VPOR Vapor Group Inc (CE)

PART I – FINANCIAL INFORMATION

 

Item 1 – Condensed, Consolidated Financial Statements

 

VAPOR GROUP, INC.

CONSOLIDATED BALANCE SHEET

 

		As of			As of
		March 31,			December 31,
		2014			2013
		(Unaudited)			(Audited)
ASSETS
CURRENT ASSETS
Cash		$	61,313			$	48,177
Accounts receivable			145,257				104,856
Loan to shareholder			133,187				282,872
Inventory			172,293				149,732
Other current assets			767,134				358,483
Total current assets			1,279,184				944,120
PROPERTY AND EQUIPMENT, NET			36,952				16,054
OTHER ASSETS
Intangible assets, net			1,300				975
Deferred expenses			44,336				87,896
Total other assets			45,636				88,871
TOTAL ASSETS		$	1,361,772			$	1,049,045
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable		$	244,807			$	-
Accrued interest			105,273				88,375
Accrued expenses			143,161				-
Payroll tax liability			3,691				-
Convertible notes payable			889,620				319,527
Loans payable related party			14,000
Loans payable			180,593				437,910
Sales tax payable			9,197				9,197
TOTAL CURRENT LIABILITIES			1,590,342				855,009
TOTAL LIABILITIES			1,590,342				855,009
STOCKHOLDERS' DEFICIT
Preferred stock, $0.001 par value, 15,000,000 shares authorized,
1,250,000 and 1,000,000 issued and outstanding at March 31, 2014 and December 31, 2013, respectively			1,250				1,000
Common stock, $0.001 par value, 2,000,000,000 shares authorized,
334,381,399 and 270,020,145 issued and outstanding at March 31, 2014 and December 31, 2013, respectively,			334,381				270,020
Additional paid in capital			(326,808	)			109,958
Accumulated deficit			(237,393	)			(186,942	)
TOTAL STOCKHOLDERS' DEFICIT			(228,570	)			194,036
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	1,361,772			$	1,049,045

 

The accompaying notes are an integral part of these financial statements.

 

 

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VAPOR GROUP, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)

 

		For the three months ended
		March 31,
		2014				2013
NET REVENUES		$	966,411			$	-
COST OF REVENUES			320,605				-
GROSS PROFIT			645,806				-
COST AND EXPENSES
Advertising and promotion			245,316				10,001
Commissions			250,301				-
Officers Compensation			-				-
Professional fees			44,927				-
General and administrative expenses			350,789				916
			891,333				10,917
(Loss) from continuing operations			(245,527	)			(10,917	)
OTHER INCOME(EXPENSE)
Interest expense			-				-
Other Income			8,134				3,917
Total other income and (expense)			8,134				3,917
Net (Loss)		$	(237,393	)		$	(7,000	)
Earnings (loss) per share - Basic		$	-			$	-
Weighted average number of shares outstanding			50,451				100

   

The accompanying notes are an integral part of these financial statements.

 

 

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VAPOR GROUP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

 

		For the three months ended
		March 31,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(237,393	)		$	(7,000	)
Adjustments to reconcile increase(decrease) in net assets to cash provided by operating activities:
Depreciation			1,585				-
Changes in operating assets and liabilities:
Inventory			(22,561	)			190,386
Accounts receivable			(40,401	)			-
Other assets			(408,651	)			(19,000	)
Accounts payables			244,808				(77,917	)
Deferred expenses			43,560
Accrued expense			143,161				-
Accrued interest			16,898				(11,930	)
Payroll liabilitiy			3,691				-
NET CASH USED IN OPERATING ACTIVITIES			(255,303	)			74,539
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment			(22,483	)			-
Payments for intangible assets			(325	)
Net cash provided by investing activities			(22,808	)			-
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan to shareholder			(437,910	)			30,005
Proceeds from sale of common stock			-				-
Proceeds from convertible notes			606,622				-
Proceeds from loans payable			163,685
Payment of loans			-				(102,728	)
Net cash used in provided by financing activities			332,397				(72,723	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			54,286				1,816
CASH - BEGINNING OF YEAR			7,027				-
CASH - END OF YEAR		$	61,313			$	1,816
Supplemental disclosure of cash flow information
Cash paid for income taxes		$	-			$	-
Cash paid for interest		$	-			$	-
Non-Cash Financing Activities
Stock issued for payment of debt		$	-			$	-

   

The accompanying notes are an integral part of these financial statements.

 

 

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VAPOR GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

AS OF MARCH 31, 2014

 

Note 1 – Nature and Description of Business

 

Company Background

We were originally incorporated under the laws of Canada on January 15, 1990, under the name "Creemore Star Printing, Inc." and changed our name on June 15, 2003 to "Smitten Press: Local Lore and Legends, Inc." We domesticated in the State of Nevada on May 8, 2007, and we were incorporated as SmittenPress: Local Lore and Legends, Inc. On April 30, 2010, our Board of Directors approved a change in our name to DataMill Media Corp., effective at the close of business on June 30, 2010.

We were a management consulting firm that planned to educate and assist small businesses to improve their management, corporate governance, regulatory compliance and other business processes, with a focus on capital market participation. On October 3, 2011. we closed the Share Exchange Agreement, which resulted in Young Aviation, LLC, (“Young Aviation”), becoming a wholly-owned subsidiary. On November 10, 2011, a majority of our shareholders approved a change in our name to AvWorks Aviation Corp.

 

As a result of acquiring Young Aviation, the Company ceased being a "shell company" as that term is defined in Section 12b-2 of the Securities Exchange Act of 1934.

The acquisition of Young Aviation is classified as a reverse merger and resulted in a change in control at the Company and a new focus on the business of Young Aviation. As the result of the slow growth of such operations, in early 2013 the Company decided to seek other business opportunities.

On September 3, 2013, the majority shareholder of the Company and record holder of 165,000,000 shares of restricted common stock of the Company (61.11% of the 270,020,145 shares of common stock issued and outstanding), and Corporate Excellence Consulting, Inc., a Florida corporation, the holder of 1,000,000 shares of the Series A Preferred Stock of the Company (100% of the issued and outstanding shares of preferred stock of the Company), (collectively, the “Sellers), entered into a share purchase agreement (the “Share Purchase Agreement”) with Dror Svorai, an individual, (the “Buyer”), and the future President and CEO of the Company (post-Merger Agreement as hereinafter described). In accordance with the Share Purchase Agreement, the Sellers agreed to sell and transfer over time the 165,000,000 shares of restricted common stock and the 1,000,000 shares of Series A Preferred Stock of the Company to the Buyer for a total purchase price of $115,000. The Share Purchase Agreement provides that the purchase price be paid on or before February 13, 2014 and that as the purchase price is being paid by the Buyer, the shares of common and preferred stock are to be released pro-rata to the Buyer by the Sellers. The Share Purchase Agreement was completed and paid-in-full within its terms, and the sale and transfer of the common stock and Series A Preferred Stock to the Buyer was finalized on February 20, 2014. The sale and purchase of the 165,000,000 shares of common stock of the Company constitutes 49.34% of the total issued and outstanding shares of the Company of 334,381,399 as of April 11, 2014, and the sale and purchases of the 1,000,000 shares of Series A Preferred Stock constitutes 100% of the total issued and outstanding shares of preferred stock which has over 50% voting control of the Company. As a result, Dror Svorai, an individual, is the controlling shareholder of the Company.

On November 11, 2013, The Board of Directors and stockholders owning or having voting authority for 165,000,000 shares of issued and outstanding Common Stock of the then 270,020,145 shares issued and outstanding, or 61.11% of the voting common stock of the Company, and 1,000,000 shares of Series A Preferred Stock, representing all of the issued and outstanding shares of preferred stock of the Company, voted in favor of an amendment to our Articles of Incorporation to affect a reverse stock split of all of the outstanding shares of Common Stock, at a ratio of one-for-thirty. The reverse split which was pending and would have become effective once FINRA completes its review of the Company’s filings related to this corporate action, was subsequently cancelled by the Board of Directors on March 13, 2014, as filed on Form 8-K on March 18, 2014.

 

 

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Merger and Plan of Reorganization with AvWorks Aviation Corp.

On January 22, 2014, the Company entered into an Agreement of Merger and Plan of Reorganization ("Merger Agreement") by and among the Company and the Vapor Group, Inc., a Florida corporation ("Vapor Group") and the shareholders of Vapor Group (the “Vapor Group Shareholders”), pursuant to which the Company will acquire 100% of the issued and outstanding shares of Vapor Group from the Vapor Group Shareholders in return for the issuance of 750,000,000 shares of its common stock. As a condition to be met prior to the closing of the Merger Agreement, the Company was required to increase its authorized shares of common stock to 2,000,000,000 from 500,000,000, which it did by filing an amendment to its Articles of Incorporation with the State of Florida on January 10, 2014, which amendment was accepted by the State of Florida on January 15, 2014 thereby increasing its authorized shares. The Merger Agreement subsequently became effective as of January 27, 2014 with its filing in the State of Florida.

As a result of the Merger Agreement: (i) the Vapor Group assumed management control of the Company and established its business model and operations as the primary business operations of the Company; (ii) prior management resigned as the sole officer and director of the Company; (iii) Dror Svorai consented to act as a member of the Board of Directors, Chairman of the Board of Directors and as the President/Chief Executive Officer, and Treasurer of the Company; (iv) Yaniv Nahon consented to act as a member of the Board of Directors and as a Vice President/Chief Operating Officer, and Secretary of the Company; and (v) Jorge Schcolnik consented to act as a member of the Board of Directors and Vice President/Chief Financial Officer of the Company. Mr. Eccles did not resign as a result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.

The “Agreement of Merger and Plan of Reorganization”, dated January 22, 2014, is considered a reverse merger, and resulted in a change in control at the Company and new management decided to abandon the former aviation business and focus solely on the business of Vapor Group.

 

Acquisition of American Vaporizer, LLC

 

On March 31, 2014, the Company entered into an Acquisition Agreement by and among the Company, American Vaporizer, LLC, a Delaware limited liability company ("American Vaporizer") and two of the three membership unit holders of American Vaporizer (the “Unit Holders”), pursuant to which the Company will increase its ownership interest in American Vaporizer from its previous twenty-five percent (25%) to fifty-one percent (51%), by acquiring an additional twenty-six membership units of American Vaporizer (the “Membership Units”) from the two Unit Holders. Under Florida law, the Agreement was effective immediately. The result of the Agreement is that American Vaporizer, LLC, becomes a majority-owned subsidiary of the Company.

 

In accordance with the terms and provisions of the Acquisition Agreement: (i) the Company acquired from the Unit Holders an aggregate 26 Membership Units, representing 26% of the one hundred (100) issued and outstanding Membership Units of American Vaporizer; (ii) in exchange thereof, the Company issued to the two Unit Holders an aggregate seven million (7,000,000) shares of its restricted common stock; (iii) the Company assumed a proportionate fifty-one percent (51%) of the assets and liabilities of American Vaporizer. On an ongoing basis, the two Unit Holders retained a forty-nine percent (49%) or forty-nine (49) Membership Units, of American Vaporizer.

 

 

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No change in the names of the officers or their titles and responsibilities or in the membership of the directors of the Company occurred as a result of the Acquisition Agreement, nor are there any changes in the names and titles of the management of American Vaporizer, LLC.

 

In addition, per the Acquisition Agreement, the Company will invest an aggregate total of four hundred and forty thousand dollars ($440,000.00) as working capital into American Vaporizer for the sole purpose of expanding its sales and marketing activity (the “Capital Investment”), which amount includes an initial investment already made of one hundred and four thousand dollars ($104,000), leaving a remaining amount to be invested of three hundred and thirty-six thousand dollars ($336,000) which is to be invested within forty-five (45) days.

 

Additionally, as incremental working capital for expanding American Vaporizer’s business, (a) should American Vaporizer in six (6) months or less from the date of the Agreement, achieve five million dollars ($5,000,000) in gross revenues, VGI shall invest or cause to be invested into it not less than an additional three hundred thousand dollars ($300,000); or (b) should AMV by December 31, 2014, reach ten million dollars ($10,000,000) in gross revenues, VGI shall invest or cause to be invested into AMV an aggregate of not less than an additional seven hundred thousand dollars ($700,000.00 U.S.).

 

The foregoing is a summary of the material terms of the Acquisition Agreement. Additional information on the Acquisition Agreement as well as a full text copy of it, can be found in the “Current Report” filed on form 8-K with the Securities and Exchange Commission on April 16, 2014.

 

About Vapor Group, Inc.

 

The business of Vapor Group, Inc., www.vaporgroup.com, is the designing, developing, manufacturing and marketing high quality, vaporizers and e-cigarette brands which use state-of-the-art electronic technology and specially formulated, “Made in the USA” e-liquids, which may or may not contain nicotine. It offers a range of products with unique e-liquid flavors that is unmatched in our industry. Its products are marketed under the Vapor Group, Total Vapor, Vapor 123, American Smoke and Vapor Products brands which it sells nationwide through distributors, wholesalers and directly to consumers through its own websites and direct response advertising. Total Vapor Inc., Vapor 123 Inc. and Vapor Products, Inc., each a Florida corporation, are each a wholly-owned subsidiary of Vapor Group, Inc, and American Vaporizer, LLC, a Delaware limited liability company, is 51% owned by Vapor Group, Inc. as a result of its acquisition on March 31, 2014.

 

All of our E-cigarettes consist of a long-life battery, a heating element, a cartridge filled with an “e-liquid” and an atomizer which when heated, vaporizes the e-liquid. Because E-cigarettes are not “lit” like regular cigarettes, they don’t create flame, smoke from burning, ash, tar, noxious fumes or leftover “cigarette butts”. As a result, they may be used virtually anywhere.

 

Vapor Group is committed to providing E-cigarettes that are convenient and economical to use, safer and healthier than traditional smoking, and which provide a flavorful, enjoyable smoking experience.

 

 

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We believe that we produce the highest quality e-liquids in the world. Our e-liquids are unsurpassed by any competitor in terms of their purity, high quality, and the steps that we take to protect our customers. All our e-liquids are formulated and mixed exclusively in the U.S. by an FDA registered laboratory by degreed professionals, in accordance with cGMP guidelines (21 CFR part 111). All our e-liquid ingredients are quarantined before use, and must pass an independent, third party laboratory test for purity. All our key ingredients are United States Pharmacopeia (“USP”) grade and kosher. Our lab carefully tests each batch of our e-liquid by high pressure liquid chromatograph to verify that we have the right levels of ingredients. Our high quality is a fundamental pillar of our competitive advantage.

 

Vapor Group, Inc. is committed to responsible business policies and practices, including, but not limited to, the marketing of our products only to persons eighteen years of age or older, not making or avoiding claims about our products’ health benefits, and fulfilling the requirements of all applicable municipal, state and federal laws and regulations.

 

 

About American Vaporizer, LLC

 

American Vaporizer, LLC, (www.americanvapor.com), founded in 2013, is an online marketer of the e-cigarette brand “American Smoke”, (www.americansmoke.com and www.tryamericansmoke.com), and includes other products and accessories including vaporizers designed specifically for the emerging Colorado Cannabis market.   American Vaporizer’s expertise is in the marketing through affiliates of its Electronic Cigarette Starter Kit and cartridges (808d battery). By letting the customer try the Starter Kit free-of-charge and signing the customer to its “Auto-Ship Home Delivery” subscription sales model, American Vaporizer has enjoyed considerable success compiling a large customer base that is currently receiving refills for its Starter Kit, auto-shipped, which provides it with a consistent, continuous revenue flow. American Vaporizer uses a mix of marketing strategies composed of “daily deal” websites, media buys, search, online affiliates, direct response and CPA networks as well as using its own onsite SEO/SEM experts to optimize and drive organic traffic. Customers can purchase products individually or as Starter Kits.

 

 

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Note 2 – Going Concern

 

As reflected in the accompanying consolidated financial statements, the Company had a net loss of $237,393 and a accumulated deficit of $237,393 as of March 31, 2014. In addition, the Company had a working capital deficit of $311,158 at March 31, 2014. These matters raise concern about the Company's ability to continue as a going concern which is dependent on the Company's ability to raise additional capital, further implement its business plan and to generate additional revenues.

 

Management believes that the actions presently being taken provide the opportunity for the Company to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Note 3 – Summary of Significant Accounting Policies

 

This summary of significant accounting policies is provided to assist the reader in understanding the Company's financial statements. The financial statements and notes thereto are representations of the Company's management. The Company's management is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

 

Basis of Presentation - The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for complete financial statements.

 

Use of estimates - In preparing financial statements, management is required to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods presented. Actual results may differ from these estimates.

 

The Company’s financial statements have been prepared as of the balance sheet date, March 31 st 2014. The financial statements were prepared on May 18 th 2014. 

 

 

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Tangible and Intangible Fixed Assets

 

Fixed assets include assets with an estimated useful life greater than one year and an acquisition cost greater than one thousand ($1,000) in respect of tangible assets, five thousands ($5,000) in respect of start-up costs, and one thousand ($1,000) in respect of other intangible assets, on an individual basis.

 

Purchased tangible and intangible fixed assets are stated at cost less accumulated depreciation and provisions, if any.

 

The cost of fixed asset improvements exceeding one thousand ($1,000) for individual tangible assets for the taxation period, and one thousand ($1,000) for individual intangible assets for the taxation period, increases the acquisition cost of the related fixed asset.

 

Depreciation is charged so as to write off the cost of tangible and intangible fixed assets, other than land and assets under construction, over their estimated useful lives, using the straight line   method, on the following basis:

 

Type of assets		Depreciation method (straight line)				Number of years/%
Trademarks		$	1,300				4 (25%)
Property and Equipment		$	36,952				5 (20%)

 

Inventory

 

Purchased inventory is valued at acquisition cost. Acquisition costs doesn’t include the purchase cost and indirect acquisition costs such as customs fees, freight costs and storage fees, commissions, insurance charges and discounts, which are recorded as general and administrative expenses or other income as the case may be. 

Internally developed inventory is stated at cost of direct materials, direct labour costs and other direct expenses are recorded as general and administrative expenses.

 

As of March 31 st 2014, inventory totals $172,293.

 

Receivables

 

Upon origination, receivables are stated at their nominal value. At this time no provisions has been established due to the non-significant amount delinquency accounts.

 

Receivables as of March 31 st 2014 are $145,257.

 

 

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Payables

 

Payables are stated at their nominal value. Payables as of March 31 st 2014 are $244,807.

 

Loans

 

Loans are stated at their nominal value. The portion of loans maturing within one year from the balance sheet date is included in Current Liabilities. For other specific financial liabilities, please see Note 4, below.

 

Borrowing Costs

 

Borrowing costs arising from loans attributable to the acquisition, construction or production of fixed assets are added to the cost of those assets. All other borrowing costs are recognised in the profit and loss account in the period in which they are incurred.

 

Note 4 – Deferred Expense

 

At March 31 st 2014 and December 31, 2013 the Company recorded deferred expense of $44,336 and $87,896.

 

Note 5 – Property & Equipment

 

Furniture and Equipment consisted of the following:

 

		March, 31 s t 2014				December, 31 s t 2013
Copyrigths			15,000.00				15,000.00
Furniture			29,236.00				5,067.00
Total			-				20,067.00
Less Acumilated Depreciation			(7,284.00	)			(4,013.00	)
Property and equipment, net			36,952.00				16,054.00

 

Depreciation expense for the period ended March 31 st 2014 was $3,271 and accumulated as of December 31 st , 2013 was $4,013.

 

 

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Notes 6 – Notes Payable

 

The Company had notes payable totaling $889.620 face value as of March 31 st 2014 and accrued interest for $105,273, each of which are included in aggregate in the “notes payable” total of the Balance Sheet:

 

1.

Investment Firm: $99,500 Note: at various dates in 2013 and 2013, a corporation loaned the Company $99,500 in exchange for a Promissory Note bearing interest at 18% for a term of one year, renewable. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note was $27,872 as of March 31 st 2014.

 

2.

Investor Loan: $73,500 Note: at various dates in 2012 an individual loaned to the Company $40,000 in exchange for a Promissory Note bearing interest at 18% for a term of one year, renewable. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note was $9,158 as of March 31 st 2014.

 

3.

Investment Firm: $113,500 Note: at various dates in 2012 and 2013, a corporation loaned the Company $113,500 in exchange for a Promissory Note bearing interest at 18% for a term of one year, renewable. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note was $27.230 as of March 31 st 2014.

 

4.

Investment Firm: $44,000 Note: on November 15 and December 20, 2012, an individual loaned the Company $44,000 000 in exchange for a Promissory Note bearing interest at 18% for a term of one year, renewable. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note was $16,372 as of March 31 st 2014.

 

5.

Investment Firm: $11,027 Note: at various dates in 2013, a corporation loaned the Company $11,027 in exchange for a Promissory Note bearing interest at 18% for a term of one year, renewable. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note was $3,126 as of March 31 st 2014.

 

6.

Investment Firm: $11,500 Note: at various dates in 2013, a corporation loaned the Company $11,500 in exchange for a Promissory Note bearing interest at 18% for a term of one year, renewable. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note was $1,794 as of March 31 st 2014.

 

7.

Investment Firm: $103,500 Note issued on March 18, 2014 a corporation loaned the Company $103,500 in exchange for a Promissory Note bearing interest at 8% for a term of one year, renewable. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note was $299 as of March 31 st 2014.

 

8.

Investment Firm: $32,500 Note issued on February 7, 2014 a corporation loaned the Company $32,500 in exchange for a Promissory Note bearing interest at 8% for a term of one year, renewable. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note was $376 as of March 31 st 2014.

 

9.

Investment Firm; $83,500 Note issued on February 25, 2014 a corporation loaned the Company $83,500 in exchange for a Promissory Note bearing interest at 8% for a term of one year, renewable. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note was $631 as of March 31 st 2014.

 

10.

Investment Firm: $50,000 Note issued on March 12, 2014 a corporation loaned the Company $50,000 in exchange for a Promissory Note bearing interest at 10% for a term of one year, renewable. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note was $264 as of March 31 st 2014.

 

11.

Investment Firm: $150,000 Note issued on March 18, 2014 a corporation loaned the Company $150,000 in exchange for a Promissory Note bearing interest at 18% for a term of one year, renewable. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note was $975 as of March 31 st 2014.

 

All of the above notes are uncollateralized.

 

As a result of the above, the balance of the notes payable is $889,620 and $319,527 at March 31 st 2014 and December 31 st 2013, respectively and the accrued interest thereon is $105,273 and $88,375 at March 31 st 2014 and December 31 st 2013

 

 

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Note 7 – Stock

 

Preferred stock

 

The Company is authorized to issue 15,000,000 shares of preferred stock at a par value $0.001. 1,250,000 shares were issued as of March 31, 2014 consisting of 1,000,000 shares of Series A Preferred Stock and 250,000 shares of Series B Preferred Stock. 1,000,000 shares of Series A Preferred Stock was issued as of December 31, 2013.

 

Common stock

 

The Company is authorized to issue up to 2,000,000,000 shares of common stock with a par value of $0.001, under terms and conditions established by the Board of Directors. The Company has 334,381,399 issued and outstanding common stock shares as of March 31, 2014 and 270,020,145 as of December 31, 2013, respectively.

 

On September 3, 2013, the majority record holder of 165,000,000 shares of restricted common stock of the Company (61.11% of the 270,020,145 shares of common stock issued and outstanding), and Corporate Excellence Consulting, Inc., a Florida corporation, the holder of 1,000,000 shares of the Series A Preferred Stock of the Company (100% of the issued and outstanding shares of preferred stock of the Company on that date), (collectively, the “Sellers), entered into a share purchase agreement (the “Share Purchase Agreement”) with Dror Svorai, an individual, (the “Buyer”), and the future President and CEO of the Company (post-Merger Agreement as herein described). In accordance with the Share Purchase Agreement, the Sellers agreed to sell and transfer over time the 165,000,000 shares of restricted common stock and the 1,000,000 shares of Series A Preferred Stock of the Company to the Buyer for a total purchase price of $115,000. The Share Purchase Agreement provides that the purchase price be paid on or before February 13, 2014 and that as the purchase price is being paid by the Buyer, the shares of common and preferred stock are to be released pro-rata to the Buyer by the Sellers. The Share Purchase Agreement was completed and paid-in-full within its terms, and the sale and transfer of the common stock and Series A Preferred Stock to the Buyer was finalized on February 20, 2014. The sale and purchase of the 165,000,000 shares of common stock of the Company constitutes 49.34% of the total issued and outstanding shares of the Company of 334,381,399 as of March 31, 2014, and the sale and purchases of the 1,000,000 shares of Series A Preferred Stock constitutes 100% of the total issued and outstanding shares of preferred stock which has over 50% voting control of the Company. As a result, Dror Svorai, an individual, is the controlling shareholder of the Company.

On November 11, 2013, The Board of Directors and stockholders owning or having voting authority for 165,000,000 shares of issued and outstanding Common Stock of the then 270,020,145 shares issued and outstanding, or 61.11% of the voting common stock of the Company, and 1,000,000 shares of Series A Preferred Stock, representing all of the issued and outstanding shares of preferred stock of the Company, voted in favor of an amendment to our Articles of Incorporation to affect a reverse stock split of all of the outstanding shares of Common Stock, at a ratio of one-for-thirty. The reverse split which was pending and would have become effective once FINRA completes its review of the Company’s filings related to this corporate action, was subsequently cancelled by the Board of Directors on March 13, 2014, as filed on Form 8-K on March 18, 2014.

 

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On January 22, 2014, AvWorks Aviation Corp. entered into an Agreement of Merger and Plan of Reorganization ("Merger Agreement") by and among the Company and the Vapor Group, Inc., a Florida corporation ("Vapor Group") and the shareholders of Vapor Group (the “Vapor Group Shareholders”), pursuant to which the Company will acquire 100% of the issued and outstanding shares of Vapor Group from the Vapor Group Shareholders in return for the issuance of 750,000,000 shares of its common stock. As a condition to be met prior to the closing of the Merger Agreement, the Company was required to increase its authorized shares of common stock to 2,000,000,000 from 500,000,000, which it did by filing an amendment to its Articles of Incorporation with the State of Florida on January 10, 2014, which amendment was accepted by the State of Florida on January 15, 2014 thereby increasing its authorized shares. The Merger Agreement subsequently became effective as of January 27, 2014 with its filing in the State of Florida. On March 7, 2014, per a filing of an 8-K dated March 13, 2014, the Company and the other parties to the Merger Agreement amended the Merger Agreement such that:

(a) The Company’s Series B Preferred Stock shall be issued in lieu of the issuance of the consideration of 750,000,000 shares of its Common Stock per the Merger Agreement, post an announced 30:1 reverse split, issuable to the Vapor Group Shareholders under the terms and conditions of the Merger Agreement;

(b) The quantity of shares of Series B Preferred Stock issuable in connection with the Merger Agreement shall be calculated by dividing the 750,000,000 shares of Common Stock by the 100:1 convertibility feature of the Series B Preferred Stock, such that only 7,500,000 shares of Series B Preferred Stock shall be issued as the consideration under the Merger Agreement;

(c) The 7,500,000 shares of Series B Preferred Stock shall remain authorized but unissued until after the effective date of the announced 30:1 reverse split of the Company’s Common Stock, at which time said issuance of Series B Preferred Stock shall be further reduced 30:1 similar to the effect of the reverse split, such that only 250,000 shares of Series B Preferred Stock are issued as the sole consideration to the Vapor Group Shareholders for entering into the Merger Agreement.

(d) Any and all shares of Series B Preferred Stock shall be restricted from any conversion into shares of Common Stock by any holder thereof for a period of eighteen (18) months from the date of their issuance.

On March 13, 2014, the Company announced by filing form 8-K on March 18, 2014, that the aforementioned 30:1 reverse split of the Company’s Common Stock had been cancelled. As a   result and consistent with the intent of the prior announcement amending the terms and conditions of the Merger Agreement, the aforementioned (see “(c)” above) 250,000 shares of Series B Preferred Stock granted in consideration of the Merger Agreement, as calculated “post reverse split” had there been one, shall be issued on the books and records of the Company to the Shareholders of Vapor Group. Said issuance by resolution of the Board of Directors occurred on March 17, 2014.

On March 31, 2014, the Company issued 7,000,000 shares of its restricted common stock to two of the three holders of the membership units of American Vaporizer, LLC, a Delaware limited liability company, in return for an incremental twenty-six percent (26%) of American Vaporizer, LLC, such that the Company currently owns fifty-one percent (51%) of American Vaporizer, LLC, having already owned twenty-five percent (25%) of American Vaporizer, LLC. As a result of the issuance American Vaporizer, LLC becomes a majority-owned subsidiary of the Company.

All the above securities mentioned qualified for exemption under Section 4(2) of the Securities Act since the issuance of securities by us did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the transaction, size of the offering, manner of the offering and number of securities offered. We did not undertake an offering in which we sold a high number of securities to a high number of investors. In addition, these shareholders had the necessary investment intent as required by Section 4(2) since they agreed to and received share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(2) of the Securities Act for this transaction.

 

 

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Note 8 – Legal Matters

 

The Company is not aware of any pending or threatened legal matters that would have a material impact on our financial condition.

Note 9 – Income Tax

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Net deferred tax assets consist of the following components as of March 31st 2014 and December 31st 2013:

		March 31, 2014				December 31, 2013
Deferred Tax Assets – Non-current:
NOL Carryover		$	0				18,135
Less valuation allowance			0				(18,135	)
Deferred tax assets, net of valuation allowance		$	-			$	-

At December 31, 2013, the Company had net operating loss carryforwards of approximately $0 that may be offset against future taxable income from the year 2014 to 2034. No tax benefit has been reported in the December 31, 2013 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.

Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal Income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.

 

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Note 10 – Subsequent Events

 

On April 29, 2014, the Company closed a private placement whereby it entered into a securities purchase agreement, dated April 29, 2014 (the “Purchase Agreement”), with Hanover Holdings I, LLC, (“Hanover”), an affiliate of Magna Group (“Magna”). Pursuant to the Purchase Agreement, the Company sold Hanover four (4) 8% senior convertible promissory notes in aggregate principal amount of $1,342,391.17 million (collectively, the “Convertible Notes”, or individually, a “Convertible Note”) due twelve months from the date of the Convertible Notes’ issuance. The Notes were purchased by Hanover for $1,235,000. Proceeds from the Convertible Notes will be used by the Company to expand its business by, among other things, increasing product inventories for its brands and for expansion of the sales and marketing of its newly acquired subsidiary, American Vaporizer, LLC, including the purchase of additional inventories of product and e-liquids for the “American Smoke” brand of American Vaporizer, LLC.

 

The Convertible Notes matures on April 29, 2015 and accrue interest at an annual rate of 8.0%. Under terms of the private placement, after six months from the Convertible Notes’ issuance, or October 29, 2014, (the “Holding Period”), the Convertible Notes may be converted, in whole or in part, at Hanover’s option, at a fixed conversion price of $0.15 per share of the Company’s common stock (“Common Stock”), and subject to certain limitations and exceptions stated within each of the Convertible Notes. After the Holding Period, Hanover will be entitled to convert any portion of the Convertible Notes to the extent that after such conversion, Hanover (together with its affiliates) would beneficially own no more than 4.99% of the outstanding shares of the Common Stock as of such date. After any conversion, Hanover may not sell more than 20% of the trading volume of the Common Stock during any single trading day.

 

If at any time after the Holding Period, the Common Stock is trading below $0.18, the Company will be considered in default of the Convertible Notes.

 

The Company has the right at any time to redeem all or a portion of the total outstanding amount then remaining under any or all of the Convertible Notes in cash at a 30% premium.

The issuance of the Convertible Notes to Hanover under the Purchase Agreement were exempt from the registration requirements of the Securities Act, pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 506 of Regulation D promulgated under the Securities Act (“Regulation D”). The Company made this determination based on the representations of Hanover in the Purchase Agreement that Hanover is an “accredited investor” within the meaning of Rul e 501 of Regulation D and has access to information about its investment and about the Company.

 

Management has evaluated subsequent events pursuant to the requirements of ASC Topic 855 and has determined that no other material subsequent events exist.

 

 

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Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our consolidated financial statements and their related notes included elsewhere in this report.

 

General

 

Executive Overview

 

The business of Vapor Group, Inc., www.vaporgroup.com, is the designing, developing, manufacturing and marketing high quality, vaporizers and e-cigarette brands which use state-of-the-art electronic technology and specially formulated, “Made in the USA” e-liquids, which may or may not contain nicotine. It offers a range of products with unique e-liquid flavors that is unmatched in our industry. Its products are marketed under the Vapor Group, Total Vapor, Vapor 123, American Smoke and Vapor Products brands which it sells nationwide through distributors, wholesalers and directly to consumers through its own websites and direct response advertising. Total Vapor Inc., Vapor 123 Inc. and Vapor Products, Inc., each a Florida corporation, are each a wholly-owned subsidiary of Vapor Group, Inc, and American Vaporizer, LLC, a Delaware limited liability company, is 51% owned by Vapor Group, Inc. as a result of its acquisition on March 31, 2014.

 

Vapor Group is committed to providing E-cigarettes that are convenient and economical to use, safer and healthier than traditional smoking, and which provide a flavorful, enjoyable smoking experience.

 

We believe that we produce the highest quality e-liquids in the world. Our e-liquids are unsurpassed by any competitor in terms of their purity, high quality, and the steps that we take to protect our customers. All our e-liquids are formulated and mixed exclusively in the U.S. by an FDA registered laboratory by degreed professionals, in accordance with cGMP guidelines (21 CFR part 111). All our e-liquid ingredients are quarantined before use, and must pass an independent, third party laboratory test for purity. All our key ingredients are United States Pharmacopeia (“USP”) grade and kosher. Our lab carefully tests each batch of our e-liquid by high pressure liquid chromatograph to verify that we have the right levels of ingredients. Our high quality is a fundamental pillar of our competitive advantage.

 

Vapor Group, Inc. is committed to responsible business policies and practices, including, but not limited to, the marketing of our products only to persons eighteen years of age or older, not making or avoiding claims about our products’ health benefits, and fulfilling the requirements of all applicable municipal, state and federal laws and regulations.

 

The Company competes in a highly fragmented and competitive market that is still emerging and evolving. Participants include several small competitors as well as entrants owned or financially backed by large tobacco or consumer products companies, all of whom foresee a marketplace that it rapidly growing at the expense of traditional consumer tobacco products. The market in which we compete for e-cigarettes, vaporizers and related accessories is in its infancy. Going forward we anticipate continued intense competition and look forward to continued success as represented by increases in distribution, market share and revenue.

 

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RESULTS OF OPERATIONS

 

THREE MONTHS ENDED MARCH 31, 2014 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2013

 

NET REVENUES - Net revenues for the three months ended March 31, 2014 increased by $966,411 or approximately 100% to $996,411 from $0 in the comparable period in 2013.

 

COST OF SALES - Cost of sales for the three months ended March 31, 2014 increased by $320,605 or approximately 100% to $320,605 from $0 in the comparable period in 2013.

 

GENERAL AND ADMINISTRATIVE - General and administrative costs for the three months ended March 31, 2014 increased by $880,416 or 8165% to $891,333 from $10,917 in the comparable period in 2013.

 

DEPRECIATION - Depreciation for the three months ended March 31, 2014 increased by approximately $1,585 or 100% to $1585 from $0 in the comparable period in 2013.

INTEREST, NET OF INTEREST INCOME - Interest expense for the three months ended March 31, 2014 increased by $0 or approximately 0% to $0 from $0 in the comparable period in 2013.

 

NET INCOME – Net income for the three months ended March 31, 2014 was $8,134 compared to $3,917 for the comparable period in 2013.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At March 31, 2014, we had approximately $61,000 in cash and total current assets of $1,279,184 as of the same date we had approximately $1,590,342 of current liabilities and a working capital deficit of approximately $311,158.

 

Our ability to continue our business activities as a going concern including continuation of our existing business service lines and funding our strategic growth plans will depend upon, among other things, raising capital from third parties or receiving net cash flows from our existing business operations.

 

The Company plans to meet its financial obligations and commitments for the next 12 months by increasing its revenues and gross margin and simultaneously raising additional capital in the form of debt or equity instruments in order to continue to increase inventories and accelerate our turn on inventory. We are uncertain whether we will be able to obtain additional financing, or if we are able to obtain financing that it will be on commercially favorable terms to us. There can be no assurance that we will be able to obtain financing on terms that are economically viable to us.

 

 

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To the extent that we raise additional capital through the sale of equity or convertible debt securities, dilution of the interests of existing shareholders may occur. If we raise additional funds through the issuance of debt securities, these securities may have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on our operations. Regardless of whether our assets prove to be adequate to meet our operational needs, we may seek to compensate providers of services by issuance of stock in lieu of cash, which may also result in dilution to existing shareholders.

 

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4 – Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this quarterly report, our President and Treasurer (the "Certifying Officer") conducted evaluations of our disclosure controls and procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, (the “1934 Act”), the term "disclosure controls and procedures" means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including the Certifying Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Certifying Officer has concluded that our disclosure controls and procedures are not effective to ensure that all material information is recorded, processed, summarized and reported by our management on a timely basis in order to comply with our disclosure obligations under the 1934 Act, and the rules and regulations promulgated there-under.

 

Based upon this evaluation the Certifying Officer has concluded that there were no material weaknesses in our disclosure controls and procedures that existed as of the end of the period covered by this quarterly report:

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rule 13a-15(f) under the 1934 Act. The Company's internal control over financial reporting is designed to provide reasonable assurance to the Company's management and board of directors regarding the preparation and fair presentation of published financial statements and the reliability of financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of the Company's internal control over financial reporting as of March 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated Framework. Based on our assessment, we believe that, as of March 31, 2014, the Company's internal control over financial reporting are effective based on those criteria. This quarterly report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this quarterly report. Further, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

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PART II – OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEEDINGS

 

In the ordinary course of business, we may from time to time be involved in various threatened or actual legal proceedings which the company will vigorously defend. The litigation process is inherently uncertain and it is possible that the outcome of such matters may result in a material adverse effect on the financial condition and/or results of operations of the Company. In the opinion of the management, matters currently pending or threatened against the Company are not expected to result in a material adverse effect on our financial position or result of operations.

 

ITEM 1A – RISK FACTORS

 

You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to our securities. The statements contained in or incorporated herein that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, you may lose all or part of your investment.

 

R isks Relating to Our Business

 

WE RELY UPON KEY MEMBERS OF OUR MANAGEMENT TEAM AND OTHER KEY PERSONNEL AND A LOSS OF KEY PERSONNEL COULD PREVENT OR SIGNIFICANTLY DELAY THE ACHIEVEMENT OF OUR GOALS.

 

Our success will depend to a large extent on the abilities and continued services of key members of our management team including our President and CEO, and Vice President and COO, as well as other key personnel. The loss of these key members of our management team or other key personnel could prevent or significantly delay the implementation of our business plan, research and development and marketing efforts. If we continue to grow, we will need to add additional management and other personnel. Our success will depend on our ability to attract and retain highly skilled personnel and our efforts to obtain or retain such personnel may not be successful.

 

 

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WE HAVE LIMITED RESOURCES AND WILL NEED ADDITIONAL FINANCING IN ORDER TO EXECUTE OUR BUSINESS PLAN AND CONTINUE AS A GOING CONCERN.

 

We have limited resources and our cash on hand may not be sufficient to satisfy our cash requirements during the next twelve months. The financial statements included in this annual report do not include any adjustment to asset values or recorded amounts of liability that might be necessary in the event we are unable to continue as a going concern. If we are in fact unable to continue as a going concern, shareholders may lose their entire investment in our common stock.

 

IF WE ARE UNABLE TO MANAGE ANY FUTURE GROWTH EFFECTIVELY, OUR PROFITABILITY AND LIQUIDITY COULD BE ADVERSELY AFFECTED.

 

Our growth is expected to place significant strain on our limited research and development, sales and marketing, operational and administrative resources. To manage any future growth, we must continue to improve our operational and financial systems and expand, train and manage our employee base. We also need to improve our supply chain management and quality control operations and hire and train new employees, including sales and customer service representatives and operations managers. If we are unable to manage our growth effectively, our profitability and liquidity could be adversely affected.

 

IF OUR DEVELOPED TECHNOLOGY OR TECHNOLOGY UNDER DEVELOPMENT DOES NOT ACHIEVE MARKET ACCEPTANCE, PROSPECTS FOR OUR GROWTH AND PROFITABILITY WOULD BE LIMITED.

 

Our future success depends on market acceptance of the technology used in our products and our technology currently under development. Although adoption of e-cigarettes has grown in recent years, adoption of such products has only recently begun, is still limited and faces significant challenges. Potential customers may be reluctant to adopt e-cigarette products as an alternative to traditional smoking because of its higher initial cost or perceived risks relating to its novelty, reliability, usefulness, quality and cost-effectiveness when compared to other established smoking products on the market. Changes in economic and market conditions may also affect the marketability of e-cigarette products. Even if e-cigarette products continue to achieve performance improvements and cost reductions, limited customer awareness of their benefits, lack of widely accepted standards governing them and customer unwillingness to adopt their use in favor of entrenched solutions could significantly limit the demand for such products and adversely impact our results of operations.

 

E-CIGARETTE PRODUCTS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGES. IF WE FAIL TO ACCURATELY ANTICIPATE AND ADAPT TO THESE CHANGES, THE PRODUCTS WE SELL WILL BECOME OBSOLETE, CAUSING A DECLINE IN OUR SALES AND PROFITABILITY.

 

E-cigarette products are subject to rapid technological changes that often cause product obsolescence. Companies within the e-cigarette industry are continuously developing new products with heightened performance and functionality. This puts pricing pressure on existing products and constantly threatens to make them, or causes them to be, obsolete. If we fail to accurately anticipate the introduction of new technologies, we may possess significant amounts of obsolete inventory that can only be sold at substantially lower prices and profit margins than we anticipated. In addition, if we fail to accurately anticipate the introduction of new technologies or are unable to develop the planned new technologies, we may be unable to compete effectively due to our failure to offer products most demanded by the marketplace. If any of these failures occur, our sales, profit margins and profitability will be adversely affected.

 

 

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WE MAY BE SUBJECT IN THE FUTURE TO BURDENSOME GOVERNMENTAL REGULATION.

 

The e-cigarette industry is relatively new and the manufacture and distribution of its products is not currently subject to consistent or significant amounts of governmental regulation. Over time, we may become subject to burdensome and costly governmental regulation at the municipal, state and federal levels. The cost of compliance with such regulation may be costly, and may negatively impact our future revenues, profits, and the manner in which we distribute and market our products.

 

IF WE ARE UNABLE TO INCREASE PRODUCTION CAPACITY FOR OUR PRODUCTS IN A COST EFFECTIVE AND TIMELY MANNER, WE MAY INCUR DELAYS IN SHIPMENT AND OUR REVENUES AND REPUTATION IN THE MARKETPLACE COULD BE HARMED.

 

An important part of our business plan is the expansion of production capacity for our products. In order to fulfill anticipated demand for our products, we invest in capacity in advance of actual customer orders, typically based on preliminary, non-binding indications of future demand. As customer demand for our products changes, we must be able to adjust our production capacity to meet demand while keeping costs down. Uncertainty is inherent within our facility and capacity expansion, and unforeseen circumstances could offset the anticipated benefits, disrupt our ability to provide products to our customers and impact product quality.

 

Our ability to successfully increase production capacity in a cost effective and timely manner will depend on a number of factors, including the following: (i) our ability to transition production in our manufacturing facility; (ii) the ability of contract manufacturers to allocate more of their existing capacity to us or their ability to add new capacity quickly; (iii) the ability of any future contract manufacturers to successfully implement our manufacturing processes; (iv) the availability of critical components and subsystems used in the manufacture of our products; (v) our ability to effectively establish adequate management information systems, financial controls and supply chain management and quality control procedures; and (vi) the occurrence of equipment failures, power outages, environmental risks or variations in the manufacturing process.

 

If we are unable to increase production capacity for our products in a cost effective and timely manner while maintaining adequate quality, we may incur delays in shipment or be unable to meet increased demand for our products which could harm our revenues and operating margins and damage our reputation and our relationships with current and prospective customers. Conversely, due to the proportionately high fixed cost nature of our business (such as facility expansion costs), if demand does not increase at the rate forecasted, we may not be able to reduce manufacturing expenses or overhead costs at the same rate as demand decreases, which could also result in lower margins and adversely impact our business and results of operations.

 

 

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WE INTEND TO ASSEMBLE AND MANUFACTURE CERTAIN OF OUR PRODUCTS AND OUR SALES, RESULTS OF OPERATIONS AND REPUTATION COULD BE MATERIALLY ADVERSELY AFFECTED IF THERE IS A DISRUPTION AT OUR ASSEMBLY AND MANUFACTURING FACILITY.

 

Our assembly and manufacturing operations for our products is based in Davie, Florida. The operation of this facility involves many risks, including equipment failures, natural disasters, industrial accidents, power outages and other business interruptions. We could incur significant costs to maintain compliance with, or due to liabilities under, environmental laws and regulations, the violation of which could lead to significant fines and penalties. Although we intend to carry business interruption insurance and third-party liability insurance to cover certain claims in respect of personal injury or property or environmental damage arising from accidents on our properties or relating to our operations, any existing insurance coverage may not be sufficient to cover all risks associated with our business. As a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our business, financial condition and results of operations. Additionally, any interruption in our ability to assemble, manufacture or distribute our products could result in lost sales, limited revenue growth and damage to our reputation in the market, all of which would adversely affect our business.

 

Additionally, we intend to rely on arrangements with independent shipping companies, such as United Parcel Service, Inc. and Federal Express Corp., for the delivery of certain components and subsystems from vendors and products to our customers in both the United States and abroad. The failure or inability of these shipping companies to deliver components, subsystems or products timely, or the unavailability of their shipping services, even temporarily, could have a material adverse effect on our business. We may also be adversely affected by an increase in freight surcharges due to rising fuel costs or added security.

 

WE MAY UTILIZE A CONTRACT MANUFACTURER TO MANUFACTURE CERTAIN OF OUR PRODUCTS AND ANY DISRUPTION IN THIS RELATIONSHIP MAY CAUSE US TO FAIL TO MEET OUR CUSTOMERS’ DEMANDS AND MAY DAMAGE OUR CUSTOMER RELATIONSHIPS.

 

Although we intend to assemble and manufacture certain of our products, we may depend on a third party contract manufacturer to manufacture a portion of our products elsewhere. This manufacturer will need to provide the necessary facilities and labor to manufacture these products, which may be primarily high volume products. Our reliance on a contract manufacturer involves certain risks, including the following: (i) lack of direct control over production capacity and delivery schedules; (ii) risk of equipment failures, natural disasters, industrial accidents, power outages and other business interruptions; (iii) lack of direct control over quality assurance and manufacturing yield; and (iv) risk of loss of inventory while in transit.

 

If a potential contract manufacturer were to terminate its arrangements with us or fail to provide the required capacity and quality on a timely basis, we would experience delays in the manufacture and shipment of our products until alternative manufacturing services could be contracted or offsetting internal manufacturing processes could be implemented. Any significant shortages or interruption may cause us to be unable to timely deliver sufficient quantities of our products to satisfy our contractual obligations and particular revenue expectations. Moreover, even if we timely locate substitute products and their price materially exceeds the original expected cost of such products, then our margins and results of operations would be adversely affected.

 

To qualify a contract manufacturer, familiarize it with our products, quality standards and other requirements and commence volume production may be a costly and time-consuming process. If we are required to choose a contract manufacturers for any reason, our revenue, gross margins and customer relationships could be adversely affected.

 

 

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OUR INDUSTRY IS HIGHLY COMPETITIVE AND IF WE ARE NOT ABLE TO COMPETE EFFECTIVELY, INCLUDING AGAINST LARGER E-CIGARETTE MANUFACTURERS WITH GREATER RESOURCES, OUR PROSPECTS FOR FUTURE SUCCESS WILL BE JEOPARDIZED.

 

Our industry is highly competitive. We face competition from both traditional smoking technologies provided by numerous vendors as well as from e-cigarette products provided by a growing roster of industry participants. The e-cigarette industry is characterized by rapid technological change, short product lifecycles and frequent new product introductions, and a competitive pricing environment. These characteristics increase the need for continual innovation and provide entry points for new competitors as well as opportunities for rapid market share shifts.

 

Currently, we view our primary competition to be from large, established companies in the traditional e-cigarette industry. Certain of these companies also provide, or have undertaken initiatives to develop, e-cigarette products as well as other similar or related products. Additionally, we face competition from a fragmented universe of smaller niche or low-cost offshore providers of e-cigarette products. We also anticipate that larger e-cigarette manufacturers may seek to compete with us by introducing products similar to ours.

 

Some of our current and future competitors are larger companies with greater resources to devote to research and development, manufacturing and marketing, as well as greater brand name recognition. Some of our more diversified competitors could also compete more aggressively with us by subsidizing losses in their e-cigarette businesses with profits from other lines of business. Moreover, if one or more of our competitors or suppliers were to merge with one another, the change in the competitive landscape could adversely affect our customer, channel or supplier relationships, or our competitive position. Additionally, any loss of a key channel partner, whether to a competitor or otherwise, could severely and rapidly damage our competitive position. To the extent that competition in our markets intensifies, we may be required to reduce our prices in order to remain competitive. If we do not compete effectively, or if we reduce our prices without making commensurate reductions in our costs, our net sales and profitability, and our future prospects for success, may be harmed.

 

IF WE DO NOT PROPERLY ANTICIPATE THE NEED FOR CRITICAL RAW MATERIALS AND COMPONENTS, WE MAY BE UNABLE TO MEET THE DEMANDS OF OUR CUSTOMERS, WHICH COULD REDUCE OUR COMPETITIVENESS, CAUSE A DECLINE IN OUR MARKET SHARE AND HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.

 

We depend on our suppliers for certain standard components as well as custom components critical to the manufacture of our products. We currently rely on a select number of suppliers for the components, including “e-liquids”, used in the production of our products. We depend on our vendors to supply such materials in a timely manner in adequate quantities and consistent quality and at reasonable costs. Should any of our suppliers be unable to fulfill a order for us, finding a suitable alternative supply of the required component that meets our strict specifications and obtaining them in needed quantities may be a time-consuming process, and we may not be able to find an adequate alternative source of supply at an acceptable cost. Any significant interruption in the supply of these raw materials and components could have a material adverse effect on our results of operations.

 

 

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OUR FINANCIAL RESULTS MAY VARY SIGNIFICANTLY FROM PERIOD-TO-PERIOD DUE TO UNPREDICTABLE SALES CYCLES IN CERTAIN OF THE MARKETS INTO WHICH WE SELL OUR PRODUCTS, AND CHANGES IN THE MIX OF PRODUCTS WE SELL DURING A PERIOD, WHICH MAY LEAD TO VOLATILITY IN OUR STOCK PRICE.

 

The size and timing of our potential revenue from sales to our customers is difficult to predict and is market dependent. Our sales efforts will often require us to educate our customers about the use and benefits of our products, including their technical and performance characteristics. We intend to spend substantial amounts of time and money on our sales efforts and there is no assurance that these investments will produce any sales within expected time frames or at all. Given the potentially large size of purchase orders for our products, particularly in the retail distribution market, the loss of or delay in the signing of a customer order could significantly reduce our revenue in any period. Our revenues in each period may also vary significantly as a result of purchases, or lack thereof, by potential significant customers. Because most of our operating and capital expenses will be incurred based on the estimated number of product purchases and their timing, they are difficult to adjust in the short term. As a result, if our revenue falls below our expectations or is delayed in any period, we may not be able to proportionately reduce our operating expenses or manufacturing costs for that period, and any reduction of manufacturing capacity could have long-term implications on our ability to accommodate future demand.

 

Our profitability from period-to-period may also vary significantly due to the mix of products that we may sell in different periods. Consequently, sales of individual products may not necessarily be consistent across periods, which could affect product mix and cause gross and operating profits to vary significantly. As a result of these factors, we believe that quarter-to-quarter comparisons of our operating results cannot necessarily be relied upon to be meaningful and that these comparisons cannot be relied upon as indicators of future performance.

 

OUR PRODUCTS MAY CONTAIN DEFECTS THAT COULD REDUCE SALES, RESULT IN COSTS ASSOCIATED WITH THE RECALL OF THOSE ITEMS AND RESULT IN CLAIMS AGAINST US.

 

The manufacture of our products involves highly complex processes. Despite testing by us and our customers, defects have been and could be found in our existing or future products. These defects may cause us to incur significant warranty, support and repair costs, and costs associated with recall may divert the attention of our engineering personnel from our product development efforts and harm our relationships with customers and our reputation in the marketplace. We generally provide lifetime warranty on our products, and such warranty may require us to repair, replace or reimburse the purchaser for the purchase price of the product, at the customer’s discretion. Moreover, even if our products meet standard specifications, our customers may attempt to use our products in applications they were not designed for, resulting in product failures and creating customer dissatisfaction. These problems could result in, among other things, a delay in the recognition or loss of revenues, loss of market share or failure to achieve market acceptance. Defects, integration issues or other performance problems in our products could also result in personal injury or financial or other damages to our customers for which they might seek legal recourse against us. We may be the target of product liability lawsuits and could suffer losses from a significant product liability judgment against us if the use of our products at issue is determined to have caused injury. A significant product recall or product liability case could also result in adverse publicity, damage to our reputation and a loss of customer confidence in our products and adversely affect our results of operations.

 

 

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IF WE ARE UNABLE TO OBTAIN AND PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR ABILITY TO COMMERCIALIZE OUR PRODUCTS COULD BE SUBSTANTIALLY LIMITED.

 

As of the date of this Annual Report, we have filed for the registration and protection of certain trademarks in the U.S. Our applications may not be granted. Because trademarks involve complex legal, technical and factual questions, the issuance, scope, validity and enforceability of them cannot be predicted with certainty. Competitors may develop products similar to our products that do not conflict with our trademark rights. Others may challenge our trademarks and, as a result, any of our trademarks could be narrowed or invalidated. In some cases, we may rely on confidentiality agreements or trade secret protections to protect our proprietary technology. Such agreements, however, may not be honored and particular elements of our proprietary technologies may not qualify as protectable trade secrets under applicable law. In addition, others may independently develop similar or superior technology, and in the absence of applicable prior patents, we would have no recourse against them.

 

OUR BUSINESS MAY BE IMPAIRED BY CLAIMS THAT WE, OR OUR CUSTOMERS, INFRINGE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.

 

Our industry is characterized by vigorous protection and pursuit of intellectual property rights. These traits may result in significant and often protracted and expensive litigation. In addition, we may inadvertently infringe on patents or rights owned by others and licenses might not be available to us on reasonable or acceptable terms or at all. Litigation to determine the validity of patents, trademarks or claims by third parties of infringement of patents, trademarks or other intellectual property rights could result in significant legal expense and divert the efforts of our personnel and management, even if the litigation results in a determination favorable to us. Third parties have and may in the future attempt to assert infringement claims against us, or our wholesale customers, with respect to our products. In the event of an adverse result in such litigation, we could be required to pay substantial damages; stop the manufacture, use and sale of products found to be infringing; incur asset impairment charges; discontinue the use of processes found to be infringing; expend significant resources to develop non-infringing products or processes; or obtain a license to use third party technology and whether or not the result is adverse to us, we may have to indemnify our wholesale customers if they were brought into the litigation.

 

FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS AND OUR STOCK PRICE.

We are subject to Section 404 of the Sarbanes-Oxley Act of 2002, which requires an annual management assessment of the effectiveness of our internal control over financial reporting. Effective internal controls are necessary for us to produce reliable financial reports, and failure to achieve and maintain effective internal controls over financial reporting could cause investors to lose confidence in our operating results, and could have a material adverse effect on our business and on the price of our common stock. Because of our status as a smaller reporting company registrant as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the independent registered public accounting firm auditing our financial statements has not been required to attest to, and report on, the effectiveness of our internal control over financial reporting.

 

 

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IF WE ARE UNABLE TO ATTRACT, HIRE AND RETAIN QUALIFIED SALES AND MANAGEMENT PERSONNEL, THE COMMERCIAL OPPORTUNITY FOR OUR PRODUCTS AND SERVICES MAY BE DIMINISHED.

 

Currently, our sales force consists of three full-time sales representatives. We may not be able to attract, hire, train and retain qualified sales and sales management personnel. If we are not successful in our efforts to maintain and grow a qualified sales force, our ability to independently market and promote our products may be impaired. In such an event, we would likely need to establish collaboration, co-promotion, distribution or other similar arrangement to market and sell our products. However, we might not be able to enter into such an arrangement on favorable terms, if at all. Even if we are able to effectively maintain a qualified sales force, our sales force may not be successful in commercializing our products and services

 

IF WE FAIL TO ATTRACT AND RETAIN KEY PERSONNEL, OR TO RETAIN OUR EXECUTIVE MANAGEMENT TEAM, WE MAY BE UNABLE TO SUCCESSFULLY DEVELOP OR COMMERCIALIZE OUR PRODUCTS.

 

Our success depends in part on our continued ability to attract, retain and motivate highly qualified managerial personnel. We are highly dependent upon our executive management team. The loss of the services of any one or more of the members of our executive management team could delay or prevent the successful completion of some of our development and commercialization objectives.

 

Recruiting and retaining qualified sales and marketing personnel is critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our development and commercialization strategy. Our consultants and advisors may also be employed by companies and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

 

IF THE ESTIMATES THAT WE MAKE, OR THE ASSUMPTIONS UPON WHICH WE RELY, IN PREPARING OUR FINANCIAL STATEMENTS PROVE INACCURATE, OUR FUTURE FINANCIAL RESULTS MAY VARY FROM EXPECTATIONS.

 

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, stockholders’ equity, revenues and expenses, the amounts of charges accrued by us and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We cannot assure you, therefore, that there may not be material fluctuations between our estimates and the actual results.

 

 

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THE CURRENT GLOBAL ECONOMIC DOWNTURN OR RECESSION MAY NEGATIVELY AFFECT OUR BUSINESS.

 

The current global economic downturn or recession could negatively affect our sales because many consumers consider the purchase of our products and services as discretionary. We cannot predict the timing or duration of the economic slowdown or recession or the timing or strength of a subsequent recovery, worldwide, or in the specific end markets we serve. If the market for our products and services significantly deteriorates due to the economic situation, our business, financial condition or results of operations could be materially and adversely affected.

 

Risks Related To Our Common Stock

 

OUR COMMON STOCK IS CLASSIFIED AS A “PENNY STOCK” AS THAT TERM IS GENERALLY DEFINED IN THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, TO MEAN EQUITY SECURITIES WITH A PRICE OF LESS THAN $5.00. OUR COMMON STOCK WILL BE SUBJECT TO RULES THAT IMPOSE SALES PRACTICE AND DISCLOSURE REQUIREMENTS ON BROKER-DEALERS WHO ENGAGE IN CERTAIN TRANSACTIONS INVOLVING A PENNY STOCK.

 

We will be subject to the penny stock rules adopted by the Securities and Exchange Commission that require brokers to provide extensive disclosure to its customers prior to executing trades in penny stocks. These disclosure requirements may cause a reduction in the trading activity of our common stock, which in all likelihood would make it difficult for our stockholders to sell their securities.

 

Rule 3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions which are not available to us. It is likely that our shares will be considered to be penny stocks for the immediately foreseeable future. This classification severely and adversely affects any market liquidity for our common stock.

 

For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

 

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The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth:

 

●	The basis on which the broker or dealer made the suitability determination, and

 

●	That the broker or dealer received a signed, written agreement from the investor prior to the transaction.

 

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

 

FINRA SALES PRACTICE REQUIREMENTS MAY LIMIT A STOCKHOLDER'S ABILITY TO BUY AND SELL OUR STOCK.

The Financial Industry Regulatory Authority ("FINRA") has adopted rules that relate to the application of the Commission's penny stock rules in trading our securities and require that a broker/dealer have reasonable grounds for believing that the investment is suitable for that customer, prior to recommending the investment. Prior to recommending speculative, low priced securities to their non-institutional customers, broker/dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, the FINRA believes that there is a high probability that speculative, low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker/dealers to recommend that their customers buy our common stock which may have the effect of reducing the level of trading activity and liquidity of our common stock. Further, many brokers charge higher transactional fees for penny stock transactions. As a result, fewer broker/dealers may be willing to make a market in our common stock thereby reducing a shareholder's ability to resell shares of our common stock.

IF WE FAIL TO COMPLY WITH THE RULES UNDER THE SARBANES-OXLEY ACT RELATED TO ACCOUNTING CONTROLS AND PROCEDURES OR IF MATERIAL WEAKNESSES OR OTHER DEFICIENCIES ARE DISCOVERED IN OUR INTERNAL ACCOUNTING PROCEDURES, OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY.

 

Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments. We are in the process of documenting and testing our internal control procedures, and we may identify material weaknesses in our internal control over financial reporting and other deficiencies. If material weaknesses and deficiencies are detected, it could cause investors to lose confidence in our Company and result in a decline in our stock price and consequently affect our financial condition. In addition, if we fail to achieve and maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly. In addition, we cannot be certain that additional material weaknesses or significant deficiencies in our internal controls will not be discovered in the future.

 

 

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OUR COMMON STOCK MAY BE THINLY TRADED, LIQUIDITY LIMITED, AND WE MAY BE UNABLE TO OBTAIN LISTING OF OUR COMMON STOCK ON A MORE LIQUID MARKET .

 

Our common stock is quoted on the OTC which provides significantly less liquidity than a securities exchange (such as the American or New York Stock Exchange) or an automated quotation system (such as the Nasdaq National Market or SmallCap Market). There is uncertainty that we will ever be accepted for a listing on an automated quotation system or a securities exchange.

 

Often there is currently a limited volume of trading in our common stock, and on many days there has been no trading activity at all. The purchasers of shares of our common stock may find it difficult to resell their shares at prices quoted in the market or at all.

 

Certain stockholders control a large percentage of our common stock and Series A Preferred Shares and therefore the current stockholders will continue to control the Company, and their interests may be different from yours, as a result, you may have no effective voice in our management.

 

The Company’s President and CEO and Vice President and COO will retain control of the Company as a result of their ownership of the Series A and Series B Preferred Stock. Management’s interests may be different from yours, and as a result, the shareholders may have no effective voice in managing the affairs of the Company.

 

FUTURE SALES OF SHARES OF OUR COMMON STOCK MAY DECREASE THE PRICE FOR SUCH SHARES.

 

Actual sales, or the prospect of sales by our shareholders, may have a negative effect on the market price of the shares of our common stock. We may also register certain shares of our common stock that are subject to outstanding convertible securities, if any, or reserved for issuance under our stock option plans, if any. Once such shares are registered, they can be freely sold in the public market upon exercise of the options. If any of our shareholders either individually or in the aggregate causes a large number of securities to be sold in the public market, or if the market perceives that these holders intend to sell a large number of securities, such sales or anticipated sales could result in a substantial reduction in the trading price of shares of our common stock and could also impede our ability to raise future capital.

 

CURRENT SHAREHOLDERS WILL BE IMMEDIATELY AND SUBSTANTIALLY DILUTED UPON A MERGER OR BUSINESS COMBINATION.

 

To the extent that additional shares of common stock are issued in connection with a merger or business combination, our shareholders could experience significant dilution of their respective ownership interests. Furthermore, the issuance of a substantial number of shares of common stock may adversely affect prevailing market prices, if any, for the common stock and could impair our ability to raise additional capital through the sale of equity securities.

 

 

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THE COMPANY HAS NOT PAID DIVIDENDS, NOR DOES IT INTEND TO.

 

The Company has paid no dividends on its Common Stock to date, and there are no plans to pay any in the foreseeable future. Initial earnings which the Company may realize, if any, will be retained to finance growth of the Company. Any future dividends, of which there can be no assurance, will be directly dependent upon the earnings of the Company, its financial requirements and other factors.

 

OUR COMMON STOCK MAY BE SUBJECT TO PRICE VOLATILITY UNRELATED TO OUR OPERATIONS.

 

The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.

 

SECURITIES ANALYSTS MAY NOT PROVIDE COVERAGE OF OUR COMMON STOCK OR MAY ISSUE NEGATIVE REPORTS, WHICH MAY HAVE A NEGATIVE IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK.

 

Securities analysts have not historically provided research coverage of our common stock and may elect not to do so in the future. If securities analysts do not cover our common stock, the lack of research coverage may cause the market price of our common stock to decline. The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about our business. If one or more of the analysts who elects to cover us downgrades our stock, our stock price would likely decline substantially. If one or more of these analysts ceases coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline. In addition, rules mandated by the Sarbanes-Oxley Act of 2002 and a global settlement reached in 2003 between the SEC, other regulatory agencies and a number of investment banks have led to a number of fundamental changes in how analysts are reviewed and compensated. In particular, many investment banking firms are required to contract with independent financial analysts for their stock research. It may be difficult for companies such as ours, with smaller market capitalizations, to attract independent financial analysts that will cover our common stock. This could have a negative effect on the market price of our stock.

 

 

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Other Risks

 

MERGERS OF THE TYPE THAT WE HAVE UNDERGONE ARE OFTEN SCRUTINIZED BY REGULATORS AND WE MAY ENCOUNTER FUTURE DIFFICULTIES OR DELAYS IN OBTAINING FUTURE REGULATORY APPROVALS WHICH WOULD NEGATIVELY IMPACT OUR FINANCIAL CONDITION AND THE VALUE AND LIQUIDITY OF YOUR SHARES OF COMMON STOCK.

 

On June 29, 2005, the SEC adopted rules dealing with private company mergers into dormant or inactive public companies. As a result, it is likely that we will be scrutinized carefully by the SEC and possibly by the Financial Industry Regulatory Authority (“FINRA”) which could result in difficulties or delays in achieving SEC clearance of any future registration statements or other SEC filings that we may pursue, in attracting FINRA-member broker-dealers to serve as market-makers in our common stock, or in achieving admission to one of the Nasdaq stock markets or any other national securities market. As a consequence, our financial condition and the value and liquidity of your shares of our common stock may be negatively impacted.

 

THE ELIMINATION OF MONETARY LIABILITY AGAINST OUR DIRECTORS, OFFICERS AND EMPLOYEES UNDER FLORIDA LAW AND THE EXISTENCE OF INDEMNIFICATION RIGHTS TO OUR DIRECTORS, OFFICERS AND EMPLOYEES MAY RESULT IN SUBSTANTIAL EXPENDITURES BY US AND MAY DISCOURAGE LAWSUITS AGAINST OUR DIRECTORS, OFFICERS AND EMPLOYEES.

 

Our Bylaws contain specific provisions that eliminate the liability of our directors for monetary damages to our company and shareholders, and we are prepared to give such indemnification to our directors and officers to the extent provided by Florida law. We may also have contractual indemnification obligations under our employment agreements with our officers. The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.

 

 

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ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On January 22, 2014, the Company entered into an Agreement of Merger and Plan of Reorganization ("Merger Agreement") by and among the Company and the Vapor Group, Inc., a Florida corporation ("Vapor Group") and its shareholders, pursuant to which the Company will acquire 100% of the issued and outstanding shares of Vapor Group, in return for the issuance of 750,000,000 shares of its common stock following completion of a pending 30:1 reverse split of the Company’s common stock. On March 7, 2014, per a filing of an 8-K dated March 13, 2014, the Company and the other parties to the Merger Agreement amended the Merger Agreement such that:

 

(a) The Company’s Series B Preferred Stock shall be issued in lieu of the issuance of the consideration of 750,000,000 shares of its Common Stock per the Merger Agreement, post an announced 30:1 reverse split, issuable to the Vapor Group Shareholders under the terms and conditions of the Merger Agreement;

 

(b) The quantity of shares of Series B Preferred Stock issuable in connection with the Merger Agreement shall be calculated by dividing the 750,000,000 shares of Common Stock by the 100:1 convertibility feature of the Series B Preferred Stock, such that only 7,500,000 shares of Series B Preferred Stock shall be issued as the consideration under the Merger Agreement;

 

(c) The 7,500,000 shares of Series B Preferred Stock shall remain authorized but unissued until after the effective date of the announced 30:1 reverse split of the Company’s Common Stock, at which time said issuance of Series B Preferred Stock shall be further reduced 30:1 similar to the effect of the reverse split, such that only 250,000 shares of Series B Preferred Stock are issued as the sole consideration to the Vapor Group Shareholders for entering into the Merger Agreement.

 

(d) Any and all shares of Series B Preferred Stock shall be restricted from any conversion into shares of Common Stock by any holder thereof for a period of eighteen (18) months from the date of their issuance.

 

On March 13, 2014, the Company announced by filing form 8-K on March 18, 2014, that the aforementioned 30:1 reverse split of the Company’s Common Stock had been cancelled. As a result and consistent with the intent of the prior announcement amending the terms and conditions of the Merger Agreement, the aforementioned (see “(c)” above) 250,000 shares of Series B Preferred Stock granted in consideration of the Merger Agreement, as calculated “post reverse split” had there been one, shall be issued on the books and records of the Company to the Shareholders of Vapor Group. Said issuance by resolution of the Board of Directors occurred on March 17, 2014.

 

Between January 17, 2014 and February 27, 2014, an unaffiliated third party investment firm and holder of convertible promissory notes of the Company in principal amounts of $42,500 and $32,500 respectively, dated February 2, 2012 and April 12, 2012 converted the remaining outstanding outstanding balances of said convertible promissory notes into 64,301,560 shares of common stock of the Company per the terms and conditions of said convertible promissory notes.

 

 

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On January 28, 2014, two (2) unaffiliated third party investment firms, and holders each of $99,500.00 and $73,500.00 respectively in convertible promissory notes of the Company, dated June 20, 2012 and dated August 29, 2012, each converted $7,150.00 of said debt into 11,000,000 shares each, total 22,000,000 shares, per the terms and conditions of said convertible promissory notes.

 

Between March 6, 2014 and March 13, 2014, an unaffiliated third party investment firm, and purchaser of portions of the convertible promissory notes of the Company, dated June 20, 2012 and dated August 29, 2012, converted portions of said debt into 5,324,427 shares of common stock of the Company per the terms and conditions of said convertible promissory notes.

 

Between January 29, 2014 and March 14, 2014, an unaffiliated third party investment firm, sold 25,735,267 shares of common stock of the Company following conversion of a convertible promissory note, dated August 5, 2011, purchased by said investment firm on April 11, 2012 from an unaffiliated third party.

 

On March 31, 2014, the Company issued 7,000,000 shares of its restricted common stock to two of the three holders of the membership units of American Vaporizer, LLC, a Delaware limited liability company, in return for an incremental twenty-six percent (26%) of American Vaporizer, LLC, such that the Company currently owns fifty-one percent (51%) of American Vaporizer, LLC, having already owned twenty-five percent (25%) of American Vaporizer, LLC. As a result of the issuance American Vaporizer, LLC becomes a majority-owned subsidiary of the Company.

 

On April 29, 2014, the Company closed a private placement whereby it entered into a securities purchase agreement (the “Purchase Agreement”), with Hanover Holdings I, LLC, (“Hanover”), an affiliate of Magna Group (“Magna”). Pursuant to the Purchase Agreement, the Company sold Hanover four (4) 8% senior convertible promissory notes in aggregate principal amount of $1,342,391.17 million (collectively, the “Convertible Notes”, or individually, a “Convertible Note”) due twelve months from the date of the Convertible Notes’ issuance. The Notes were purchased by Hanover for $1,235,000. The Convertible Notes matures on April 29, 2015 and accrue interest at an annual rate of 8.0%. Under terms of the private placement, after six months from the Convertible Notes’ issuance, or October 29, 2014, (the “Holding Period”), the Convertible Notes may be converted, in whole or in part, at Hanover’s option, at a fixed conversion price of $0.15 per share of the Company’s common stock (“Common Stock”), and subject to certain limitations and exceptions stated within each of the Convertible Notes. After the Holding Period, Hanover will be entitled to convert any portion of the Convertible Notes to the extent that after such conversion, Hanover (together with its affiliates) would beneficially own no more than 4.99% of the outstanding shares of the Common Stock as of such date. After any conversion, Hanover may not sell more than 20% of the trading volume of the Common Stock during any single trading day. If at any time after the Holding Period, the Common Stock is trading below $0.18, the Company will be considered in default of the Convertible Notes. The Company has the right at any time to redeem all or a portion of the total outstanding amount then remaining under any or all of the Convertible Notes in cash at a 30% premium. Proceeds from the Convertible Notes will be used by the Company to expand its business by, among other things, increasing product inventories for its brands and for expansion of the sales and marketing of its newly acquired subsidiary, American Vaporizer, LLC, including the purchase of additional inventories of product and e-liquids for the “American Smoke” brand of American Vaporizer, LLC.

 

All the above securities mentioned qualified for exemption under Section 4(2) of the Securities Act since the issuance of securities by us did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the transaction, size of the offering, manner of the offering and number of securities offered. We did not undertake an offering in which we sold a high number of securities to a high number of investors. In addition, these shareholders had the necessary investment intent as required by Section 4(2) since they agreed to and received share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(2) of the Securities Act for this transaction.

 

 

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ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5 – OTHER INFORMATION

 

SUBSEQUENT EVENTS

On April 29, 2014, the Company closed a private placement whereby it entered into a securities purchase agreement, dated April 29, 2014 (the “Purchase Agreement”), with Hanover Holdings I, LLC, (“Hanover”), an affiliate of Magna Group (“Magna”). Pursuant to the Purchase Agreement, the Company sold Hanover four (4) 8% senior convertible promissory notes in aggregate principal amount of $1,342,391.17 million (collectively, the “Convertible Notes”, or individually, a “Convertible Note”) due twelve months from the date of the Convertible Notes’ issuance. The Notes were purchased by Hanover for $1,235,000. Proceeds from the Convertible Notes will be used by the Company to expand its business by, among other things, increasing product inventories for its brands and for expansion of the sales and marketing of its newly acquired subsidiary, American Vaporizer, LLC, including the purchase of additional inventories of product and e-liquids for the “American Smoke” brand of American Vaporizer, LLC.

 

The Convertible Notes matures on April 29, 2015 and accrue interest at an annual rate of 8.0%. Under terms of the private placement, after six months from the Convertible Notes’ issuance, or October 29, 2014, (the “Holding Period”), the Convertible Notes may be converted, in whole or in part, at Hanover’s option, at a fixed conversion price of $0.15 per share of the Company’s common stock (“Common Stock”), and subject to certain limitations and exceptions stated within each of the Convertible Notes. After the Holding Period, Hanover will be entitled to convert any portion of the Convertible Notes to the extent that after such conversion, Hanover (together with its affiliates) would beneficially own no more than 4.99% of the outstanding shares of the Common Stock as of such date. After any conversion, Hanover may not sell more than 20% of the trading volume of the Common Stock during any single trading day.

 

If at any time after the Holding Period, the Common Stock is trading below $0.18, the Company will be considered in default of the Convertible Notes.

 

The Company has the right at any time to redeem all or a portion of the total outstanding amount then remaining under any or all of the Convertible Notes in cash at a 30% premium.

The issuance of the Convertible Notes to Hanover under the Purchase Agreement were exempt from the registration requirements of the Securities Act, pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 506 of Regulation D promulgated under the Securities Act (“Regulation D”). The Company made this determination based on the representations of Hanover in the Purchase Agreement that Hanover is an “accredited investor” within the meaning of Rul e 501 of Regulation D and has access to information about its investment and about the Company.

 

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ITEM 6 – EXHIBITS

 

Exhibit 31.1		Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2		Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1		Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS **		XBRL Instance Document
101.SCH **		XBRL Taxonomy Extension Schema Document
101.CAL **		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF **		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB **		XBRL Taxonomy Extension Label Linkbase Document
101.PRE **		XBRL Taxonomy Extension Presentation Linkbase Document

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	Vapor Group, Inc.
	(Registrant)
Date: May 20, 2014	By:	/s/ Dror Svorai
		Dror Svorai
		President and Treasurer

 

 

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