Healthier Choices Management Corp. - Quarter Report: 2012 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended September 30, 2012

Or

For the transition period from                    to                     

Commission file number: 000-19001

VAPOR CORP.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: 888-766-5351

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

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

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.

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

As of November 13, 2012, there were 60,185,344 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

VAPOR CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to unaudited condensed consolidated financial statements

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VAPOR CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

See notes to unaudited condensed consolidated financial statements

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VAPOR CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See notes to unaudited condensed consolidated financial statements

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VAPOR CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. ORGANIZATION AND BASIS OF PRESENTATION

Business description

Vapor Corp. (the “Company”) is the holding company for its wholly owned subsidiary Smoke Anywhere U.S.A., Inc. (“Smoke “). The Company designs, markets and distributes electronic cigarettes and accessories under the Fifty-One^®, Krave^®, VaporX^®, EZ Smoker^®, Green Puffer^®, Americig^®, FumaréTM, Hookah StixTM, and Smoke Star^® brands. “Electronic cigarettes” or “e-cigarettes”, designed to look like traditional cigarettes, are battery powered products that enable users to inhale nicotine vapor without smoke, tar, ash or carbon monoxide.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required for audited annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the condensed consolidated financial statements not misleading have been included. The condensed consolidated balance sheet at December 31, 2011 has been derived from the Company’s audited consolidated financial statements as of that date.

These unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2012 and 2011 should be read in conjunction with the audited consolidated financial statements and related notes thereto as of and for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K for such year as filed with the SEC on March 27, 2012. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2012.

Liquidity

Our liquidity and capital resources have decreased significantly as a result of the net operating losses we incurred during the third quarter of 2012. Subsequent to September 30, 2012, as discussed in Note 7, the Company amended the redemption feature of the $300,000 Senior Convertible Notes that were entered into on June 19, 2012 with Kevin Frija, its Chief Executive Officer, Harlan Press, its Chief Financial Officer and Doron Ziv, a greater than 10% stockholder of the Company to extend the redemption provision of the note at the option of the holders from any time after June 18, 2013 to any time after June 18, 2014. In addition, the Company amended the redemption feature of the $50,000 Senior Convertible Note with Kevin Frija to extend the redemption provision of the note at the option of the holder from any time after September 27, 2013 to any time after September 27, 2014. The Company also extended the maturity date on the $500,000 Senior Note payable from January 8, 2013 to January 8, 2014. At September 30, 2012, we had working capital of $1,009,544 compared to $1,347,846 at December 31, 2011, a decrease of $338,302.

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Although the Company can provide no assurances, it believes its cash on hand, forthcoming income tax refund, and anticipated cash flow from operations will provide sufficient liquidity and capital resources to fund its business for at least the next twelve months. However, it may need to raise additional capital in the form of equity or debt financing to fund the anticipated growth of our business. There are no assurances that it will be able to raise such additional capital on terms acceptable to the Company or at all. In the event that the Company does not raise additional capital, it may be required to curtail its growth initiatives, scale back its operations and/or take additional measures to reduce costs in order to conserve its cash.

Note 2. SUMMARY OF CERTAIN SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany transactions and balances have been eliminated.

Reclassifications

Certain amounts in the prior period have been reclassified to conform to the current period presentation. These reclassifications had no effect on the Company’s previously reported financial position and results of operations.

Use of estimates in the preparation of the financial statements

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of net revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities, derivative instruments, hybrid instruments, share based payment arrangements, deferred tax and valuation allowances. Certain of our estimates could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and records adjustments when necessary.

Revenue recognition

The Company recognizes revenue from product sales or services rendered when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.

Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances are recorded when the products are shipped, title passes to customers and collection is reasonably assured. Retail sales to customers are made pursuant to a sales contract that provides for transfer of both title and risk of loss upon the Company’s delivery to the carrier. Return allowances, which reduce product revenue, are estimated using historical experience. Revenue from product sales and services rendered is recorded net of sales and consumption taxes.

The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases, inducement offers, such as offers for future discounts subject to a minimum current purchase, and other similar offers. Current discount offers, when accepted by the Company’s customers, are treated as a reduction to the purchase price of the related transaction, while inducement offers, when accepted by its customers, are treated as a reduction to purchase price of the related transaction based on estimated future redemption rates. Redemption rates are estimated using the Company’s historical experience for similar inducement offers. The Company reports sales, net of current discount offers and inducement offers on its condensed consolidated statements of operations.

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Accounts Receivable

Accounts receivable, net are stated at the amount the Company expects to collect. The Company provides a provision for allowances that includes returns, allowances and doubtful accounts equal to the estimated uncollectible amounts. The Company estimates its provision for allowances based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the provision for allowances will change.

At September 30, 2012, accounts receivable balances included a concentration from one customer of an amount greater than 10% of the total net accounts receivable balance ($49,553 from Customer A.) At December 31, 2011 accounts receivable balances included a concentration from one customer of an amount greater than 10% of the total net accounts receivable balance ($114,525 from Customer B). As to revenues, one customer accounted for sales in excess of 10% of the net sales for the three and nine month periods ended September 30, 2012 ($635,535 and $4,093,086, respectively, to Customer C). No customers accounted for revenues in excess of 10% of the net sales for the three and nine month periods ended September 30, 2011.

Inventories

Inventories are stated at the lower of cost or market determined by the first-in, first-out method. If the cost of the inventories exceeds their market value, provisions are recorded to write down excess inventory to its net realizable value. The Company’s inventories consist primarily of merchandise available for resale.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the expected useful life of the respective asset, after the asset is placed in service. Depreciation expense for the three months ended September 30, 2012 and 2011 was $2,962 and $1,849, respectively and is included in selling, general and administrative expense on the condensed consolidated statements of operations. Depreciation expense for the nine months ended September 30, 2012 and 2011 was $8,490 and $3,011, respectively and is included in selling, general and administrative expense on the consolidated statements of operations.

Income Taxes

The provision (benefit) for income taxes is based on (loss) income before income tax (benefit) expense reported for financial statement purposes after adjustments for transactions that do not have tax consequences. Deferred tax assets and liabilities are realized according to the estimated future tax consequences attributable to differences between the carrying value of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates as of the date of the condensed consolidated balance sheets. The effect of a change in tax rates on deferred tax assets and liabilities is reflected in the period that includes the statutory enactment date. A deferred tax asset valuation allowance is recorded when it has been determined that it is more likely than not that deferred tax assets will not be realized. If a valuation allowance is needed, a subsequent change in circumstances in future periods that causes a change in judgment about the realization of the related deferred tax amount could result in the reversal of the deferred tax valuation allowance.

The Company recognizes a liability for uncertain tax positions. An uncertain tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax return that is not based on clear and unambiguous tax law and which is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes.

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In order to determine the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates. Certain significant or unusual items are separately recognized in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter. Income tax (benefit) for the three months ended September 30, 2012 and 2011 was ($474,319) and ($74,537), respectively. Income tax (benefit) expense for the nine months ended September 30, 2012 and 2011 was ($634,285) and $314,900, respectively. The effective tax rate for the three and nine months ended September 30, 2012 differs from the U.S. federal statutory rate of 35% primarily due to under accrual of state income taxes from prior years and certain permanent differences between tax reporting purposes and financial reporting purposes. The Company files U.S. and state income tax returns in jurisdictions with various statutes of limitations. The Company does not have any net operating loss carryforwards. The Company’s consolidated federal tax return and any state tax returns are not currently under examination. The Company was subject to federal tax liens for failure to timely pay federal corporate taxes for the year ended December 31, 2009. These tax liens, including interest and penalties, amounted to $281,236. The Company paid the amounts owed in full during the first quarter of 2012 and effective July 5, 2012, the federal liens were permanently released.

Fair value measurements

The Company adopted the provisions of Accounting Standards Codification (“ASC”) Topic No. 820, “Fair Value Measurements and Disclosures,” (“ASC 820”) which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.

The estimated fair value of certain financial instruments, including cash and cash equivalents, due from merchant credit card processors, accounts receivable, accounts payable and accrued expenses which are carried at historical cost basis approximates their fair market values because of the short-term nature of these instruments.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value: Level 1 – quoted prices in active markets for identical assets or liabilities; Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable; and Level 3 – inputs that are unobservable.

Stock-Based Compensation

The Company accounts for stock-based compensation under ASC Topic No. 718, “Compensation-Stock Compensation” (“ASC 718”). These standards define a fair value based method of accounting for stock-based compensation. In accordance with ASC 718, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using the Black-Scholes-Merton valuation model, whereby compensation cost is the fair value of the award as determined by the valuation model at the grant date or other measurement date. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.

Derivative Instruments

The Company accounts for free-standing derivative instruments and hybrid instruments that contain embedded derivative features in accordance with ASC Topic No. 815, “Accounting for Derivative Instruments and Hedging Activities,” (“ASC 815”) as well as related interpretations of this topic. In accordance with this topic, derivative instruments and hybrid instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument.

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The Company estimates fair values of derivative instruments and hybrid instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective of measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex instruments, such as free-standing warrants, the Company generally uses the Black-Scholes-Merton valuation model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as the Black-Scholes-Merton valuation model) are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair values, the Company’s income (loss) going forward will reflect the volatility in these estimates and assumption changes. Under ASC 815, increases in the trading price of the Company’s common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Company’s common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.

Convertible Debt Instruments

The Company accounts for convertible debt instruments when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments in accordance with ASC 470-20 “Debt with Conversion and Other Options”. The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. The Company amortizes the respective debt discount over the term of the notes, using the straight-line method, which approximates the effective interest method.

Recent Accounting Pronouncements

The Financial Accounting Standards Board, the Emerging Issues Task Force and the SEC have issued certain accounting standards, updates and regulations as of September 30, 2012 that will become effective in subsequent periods; however, management of the Company does not believe that any of those standards, updates or regulations would have significantly affected the Company’s financial accounting measures or disclosures had they been in effect during the three and nine months ended September 30, 2012 or 2011, and it does not believe that any of them will have a significant impact on the Company’s condensed consolidated financial statements at the time they become effective.

Note 3. Notes Payable to Related Parties and a Shareholder

Senior Convertible Notes Payable to Related Parties

On June 19, 2012, the Company entered into securities purchase agreements with Kevin Frija, its Chief Executive Officer, Harlan Press, its Chief Financial Officer, and Doron Ziv, a greater than 10% stockholder of the Company, pursuant to which Messrs. Frija, Press and Ziv purchased from the Company (i) $300,000 aggregate principal amount of the Company’s senior convertible notes (the “$300,000 Senior Convertible Notes”) and (ii) common stock purchase warrants to purchase up to an aggregate of 46,512 shares of the Company’s common stock as described in Note 5 below.

The $300,000 Senior Convertible Notes bear interest at 18% per annum, provide for cash interest payments on a monthly basis, mature on June 18, 2015, are redeemable at the option of the holders at any time after June 18, 2013 subject to certain limitations, are convertible into shares of the Company’s common stock at the option of the holders at an initial conversion price of $0.213 per share (which represents 110% of the 30-day weighted average closing price per share of the Company’s common stock, as reported on the OTC Bulletin Board, preceding June 19, 2012) subject to certain anti-dilution protection and are senior unsecured obligations of the Company.

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Subsequent to September 30, 2012, as discussed in Note 7, the Company amended the redemption feature of the $300,000 Senior Convertible Notes that were entered into on June 19, 2012 with Kevin Frija, its Chief Executive Officer, Harlan Press, its Chief Financial Officer and Doron Ziv, a greater than 10% stockholder of the Company to extend the redemption provision of the note at the option of the holders from any time after June 18, 2013 to any time after June 18, 2014.

On September 28, 2012, the Company entered into a securities purchase agreement with Kevin Frija, its Chief Executive Officer, pursuant to which Mr. Frija purchased from the Company (i) a $50,000 principal amount senior convertible note of the Company (the “$50,000 Senior Convertible Note”) and (ii) common stock purchase warrants to purchase up to an aggregate of 6,868 shares of the Company’s common stock as described in Note 5 below.

The $50,000 Senior Convertible Note bears interest at 18% per annum, provides for cash interest payments on a monthly basis, matures on September 28, 2015, is redeemable at the option of the holder at any time after September 27, 2013 subject to certain limitations, is convertible into shares of the Company’s common stock at the option of the holder at an initial conversion price of $0.24 per share (which represents 110% of the 30-day weighted average closing price per share of the Company’s common stock, as reported on the OTC Bulletin Board, preceding September 27, 2012) subject to certain anti-dilution protection and is a senior unsecured obligation of the Company.

Subsequent to September 30, 2012, as discussed in Note 7,the Company amended the redemption feature of the $50,000 Senior Convertible Note with Kevin Frija to extend the redemption provision of the note at the option of the holder from any time after September 27, 2013 to any time after September 27, 2014.

The $300,000 Senior Convertible Notes and the $50,0000 Senior Convertible Note do not restrict the Company’s ability to incur future indebtedness.

During the nine months ended September 30, 2012, the Company recorded $3,902 as debt discount on the principal amount of the $300,000 Senior Convertible Notes issued on June 19, 2012 and $368 as debt discount on the principal amount of the $50,000 Senior Convertible Note issued on September 28, 2012 due to the valuation of the common stock purchase warrants issued in conjunction therewith. The debt discount applicable to each of the $300,000 Senior Convertible Notes and the $50,000 Senior Convertible Note will be amortized, using the straight-line method, over the life of the $300,000 Senior Convertible Notes and $50,000 Senior Convertible Note, as applicable, or until such time that the $300,000 Senior Convertible Notes or the $50,000 Senior Convertible Note, as applicable, is converted, in full or in part, into shares of common stock of the Company with any unamortized debt discount continuing to be amortized in the event of any partial conversion thereof and any unamortized debt discount being expensed at such time of full conversion thereof. The $300,000 Senior Convertible Notes and the $50,000 Senior Convertible Note are presented on a combined basis net of their respective debt discounts. During the three and nine months ended September 30, 2012, the Company recorded $330 and $385, respectively, in amortization expense related to the debt discount, which is included on a combined basis in interest expense in the Company’s condensed consolidated statement of operations.

Senior Note Payable to Shareholder

On July 9, 2012, the Company borrowed $500,000 from Ralph Frija, the father of the Company’s Chief Executive Officer Kevin Frija and a less than 5% stockholder of the Company, pursuant to a senior note (the “Senior Note”).

The Senior Note bears interest at 24% per annum, provides for cash interest payments on a monthly basis, is a senior unsecured obligation of the Company, and matures at the discretion of the Company on the earlier of (x) the date on which the Company consummates a single or series of related financings from which it receives net proceeds in excess of 125% of the initial principal amount of the Senior Note or (y) January 8, 2013.

Subsequent to September 30, 2012, as discussed in Note 7, the Company extended the maturity date on the $500,000 Senior Notes payable from January 8, 2013 to January 8, 2014.

The Senior Note does not restrict the Company’s ability to incur future indebtedness.

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Note 4. STOCKHOLDERS’ EQUITY

Issuance of Common Stock

On March 7, 2011, the Company issued a total of 100,000 shares of common stock, pursuant to a consultancy agreement dated February 17, 2011. The Company terminated the agreement on May 3, 2011 and 50,000 shares were subject to be returned to the Company. Said shares were returned to the Company and cancelled on June 23, 2011. The Company valued these shares at $21,500 based on the market price and recognized an expense in the amount of $0 and $21,500, which is included in stock-based compensation expense for the three and nine months ended September 30, 2011.

Stock-based Compensation

During the three months ended September 30, 2012 and 2011, the Company recognized stock-based compensation expense of $12,188 and $24,974, respectively, which is included as part of selling, general and administrative expense in the accompanying condensed consolidated statements of operations. During the nine months ended September 30, 2012 and 2011, the Company recognized stock-based compensation expense of $32,604 and $42,054, respectively, which is included as part of selling, general and administrative expense in the accompanying condensed consolidated statements of operations. The amounts relate to the granting of options to employees and consultants to purchase 624,000 shares of the Company’s common stock with a grant price of $0.375 per share in January 2010 which vest in 4 equal annual installments valued at $120,432, the granting of options to the Chief Financial Officer to purchase 200,000 shares of the Company’s common stock with a grant price of $0.20 per share in February 2012 which vest in 36 monthly installments valued at $20,000, the granting of options to employees and consultants to purchase 400,000 shares of the Company’s common stock with a grant price of $0.23 per share in March 2012 which vest in 4 equal annual installments valued at $45,600 and the granting of options to consultants to purchase 150,000 shares of the Company’s common stock with a grant price of $0.20 per share in September 2012 which vest in 4 equal annual installments valued at $17,850. As of September 30, 2012, 312,000 of the 624,000 options granted to employees and consultants were vested, 38,891 of the 200,000 options granted to the chief financial officer were vested, none of the 400,000 options granted to employees and consultants were vested, and none of the 150,000 options granted to consultants were vested. At September 30, 2012 and December 31, 2011, the amount of unamortized stock-based compensation expense on unvested stock options granted to employees and consultants was $111,496 and $61,374, respectively.

The fair value of employee stock options was estimated using the following weighted-average assumptions:

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Stock option activity

Options outstanding at September 30, 2012 under the various plans is as follows (in thousands):

A summary of activity under all option Plans at September 30, 2012 and changes during the nine months ended September 30, 2012 (in thousands, except per share data):

The aggregate intrinsic value, which was not material at September 30, 2012, is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock ($0.20) for stock options.

Net (loss) income per share

Basic net (loss) income per share are computed by dividing the net income or loss applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method) and the conversion or exercise of the Company’s Senior Convertible Notes and common stock purchase warrants, as applicable (using the if-converted or exercised method). Diluted income per share for the nine month period ended September 30, 2011 excludes the shares issuable upon the exercise of stock options from the calculation of net income per share, as their effect would be antidilutive.

Because the Company incurred a loss for the nine month period ended September 30, 2012 and three month periods ended September 30, 2012 and 2011, potentially dilutive securities outlined in the table below have been excluded from the computation of diluted net (loss) income per share, because the effect of their inclusion would have been anti-dilutive.

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Securities that could potentially dilute earnings per share in the future that were not included in the computation of diluted loss per share consist of the following as of September 30 (in thousands):

Note 5. RELATED PARTY TRANSACTIONS

On June 19, 2012, the Company entered into securities purchase agreements with Kevin Frija, its Chief Executive Officer, Harlan Press, its Chief Financial Officer, and Doron Ziv, a greater than 10% stockholder of the Company, pursuant to which Messrs. Frija, Press and Ziv (each, a “Purchaser”) purchased from the Company (i) the $300,000 Senior Convertible Notes (described in Note 3 above) and (ii) common stock purchase warrants to purchase up to an aggregate of 46,512 shares of the Company’s common stock (the “June Warrants”).

Each Purchaser purchased one of the $300,000 Senior Convertible Notes in the principal amount of $100,000 and a June Warrant to purchase up to 15,504 shares of the Company’s common stock (which number of shares represents the quotient obtained by dividing (x) $3,000 (3% of the $100,000 principal amount of such Senior Convertible Note) by (y) $0.1935 (the 30-day weighted average closing price per share of the Company’s common stock, as reported on the OTC Bulletin Board, preceding June 19, 2012)).

The June Warrants are exercisable at initial exercise price of $0.213 per share (which represents 110% of the 30-day weighted average closing price per share of the Company’s common stock, as reported on the OTC Bulletin Board, preceding June 19, 2012) subject to certain anti-dilution protection and may be exercised at the option of the holders for cash or on a cashless basis until June 18, 2017.

Subsequent to September 30, 2012, as discussed in Note 7, the Company amended the redemption feature of the $300,000 Senior Convertible Notes that were entered into on June 19, 2012 with Kevin Frija, its Chief Executive Officer, Harlan Press, its Chief Financial Officer and Doron Ziv, a greater than 10% stockholder of the Company to extend the redemption provision of the note at the option of the holders from any time after June 18, 2013 to any time after June 18, 2014.

In addition, on September 28, 2012, the Company entered into a securities purchase agreement with Kevin Frija, its Chief Executive Officer, pursuant to which Mr. Frija purchased from the Company (i) the $50,000 Senior Convertible Notes (described in Note 3 above) and (ii) common stock purchase warrants to purchase up to an aggregate of 6,868 shares of the Company’s common stock (the “September Warrants”) (which number of shares represents the quotient obtained by dividing (x) $3,000 (3% of the $50,000 principal amount of the $50,000 Senior Convertible Note) by (y) $0.2184 (the 30-day weighted average closing price per share of the Company’s common stock, as reported on the OTC Bulletin Board, preceding September 27, 2012)).

The September Warrants are exercisable at initial exercise price of $0.24 per share (which represents 110% of the 30-day weighted average closing price per share of the Company’s common stock, as reported on the OTC Bulletin Board, preceding September 27, 2012) subject to certain anti-dilution protection and may be exercised at the option of the holders for cash or on a cashless basis until September 27, 2017.

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Subsequent to September 30, 2012, as discussed in Note 7,the Company amended the redemption feature of the $50,000 Senior Convertible Note with Kevin Frija to extend the redemption provision of the note at the option of the holder from any time after September 27, 2013 to any time after September 27, 2014.

The June Warrants and the September Warrants were evaluated in accordance with ASC 815 and were determined to be equity instruments.

The Company estimated the fair value of these Warrants using the Black-Scholes-Merton valuation model. The significant assumptions which the Company used to measure the fair value were as follows:

On July 9, 2012, the Company borrowed $500,000 from Ralph Frija, the father of the Company’s Chief Executive Officer Kevin Frija and a less than 5% stockholder of the Company, pursuant to the Senior Note (described in Note 3 above).

Subsequent to September 30, 2012, as discussed in Note 7, the Company extended the maturity date on the $500,000 Senior Notes payable from January 8, 2013 to January 8, 2014.

The Company utilized the services of an entity that is owned 50% by its President and Chief Executive Officer. The entity performed fulfillment services and leasing of warehouse space to the Company prior to its move to new facilities in the second quarter of 2011. Upon its move to its new facilities such services ceased. Amounts paid to this entity for the three and nine months ended September 30, 2011 were $36,929 and $102,972, respectively.

Note 6. COMMITMENTS AND CONTINGENCIES

Lease Commitments

In March 2011, the Company entered into an operating lease for its new Florida office and warehouse facilities, expiring on April 30, 2013, which provides for minimum annual rentals of approximately $144,000, and provides, subject to its exercise, six successive one-year renewal options.

The remaining minimum annual rents for the years ending December 31 are:

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Rent expense for the three and nine months ended September 30, 2012 and 2011 was $38,160 and $114,480 and $38,248 and $71,063, respectively, and is included in selling, general and administrative expenses in the Company’s condensed consolidated statement of operations.

Employment Agreements

On October 1, 2009, the Company entered into an employment agreement with Kevin Frija to serve as its Chief Executive Officer and Director. The agreement provided for the payment of $72,000 in annual base salary, a one-time bonus of $48,000 payable ratably over a twelve (12) month period and an award to purchase up to 900,000 shares of the Company’s common stock which vested monthly on a pro-rata basis over twelve (12) months, and are exercisable at $0.45 per share. The agreement expired on September 10, 2010 and the Company has continued to employ Mr. Frija as its Chief Executive Officer on an at-will basis. Mr. Frija also served as the Company’s Chief Financial Officer from October 1, 2009 until February 29, 2012. Effective February 29, 2012, Mr. Frija resigned as the Company’s Chief Financial Officer as a result of the Company’s appointment of Harlan Press as the Company’s Chief Financial Officer as described below.

On February 27, 2012, the Company entered into a new employment agreement with Mr. Frija pursuant to which Mr. Frija will continue being employed as Chief Executive Officer and also be employed as President of the Company for a term that shall begin on January 1, 2012, and, unless sooner terminated as provided therein, shall end on December 31, 2014; provided that such term of employment shall automatically extend for successive one-year periods unless either party gives at least six months’ advance written notice of its intention not to extend the term of employment. Mr. Frija will receive a base salary of $144,000, increasing to $150,000 and $159,000, respectively, for the second and third years of the Agreement. The Company has agreed to pay Mr. Frija a one-time cash retention bonus in the amount of $10,500 on or before June 30, 2012. Mr. Frija shall be eligible to participate in the Company’s annual performance based bonus program, as the same may be established from time to time by the Company’s Board of Directors in consultation with Mr. Frija for executive officers of the Company. In addition, the Company may terminate Mr. Frija’s employment at any time, with or without cause (as defined in the employment agreement), and Mr. Frija may terminate his employment with the Company without or for good reason (as defined in the employment agreement), provided that termination by either party is subject to advance written notice and, in most instances, the satisfaction of other conditions. Under the employment agreement, in the event Mr. Frija’s employment is terminated by the Company without cause or by Mr. Frija for good reason, Mr. Frija will be entitled to receive severance benefits equal to three months of his base salary for each year of service. Mr. Frija’s employment agreement also contains term and post-termination non-solicitation, confidentiality and non-competition covenants.

As noted above, effective February 29, 2012, Mr. Harlan Press was appointed as Chief Financial Officer of the Company in connection with his entry into an employment agreement with the Company, the terms and conditions of which are summarized below.

On February 27, 2012, the Company entered into the aforesaid employment agreement with Mr. Press pursuant to which Mr. Press will be employed as Chief Financial Officer of the Company for a term that shall begin on February 29, 2012, and, unless sooner terminated as provided therein, shall end on February 28, 2015; provided that such term of employment shall automatically extend for successive one-year periods unless either party gives at least six months’ advance written notice of its intention not to extend the term of employment. Mr. Press will receive a base salary of $175,000, increasing to $181,000 and $190,000, respectively, for the second and third years of the employment agreement. Mr. Press shall be eligible to participate in the Company’s annual performance based bonus program, as the same may be established from time to time by the Company’s Board of Directors in consultation with Mr. Press for executive officers of the Company.

In addition, the Company may terminate Mr. Press’ employment at any time, with or without cause (as defined in the employment agreement), and Mr. Press may terminate his employment with the Company without or for good reason (as defined in the employment agreement), provided that termination by either party is subject to advance written notice and, in most instances, the satisfaction of other conditions. Under the employment agreement, in the event Mr. Press’ employment is terminated by the Company without cause or by Mr. Press for good reason, Mr. Press will be entitled to receive severance benefits equal to three months of his base salary for each year of service. In addition, Mr. Press will receive a 10-year option to purchase 200,000 shares of the Company’s common stock at an exercise price of $0.20, vesting monthly at the rate of approximately 5,556 per month. Mr. Press’ employment agreement also contains term and post-termination non-solicitation, confidentiality and non-competition covenants.

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Legal Proceedings

From time to time the Company may be involved in various claims and legal actions arising in the ordinary course of its business. There were no pending material claims or legal matters as of September 30, 2012 other than the following matters.

On May 15, 2011, the Company became aware that Ruyan Investment (Holdings) Limited (“Ruyan”) had named the Company, along with three other sellers of electronic cigarettes, in a lawsuit alleging patent infringement under federal law. In that lawsuit, which was initially filed on January 12, 2011, Ruyan was unsuccessful in bringing suit against the Company due to procedural rules of the court. Subsequent thereto, on July 29, 2011, Ruyan filed a new lawsuit in which it named the Company, along with seven other sellers of electronic cigarettes, alleging patent infringement under federal law. The lawsuit is Ruyan Investment (Holdings) Limited vs. Vapor Corp. et. al.2:11 CV-06268- GAF-FFM and is pending in the United States District Court for the Central District of California. On September 23, 2011, the Company filed an answer and counterclaims against Ruyan in the lawsuit. A joint scheduling conference among the parties occurred on January 9, 2012. On February 6, 2012, the Court sent out its final Scheduling Order and established a trial date of June 25, 2013. On February 27, 2012, Ruyan served its Infringement Contentions against the Company claiming that the Company’s Fifty-One Trio model of electronic cigarette infringes their patent. Although the Company can give no assurance as to the outcome of this lawsuit or the counterclaims, the Company believes that the allegations against it in this lawsuit are without merit, and the Company intends to vigorously defend against the lawsuit and prosecute its counterclaims.

On June 22, 2012, Ruyan filed a second lawsuit against the Company alleging patent infringement under federal law by the Company of a certain patent issued to Ruyan by the United States Patent Office on April 17, 2012. This second lawsuit is Ruyan Investment (Holdings) Limited vs. Vapor Corp. CV-12-5466 and is pending in the United States District Court for the Central District of California. The Company intends to vigorously defend against this lawsuit.

NOTE 7. SUBSEQUENT EVENTS

The Company evaluates events that have occurred after the balance sheet date but before the condensed consolidated financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements.

Subsequent to September 30, 2012, as discussed in Note 7, the Company amended the redemption feature of the $300,000 Senior Convertible Notes that were entered into on June 19, 2012 with Kevin Frija, its Chief Executive Officer, Harlan Press, its Chief Financial Officer and Doron Ziv, a greater than 10% stockholder of the Company to extend the redemption provision of the note at the option of the holders from any time after June 18, 2013 to any time after June 18, 2014. In addition, the Company amended the redemption feature of the $50,000 Senior Convertible Note with Kevin Frija to extend the redemption provision of the note at the option of the holder from any time after September 27, 2013 to any time after September 27, 2014. The Company also extended the maturity date on the $500,000 Senior Notes payable from January 8, 2013 to January 8, 2014.

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Our Management’s Discussion and Analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this quarterly report.

Forward-Looking Statements

This quarterly report contains forward-looking statements and information relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, our management. When used in this report, the words “believe,” “anticipate,” “expect,” “estimate,” “intend”, “plan” and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved. Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the “Risk Factors” section of and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in our subsequent filings with the SEC, and include, among others, the following: competition, consumer acceptance of our products, changes in customer preferences, reliance on Chinese suppliers and manufacturers, government regulation, product liability claims and the availability, terms and deployment of capital. The terms “Vapor Corp.,” “Vapor,” “we,” “us,” “our,” and the “Company” refer to Vapor Corp. and its wholly owned subsidiary Smoke Anywhere USA, Inc. and the terms “Smoke Anywhere USA,” and “Smoke” refer to our wholly owned subsidiary Smoke Anywhere USA, Inc.”

Executive Overview

The Company designs, markets and distributes electronic cigarettes and accessories under the Fifty-One^®, Krave^®, VaporX^®, EZ Smoker^®, Green Puffer^®, Americig^®, Fumaré^TM, Hookah Stix^TM, and Smoke Star^® brands. “Electronic cigarettes” or “e-cigarettes,” are battery-powered products that enable users to inhale nicotine vapor without fire, smoke, tar, ash, or carbon monoxide.

The Company participates directly in the highly competitive and fragmented e-cigarette market, but also faces competition from tobacco companies. Electronic cigarettes are relatively new products and the Company is continually working to introduce its product and brands to customers. The Company believes increased investment in marketing and advertising programs is critical to increasing product and brand awareness and that sales of its innovative and differentiated products are enhanced by knowledgeable salespersons who can convey the value and benefits electronic cigarettes have to offer over traditional tobacco burning cigarettes.

The Company’s business strategy leverages its unique ability to design market and develop multiple e-cigarette brands and to bring those brands to market through its multiple distribution channels. The Company sells its products through its online stores, its direct response television marketing efforts, to retail channels through its direct sales force, and through third-party wholesalers, retailers, and value-added resellers.

Critical Accounting Policies and Estimates

In response to the SEC’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have selected for disclosure our revenue recognition process and our accounting processes involving significant judgments, estimates and assumptions. These processes affect our reported revenues and current assets and are therefore critical in assessing our financial and operating status. We regularly evaluate these processes in preparing our condensed consolidated financial statements. The processes for determining the allowance for collection of trade receivables, stock-based compensation and income taxes involve certain assumptions and estimates that we believe to be reasonable under present facts and circumstances. These estimates and assumptions, if incorrect, could adversely impact our operations and financial position. There were no changes to our critical accounting policies during the quarter ended September 30, 2012 as described in Item 7. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

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Results of Operations for the Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

Sales, net for the nine months ended September 30, 2012 and 2011 were $16,844,097 and $12,634,823, respectively, an increase of $4,209,274 or approximately 33.3%. The increase in sales is primarily attributable to sales to a new distributor and wholesale customers. After reviewing the effectiveness of our direct marketing campaigns, we decreased our direct marketing campaigns and began the process of redesigning and reconfiguring the campaigns. In addition, we increased our Internet advertising campaigns. This decrease in direct marketing and increase in Internet advertising has led to a decrease in direct sales to consumers during the nine months ended September 30, 2012. We replaced those direct sales to consumers by increasing sales to distributors and wholesalers during the nine months ended September 30, 2012.

Cost of goods sold for the nine months ended September 30, 2012 and 2011 were $10,703,606 and $5,324,505 respectively, an increase of $5,379,101, or approximately 101%. The increase is primarily due to a change in product mix to higher distributor and wholesaler sales, which have lower gross margins than our direct sales to consumers. Our gross margins decreased to 36.5% for the nine months ended September 30, 2012 from 57.9% for the nine months ended September 30, 2011 due to the change in the product mix and increases in freight costs related to higher fuel costs. This increase in cost of goods sold for the nine months ended September 30, 2012 was partially offset by our lower average cost per unit during the period, due to more consistent purchases from our suppliers and our efforts to consolidate our product acquisitions with fewer suppliers. We believe we can continue to lower our average cost per unit through higher volume purchases from suppliers.

Selling, general and administrative expenses for the nine months ended September 30, 2012 and 2011 were $5,073,162 and $3,170,969, an increase of $1,902,193 or approximately 60%. The increase is primarily attributable to increases in salaries and related benefits of $1,215,705 due to increased personnel, including the hiring of a chief financial officer, increased compensation arrangements with our chief executive officer and the hiring of additional sales personnel; increased occupancy costs of $93,474 due to the Company moving to a new facility and an increase in infrastructure costs; increased variable selling expenses of $657,345 due to increases in freight out, insurance and travel costs, net of decreases in merchant card processing fees; net of decreased professional and consulting fees of $84,185 for accounting, legal matters and consulting fees primarily attributable to the hiring of additional personnel instead of engaging consultants.

Advertising expense was approximately $2,854,003 for the nine months ended September 30, 2012 compared to approximately $3,320,116 for the same period in 2011, a decrease of $466,113 or approximately 14%. During the nine months ended September 30, 2012, we decreased certain of our direct marketing campaigns and increased and continued various other advertising campaigns.

Interest expense was approximately $43,072 and $0 for the nine months ended September 30, 2012 and 2011, respectively. The increase was attributable to the Senior Convertible Notes and the Senior Note issued during the nine months ended September 30, 2012 (discussed in Note 3 to the condensed consolidated financial statements included elsewhere in this report).

Income tax (benefit) expense for the nine months ended September 30, 2012 and 2011 was ($634,285) and $314,900, respectively. The effective tax rate for the nine months ended September 30, 2012 and 2011differs from the U.S. federal statutory rate of 35% primarily due to under accrual of state income taxes from prior years and certain permanent differences between tax reporting purposes and financial reporting purposes. The Company was subject to federal tax liens for failure to timely pay federal corporate taxes for the year ended December 31, 2009 The tax liens, including interest and penalties, amounted to $281,236. The Company paid the amounts owed in full during the first quarter of 2012. Effective July 5, 2012, the federal liens were permanently released.

Net (loss) income for the nine months ended September 30, 2012 and 2011 was ($1,195,461) and $504,333, respectively, as a result of the items discussed above.

Results of Operations for the Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

Sales, net for the three months ended September 30, 2012 and 2011 were $3,855,568 and $3,330,839, respectively, an increase of $524,729 or approximately 15.8%. The increase in sales is primarily attributable to sales to a new distributor and wholesale customers and increased direct to consumer sales. As initiated earlier in 2012, we continued to decrease our direct marketing campaigns and redesign and reconfigure the campaigns. In addition, we continued increasing our Internet advertising campaigns, which led to increased direct to consumer sales, which more than offset the decrease in direct marketing sales during the three months ended September 30, 2012.

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Cost of goods sold for the three months ended September 30, 2012 and 2011 were $2,504,019 and $1,906,920, respectively, an increase of $597,099, or approximately 31.3%. The increase is primarily due to a change in product mix to higher distributor and wholesaler sales, which have lower gross margins than our direct sales to consumers. Our gross margins decreased to 35.1% from 42.7% due to the change in the product mix. This increase in cost of goods sold for the three months ended September 30, 2012 was partially offset by our lower average cost per unit during the period, due to more consistent purchases from our suppliers and our continuing efforts to consolidate our product acquisitions with fewer suppliers. We believe we can continue to lower our average cost per unit through higher volume purchases from suppliers.

Selling, general and administrative expenses for the three months ended September 30, 2012 and 2011 were $1,762,902 and $1,153,510, an increase of $609,392 or approximately 52.8%. The increase is primarily attributable to increases in salaries and related benefits of $310,565 due to increased personnel, including the hiring of a chief financial officer, increased compensation arrangements with our chief executive officer and the hiring of additional sales personnel; increased occupancy costs of $12,827 due to increases in operating expenses and infrastructure costs; and increased variable selling expenses of $293,790 due to increases in freight out, insurance, travel costs, and merchant card processing fees.

Advertising expense was approximately $840,733 for the three months ended September 30, 2012 compared to approximately $469,488 for the same period in 2011, an increase of $371,245 or approximately 79.1%. During the three months ended September 30, 2012, we increased our Internet advertising campaigns and decreased certain of our direct marketing campaigns and continued various other advertising campaigns.

Interest expense was approximately $41,243 and $0 for the three months ended September 30, 2012 and 2011, respectively. The increase was attributable to the Senior Convertible Notes and the Senior Note issued in the second and third quarters of 2012.

Income tax (benefit) for the three months ended September 30, 2012 and 2011 was ($474,319) and ($74,537), respectively. The effective tax rate for the three months ended September 30, 2012 and 2011 differs from the U.S. federal statutory rate of 35% primarily due to under accrual of state income taxes from prior years and certain permanent differences between tax reporting purposes and financial reporting purposes. The Company was subject to federal tax liens for failure to timely pay federal corporate taxes for the year ended December 31, 2009 during the three months ended June 30, 2012. The tax liens, including interest and penalties, amounted to $281,236. The Company paid the amounts owed in full during the first quarter of 2012. Effective July 5, 2012, the federal liens were permanently released.

Net (loss) for the three months ended September 30, 2012 and 2011 was ($819,010) and ($124,542), respectively, as a result of the items discussed above.

Liquidity and Capital Resources

We are not aware of any factors that are reasonably likely to adversely affect liquidity trends, other than those factors summarized under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. We are not involved in any hedging activities and had no forward exchange contracts outstanding at September 30, 2012. In the ordinary course of business we enter into purchase commitments by issuing purchase orders, which may or may not require vendor deposits. These transactions are recognized in our condensed consolidated financial statements in accordance with GAAP.

Our liquidity and capital resources have decreased significantly as a result of the net operating losses we incurred during the third quarter of 2012. Subsequent to September 30, 2012, as discussed in Note 7, the Company amended the redemption feature of the $300,000 Senior Convertible Notes that were entered into on June 19, 2012 with Kevin Frija, its Chief Executive Officer, Harlan Press, its Chief Financial Officer and Doron Ziv, a greater than 10% stockholder of the Company to extend the redemption provision of the note at the option of the holders from any time after June 18, 2013 to any time after June 18, 2014. In addition, the Company amended the redemption feature of the $50,000 Senior Convertible Note with Kevin Frija to extend the redemption provision of the note at the option of the holder from any time after September 27, 2013 to any time after September 27, 2014. The Company also extended the maturity date on the $500,000 Senior Notes payable from January 8, 2013 to January 8, 2014. At September 30, 2012, we had working capital of $1,009,544 compared to $1,347,846 at December 31, 2011, a decrease of $338,302.

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Although we can provide no assurances, we believe our cash on hand, forthcoming income tax refund, and anticipated cash flow from operations will provide sufficient liquidity and capital resources to fund our business for at least the next twelve months. However, we may need to raise additional capital in the form of equity or debt financing to fund the anticipated growth of our business. There are no assurances that we will be able to raise such additional capital on terms acceptable to us or at all. In the event that the Company does not raise additional capital, it may be required to curtail its growth initiatives, scale back its operations and/or take additional measures to reduce costs in order to conserve its cash.

Our net cash (used) in operating activities was ($1,184,148) for the nine months ended September 30, 2012, which compared unfavorably to cash provided by operating activities of $278,529 during the nine months ended September 30, 2011. Our net cash used in operating activities for the nine months ended September 30, 2012 resulted from increases in due from merchant credit card processors, prepaid expenses, other assets, and accounts payable, and decreases in accounts receivable, inventories, accrued expenses, customer deposits and income taxes payable, which are attributable to our efforts to increase sales and accommodate anticipated future sales growth.

Our net cash (used) in investing activities was $9,319 and $24,410 for the nine months ended September 30, 2012 and 2011, respectively, for purchases of property and equipment.

Our net cash provided by financing activities was $850,000 and $0 for the nine months ended September 30, 2012 and 2011, respectively. These financing activities relate to the Company’s issuance of the Senior Convertible Notes and the Senior Note.

In the ordinary course of our business, we enter in to purchase orders for components and finished goods, which may or may not require vendor deposits and may or may not be cancellable by either party. At September 30, 2012 and December 31, 2011, we had $280,205 and $497,455 in vendor deposits, respectively and is included in prepaid expenses on the condensed consolidated balance sheets. At September 30, 2012 and December 31, 2011, we do not have any material financial guarantees or other contractual commitments that are reasonably likely to have an adverse effect on liquidity.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Seasonality

We do not consider our business to be seasonal.

Inflation and Changing Prices

Neither inflation or changing prices for the three and nine months ended September 30, 2012 had a material impact on our operations.

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Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2012. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2012.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2012, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities Exchange Act Rules 13a-15 or 15d-15 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

Reference is made to Note 6 to the Company’s condensed consolidated financial statements included elsewhere in this report for the information required by this Item.

Item 6. Exhibits.

The documents set forth below are filed herewith or incorporated by reference as indicated.

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SIGNATURES

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

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