VPOR Vapor Group Inc (CE)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2014

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to _____________

 

Commission File No.: 000-27795

 

 

 

VAPOR GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Florida		98-0427526
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

  

3901 SW 47^th AVENUE, SUITE 415

DAVIE, FLORIDA 33314

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: (954) 792-8450

 

Securities registered pursuant to Section 12(b) of the Exchange Act: None

 

Securities registered pursuant to Section 12(g) of the Exchange Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x

 

Indicate by check mark whether the registrant has (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ¨ No x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and ask price of such common equity, as of the last business day of the registrant's most recently completed fiscal quarter ended December 31, 2014 was $2,969,495. (This calculation is based on historical data at December 31, 2014). For purposes of the foregoing calculation only, directors, executive officers, and holders of 10% or more of the issuer’s common capital stock have been deemed affiliates.

 

The number of shares outstanding of the Registrant’s Common Stock as of March 30, 2015 is 2,658,813,601.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

None.

 

 

 

 

 

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TABLE OF CONTENTS

 

ITEM 1.	BUSINESS.			6
ITEM 1A.	RISK FACTORS			9
ITEM 1B.	UNRESOLVED STAFF COMMENTS.			19
ITEM 2.	PROPERTIES.			19
ITEM 3.	LEGAL PROCEEDINGS.			19
ITEM 4.	MINE SAFETY DISCLOSURE.			19
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.			20
ITEM 6.	SELECTED FINANCIAL DATA.			30
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.			31
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.			38
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.			38
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.			38
ITEM 9A.	CONTROLS AND PROCEDURES.			39
ITEM 9B.	OTHER INFORMATION.			40
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.			41
ITEM 11.	EXECUTIVE COMPENSATION.			44
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.			45
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.			46
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES.			46
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES.			47

 

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INTRODUCTORY COMMENT

 

This Annual Report on Form 10-K ("Annual Report"), in particular the Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in Item 7 herein ("MD&A") contains certain "forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give expectations or forecasts of future events. The reader can identify these forward-looking statements by the fact that they do not relate strictly to historical or current facts. They use words such as "believe(s)," "goal(s)," "target(s)," "estimate(s)," "anticipate(s)," "forecast(s)," "project(s)," plan(s)," "intend(s)," "expect(s)," "might," may" and other words and terms of similar meaning in connection with a discussion of future operating, financial performance or financial condition. Forward-looking statements, in particular, include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends of operations and financial results.

 

Any or all forward-looking statements may turn out to be wrong, and, accordingly, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this Annual Report. These statements are based on current expectations and current the current economic environment. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance; actual results could differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining the Company's actual results and financial condition. The reader should consider the following list of general factors that could affect the Company's future results and financial condition.

 

Among the general factors that could cause actual results and financial condition to differ materially from estimated results and financial condition are:

 

·	The success or failure of management's efforts to implement their business strategy
·	The ability of the Company to raise sufficient capital to meet operating requirements
·	The uncertainty of consumer demand for our products and services;
·	The ability of the Company to compete with major established companies;
·	Heightened competition, including, with respect to pricing, entry of
·	New competitors and the development of new products by new and existing competitors;
·	Absolute and relative performance of our products and services;
·	The effect of changing economic conditions;
·	The ability of the Company to attract and retain quality employees and management;
·	The current global recession and financial uncertainty; and
·	Other risks which may be described in future filings with the U.S. Securities and Exchange Commission ("SEC").

 

No assurances can be given that the results contemplated in any forward-looking statements will be achieved or will be achieved in any particular timetable. We assume no obligation to publicly correct or update any forward-looking statements as a result of events or developments subsequent to the date of this Annual Report. The reader is advised, however, to consult any further disclosures we make on related subjects in our filings with the SEC.

 

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PART I

 

ITEM 1. BUSINESS.

 

Corporate Overview and History of Vapor Group, Inc.

 

We were originally incorporated under the laws of Canada on January 15, 1990, under the name "Creemore Star Printing, Inc." We changed our name on June 15, 2003 to "Smitten Press: Local Lore and Legends, Inc." We domesticated in the State of Nevada by filing Articles of Incorporation in Nevada on May 8, 2007, and we were incorporated in the State of Nevada on May 8, 2007, 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. In June 2011, we completed our initial public offering of 5,000,000 shares of Common Stock and received $100,000 in proceeds from the offering.

 

We were a management consulting firm that planned to educate and assist small businesses. However, after we completed our initial public offering, we explored opportunities to acquire operating companies to enhance shareholder value. On September 2, 2011, we entered into a Share Exchange Agreement with Young Aviation, LLC, founded in 2004, a broker and supplier of parts, components and products to the general aviation (that is, non-military and commercial airline) and aerospace markets (“Young Aviation”).

 

On September 19, 2011, we amended our Articles of Incorporation to (i) increase our authorized capital stock to 500,000,000 shares of Common Stock and (ii) effect a 10:1 forward stock split. On October 3, 2011, we closed the Share Exchange Agreement, wherein Young Aviation became a wholly-owned subsidiary. On November 10, 2011, a majority of our shareholders approved a change of our name to AvWorks Aviation Corp., effective November 30, 2011, to reflect the Company’s new business focus.

 

As a result of execution of the Share Exchange Agreement on October 3, 2011 in which the Company acquired Young Aviation: (a) the Company ceased being a "shell company" as that term is defined in Section 12b-2 of the Securities Exchange Act of 1934; (b) Joel Young, an individual, became the owner of 165,000,000 shares of restricted common stock of the Company or 61.11% of the total of 270,020,145 issued and outstanding shares of common stock of the Company as of that date, making him the Company’s majority shareholder; and (c) the Board of Directors of the Company appointed Joel A. Young as its President, CEO and sole Director. Following Joel Young’s acceptance of this appointment, all prior officers and directors of the Company resigned.

 

The acquisition of Young Aviation was by reverse merger and resulted in a change in control of the Company and new management ‘s abandonment of its former management consulting business with a new focus solely on the business of Young Aviation. Subsequently, as the result of the slow growth of such operations, in early 2013 the Company decided to seek other business opportunities, including a business combination.

 

On August 1, 2013, the Board of Directors accepted the consent of Michael Zoyes to become a member of its Board of Directors, the President/CEO, Secretary, Treasurer and CFO of the Company replacing Joel Young who resigned as its sole officer and director. Mr. Young did not resign as a result of any disagreement with the Company on any matter relating to its operations, policies or practices, and remained available to it in an advisory capacity while Mr. Zoyes pursued a strategy of seeking a business combination partner for the Company.

 

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On September 3, 2013, the majority shareholder of the Company, being the 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 this Agreement, the Sellers agreed to sell and transfer over time their shares of restricted common stock and Series A Preferred Stock of the Company to the Buyer for a total purchase price of $115,000. The Share Purchase Agreement provided that the purchase price is to 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 were 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.

 

Effective on September 23, 2013, the Board of Directors accepted the consent of Joe Eccles, to become a member of its Board of Directors, the President/CEO, Secretary, Treasurer and CFO of the Company replacing Michael Zoyes who resigned as its sole officer and director. Mr. Zoyes did not resign as a result of any disagreement with the Company on any matter relating to its operations, policies or practices. Mr. Eccles served as the Company’s sole officer and director until January 22, 2014 at which time the Company entered into the Merger Agreement as hereinafter discussed.

 

On November 11, 2013, The Board of Directors and stockholders owning or having voting authority over a majority of the voting capital stock of the Company, voted in favor of an amendment to the 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 per completion of a FINRA review was subsequently cancelled by the Board of Directors on March 13, 2014, as filed on Form 8-K on March 18, 2014.

 

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)Joe Eccles 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.

 

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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 biographies of the new directors and officers to be elected and appointed respectively are set forth below as follows:

 

Dror Svorai. Mr. Svorai, President and Chief Executive Officer and Treasurer of the Vapor Group, Inc., is a founder in 2012 of the Vapor Group, Inc., and its subsidiaries, Total Vapor Inc., Vapor 123, Inc. and Vapor Products, Inc. For the past two years he has overseen the day-to-to operations of these companies and managed their steady growth. In the ten years prior to 2012, Mr. Svorai has served in executive positions, including president and chief executive officer of several companies, and has maintained an ongoing involvement in several private real estate ventures. Before then, Mr. Svorai also was involved in investments of real estate, and was a business owner in the garment industry and the private jet industry. From 1997 until 2001, Mr. Svorai was the founder and chief executive officer of Ocean Drive of Orlando. From 1998 until 2003, Mr. Svorai was the founder and chief executive officer of Ocean Drive Fashion. From 2003 until 2006 Mr. Svorai was the founder and chief executive officer of the D & D Fashion Group Inc.

 

Yaniv Nahon. Mr. Nahon established the first e-cigarette retail business in Southwest Florida in 2008. Since 2008, he has remained focused on the development and marketing of e-cigarettes at both the wholesale and retail levels, owning an operating his own retail businesses. In 2012 he joined Vapor Group as Vice President and Chief Operating Officer having overall responsibility for product development, quality control and the supply chain. Mr. Nahon is also the corporate Secretary of the Vapor Group and a member of its Board of Directors.

 

Jorge Schcolnik. In September 2013, Mr. Schcolnik became Vice President, Chief Financial Officer and a member of Board of Directors of the Vapor Group. During the past five years, Mr. Schcolnik has been involved in several large international companies. Mr. Schcolnik was one of the founders of Integral Bioenergies Systems SL, a company located in Spain, where he was involved in its restructure and ultimate sale in 2008. Mr. Schcolnik was associated with E-Libro Corp. for which he deployed the digital publishing market in Argentina. He was also associated with the Federal and City of Buenos Aires Government for the company's academic platform. Since 2010, Mr. Schcolnik has been an officer in Advanced Envirotec Corp., Advanced Copisa Environmental Corp. and other environmental remediation companies. Since 1995, Mr. Jorge Schcolnik has also been representing the State of Buenos Aires, Argentina, within the United States in a number of capacities Commencing 1999, Mr. Schcolnik acted as the chief advisor to the Small and Medium Sized Enterprises Secretariat of the Republic of Argentina based in the United States. Mr. Schcolnik held that position until 2001. During 2001, Mr. Schcolnik participated as a co-founder of Enterprise Buenos Aires Corp., which was later transformed into EBA PLC Corp., a company dedicated to the development of power-line communications. EBA PLC Corp. became a prominent company within the power line communications industry as after two years it was sold in a transaction involving several million US Dollars. Mr. Schcolnik was born in Buenos Aires, Argentina, in 1945 and moved to the United States in September 1995.

 

Business of Vapor Group, Inc.

 

The principal business of Vapor Group, Inc., www.vaporgroup.com, (“Vapor Group”) is in the designing, developing, manufacturing and marketing high quality, vaporizers and e-cigarettes and accessories which use state-of-the-art electronic technology and specially formulated, “Made in the USA” e-liquids, which may or may not contain nicotine. Vapor Group offers a range of products and unique e-liquid flavors that it believes are unmatched in its industry. Its products are marketed under the Vapor Group, Total Vapor, Vapor 123, and Vapor Products brands, each of which is also a wholly-owned subsidiary of the same name. It sells nationwide through distributors, wholesalers and directly to consumers through its own websites and direct response advertising, and also owns as a wholly-owned subsidiary, Total Vapor Opportunities, Inc., a pending franchisor of “Total Vapor” retail stores in the continental U.S. In addition, Vapor Group owns as a wholly-owned subsidiary, VGR Media, Inc., www.vgr-media.com, a full service interactive advertising agency, offering Vapor Group’s products, and more generally customized performance marketing solutions to help marketers of consumer products acquire new customers and maximize their return on investment. VGR Media operates in the U.S. and sells domestically and internationally.

 

Vapor Group, Inc. and its subsidiaries are managed by a highly experienced team of executives committed to responsible business policies and practices, including the marketing of our products only to those eighteen years of age or older, not making or avoiding claims about our product health benefits, and fulfilling the requirements of all applicable laws and regulations.

 

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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.

 

Risks 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.

 

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.

 

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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.

 

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 an 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.

 

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.

 

12

 

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.

 

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.

 

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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.

 

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.

 

14

 

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.

 

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.

 

15

 

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.

 

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.

 

16

 

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.

 

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.

 

17

 

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.

 

EMPLOYEES

 

The Company currently has approximately twenty employees including its officers and directors. 

 

BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS

 

Our Company has not been involved in any bankruptcy, receivership or any similar proceeding, and, except as set forth herein, we have not had or been a party to any material reclassifications, mergers or consolidations during the previous five (5) years.

 

DOMAIN NAMES - None

 

MAJOR CUSTOMERS - None

 

RESEARCH AND DEVELOPMENT ACTIVITIES

 

The Company has not performed any customer-sponsored research and development activities relating to any new products or services during 2013 or 2014.

 

ENVIRONMENTAL LAWS

 

We do not handle, store or transport hazardous materials or waste products. We abide by all applicable federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. We do not anticipate the cost of complying with these laws and regulations to be material.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2. PROPERTIES.

 

Office Locations

 

Until January 22, 2014, we maintained our principal offices at 10778 NW 53^rd Street, Suite E, Sunrise Florida 33352, occupying an executive office of 500 square feet, for which no rent was paid through the year end of December 31, 2013. Following the completion of the Merger, as recorded on January 27, 2014, our headquartered address changed to 3701 SW 47th Avenue, Suite 415, Davie, Florida 33314, the principal rented office and manufacturing facility of Vapor Group, Inc., consisting of approximately 7,600 square feet of office, manufacturing and warehouse space in a one story industrial park complex.

 

ITEM 3. LEGAL PROCEEDINGS.

 

There are no pending legal or governmental proceedings relating to our Company to which we are a party, and to our knowledge, there are no material proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us.

 

ITEM 4. MINE SAFETY DISCLOSURE.

 

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

As of the date of this Annual Report, the Company's Common Stock is quoted on the Over-the-Counter Pink-Sheets under the symbol "VPOR" which was changed by FINRA from the old symbol, “SPLI”, on April 29, 2014. The market for the Company's Common Stock is limited, volatile and sporadic and the price of the Company's Common Stock could be subject to wide fluctuations in response to quarterly variations in operating results, news announcements, trading volume, sales of Common Stock by officers, directors and principal shareholders of the Company, general market trends, changes in the supply and demand for the Company's shares, and other factors. The following table sets forth the high and low sales prices for each quarter relating to the Company's Common Stock for the last two fiscal years. These quotations reflect inter-dealer prices without retail mark-up, markdown, or commissions, and may not reflect actual transactions.

 

		High				Low
Fiscal 2013
1Q2013		$	0.0020			$	0.0007
2Q2013		$	0.0014			$	0.0006
3Q2013		$	0.0017			$	0.0006
4Q2013		$	0.0019			$	0.0060

 

Fiscal 2014
1Q2014		$	0.4180			$	0.0006
2Q2014		$	0.3045			$	0.0530
3Q2014		$	0.0819			$	0.0138
4Q2014		$	0.0310			$	0.0031

 

Description of Securities

 

Our authorized capital stock consists of 4,500,000,000 shares of common stock, par value $0.001 per share, and 15,000,000 shares of preferred stock, $0.001 par value per share. As of March 30, 2015, 2,658,813,601 shares of our common stock were issued and outstanding.

 

Common Stock. Our Articles of Incorporation, as amended on October 28, 2014, January 29, 2015 and March 10, 2015, respectively, to increase the total number of authorized shares of common stock, provide that we are authorized to issue up to 4.5 billion (4,500,000,000) shares of common stock with a par value of $.001 per share.

 

Each outstanding share of common stock entitles the holder thereof to one vote per share on all matters. Stockholders do not have preemptive rights to purchase shares in any future issuance of our common stock. Upon our liquidation, dissolution or winding up, and after payment of creditors and preferred stockholders, if any, our assets will be divided pro-rata on a share-for-share basis among the holders of the shares of common stock.

 

The holders of shares of our common stock are entitled to dividends out of funds legally available when and as declared by our board of directors. Our board of directors has never declared a cash dividend and does not anticipate declaring any dividend in the foreseeable future. Should we decide in the future to pay dividends, as a holding company, our ability to do so and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions. In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to receive, ratably, the net assets available to stockholders after payment of all creditors and preferred stockholders.

 

20

 

Preferred Stock. Our Articles of Incorporation, as amended, also provide that we are authorized to issue up to fifteen million (15,000,000) shares of preferred stock with a par value of $.001 per share. As of the date of this report, there are two series of Preferred Stock designated, Series A and Series B, of which there are 1,000,000 shares of Series A Preferred Stock issued and outstanding and no shares of Series B Preferred Stock issued and outstanding. Our Board of Directors has the authority, without further action by the shareholders, to issue from time to time the preferred stock in one or more series for such consideration and with such relative rights, privileges, preferences and restrictions that the Board may determine. The preferences, powers, rights and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and purchase funds and other matters. The issuance of preferred stock could adversely affect the voting power or other rights of the holders of common stock.

 

Series A Preferred Stock. There are 1,000,000 shares of preferred stock designated as Series A Preferred Stock. Each share of Series A Preferred Stock has a par value of $.001 per share and a stated value equal to $.001. The Holders of outstanding Series A Preferred Stock shall be entitled to participate in any dividends declared on the Corporation’s common stock .In addition to voting as a class as to all matters that require class voting under the Florida Business Corporation Act, the Holders of the Series A Preferred Stock shall vote on all matters with the holders of the Common Stock (and not as a separate class) on ten thousand votes per share (10,000:1) basis. The Holders of the Series A Preferred Stock shall be entitled to receive all notices relating to voting as are required to be given to the holders of the Common Stock. The Series A Preferred Stock shall, with respect to rights on liquidation, rank equivalent to all classes of the common stock, $.001 par value per share (collectively, the "Common Stock" or "Common Shares"), of the Corporation. Shares of Series A Preferred Stock may not be redeemed by the Corporation. Each share of Series A Preferred Stock is not convertible into any other class of capital stock.

 

Series B Preferred Stock. On March 11, 2014, the Company designated 10,000,000 shares of the 15,000,000 authorized shares of preferred stock as Series B Preferred Stock. Each share of Series B Preferred Stock has a par value of $.001 per share and a stated value equal to $.001. The Holders of outstanding Series B Preferred Stock shall be entitled to participate in any dividends declared on the Corporation’s common stock .In addition to voting as a class as to all matters that require class voting under the Florida Business Corporation Act, the Holders of the Series B Preferred Stock shall vote on all matters with the holders of the Common Stock (and not as a separate class) on an eighteen hundred vote per share (1,800:1) basis. The Holders of the Series B Preferred Stock shall be entitled to receive all notices relating to voting as are required to be given to the holders of the Common Stock. The Series B Preferred Stock shall, with respect to rights on liquidation, rank equivalent to all classes of the common stock, $.001 par value per share (collectively, the "Common Stock" or "Common Shares"), of the Corporation. Shares of Series B Preferred Stock may not be redeemed by the Corporation. Each share of Series B Preferred Stock shall be convertible, without the payment of any additional consideration by the holder thereof and at the option of the holder thereof, at any time after the Series B Issue Date at the conversion ratio of one (1) share of Series B Preferred Stock for eighteen hundred (1,800) shares of Common Stock.

 

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Holders

 

As of March 30, 2015, there are two holders of our preferred stock who are also officers and directors of the Company and approximately 75 shareholders of record of the common stock.

 

Transfer Agent and Registrar

 

On March 25, 2014, the Corporation appointed VStock Transfer, LLC, 77 Spruce Street, Suite 201, Cedarhurst, NY 11516 as its transfer agent and registrar for its common stock, replacing Interwest Transfer Co., 1981 Murray Holladay Road, Suite 100 Salt Lake City, Utah 84117, as its transfer agent and registrar for its common stock.

 

Our common stock is considered a "penny stock." The application of the "penny stock" rules to our common stock could limit the trading and liquidity of the common stock, adversely affect the market price of our common stock and increase your transaction costs to sell those shares. The Commission has adopted regulations which generally define a "penny stock" to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.

 

Shareholders should be aware that, according to SEC Release No. 34-29093 dated April 17, 1991, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. The occurrence of these patterns or practices could increase the volatility of our share price.

 

Our management is aware of the abuses that have occurred historically in the penny stock market.

 

Dividends

 

The Company has not declared any cash dividends with respect to its common stock or preferred stock during the last two fiscal years and does not intend to declare dividends in the foreseeable future. There are no material restrictions limiting or that are likely to limit the Company's ability to pay dividends on its outstanding securities.

 

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Recent Sales of Unregistered Securities

 

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.

 

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Acquisition and Sale of Ownership Interest In 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, as a membership unit holder, would increase its ownership interest 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 other two Unit Holders. Under Florida law, the Agreement was effective immediately and American Vaporizer became a majority-owned subsidiary of the Company.

 

On June 23, 2014, the Company entered into an agreement wherein it sold to S.E. Naples, Inc. (“S.E. Naples”) all of its 51% ownership interest in American Vaporizer to return for an 8% interest bearing promissory note in the principal amount of $400,000 (the “Sale”) and other terms and conditions. Under the agreement, the Company agreed to assist S.E. Naples in marketing of the American Vaporizer brand, American Smoke, for ninety (90) days. As a result of the Sale, American Vaporizer ceased to be a subsidiary of the Company, and the financial results of operations and financial statements of American Vaporizer were no longer consolidated with those of the Company. Investments made by the Company in American Vaporizer under the terms and conditions of its Acquisition Agreement and loans made in conjunction therewith, shall remain obligations of American Vaporizer for repayment to the Company. In connection with the Sale, the Company cancelled any aforementioned incentive investments that it was to make in American Vaporizer under the Acquisition Agreement.

 

Acquisition of VGR Media, Inc.

 

On December 31, 2014, the Company entered into an Acquisition Agreement by and among the Company, VGR Media, Inc., a Florida corporation ("VGR Media") and the shareholders of VGR Media, each an individual, pursuant to which the Company would acquire one hundred percent (100%) of VGR Media from its shareholders (the “Ownership Interest”). The result of this Agreement is that VGR Media, Inc. became a wholly-owned subsidiary of the Company.

 

Per the Acquisition Agreement, in exchange for an aggregate of one hundred percent (100%) of the issued and outstanding capital stock of VGR Media, Inc. owned by its shareholders, which consists of three hundred and fifty million (350,000,000) shares of restricted common stock of VGR Media, Inc.: (i) the Company will acquire the Ownership Interest (i) in exchange thereof, the Company will issue to them an aggregate one hundred thousand (100,000) shares of its Series B preferred stock which cannot be converted into shares of common stock until December 31, 2015; and (ii) the Company will assume all assets and liabilities of VGR Media, including licenses, equipment, product designs, marketing and sale materials, logos, trademarks, copyrights and websites, and trade and debt obligations.

 

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The shares of the Company are being issued to the shareholders of VGR Media, Inc., in reliance on Section 4(2) and Regulation D of the United States Securities Act of 1933, as amended (the “Securities Act”). The shares of Series B preferred stock will not been registered under the Securities Act or under any state securities laws and may not be offered or sold without registration with the United States Securities and Exchange Commission or an applicable exemption from the registration requirements. The shareholders of VGR Media, Inc. acknowledged that the securities to be issued have not been registered under the Securities Act, that they understood the economic risk of an investment in the securities, and that they had the opportunity to ask questions of and receive answers from the Company’s management concerning any and all matters related to acquisition of the securities.

 

As a result of the Acquisition Agreement in which 100,000 shares of the Company’s Series B preferred stock were issued, there is one million, three hundred and fifty thousand (1,350,000) shares of preferred stock of the Company issued and outstanding, consisting of one million (1,000,000) shares of Series A preferred stock and three hundred and fifty thousand (350,000) shares of Series B preferred stock. As of the date of this Annual Report the 100,000 shares of Series B preferred stock to be issued per the Acquisition Agreement have been issued and are outstanding.

 

Beneficial Ownership Chart Following Acquisition of VGR Media, Inc.

 

The following two tables set forth certain information, as of the date of this Annual Report, with respect to the beneficial ownership of the outstanding preferred stock and common stock by: (i) any holder of more than five (5%) percent; (ii) each of the Company’s executive officers and directors; and (iii) the Company’s directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned. Unless otherwise indicated, each of the stockholders named in the table below has sole voting and investment power with respect to such shares of common stock. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated.

 

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Preferred Stock: Unless otherwise indicated, each of the stockholders named in the table below has sole voting and investment power with respect to such shares of the preferred stock. As of the date of this Annual Report, there are 1,350,000 shares of preferred stock issued and outstanding.

 

Name of Beneficial Owner & Shares Issued and Outstanding		Number of Shares Beneficially Owned				Percentage Beneficially Owned
Series A Preferred Stock (1,000,000)
Dror Svorai 3901 SW 47 Avenue Suite 415 Davie, Florida 33314			1,000,000 (1	)			100	%
Series B Preferred Stock (350,000,000)
Dror Svorai 3901 SW 47 Avenue Suite 415 Davie, Florida 33314			262,500 (1	)			75	%
Yaniv Nahon 3901 SW 47 Avenue Suite 415 Davie, Florida 33314			87,500 (1	)			25	%
Jorge Schcolnik 3901 SW 47 Avenue Suite 415 Davie, Florida 33314			-0-				-0-

__________________

(1) Each share of Series A Preferred Stock has voting rights equivalent to 10,000 shares of common stock in any election of the shareholders for any purpose and is not convertible into common stock. Each share of Series B Preferred Stock is convertible into 1,800 shares of common stock and has voting rights equivalent to 1,800 shares of common stock in any election of the shareholders for any purpose.

 

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Common Stock: Unless otherwise indicated, each of the stockholders named in the table below has sole voting and investment power with respect to such shares of common stock. As of the date of this Annual Report, there are 2,658,813,601 shares of common stock issued and outstanding.

 

Name of Beneficial Owner		Number of Shares Beneficially Owned				Percentage Beneficially Owned (1)
Dror Svorai 3901 SW 47 Avenue Suite 415 Davie, Florida 33314			-0-				-0-
Yaniv Nahon 3901 SW 47 Avenue Suite 415 Davie, Florida 33314			-0-				-0-
Jorge Schcolnik 3901 SW 47 Avenue Suite 415 Davie, Florida 33314			1,000,000				1	%
5% or Greater Owners			(None)

____________

(1) Based on the number of shares of common stock issued and outstanding as of the date of this Annual Report.

 

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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.

 

Entry into Private Placement with Magna Equities II, LLC (formerly Hanover Holdings I, LLC)

 

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 Magna Equities II, LLC (formerly Hanover Holdings I, LLC) (“Magna”), an affiliate of Magna Group. Pursuant to the Purchase Agreement, the Company sold Magna 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 Convertible Notes were purchased by Magna for $1,235,000. A copy of the Purchase Agreement and the Convertible Notes are attached as Exhibits to the Current Report on Form 8-K, filed by the Company with the U.S. Securities Exchange Commission on May 6, 2014.

 

On October 24, 2014, the Company made a prepayment (the “Prepayment”) to Magna to be applied against the Convertible Notes in the amount of $75,000. On October 27, 2014, the Company entered into a Side Letter Agreement with Magna under which the Company and Magna agreed to allocate the Prepayment towards the principal amount due under the Convertible Note with a $480,000 purchase price. As such, the outstanding principle amount due under the Convertible Note with a Purchase Price of $480,000 was reduced accordingly. Further, the Side Letter Agreement provides that the fixed conversion price under each of the Convertible Notes will be amended to reflect that the conversion price will be equal to a 30% discount from the lowest trading price in the five (5) trading days prior to conversion, subject to adjustment. The Side Letter Agreement also makes various modifications to the Convertible Notes, including, without limitation, the removal of the clause in Section 3.19 of each Convertible Note, which stated: “Trading Below Premium. If, at any time after one hundred and eighty (180) calendar days after the Issue Date, the stock is trading below $0.18, the Company will be considered in default.”

 

Additionally, the Side Letter Agreement provides for the issuance of a new 8% senior convertible promissory note was by the Company to Magna in the principle amount of $35,760.95, for a purchase price of $38,870.69 (the “New Note”). The New Note was issued in accordance with the terms and conditions of the Purchase Agreement, contains substantially the same terms and conditions as the Convertible Notes, and has a maturity date of October 27, 2015.

 

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On February 12, 2015 the Company entered into a further Side Letter Agreement with Magna under which Section 8.0. of the Purchase Agreement, dated April 29, 2014, between them shall only apply to payments due pursuant to quarterly reports filed by the Company up to and including that quarterly report filed for the period ending June 30, 2014. Moreover, any amount due to Magna under said Section of the Purchase Agreement pursuant to a quarterly report filed for a period ending subsequent to June 30, 2014 shall no longer be considered due or payable. For the avoidance of doubt, the only payment due by the Company pursuant to said Section shall pertain to the aforementioned Note dated October 27, 2014 in principal amount of $38,870.69 issued to Magna pursuant to those certain fees earned under said Section of the Purchase Agreement per the Company’s quarterly report filed for the period ending June 30, 2014.

 

Moreover, the Side Letter Agreements provide that except as otherwise expressly provided therein, the Purchase Agreement, the Convertibles Notes, and the related Escrow Agreement, dated April 29, 2014, are, and shall continue to be, in full force and effect and are thereby ratified and confirmed in all respects, including, without limitation, all representations and warranties made by each of the Company and Magna.

 

The aforementioned issuance of the New Note to Magna, dated October 27, 2014, was exempt from the registration requirements of the Securities Act of 1933, as amended (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 and Rule 506 of Regulation D promulgated under the Securities Act (“Regulation D”). The Company made this determination based on the representations of Magna in the Purchase Agreement that Magna is an “accredited investor” within the meaning of Rule 501 of Regulation D and has access to information about its investment and about the Company.

 

Change in Control of the Company

 

As previously cited, on September 3, 2013, the majority shareholder of the Company and Corporate Excellence Consulting, Inc., a Florida corporation (collectively, the “Sellers”), who were the record holders respectively of 165,000,000 shares of restricted common stock (61.11% of the issued and outstanding shares prior to issuances connected to the Merger Agreement) and 1,000,000 shares of the Series A Preferred Stock of the Company, 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). 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.

 

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Securities Authorized for Issuance under Equity Compensation Plans

 

We did not have any equity compensation plans as of December 31, 2014. Our Board of Directors may adopt an equity compensation plan in the future.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

ITEM 6. SELECTED FINANCIAL DATA.

 

We are a smaller reporting company as defined by Rule 229.10(f)(1) and are not required to provide information under this item.

 

 

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Overview of the Vapor Group, Inc.

 

The principal business of Vapor Group, Inc., www.vaporgroup.com, (“Vapor Group”) is in the designing, developing, manufacturing and marketing high quality, vaporizers and e-cigarettes and accessories which use state-of-the-art electronic technology and specially formulated, “Made in the USA” e-liquids, which may or may not contain nicotine. Vapor Group offers a range of products and unique e-liquid flavors that it believes are unmatched in its industry. Its products are marketed under the Vapor Group, Total Vapor, Vapor 123, and Vapor Products brands, each of which is also a wholly-owned subsidiary of the same name. It sells nationwide through distributors, wholesalers and directly to consumers through its own websites and direct response advertising, and also owns as a wholly-owned subsidiary, Total Vapor Opportunities, Inc., a pending franchisor of “Total Vapor” retail stores in the continental U.S. In addition, Vapor Group owns as a wholly-owned subsidiary, VGR Media, Inc., www.vgr-media.com, a full service interactive advertising agency, offering Vapor Group’s products, and more generally customized performance marketing solutions to help marketers of consumer products acquire new customers and maximize their return on investment. VGR Media operates in the U.S. and sells domestically and internationally. 

 

Operating Expenses:

 

Operating expenses increased by $2,942,127 or 343% to $3,798,786 for the year ended December 31, 2014 from $856,659 for the year ended December 31, 2013. The increase in operating expenses was primarily due to an increase in Advertising and Promotion, Commissions and General and administrative expenses.

 

Loss from Operations:

 

Loss from continuing operations was $740,369 for the year ended December 31, 2014 compared to a profit from continuing operations of $267,614 for the year ended December 31, 2013 mainly due to the increase in Operating Expenses described above.

 

Interest Income:

 

The company had no interest income to report.

 

Net Loss:

 

Net Loss was $804,828 for the year ended December 31, 2014 compared to a net profit of $161,720 for the year ended December 31, 2013 mainly due to the increase in Operating Expenses described above.

 

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Going Concern

 

As reflected in the accompanying consolidated financial statements, for the year ended December 31, 2014, the Company had a net loss and net cash used in operations of $804,828 and ($2,186,824), respectively, and a total stockholders’ deficit of $361,569. These matters have raised substantial doubt about the Company's ability to continue as a going concern. Going forward, the ability of the Company to continue as a going concern is dependent on its ability to raise additional capital, further implement or augment its business model and business plan, and to generate additional revenues.

 

The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of December 31, 2014, we had net current liabilities of $3,553,250 compared to $855,009 as of December 31, 2013. Our balance of cash and cash equivalents at December 31, 2014 was $413,230 as compared to $48,177 on December 31, 2013.

 

Operational cash flow

 

We had operating cash outflows in the year ended December 30, 2014 of $2,186,824, and $236,567 in the year ended December 30, 2013. Our primary uses of cash have been for marketing expenses and general working capital purposes. All cash we received over the reported periods has been expended in the furtherance of growing assets.

 

Financing cash flows

 

Going forward, we may not have sufficient resources to fully develop any new products or technologies or expand our inventory levels unless we are able to raise additional financing. We can make no assurances these required funds will be available on favorable terms, if at all. If additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in dilution to our existing stockholders. Additionally, these conditions may increase costs to raise capital and/or result in further dilution. Our failure to raise capital when needed would adversely affect our business, financial condition and results of operations, and could force us to reduce or cease our operations.

 

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We believe that we will be able to meet the costs of growth and public reporting with funds generated from operations and additional amounts generated through debt and equity financing, Although management believes that the required financing to fund product development and increasing inventory levels can be secured at terms satisfactory to the Company, there is no guarantee these funds will be made available, and if funds are available, that the terms will be satisfactory to the Company.

 

Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition. Some of the critical accounting estimates are detailed below.

 

Critical Accounting Estimates and New Accounting Pronouncements

 

Critical Accounting Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made, and if changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition.

 

We base our estimates and judgments on our experience, our current knowledge, and our beliefs of what could occur in the future, our observation of trends in the industry, information provided by our customers and information available from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the following accounting policies and estimates as those that we believe are most critical to our financial condition and results of operations and that require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties: share-based compensation expense, income taxes, and derivative financial instruments.

 

Share-Based Compensation Expense. We plan to calculate share-based compensation expense for option awards and warrant issuances ("Share-based Awards") based on the estimated grant/issue-date fair value using the Black-Scholes-Merton option pricing model ("Black-Sholes Model"), and recognize the expense on a straight-line basis over the vesting period, net of estimated forfeitures. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the vesting period of the Share-based Award in determining the fair value of Share-based Awards. Although we believe our assumptions used to calculate share-based compensation expense are reasonable, these assumptions can involve complex judgments about future events, which are open to interpretation and inherent uncertainty. In addition, significant changes to our assumptions could significantly impact the amount of expense recorded in a given period.

 

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Income Taxes. As part of the process of preparing our consolidated financial statements, we will be required to estimate income taxes in each of the jurisdictions in which we operate. Our provision for income taxes is determined using the asset and liability approach to account for income taxes. A current liability is recorded for the estimated taxes payable for the current year. Deferred tax assets and liabilities are recorded for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which the timing differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates or tax laws are recognized in the provision for income taxes in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount more-likely-than-not to be realized. Changes in valuation allowances will flow through the statement of operations unless related to deferred tax assets that expire unutilized or are modified through translation, in which case both the deferred tax asset and related valuation allowance are similarly adjusted. Where a valuation allowance was established through purchase accounting for acquired deferred tax assets, any future change will be credited or charged to income tax expense.

 

The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. In the ordinary course of our business, there are transactions and calculations for which the ultimate tax determination is uncertain. In spite of our belief that we have appropriate support for all the positions taken on our tax returns, we acknowledge that certain positions may be successfully challenged by the taxing authorities. We determine the tax benefits more likely than not to be recognized with respect to uncertain tax positions. Although we believe our recorded tax assets and liabilities are reasonable, tax laws and regulations are subject to interpretation and inherent uncertainty; therefore, our assessments can involve both a series of complex judgments about future events and rely on estimates and assumptions. Although we believe these estimates and assumptions are reasonable, the final determination could be materially different than that which is reflected in our provision for income taxes and recorded tax assets and liabilities.

 

New Accounting Pronouncements

 

In December 2011, FASB issued Accounting Standards Update ("ASU") 2011-11, Balance Sheet - Offsetting. This guidance requires disclosures about offsetting and related arrangements for recognized financial instruments and derivative instruments. The standard is effective for us as of January 1, 2013 and will not materially impact our financial statement disclosures.

 

In September 2011, the FASB issued ASU 2011-08, "Testing Goodwill for Impairment." This guidance provides the option to evaluate prescribed qualitative factors to determine whether a calculated goodwill impairment test is necessary. The standard is effective for us as of January 1, 2012 and will not materially impact on our financial condition, results of operations, or financial statement disclosures. 

 

34

 

In May 2011, FASB issued Accounting Standards Update ("ASU") 2011-05, Comprehensive Income: Presentation of Comprehensive Income, to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments do not change the guidance regarding the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments should be applied retrospectively, and is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The adoption is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.

 

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the "Boards") on fair value measurement, and results in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term "fair value." These amendments change some of the terminology used to describe many of the existing requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments should be applied prospectively, and they are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The adoption is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.

 

Management does not believe there would be a material effect on the accompanying financial statements had any other recently issued but not yet effective accounting standards been adopted in the current period.

 

Recent Events

 

“Convertible Notes Payable” and “Accrued Interest” Reductions

 

Since January 1, 2015, the Company has directly paid down in cash $285,987.99 in principal, interest and additional fees and penalties (the “Prepayments”) specific to early payments of portions of the outstanding balances of “Convertible notes payable” and “Accrued Interest“ stated on its Consolidated Balance Sheet which for the period ended December 31, 2014 were $3,153,792 and $245,751 respectively, or a total of $3,399,543. 

 

In addition, from January 1, 2015 through March 30, 2015, several respective note holders of various and specific “Convertible notes payable” converted $1,738,614 of the aggregate principal and interest, as reported for the period ended December 31, 2014, of the total of “Convertible notes payable” and “Accrued Interest” into shares of common stock of the Company, in accordance with federal law and regulation (the “Conversions”). 

  

35

 

Adjusted for the Prepayments, net of fees and penalties, and the Conversions, which together total $1,958,229 in reduction of such debt, the remaining outstanding balance of “Convertible notes payable” and “Accrued Interest” on the Consolidated Balance Sheet for the period ended December 31, 2014, would be reduced to $1,441,314 from $3,399,543.

  

Increases in Authorized Shares of Common Stock

 

As of the date of the filing of this Annual Report, March 30, 2015, the Company on separate occasions has filed two amendments to its Articles of Incorporation with State of Florida, each of which increased its authorized shares of common stock. The amendments were accepted by the State of Florida respectively on January 29, 2015 and March 10, 2015, thereby increasing the Company’s authorized shares from 2,500,000,000 to 3,500,000,000 and 4,500,000,000 respectively.

 

As reported on our Form 8-K filed December 4, 2014, and as reported in the Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements of the Registrant filed on Form 10-Q for the quarter ended September 30, 2014 and filed with the SEC on November 14, 2014 (collectively referred to as the “Filings”), the Registrant had accumulated “convertible notes payable” in aggregate amount of $3,583,423 (the “Aggregate Convertible Notes Payable”) as of September 30, 2014. As previously noted, since the Filings, several holders of said convertible promissory notes (the “Notes” or individually, a “Note”) have exercised their right to convert all or a portion of their Note(s), in accordance with Federal and State law and regulation, into free-trading shares of common stock of the Registrant pursuant to the exemption from registration under Rule 144 of the Securities Act of 1933, as amended and per the terms of each holder’s respective Note.

 

Also, as reported on Form 8-K filed with the SEC on February 4, 2015 by the Registrant, included in the documentation related to each Note is often the requirement that the Registrant authorize its transfer agent to reserve a quantity of shares of common stock in advance of any conversion of debt to shares of common stock in the event that the Note holder decides to convert all or any part of the outstanding balance of their respective Note (each a “Reserve”). Such Reserves are frequently variable in that downward changes in the market price of the Registrant’s common stock may trigger an increase in the quantity of shares required to be reserved by the Note holder. Moreover, such Notes allow the Note holder to convert all or a portion of the outstanding balance of each Note, in accordance with Federal and State law and regulation, without the approval of the Registrant, meaning that such conversions of debt into free trading shares of common stock of the Registrant are outside of the Registrant’s control.

 

36

 

As a result of the continuing low market price of the Registrant’s common stock, several Note holders have again required increases in their Reserves equivalent to many times the total possible number of shares that could be issued from their conversions greatly inflating the total number of shares set aside as Reserves. Such increases have repeatedly resulted in a significant reduction in the number of authorized shares of common stock in the Registrant’s treasury which need to be available for general business purposes. Therefore to maintain an adequate quantity of common stock in its treasury for future uses, the Registrant has been required to repeatedly amend its Articles of Incorporation, to increase the number of shares of its authorized common stock.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2014, we had no material off-balance sheet arrangements.

 

In the ordinary course of business, we enter into agreements with third parties that include indemnification provisions which, in our judgment, are normal and customary for companies in our industry sector. These agreements are typically with business partners, and suppliers. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred by the indemnified parties with respect to our product candidates, use of such product candidates, or other actions taken or omitted by us. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of liabilities relating to these provisions is minimal. Accordingly, we have no liabilities recorded for these provisions as of December 31, 2014.

 

In the normal course of business, we may be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims, environmental actions or the actions of various regulatory agencies. We consult with counsel and other appropriate experts to assess the claim. If, in our opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the U.S., an estimate is made of the loss and the appropriate accounting entries are reflected in our financial statements.

 

Impact of Inflation

 

The business will have to absorb any inflationary increases on development costs in the short-term, with the expectation that it will be able to pass inflationary increases on costs on to our customers through price increases on the release of these new/enhanced products into the market and hence the management do not expect inflation to be a significant factor in our business.

 

37

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Our Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and as such, is not required to provide the information required under this item.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Financial statements are included and may be found at pages F-1 through F-11.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

On November 21, 2013, the PCAOB revoked the registration of the Company’s prior independent accountant, Harris F. Rattray, CPA (“Harris”), due to Harris’ violations of PCAOB rules and auditing standards in auditing the financial statements and PCAOB rules and quality control standards with respect to Harris’ clients.

 

On November 27, 2013, Harris F. Rattray, CPA (“Harris”) resigned as the independent registered public accounting firm of the Company. The resignation was accepted by the Board of Directors of the Company (the “Board”).

 

Other than an explanatory paragraph included in Harris’ audit reports for the Company's fiscal year ended December 31, 2012 and 2011 relating to the uncertainty of the Company's ability to continue as a going concern, the audit reports of Harris on the Company's financial statements for the last two fiscal years ended December 31, 2011 and 2012 through September 30, 2013, did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles.

 

During the Company's 2012 and 2011 fiscal years and through the date of this Current Report on Form 8-K, (1) there were no disagreements with Harris on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Harris, would have caused Harris to make reference to the subject matter of the disagreements in connection with their report, and (2) there were no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.

 

The Company had provided Harris with a copy of the foregoing statements and had requested that Harris provide it with a letter addressed to the Securities and Exchange Commission stating whether he agrees with the foregoing statements. A copy of said letter, was filed on Form 8-K filed with the SEC on January 21, 2014.

 

On January 9, 2014, the Company engaged Terry L. Johnson, CPA, as the Company's independent accountant to audit the Company’s financial statements and to perform reviews of interim financial statements. During the fiscal years ended December 31, 2011, December 31, 2012 and December 31, 2013 through January 9. 2014 neither the Company nor anyone acting on its behalf consulted with Terry L. Johnson, CPA regarding (i) either the application of any accounting principles to a specific completed or contemplated transaction of the Company, or the type of audit opinion that might be rendered by Terry L. Johnson, CPA on the Company's financial statements; or (ii) any matter that was either the subject of a disagreement with Harris or a reportable event with respect to Harris.

 

As of March 31, 2014, the Company has re-filed audited financial statements for the year ended December 31, 2012 and re-reviewed quarterly financial statements for March 31, 2012, June 30, 2012, September 30, 2012, and March 31, 2013, June 30, 2013 and September 30, 2013, each of which was audited and/or reviewed respectively by Terry L. Johnson, CPA.

 

There were no disagreements with Terry L. Johnson, CPA, or any other accountants on accounting or financial disclosure matters.

 

38

 

ITEM 9A. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 ("Exchange Act"), the Company's Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report.

 

Based upon that evaluation, they concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2014 to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated properly to allow timely decisions regarding required disclosure.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

 

The Company believes there are no material weaknesses in internal controls and procedures parting that the Company believes it has sufficient personnel with expertise in the area of SEC, generally accepted accounting principles (GAAP) and tax accounting procedures. 

 

Management's Report on Internal Control Over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The Company's internal control over financial reporting includes those policies and procedures that:

 

·	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
·	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
·	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

39

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In connection with the preparation of our annual financial statements, we have assessed the effectiveness of internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO Framework. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls. Based on this evaluation, management has determined that as of December 31, 2014, our internal controls over financial reporting were effective and that there were no material weaknesses in our internal control over financial reporting.

 

Changes in Internal Controls Over Financial Reporting

 

During the fourth quarter ended December 31, 2014, there were no significant changes in internal controls of the Company, or other factors that could significantly affect these controls subsequent to the date of their evaluation.

 

ITEM 9B. OTHER INFORMATION.

 

None.

 

40

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

 

Directors, Executive Officers, Promoter and Control Persons

 

The below table lists all current officers and directors of the Company as of the date of the filing of this Report. All officers serve at the discretion of the Board of Directors. The term of office of each of our directors expire at our next Annual Meeting of Shareholders or until their successors are duly elected and qualified.

 

NAME		AGE		POSITION
Dror Svorai		46		President, CEO, Treasurer, Director
Yaniv Nahon		33		Vice President, Secretary, COO, Director
Jorge Schcolnik		70		Vice President, CFO, Director

 

The business background descriptions of the newly appointed director and officer are as follows:

 

Dror Svorai. Mr. Svorai, President and Chief Executive Officer and Treasurer of the Vapor Group, Inc. is a founder in 2012 of the Vapor Group, Inc., and its subsidiaries, Total Vapor Inc., Vapor 123, Inc. and Vapor Products, Inc. For the past two years he has overseen the day-to-to operations of these companies and managed their steady growth. In the ten years prior to 2012, Mr. Svorai has served in executive positions, including president and chief executive officer of several companies, and has maintained an ongoing involvement in several private real estate ventures.

 

Before then, Mr. Svorai also was involved in investments of real estate, and was a business owner in the garment industry and the private jet industry. From 1997 until 2001, Mr. Svorai was the founder and chief executive officer of Ocean Drive of Orlando. From 1998 until 2003, Mr. Svorai was the founder and chief executive officer of Ocean Drive Fashion. From 2003 until 2006 Mr. Svorai was the founder and chief executive officer of the D & D Fashion Group Inc.

 

Yaniv Nahon. Mr. Nahon established the first e-cigarette retail business in Southwest Florida in 2008. Since 2008, he has remained focused on the development and marketing of e-cigarettes at both the wholesale and retail levels, owning an operating his own retail businesses. In 2012 he joined Vapor Group as Vice President and Chief Operating Officer having overall responsibility for product development, quality control and the supply chain. Mr. Nahon is also the corporate Secretary of the Vapor Group and a member of its Board of Directors.

 

41

 

Jorge Schcolnik. In September 2013, Mr. Schcolnik became Vice President, Chief Financial Officer and a member of Board of Directors of the Vapor Group. During the past five years, Mr. Schcolnik has been involved in several large international companies. Mr. Schcolnik was one of the founders of Integral Bioenergies Systems SL, a company located in Spain, where he was involved in its restructure and ultimate sale in 2008. Mr. Schcolnik was associated with E-Libro Corp. for which he deployed the digital publishing market in Argentina. He was also associated with the Federal and City of Buenos Aires Government for the company's academic platform. Since 2010, Mr. Schcolnik has been an officer in Advanced Envirotec Corp., Advanced Copisa Environmental Corp. and other environmental remediation companies.

 

Since 1995, Mr. Jorge Schcolnik has also been representing the State of Buenos Aires, Argentina, within the United States in a number of capacities Commencing 1999, Mr. Schcolnik acted as the chief advisor to the Small and Medium Sized Enterprises Secretariat of the Republic of Argentina based in the United States. Mr. Schcolnik held that position until 2001. During 2001, Mr. Schcolnik participated as a co-founder of Enterprise Buenos Aires Corp., which was later transformed into EBA PLC Corp., a company dedicated to the development of power-line communications. EBA PLC Corp. became a prominent company within the power line communications industry as after two years it was sold in a transaction involving several million US Dollars. Mr. Schcolnik was born in Buenos Aires, Argentina, in 1945 and moved to the United States in September 1995.

 

Currently, Mr. Svorai, Mr. Nahon and Mr. Schcolnik are the Company’s sole officers and directors.

 

There are no arrangements or understandings between our officers and directors and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and there are no arrangements, plans or understandings as to whether non-management shareholders will exercise their voting rights to continue to elect the current board of directors. There are also no arrangements, agreements or understandings to our knowledge between non-management shareholders that may directly or indirectly participate in or influence the management of our affairs.

 

Family Relationships

 

None.

 

Other Directorships

 

Other than as indicated within this section none of the Company's directors hold or have been nominated to hold a directorship in any company with a class of securities registered pursuant to Section 12 of the Exchange Act (the "Act") or subject to the requirements of Section 15(d) of the Securities Act of 1933 or any or any company registered as an investment company under the Investment Company Act of 1940.

 

42

 

Involvement In Certain Legal Proceedings

 

During the past five years, the Company's officers and directors have not been involved in any of the following: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.

 

Committees of the Board

 

None

 

Board Meetings and Committees; Annual Meeting Attendance

 

During 2014, the Company did not conduct any formal Board meetings and conducted business through Written Actions.

 

Indemnification

 

The General Corporation Law of Florida provides that directors, officers, employees or agents of Florida corporations are entitled, under certain circumstances, to be indemnified against expenses (including attorneys' fees) and other liabilities actually and reasonably incurred by them in connection with any suit brought against them in their capacity as a director, officer, employee or agent, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, if they had no reasonable cause to believe their conduct was unlawful. This statute provides that directors, officers, employees and agents may also be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by them in connection with a derivative suit brought against them in their capacity as a director, if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification may be made without court approval if such person was adjudged liable to the corporation.

 

43

 

Our Certificate of Incorporation provides that we shall indemnify any and all persons whom we shall have power to indemnify to the fullest extent permitted by the Florida Corporate Law. Article VII of our By-Laws provides that we shall indemnify our authorized representatives to the fullest extent permitted by the Florida Law. Our By-Laws also permit us to purchase insurance on behalf of any such person against any liability asserted against such person and incurred by such person in any capacity, or out of such person's status as such, whether or not we would have the power to indemnify such person against such liability under the foregoing provision of the by-laws.

 

The foregoing discussion of indemnification merely summarizes certain aspects of indemnification provisions and is limited by reference to the above discussed sections of the Florida Corporation Law.

 

The Company's Articles of Incorporation and Bylaws provide that the Company may indemnify to the full extent of its power to do so, all directors, officers, employees, and/or agents. Insofar as indemnification by the Company for liabilities arising under the Securities Act may be permitted to officers and directors of the Company pursuant to the foregoing provisions or otherwise, the Company is aware that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

 

ITEM 11. EXECUTIVE COMPENSATION.

 

Summary Compensation Table

 

The following table lists the compensation of the Company's principal executive officers for the years ended December 31, 2014 and 2013. The following information includes the dollar value of base salaries, bonus awards, the number of non-qualified Company Options granted and certain other compensation, if any, whether paid or deferred.

 

Name and all other Principal Position Compensation ($)		Total ($)				Year			Salary ($)				Bonus ($)				Stock Awards ($)
Dror Svorai, CEO		$	0			2014			$	0			$	0			$	0
Yaniv Nahon, COO		$	0			2014			$	0			$	0			$	0
Jorge Schcolnik, CFO		$	0			2014			$	0			$	0			$	0
Joe Eccles, President, CEO		$	0			2013			$	0			$	0			$	0
Michael Zoyes, President, CEO		$	0			2013			$	0			$	0			$	0
Joel A Young, President, CEO		$	0			2013			$	0			$	0			$	0

 

We do not have any employment agreements with any of our officers.

 

The compensation discussed herein addresses all compensation awarded to, earned by, or paid to our named executive officer.

 

44

 

STOCK OPTION AND OTHER COMPENSATION PLANS

 

The Company currently does not have a stock option or any other compensation plan for its executive officers or directors and has never had such a plan in the past.

 

COMMITTEES OF THE BOARD OF DIRECTORS

 

We do not currently have an audit committee or a compensation committee.

 

COMPENSATION OF DIRECTORS

 

Our directors do not receive any direct compensation for their service on our board of directors. Any future director compensation will be determined by our compensation committee, once it is chartered.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

There is currently no compensation policy in place for officers or directors of the Company.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth, as of March 30, 2015, the number and percentage of shares of Preferred Stock and Common Stock of the Company, owned of record and beneficially, by each person known by the Company to own 5% or more of such stock, each director of the Company, and by all executive officers and directors of the Company, as a group:

 

Name and Address		Class		Number of Shares(1)		Percentage
Dror Svorai (3)		Series A Preferred		1,000,000		100.00%
Dror Svorai (3)		Series B Preferred		262,500 (2)		75.00%
Yaniv Nahon (4)		Series B Preferred		87,500 (2)		25.00%
Dror Svorai (3)		Common		17,784,793		<1%
Jorge Schcolnik (5)		Common		1,000,000		<1%
All officers and directors as a group (3 persons)		Series A Preferred		1,000,000		100.00%
Dror Svorai (3) and Yaniv Nahon (4)		Series B Preferred		350,000 (2)		100.00%
Dror Svorai (3) and Jorge Schcolnik		Common		18,784,793		<1%

 

45

 

(1) The numbers and percentages set forth in these columns are based on 2,658,813,601 shares of Common Stock outstanding as of March 30, 2015. The number and percentage of units beneficially owned is determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rule, beneficial ownership includes any equity securities as to which the holder has sole voting power or investment power and also any shares that the holder has the right to acquire within 60 days.

 

(2) The quantities of Series B Preferred Stock set forth in these columns is based on an allocation of the total of 350,000 shares of Series B Preferred Stock to be issued per the terms and conditions of the Merger Agreement, as amended, per the Form 8-K dated March 7, 2014, filed by the Company on March 11, 2014, and the Acquisition Agreement, dated December 31, 2014 by and between the Company and VGR Media, Inc. per the 8-K dated December 31, 2014, and filed by the Company on January 5, 2014.

 

(3) Mr. Svorai's address is 3901 SW 47^th Avenue, Suite 415, Davie, Florida 33314.

 

(4) Mr. Nahon's address is 3901 SW 47^th Avenue, Suite 415, Davie, Florida 33314.

 

(5) Mr. Schcolnik's address is 3901 SW 47^th Avenue, Suite 415, Davie, Florida 33314.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires directors and certain officers of the Company, as well as persons who own more than 10% of a registered class of the Company’s equity securities ("Reporting Persons"), to file reports with the Commission. The Company believes that during fiscal 2014, all Reporting Persons timely complied with all filing requirements applicable to them.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

Except for the transactions described below, none of our directors, officers or principal shareholders, or any associate or affiliate of the foregoing, have any interest, direct or indirect, in any transaction or in any proposed transaction, which materially affected us during the year ended December 31, 2014.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

As incurred by Vapor Group, Inc.

 

Audit and Accounting Fees. By a letter of agreement with the Company dated January 25, 2015, Terry L. Johnson, CPA, (“Johnson”), will invoice the Company $7,500-10,000 for professional services plus out-of-pocket expenses, rendered for the annual audit for the year ended December 31, 2014. In 2014, Johnson invoiced the Company a total of $4,500 for the three quarterly reviews of the Company's financial statements for 2014, and $14,500 for professional services rendered for the annual audit for the year ended December 31, 2013, December 31, 2012 and December 31, 2011, and each of their respective quarterly reviews of the Company's financial statements for 2013 and 2012, including other services that are normally provided by an accountant in connection with statutory and regulatory filings or engagements for the fiscal year.

 

Tax Fees: No amounts have been billed to the Company for the preparation of tax returns for the fiscal years ended December 31, 2014.

 

All Other Fees. We incurred no other fees for the years ended December 31, 2014 and 2013.

 

46

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

 

Exhibits

 

Exhibit No.		Description
(a)		Financial statements for Vapor Group, Inc. listed in the Index on page F-1 are filed as part of this Annual Report.
31.1 and 31.2		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14.*
32.1 and 32.2		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 _________

* Filed Herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

	Vapor Group, Inc.
Date: March 30, 2015	By:	/s/ Dror Svorai
		Dror Svorai President and Treasurer

 

48

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To The Board of Directors and shareholders of

Vapor Group, Inc.

Sunrise, Florida

 

I have audited the accompanying consolidated balance sheets of Vapor Group, Inc. and its subsidiaries (the “Company”) as of December 31, 2014 and 2013 and the related statements of operations, stockholders’ deficit and cash flows for the years ended December 31, 2014 and 2013, and the related notes to the financial statements.

 

Management’s Responsibility for Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United State of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

My responsibility is to express an opinion on these consolidated financial statements based on my audits. I conducted my audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor was I engaged to perform, an audit of its internal control over financial reporting. My audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, I express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. I believe that my audits provide a reasonable basis for my opinion.

 

Opinion

 

In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2014 and 2013 and the consolidated results of its operations and its cash flows for the years ended December 31, 2014 and 2013, in conformity with accounting principles generally accepted in the United States of America.

 

Emphasis of Matter

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 of the accompanying consolidated financial statements, the Company has minimal revenues, has incurred losses since inception, and has a negative working capital balance at December 31, 2014, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Terry L. Johnson, CPA

Casselberry, Florida

March 29, 2015

 

F-1

 

VAPOR GROUP, INC.

CONSOLIDATED BALANCE SHEET

 

		As of December 31,
		2014				2013
ASSETS
CURRENT ASSETS
Cash		$	413,230			$	48,177
Accounts receivable			257,991				104,856
Loan to shareholder			-				282,872
Inventory			1,006,679				149,732
Other current assets			1,423,133				358,483
Total current assets			3,101,033				944,120
PROPERTY AND EQUIPMENT, NET			75,569				16,054
OTHER ASSETS
Intangible assets, net			15,000				975
Deferred expenses			79				87,896
Total other assets			15,079				88,871
TOTAL ASSETS		$	3,191,681			$	1,049,045
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable		$	63,829			$	-
Accrued interest			245,751				88,375
Convertible notes payable			3,153,792				319,527
Loans payable			2,666				437,910
Payroll taxes payable			76,819				-
Sales tax payable			10,393				9,197
TOTAL CURRENT LIABILITIES			3,553,250				855,009
TOTAL LIABILITIES			3,553,250				855,009
STOCKHOLDERS' DEFICIT
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, none issued and outstanding			-				-
Common stock, $0.0001 par value, 2,500,000,000 shares authorized, 50,451,000 and 100,000 issued and outstanding at December 31, 2014 and 2013 respectively,			927,967				50,451
Additional paid in capital			(808,148	)
Retained earnings(accumulated deficit)			(481,388	)			373,891
TOTAL STOCKHOLDERS' DEFICIT			(361,569	)			424,342
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	3,191,681			$	1,279,351

 

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

 

F-2

 

VAPOR GROUP, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

 

		For the Years Ended
		December 31,
		2014				2013
NET REVENUES		$	4,481,839			$	1,991,023
COST OF REVENUES			1,423,422				866,750
GROSS PROFIT			3,058,417				1,124,273
COST AND EXPENSES
Advertising and promotion			740,449				67,947
Commissions			491,700				45,054
Officers Compensation			-				150,000
Professional fees			303,717				95,778
General and administrative expenses			2,262,920				497,880
			3,798,786				856,659
(Loss) from continuing operations			(740,369	)			267,614
OTHER INCOME(EXPENSE)
Interest expense			(64,459	)			(105,894	)
Total other income and (expense)			(64,459	)			(105,894	)
Net (Loss)		$	(804,828	)		$	161,720
Earnings (loss) per share - Basic		$	-			$	-
Weighted average number of shares outstanding							50,451

 

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

 

F-3

 

VAPOR GROUP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

 

																		Additional								Total
		Preferred Stock								Common Stock								Paid-in				Accumulated				Stockholders'
		Shares				Amount				Shares				Amount				Capital				Deficit				Deficit
Balance at December 31, 2012			-			$	-				100,000			$	100			$	-			$	161,720			$	161,820
Common stock issued for services											50,351,000				50,351												50,351
Net loss																							161,720				161,720
Balance at December 31, 2013			-				-				50,451,000				50,451				-				323,440				373,891
Common stock issued for Debt conversion											(41,276,150	)		$	(41,276	)			110,644								69,368
Shares cancelled											918,792,358				918,792				(918,792	)							-
Net loss																							(804,828	)			(804,828	)
Balance at December 31, 2014			-			$	-				927,967,208			$	927,967			$	(808,148	)		$	(481,388	)		$	(361,569	)

 

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

 

F-4

 

VAPOR GROUP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

 

		For the Years Ended
		December 31,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(804,828	)		$	161,720
Adjustments to reconcile increase(decrease) in net assets to cash provided by operating activities:
Common stock issued for services			-				50,351
Depreciation			-				4,338
Changes in operating assets and liabilities:
Inventory			(856,947	)			40,654
Accounts receivable			(153,135	)			(104,856	)
Other assets			(671,134	)			(308,603	)
Accounts payables			63,829				(77,917	)
Payroll tax payable			76,819
Sales tax payable			1,196				9,197
Deferred expenses							(87,896	)
Accrued interest			157,376				76,445
NET CASH USED IN OPERATING ACTIVITIES			(2,186,824	)			(236,567	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment			(59,515	)			(6,367	)
Net cash provided by investing activities			(59,515	)			(6,367	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan to shareholder			164,194				(248,626	)
Proceeds from sale of common stock			-				-
Proceeds from convertible notes			2,834,265				94,800
Payments on loans payable loans payable			(435,244	)			437,910
Net cash used in provided by financing activities			2,563,215				284,084
NET DECREASE IN CASH AND CASH EQUIVALENTS			316,876				41,150
CASH - BEGINNING OF YEAR			48,177				7,027
CASH - END OF YEAR		$	365,053			$	48,177
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.

 

F-5

 

VAPOR GROUP INC 

NOTES TO FINANCIAL STATEMENTS 

AS OF DECENBER 31, 2014

 

Note 1 – GENERAL INFORMATION

 

1.1. Incorporation, Nature and Description of Business

 

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 to 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. On October 3, 2011, we closed a 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. 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 343,536,386 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.

 

F-6

 

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:, Vapor Group assumed management control of the Company and established its business model and operations as the primary business operations of the Company. Prior management of the Company, Joe Eccles, resigned. 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 another 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.

 

About Vapor Group, Inc.

 

The principal business of Vapor Group, Inc., www.vaporgroup.com, (“Vapor Group”) is in the designing, developing, manufacturing and marketing high quality, vaporizers and e-cigarettes and accessories which use state-of-the-art electronic technology and specially formulated, “Made in the USA” e-liquids, which may or may not contain nicotine. Vapor Group offers a range of products and unique e-liquid flavors that it believes are unmatched in its industry. Its products are marketed under the Vapor Group, Total Vapor, Vapor 123, and Vapor Products brands, each of which is also a wholly-owned subsidiary of the same name. It sells nationwide through distributors, wholesalers and directly to consumers through its own websites and direct response advertising, and also owns as a wholly-owned subsidiary, Total Vapor Opportunities, Inc., a pending franchisor of “Total Vapor” retail stores in the continental U.S. In addition, Vapor Group owns as a wholly-owned subsidiary, VGR Media, Inc., www.vgr-media.com, a full service interactive advertising agency, offering Vapor Group’s products, and more generally customized performance marketing solutions to help marketers of consumer products acquire new customers and maximize their return on investment. VGR Media operates in the U.S. and sells domestically and internationally.

 

 

F-7

 

The following table shows individuals and legal entities with an equity interest greater than 20 percent and the amount of their equity interest:

 

Shareholder/owner		Class of Stock		Ownership Percentage
Dror Svorai		Preferred Series A Preferred Series B			100 75	% %
Yaniv Nahon		Preferred Series B			25	%
CEDE & Co.		Common			90	%
		Total			90	%

 

The Company's business activity is with customers located elsewhere in the United States through retailers and web-based sales as well.

 

1.2. Year-on-Year Changes and Amendments to the Florida Department of State – Division of Corporations

 

During calendar 2014, in addition to filing with the Department of State of Florida, a Notice of Merger on January 27, 2014, the Company filed six (6) amendments pertaining to Article IV of its Articles of Incorporation, all of which changed the number of shares of authorized common stock, and altered the preferences of the Series A and Series B Preferred Stock.

 

1.3. Organizational Structure

 

  

 1.4. Board of Directors at the Balance Sheet Date:

 

	Position		Name
Board of Directors	Chairman & CEO		Dror Svorai
	Vice-Chairman & COO		Yaniv Nahon
	CFO		Jorge Schcolnik

 

F-8

 

Note 2 - GOING CONCERN

 

As reflected in the accompanying consolidated financial statements, the Company had a net loss of $804,828 as of December 31, 2014. In addition, the Company had a working capital deficit of $452,217 at December 31, 2014. These matters raise substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern 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, December 31, 2014. The financial statements were prepared on January 31, 2015.

 

3.1. 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.

 

F-9

 

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:

 

Property and equipment is as follows as of December 31, 2014:

 

 

Depreciation expense for the third fiscal year ended December 31, 2014was $4,404. The use of our property and equipment determines if the depreciation is recorded as general and administrative expenses.

 

3.2. 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.

 

Inventory as of December 31, 2014 total $1,006,679

 

3.3. Receivables

 

Upon origination, receivables are stated at their nominal value. At this time no provisions has been established total Account Receivable as of December 31, 2014 totals $257,991

 

3.4. Payables

 

Payables are stated at their nominal value. The balance as of December 31, 2014 was $63,829

 

3.5. 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 as Loans Payable and as of December 31, 2014 total $2,666. For other specific financial liabilities, please see Note 4, below.

 

3.6. 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.

 

F-10

 

Note 4 – Notes Payable

 

The Company had notes payable totaling $3,399,543 reflecting principal and accrued interest as of December 31, 2014.

 

NOTE DISCLOSURE		FACE VALUE				ACCRUED INTEREST
Investment Firm: $150,000 Note issued on May 22, 2014, a corporation loaned the Company $150,000 in exchange for a Promissory Note bearing interest at 8%. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet was as of December 31, 2014. Balances are shown net of conversions.			66,532				7,557
Investment Firm: $6,000 Note issued on November 22, 2011. A corporation loaned the Company $6,000 in exchange for a Promissory Note bearing interest at 10%. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet was as of December 31, 2014.			6,000				1,892
Investment Firm: $50,000 Note issued on November 18, 2011. A corporation loaned the Company $50,000 in exchange for a Promissory Note bearing interest at 10%. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet was as of December 31, 2014.			50,000				478
Investment Firm: $50,000 Note issued on March 12,2014. This corporation loaned the Company $50,00 in exchange for a Promissory Note bearing interest at 10%. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet was as of December 31, 2014. Balances are shown net of conversions.							2,849
Investment Firm $105,000 Note: on August 22, 2014 this entity loaned the Company $105,000 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 $3,820.83 as of December 31, 2014 and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet.			105,000				3,821
Investment Firm $110,000 Note: on July 18, ,2014 this entity loaned the Company $110,000 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 $4,057.78 as of December 31, 2014 and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet.			110,000				4,058
Investment Firm $100,000 Note: on October 10th, 2014 this entity loaned the Company $110,000 in exchange for a Promissory Note bearing interest at 12% 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 $1,503.33 as of December 31, 2014 and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet.			55,000				1,503

 

F-11

 

Investment Firm $80,000 Note: on April 20, 2014 this entity loaned the Company $80,000 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 $11,482.09 as of December 31, 2014 and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet.			80,000				11,482
Investment Firm: $11,027.10 Note issued on February 7,2014. This corporation loaned the Company $11,027.10 in exchange for a Promissory Note bearing interest at 18%. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet was as of December 31, 2014.			11,027				5,705
Investment Firm $75,000 Note issued on August 29 and 30, 2012. This corporation loaned the Company $75,000 in exchange for a Promissory Note bearing interest at 18%, $1,500 is pending for funding. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note was $24.043 as of December 31, 2014. and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet. Balances are shown net of conversions.			26,984				2,867
Investment Firm: $40,000 Note issued on April 30, 2014. This corporation loaned the Company $40,000 in exchange for a Promissory Note bearing interest at 18%. The Lender and is allowed to convert the promissory note into Company common shares, based on which, Lender converted on January 28, 2014 $9,000 of the note. The accrued interest payable balance on this note and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet was as of December 31, 2014.			31,000				10,877
Individual $69,000 Note: on May 1, 2014 this entity loaned the Company $69,000 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 $9,759.72 as of December 31, 2014 and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet.			69,000				9,760
Private Investor: $50,000.00 Note issued on December 5, 2011. This individual loaned the Company $50,000 in exchange for a Promissory Note bearing interest at 8%. On May, 2012 $28,000 was paid on the Note. The Lender is allowed to convert the promissory note into Company common shares, The accrued interest payable balance on this note and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet was as of December 31, 2014.			22,000				8,228
Investment Firm: On April 29, 2014 Notes issued: $21,739.13, $364,130.43, $434,782.61 and $521,739.00. This corporation loaned the Company $1,342,391.17 in exchange for a Promissory Note bearing interest at 8%. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet was as of December 31, 2014. Balances are shown net of conversions.			912,700				56,706

 

F-12

 

Investment Firm: $20,000.00 Note issued on August 15, Aug-2011. A corporation loaned the Company $20,000 in exchange for a Promissory Note bearing interest at 5%. The Lender is allowed to convert the promissory note into Company common shares, based on which the Note's buyer, Subsequently the note transferred to a non-affiliated second investment firm, which has converted $7,720.58. The accrued interest payable balance on this note and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet was as of December 31, 2014.			12,279				2,105
Investment Firm: $150,000.00 funded $75,000 on July 1, 2014; $75,000 on September 3, 2014 and $34,902.22 (net) on October 22nd 2014. Note issued on May 28, 2014. This corporation agreed to loan the Company $521,739.00 over the times in exchange for a Promissory Note bearing no interest for the first three months. The Lender is allowed to convert the promissory note into Company common shares. No accrued interest payable due to the grace period already mentioned. Accrued Interest Section of the Company’s balance sheet was as of December 31, 2014.			184,902				9,433
Investment Firm $100,000 Note: on July 17, ,2014 this entity loaned the Company $100,000 in exchange for a Promissory Note bearing interest at 12% 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 $5,556.67 as of December 31, 2014 and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet.			100,000				5,567
Investment Firm: $60,000 Note issued on October 8, 2014 $104,000 and November 20, 2014 $84,000. This corporation loaned the Company $188,000 in exchange for a Promissory Note bearing interest at 8%. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet was as of December 31, 2014.			188,000				2,444
Investment Firm: $165,000 Note issued on May 22, 2014. This corporation loaned the Company $150,000 in exchange for a Promissory Note bearing interest at 8%. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet was as of December 31, 2014.			165,000				3,449
Investment Firm $250,000 Note: on April 24, 2014 this entity loaned the Company $250,000 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 $32,933.32 as of December 31, 2014 and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet.			250,000				32,933
Investment Firm $11,500 Note: on May 23rd 2013 this entity 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 $5,395.81 as of December 31, 2014. and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet.			11,500				5,396
Private Investor $44,000.00 Note issued on November 15th and December 20th 2012, an individual loaned the Company $44,000 000 in exchange for a Promissory Note bearing interest at 18%. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note was $9,794.71 as of December 31, 2014. and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet.			13,728				9,795

 

F-13

 

Investment Firm: $5,000 Note issued on January 18, 2013, $5,000 Note issued on February 4, 2013, $1,500 Note issued on August 14, 2013; $15,000 Note issued on May 21, 2012, $7,000 Note issued on May 30, 2012, $20,000 Note issued on July 24, 2012, $17,000 Note issued on October 10, 2013, $13,000 Note issued on January 16, 2013, $6,000 Note issued on July 24, 2012, $20,000 Note issued on March 6, 2014 and $10,000 Note issued on Augsust 9, 2012. This corporation loaned the Company $112,500 in exchange for a Promissory Note bearing interest at 18%. The Lender is allowed to convert the promissory note into Company common shares, based on which converted $20,384,34 from Face Value and $67,615.66 from Accrued Interests. The accrued interest payable balance on this note and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet was as of as of December 31, 2014. and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet. Balances are shown net of conversions.			29,763
Investment Firm: $8,877 Note issued on June 25, 2012. This individual loaned the Company $8,877 in exchange for a Promissory Note bearing interest at 8%. The Lender is allowed to convert the promissory note into Company common shares, The accrued interest payable balance on this note and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet was as of December 31, 2014.			8,877				2,587
Investment Firm: $150,000 Note issued on March 18, 2014. This corporation loaned the Company $150,000 in exchange for a Promissory Note bearing interest at 18%, plus $4,882.19 financial expenses. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet was as of December 31, 2014. Balances are shown net of conversions.			29,500				12,898
Investment Firm: $100,000 Note issued on May 29, 2014. This corporation loaned the Company $95,000 in exchange for a Promissory Note bearing interest at 8%. The Lender is allowed to convert the promissory note into Company common shares. The accrued interest payable balance on this note and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet was as of 31, 2014. Balances are shown net of conversions.			75,000				4,575
Investment Firm $555,000 Note: on June 27,2014 and funded $200,000 on July 2, 2014 this entity loaned the Company $225,000 and $110,000 on December 19, 2014. 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 $12,054.17 as of December 31, 2014 and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet.			335,000				12,054
Investment Firm $110,000 Note: on July 29, ,2014 this entity loaned the Company $110,000 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 $3,788.89 as of December 31, 2014 and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet.			110,000				3,789
Investment Firm $250,000 Note: on June 24.2014. Funded $50,000 + 10% IOD on July 1, 2014, this entity loaned the Company $250,000 in exchange for a Promissory Note bearing interest at 12% 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 $3,483.33 as of December 31, 2014 and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet.			55,000				3,483
Private Investor: $40,000.00 Note issued on June 1, 2012. This individual loaned the Company $40,000 in exchange for a Promissory Note bearing interest at 8%. The Lender is allowed to convert the promissory note into Company common shares, The accrued interest payable balance on this note and is included in the Convertible Promissory Notes – Accrued Interest Section of the Company’s balance sheet was as of December 31, 2014.			40,000				7,461
TOTAL:			3,153,792				245,751

 

F-14

 

As a result of the above, the balance of the notes payable is $3,153,792 and the accrued interest thereon is $245,751.

 

Other Current Liabilities - The Company had other current liabilities consisting of the following at December 31, 2014:

 

Taxes			10,393
Payrrol Tax Liability			76,819

  

Note 5 – ADDITIONAL INFORMATION

 

Note 5.1 - Stock

 

Preferred stock

 

The Company is authorized to issue 15,000,000 shares of preferred stock at a par value $0.001. 1,350,000 shares were issued as of December 31, 2014.

 

Common stock

 

The Company is authorized to issue up 4,500,000,000 shares of common stock with a par value of $0.001, under terms and conditions established by the Board of Directors.

 

The Company had 927,967,208 issued and outstanding common stock shares as of December 31, 2014.

 

Note 6- Legal Matters

 

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

 

 

F-15

---

EXHIBIT 31.1

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Dror Svorai, certify that:

 

1.	I have reviewed this annual report on Form 10-K of Vapor Group, Inc.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.	I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

 

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter of the annual report) that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.	I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditor and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Date: March 30, 2015	By:	/s/ Dror Svorai
		Dror Svorai
		President and Treasurer

 

EXHIBIT 31.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Dror Svorai, certify that:

 

1.	I have reviewed this annual report on Form 10-K of Vapor Group, Inc.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.	I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

 

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter of the annual report) that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.	I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditor and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

Date: March 30, 2015	By:	/s/Dror Svorai
		Dror Svorai
		Treasurer

 

EXHIBIT 32.1

 

CERTIFICATION PURSUANT TO

 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

Pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, in connection with the filing of the annual report on Form 10-K of Vapor Group, Inc. (the "Company") for the twelve month period ended December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies, that, to such officer’s knowledge:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

 

Date: March 30, 2015	By:	/s/ Dror Svorai
		Dror Svorai
		President

 

Date: March 30, 2015	By:	/s/ Dror Svorai
		Dror Svorai
		Treasurer