $970,806, respectively.
New accounting pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on the Company’s accounting and reporting. The Company believes that such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not be material to its financial position, results of operations and cash flows when implemented.
DUE FROM MERCHANT CREDIT CARD PROCESSOR
Due from merchant credit card processor represents monies held in reserve by the Company’s former credit card processors. The funds are expected to be released to the Company no later than June 30, 2011 pending satisfaction of their reserve requirements and expiration of charge backs/refunds from customers.
The income tax expense (benefit) consists of the following:
RELATED PARTY TRANSACTIONS
The Company utilizes the services of an entity that is owned 50% by the CEO of the Company. The entity performs fulfillment services and leasing of warehouse space for the Company at a cost that is approximately equal to what these services would cost from an unrelated third party. Amounts paid to this entity for the year ended December 31, 2010 approximately $65,000.
The Company is obligated under an operating lease for its Florida office which calls for minimum annual rentals of $23,000. The lease expires in December 2011.
Rental expense charged to operations for the year ended December 31, 2010 aggregated approximately $26,000.
CONTINGENCIES, LITIGATION AND GENERAL COMMENTS
The Company is subject to various legal proceedings and claims which have arisen in the ordinary course of its business and have not been fully adjudicated. These actions, when ultimately concluded and determined, will not, in the opinion of management, have a material adverse effect on results of operations or the financial condition of the Company.
Management evaluated all activity of the Company through March 26, 2011 (the issue date of the financial statements). There were no material subsequent events as of that date.
EXHIBIT INDEX
*
Indicates management contract or compensatory plan or arrangement.
**
Filed herewith.
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, this 30th day of March 2011.
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kevin Frija attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
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:
Name
Title
Date
/s/ Kevin Frija
KEVIN FRIJA
Chief Executive Officer, Chief Financial Officer and Director (Principal Executive Officer & Principal Financial Officer)
March 30, 2011