Healthier Choices Management Corp. - Annual Report: 2015 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2015

or

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

For the transition period from: _____________ to _____________

VAPOR CORP.

(Exact name of registrant as specified in its charter)

Address of Principal Executive Office: 3001 Griffin Road, Dania Beach, Florida 33312

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

Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.0001

Securities registered pursuant to Section 12(g) of the Act:

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

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $9.4 million based on the June 30, 2015 closing price of $112.00 per share.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 64,932,483 shares outstanding as of April 6, 2016.

INDEX

PART I

Item 1. Business.

Vapor Corp. (“Vapor” or the “Company”) operates 20 vape stores in the Southeastern United States and online where it sells vaporizers, liquids for vaporizers and e-cigarettes. The Company also designs, markets and distributes electronic cigarettes, vaporizers, e-liquids and accessories under the Vapor X®, Hookah Stix®, Vaporin™, Krave®, and Honey Stick® brands. “Electronic cigarettes” or “e-cigarettes,” and “vaporizers” are battery-powered products that enable users to inhale nicotine vapor without fire, smoke, tar, ash, or carbon monoxide. We also design and develop private label brands for our distribution customers. Third party manufacturers manufacture our products to meet our design specifications. We market our products as alternatives to traditional tobacco cigarettes and cigars. In 2014, as a response to market product demand changes, Vapor began to shift its primary focus from electronic cigarettes to vaporizers.

We offer our vaporizers and e-cigarettes and related products through our vape stores, online, customer direct phone center, online stores, to retail channels through our direct sales force, and through third party wholesalers, retailers and value-added resellers. Retailers of our products include small-box discount retailers, gas stations, drug stores, convenience stores, tobacco shops and kiosk locations in shopping malls throughout the United States.

The Company’s business strategy is currently focused on a multi-pronged approach to diversify our revenue streams to include the brick-and-mortar retail locations. We are seeing that there is a large consumer demand centered on the vaporizer products and the retention “atmosphere” created by the stores. Our distribution sales continue to be a significant part of our operations and we anticipate an improvement in their growth as we have adjusted towards vaporizers in addition to our e-cigarette brands.

Merger with Vaporin, Inc.

On March 4, 2015, the Company completed pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”) with Vaporin, Inc., a Delaware corporation (“Vaporin”) by which Vaporin and its wholly owned subsidiaries including, The Vape Store, Inc. merged with and into the Company with the Company being the surviving entity (the “Merger”). The Company had also entered into a joint venture with Vaporin (the “Joint Venture”) through the execution of an operating agreement (the “Operating Agreement”) of Emagine, pursuant to which the Company and Vaporin were 50% members of Emagine. In connection with the Merger, Emagine became wholly-owned subsidiaries of the Company.

Retail Stores

The Company acquired eight Florida retail stores in the aforementioned Merger in March 2015, and opened three additional Florida retail stores between April and August 2015. On August 31, 2015, the Company acquired the assets of two established retail stores in Gainesville, Florida. On September 3, 2015, the Company acquired the assets of one established retail store in Fort Myers, Florida. On October 10, 2015, the Company acquired the assets of three established retail stores in Atlanta, Georgia. On November 6, 2015, the Company acquired the assets of two retail stores located in Atlanta, Georgia, and Nashville, Tennessee, and a retail store with an adjoining warehouse located in Birmingham, Alabama. During the fourth quarter of 2015, the Company ceased its plans to increase the number of retail stores due to adverse industry trends and increasing federal and state regulations that, if implemented, may negatively impact future retail revenues.

Series A Units Offering

On July 29, 2015, the Company closed a registered public offering of 3,761,657 Series A Units (“Units”) at $11.00 per Unit for gross proceeds of approximately $41.4 million and net proceeds of approximately $38.7 million. Each Unit is comprised of one-fourth of share of Series A convertible preferred stock and 0.1429 shares of Series A warrants.

Change from NASDAQ to OTCQB Stock Listing

On January 22, 2016, the Company received a letter from the Listing Qualifications Staff (the “Staff”) of The NASDAQ Stock Market LLC (“Nasdaq”) indicating that the Staff had determined to delist the Company’s securities based upon its concerns that the Company’s continued listing on Nasdaq, particularly pursuant to a grace period within which to regain compliance with the $1.00 bid price requirement set forth in Nasdaq Listing Rule 5450, is no longer in the public interest as that concept is described in Nasdaq Listing Rule 5110. Specifically, the Staff indicated that, given the potential for dilution of the Company’s stockholders that may be caused by the cashless exercise provision of the Company’s Series A warrants, the Staff believes that the grace period provided to the Company to regain compliance with the $1.00 bid price requirement is no longer warranted. Previously on September 14, 2015, the Staff had notified the Company that, based upon its non-compliance with the minimum $1.00 bid price requirement for the prior 30 consecutive business days, the Company – in accordance with the Nasdaq Listing Rules – had been provided a grace period, through March 14, 2016, to regain compliance with the minimum bid price requirement. On the afternoon of February 11, 2016, the Company was notified by Nasdaq that trading of the Company’s common stock would be halted.

On February 16, 2016, the Company notified the Staff of Nasdaq that it was withdrawing its request to the Nasdaq Listing Qualifications Panel (the “Panel”) for an appeal of the delisting determination made by the Staff on January 22, 2016. As a result, the Company’s shares of common stock were suspended from The Nasdaq Capital Market at the opening of business on Wednesday, February 17, 2016. Nasdaq filed a Form 25 Notification of Delisting with the Securities and Exchange Commission relating to the delisting of the Company’s common stock. The official delisting of the Company’s common stock became effective ten days thereafter. Upon the delisting from Nasdaq, the Company no longer met the “Equity Conditions” required to issue the Company’s common stock to fulfill a cashless exercise pursuant to Section 1(d) of its Series A Warrants. The Company began trading on the OTCQB Market at the opening of the markets on March 16, 2016 under its temporary symbol, VPCOD and thereby met the “Equity Conditions” required to issue the Company’s common stock to fulfill a cashless exercise pursuant to Section 1(d) of its Series A Warrants.

Vaporizers and Electronic Cigarettes

“Vaporizers” and “electronic cigarettes,” or “e-cigarettes,” are battery-powered products that enable users to inhale nicotine vapor without smoke, tar, ash, or carbon monoxide. Electronic cigarettes look like traditional cigarettes and, regardless of their construction are comprised of three functional components:

When a user draws air through the electronic cigarette and/or vaporizer, the air flow is detected by a sensor, which activates a heating element that vaporizes the solution stored in the mouthpiece/cartridge, the solution is then vaporized and it is this vapor that is inhaled by the user. The cartridge contains either a nicotine solution or a nicotine free solution, either of which may be flavored.

Our Vaporizers and Electronic Cigarettes

Vaporizers feature a tank or chamber, a heating element and a battery. The vaporizer user fills the tank with e-liquid or the chamber with dry herb or leaf. The vaporizer battery can be recharged and the tank and chamber can be refilled.

We also offer disposable electronic cigarettes in multiple sizes, puff counts, styles, flavors and nicotine strengths; rechargeable electronic cigarettes that use replaceable cartridges (also known as “cartomizers”), and rechargeable vaporizers for use with either electronic cigarette solution (“e-liquid”) or dry herbs or leaf. Disposable electronic cigarettes feature a one-piece construction that houses all the components and is utilized until the nicotine or nicotine free solution is depleted. Rechargeable electronic cigarettes feature a rechargeable battery and replaceable cartridge (also known as a “cartomizer”). The cartomizers are changed when the solution is depleted from use.

Our Brands

We sell our vaporizers, electronic cigarettes and e-liquids under several different brands, including, Krave®, VaporX®, HookahStix® and Vaporin™, Honey Stick® brands. We also design and develop private label brands for our distribution customers. Our in-house engineering and graphic design team’s work to provide aesthetically pleasing, technologically advanced affordable vaporizers and e-cigarette options. We are in the process of preparing to commercialize additional brands which we intend to market to new customers and demographics.

Our Improvements and Product Development

We have developed and trademarked or are preparing to commercialize additional products. We include product development expenses as part of our operating expenses. We currently own no patents which are material to our business. We have a patent application pending in the United States. There is no assurance that we will be awarded patents for of any of these pending patent applications.

Flavor Profiles

We are developing new flavor profiles that are distinct to our brands. We believe that as the vaporizer and electronic cigarette industry matures, users of vaporizers and electronic cigarettes will develop, if they have not already, preferences for the product based not only on their quality, ability to successfully deliver nicotine, battery capacity, and vapor volume they generate, but on taste and flavor, like smokers do with their preferred brand of conventional tobacco cigarettes.

Vaporizer Biometric Fingerprint Lock Sensor Patent

We have a patent pending for a biometric fingerprint lock sensor that can be used in vaporizers. The biometric fingerprint lock sensor will allow the owner of the vaporizer to keep the device locked and turned off unless the authorized user unlocks the device via fingerprint scan, protecting the device from use by another individual. This technology may be used to protect against minors being able to turn on the device and will also deem the devices unusable in the event the device is lost or stolen. There is no assurance that we will be awarded a patent for this technology.

Our Kits and Accessories

Our vaporizer and electronic cigarettes are available in kits that contain everything a user needs to begin enjoying their “vaping” experience. In addition to kits we sell replacement parts including batteries, coils, refill cartridges or cartomizers that contain the liquid solution, atomizers, tanks and e-liquids. Our refill cartridges and e-liquids are available in various assorted flavors and nicotine levels (including 0.0% nicotine). In addition to our electronic cigarette and vaporizer products we sell an assortment of accessories, including various types of chargers (including USB chargers), carrying cases and lanyards.

The Market for Vaporizers and Electronic Cigarettes

We market our vaporizers and electronic cigarettes as an alternative to traditional tobacco cigarettes and cigars. We offer our products in multiple nicotine strengths, flavors and puff counts. Because vaporizers and electronic cigarettes offer a “smoking” experience without the burning of tobacco leaf, vaporizers and electronic cigarettes offer users the ability to satisfy their nicotine cravings without smoke, tar, ash or carbon monoxide. In many cases vaporizers and electronic cigarettes may be used where tobacco-burning cigarettes may not. Vaporizers and electronic cigarettes may be used in some instances where for regulatory or safety reasons tobacco burning cigarettes may not be used. However, certain states, cities, businesses, providers of transportation and public venues in the U.S. have already banned the use of vaporizers and electronic cigarettes, where traditional cigarettes may not be smoked, while others are considering banning the use of vaporizers and electronic cigarettes. We cannot provide any assurances that the use of vaporizers and electronic cigarettes will be permitted in places where traditional tobacco burning cigarette use is banned. See the “Risk Factors” on page 27.

Advertising

Currently, we advertise our products primarily on the Internet, through trade magazine ads, and through point of sale materials and displays at retail locations. We also attempt to build brand awareness through social media marketing activities, price promotions, and in-store and on premise promotions, public relations and trade show participation. We intend to continue to strategically manage our advertising activities in 2016 to gain editorial coverage for our brands. Some of our competitors promote their brands through print media and television commercials, and through celebrity endorsements, and have substantial resources to devote to such efforts. We believe that our and our competitors’ efforts have helped increase our sales, our product acceptance and general industry awareness.

Distribution and Sales

We offer our vaporizers and electronic cigarettes and related products through our retail vape stores, our websites, and retail channels through our direct sales force, and through third party wholesalers and distributors, retailers and value-added resellers. Retailers of our products include small-box discount retailers, gas stations, drug stores, convenience stores, tobacco shops throughout the United States. Vapor sells directly to consumers through twenty company owned retail vape stores. Our management believes that consumers are shifting towards vape stores for an enhanced experience. This enhanced experienced is derived from the greater variety of products at the stores, the knowledgeable staff and the social atmosphere. Vapor anticipates a significant portion of future revenue will come from its retail stores.

We believe that future growth of vaporizers, electronic cigarettes, and e-liquids is dependent on either higher volume, lower margin sales channels, like the broad based distribution network through which cigarettes are sold, or through Company-owned stores. Thus, we focused on growing our retail distribution reach by opening retail stores and entering into distribution agreements with large and established value added resellers. We currently have established relationships with several large retailers and national chains and in connection therewith we have paid slotting fees based on the number of stores our products are carried. These existing relationships are “at-will” meaning that either party may terminate the relationship for any reason or no reason at all. In 2015, we closed all of our retail kiosks, due to growing mall restrictions on public vaping, and focused on acquiring and developing the vape stores in Florida and the Southeast USA.

Business Strategy

We believe and are seeing in our current stores that there is a large consumer demand centered on the vaporizer products and the “atmosphere” created by the vape stores. Additionally, our business strategy leverages our ability to design market and develop multiple vaporizer and e-cigarette brands and to bring those brands to market through our multiple distribution channels.

We believe that our reputation and our experience in the electronic cigarette industry, both from a development, customer service and production perspective give us an advantage in attracting customers, specifically re-sellers who require ongoing support, reliable and consistent supply chains and mechanisms in place for supporting broad based distributors and big box retailers.

Moreover, we believe that our history with our suppliers, including the volume of products we source, gives us an advantage over other market participants as it relates to favorable pricing, priority as to inventory supply and delivery and first access to new products, including first access to next generation electronic cigarette products and technology.

Our goal is to achieve a position of sustainable leadership in the vaporizer industry. Our strategy consists of the following key elements:

Competition

Competition in the electronic cigarette industry, including the vaporizer and e-liquid segments, is intense. We compete with other sellers of electronic cigarettes, most notably Altria Group, Inc., JT International, Imperial Tobacco, and Reynolds American, Inc., which are big tobacco companies that have electronic cigarette business segments. The nature of our competitors is varied as the market is highly fragmented and the barriers to entry into the business are low. Our direct competitors sell products that are substantially similar to ours and through the same channels through which we sell our products. We compete with these direct competitors for sales through distributors, wholesalers and retailers, including but not limited to national chain stores, tobacco shops, gas stations, travel stores, shopping mall kiosks, in addition to direct to public sales through the Internet, mail order and telesales.

As a general matter, we have access to market and sell the similar vaporizers and electronic cigarettes as our competitors and we sell our products at substantially similar prices as our competitors; accordingly, the key competitive factors for our success is the quality of service we offer our customers, the scope and effectiveness of our marketing efforts, including media advertising campaigns and, increasingly, the ability to identify and develop new sources of customers.

As discussed above, we compete against “big tobacco”, U.S. cigarette manufacturers of both conventional tobacco cigarettes and electronic cigarettes like Altria Group, Inc., JT International, Imperial Tobacco, and Reynolds American, Inc. We compete against “big tobacco” who offers not only conventional tobacco cigarettes and electronic cigarettes and vaporizers, but also smokeless tobacco products such as “snus” (a form of moist ground smokeless tobacco that is usually sold in sachet form that resembles small tea bags), chewing tobacco and snuff. “Big tobacco” has nearly limitless resources, global distribution networks in place and a customer base that is fiercely loyal to their brands. Furthermore, we believe that “big tobacco” is devoting more attention and resources to developing, acquiring technology patents, and offering electronic cigarettes, vaporizers and e-liquids as these markets grow. Because of their well-established sales and distribution channels, marketing expertise and significant resources, “big tobacco” is better positioned than small competitors like us to capture a larger share of the electronic cigarette market.

Manufacturing

We have no manufacturing capabilities and do not intend to develop any manufacturing capabilities. Third party manufacturers make our products to meet our design specifications. We depend on third party manufacturers for our vaporizers, e-liquid, electronic cigarettes and accessories. Our customers associate certain characteristics of our products including the weight, feel, draw, unique flavor, packaging and other attributes of our products to the brands we market, distribute and sell. Any interruption in supply and or consistency of our products may harm our relationships and reputation with customers, and have a material adverse effect on our business, results of operations and financial condition. In order to minimize the risk of supply interruption, we currently utilize several third party manufacturers to manufacture our products to our specifications.

We currently utilize several manufacturers, all of which are based in China. We contract with our manufacturers on a purchase order basis. We do not have any output or requirements contracts with any of our manufacturers. Our manufacturers provide us with finished products, which we hold in inventory for distribution, sale and use. Certain Chinese factories and the products they export have recently been the source of safety concerns and recalls, which is generally attributed to lax regulatory, quality control and safety standards. Should Chinese factories continue to draw public criticism for exporting unsafe products, whether those products relate to our products or not, we may be adversely affected by the stigma associated with Chinese production, which could have a material adverse effect on our business, results of operations and financial position.

Although we believe that several alternative sources for our products are available, any failure to obtain the components, chemical constituents and manufacturing services necessary for the production of our products would have a material adverse effect on our business, results of operations and financial condition.

Source and Availability of Raw Materials

We believe that an adequate supply of product and raw materials will be available to us as needed and from multiple sources and suppliers. 

Intellectual Property

We have developed and trademarked or are preparing to commercialize additional products. We include product development expenses as part of our operating expenses. We currently own no patents which are material to our business. We have one patent application pending in the United States. There is no assurance that we will be awarded patents for of any of these pending patent applications.

Vaporizer Biometric Fingerprint Lock Sensor Patent

We have a patent pending for a biometric fingerprint lock sensor that can be used in vaporizers. The biometric fingerprint lock sensor will allow the owner of the vaporizer to keep the device locked and turned off unless the authorized user unlocks the device via fingerprint scan, protecting the device from use by another individual. This technology may be used to protect against minors being able to turn on the device and will also deem the devices unusable in the event the device is lost or stolen.

Trademarks

We own federal trademarks registrations for our brands, including: Fifty-One®, Krave®, Vapor X®, Alternacig®, EZSMOKER®, Green Puffer®, Americig®, Hookah Stix®, Honey Stick®, Vaporin™ and Smoke Star® brands. We have also own additional pending federal trademarks applications for other brands and product lines.

Patent Litigation

Third party patent lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights have and could force us to do one or more of the following:

Future third party lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights could have a material adverse effect on our business, results of operations and financial condition. 

We are required to obtain licenses to patents or proprietary rights of others and may be required to obtain more in the future and as the product continues to evolve. We cannot assure you that any future licenses required under any such patents or proprietary rights would be made available on terms acceptable to us or at all. If we do not obtain such licenses, we could encounter delays in product market introductions while we attempt to design around such patents, or could find that the development, manufacture, or sale of products requiring such licenses could be foreclosed. Litigation may be necessary to defend against claims of infringement asserted against us by others, or assert claims of infringement to enforce patents issued to us or exclusively licensed to us, to protect trade secrets or know-how possessed by us, or to determine the scope and validity of the proprietary rights of others. In addition, we may become involved in oppositions in foreign jurisdictions, reexaminations declared by the United States Patent and Trademark Office, or interference proceedings declared by the United States Patent and Trademark Office to determine the priority of inventions with respect to our patent applications or those of our licensors. Litigation, opposition, reexamination or interference proceedings could result in substantial costs to and diversion of effort by us, and may have a material adverse impact on us. In addition, we cannot assure you that our efforts to maintain or defend our patents will be successful.

Since a 2010 U.S. Court of Appeals decision, the Food and Drug Administration (“FDA”) is permitted to regulate electronic cigarettes as “tobacco products” under the Family Smoking Prevention and the Tobacco Control Act. Under this decision, the FDA is not permitted to regulate electronic cigarettes as “drugs” or “devices” or a “combination product” under the Federal Food, Drug and Cosmetic Act unless they are marketed for therapeutic purposes. This is contrary to anti-smoking devices like nicotine patches, which undergo more extensive FDA regulation. Because Vapor does not market Vapor’s electronic cigarettes for therapeutic purposes, Vapor’s electronic cigarettes are subject to being classified as “tobacco products” under the Tobacco Control Act. The Tobacco Control Act grants the FDA broad authority over the manufacture, sale, marketing and packaging of tobacco products, although the FDA is prohibited from issuing regulations banning all cigarettes or all smokeless tobacco products, or requiring the reduction of nicotine yields of a tobacco product to zero.

On April 24, 2014, the FDA released proposed rules that would extend its regulatory authority to electronic cigarettes and certain other tobacco products under the Tobacco Control Act. The proposed rules would require that electronic cigarette manufacturers (i) register with the FDA and report electronic cigarette product and ingredient listings; (ii) market new electronic cigarette products only after FDA review; (iii) only make direct and implied claims of reduced risk if the FDA confirms that scientific evidence supports the claim and that marketing the electronic cigarette product will benefit public health as a whole; (iv) not distribute free samples; (v) implement minimum age and identification restrictions to prevent sales to individuals under age 18; (vi) include a health warning; and (vii) not sell electronic cigarettes in vending machines, unless in a facility that never admits youth. It is not known how long this regulatory process to finalize and implement the rules may take. Accordingly, Vapor cannot predict the content of any final rules from the proposed rules or the impact they may have. See the “Risk Factor” on page 31 which also discusses possible additional FDA rulemaking.

In this regard, total compliance and related costs are not possible to predict and depend substantially on the future requirements imposed by the FDA under the Tobacco Control Act. Costs, however, could be substantial and could have a material adverse effect on Vapor’s business, results of operations and financial condition. In addition, failure to comply with the Tobacco Control Act and with FDA regulatory requirements could result in significant financial penalties and could have a material adverse effect on Vapor’s business, financial condition and results of operations and ability to market and sell Vapor’s products. At present, it is difficult to predict whether the Tobacco Control Act will impact Vapor to a greater degree than competitors in the industry, thus affecting Vapor’s competitive position.

State and local governments currently legislate and regulate tobacco products, including what is considered a tobacco product, how tobacco taxes are calculated and collected, to whom and by whom tobacco products can be sold and where tobacco products may or may not be smoked. State and local regulation of the e-cigarette market and the usage of e-cigarettes is beginning to accelerate.

As local regulations expand, vaporizers and electronic cigarettes may lose their appeal as an alternative to cigarettes, which may have the effect of reducing the demand for Vapor’s products and as a result have a material adverse effect on Vapor’s business, results of operations and financial condition.

At present, neither the Prevent All Cigarette Trafficking Act (which prohibits the use of the U.S. Postal Service to mail most tobacco products, which would require individuals and businesses that make interstate sales of cigarettes or smokeless tobacco to comply with state tax laws) nor the Federal Cigarette Labeling and Advertising Act (which governs how cigarettes can be advertised and marketed) apply to electronic cigarettes. The application of either or both of these federal laws to vaporizers and electronic cigarettes would have a material adverse effect on Vapor’s business, results of operations and financial condition.

Regulations

On July 1, 2015, the FDA published a document entitled “Advanced notice of proposed rulemaking” or the Advance. Through the Advance, the FDA solicited public comments on whether it should issue rules with respect to nicotine exposure warning and child-resistant packaging for e-liquids containing nicotine. Following public comment, the FDA may issue proposed rules in furtherance of the purposes outlined in the Advance and ultimately pass the rules as proposed or in modified form. We cannot predict whether if rules are passed it will have a material adverse effect on our future results of operations and financial conditions.

Vapor expects that the tobacco industry will experience significant regulatory developments over the next few years, driven principally by the World Health Organization’s FCTC. The FCTC is the first international public health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. Regulatory initiatives that have been proposed, introduced or enacted include:

•the levying of substantial and increasing tax and duty charges;

•restrictions or bans on advertising, marketing and sponsorship;

•the display of larger health warnings, graphic health warnings and other labelling requirements;

•restrictions on packaging design, including the use of colors and generic packaging;

•restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;

•requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels;

•requirements regarding testing, disclosure and use of tobacco product ingredients;

•increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;

•elimination of duty free allowances for travelers; and

• encouraging litigation against tobacco companies.

If Vaporizers, electronic cigarettes, or e-liquids, are subject to one or more significant regulatory initiates enacted under the FCTC, Vapor’s business, results of operations and financial condition could be materially and adversely affected.

Employees

As of April 6, 2016, we had 122 full-time employees and 9 part-time employees, none of which are represented by a collective bargaining agreement. We believe that our employee relations are good.

Item 1A. Risk Factors.

Not applicable to smaller reporting companies. Please see the Company’s risk factors contained under Item 7.

Item 1B. Unresolved Staff Comments.

None

Item 2. Properties.

We lease approximately 13,000 square feet of office and warehouse facilities located at 3001 Griffin Road, Dania Beach, Florida, under a month to month lease.

The Company currently has lease agreements for 20 retail store locations one of which has a small warehouse. Under these leases, the initial lease terms range from one to five years. During 2015, the Company closed its eight kiosks that it opened in the fourth quarter of 2014 and negotiated settlements and terminations of the related leases and licensing agreements. Under these leases, the initial lease terms ranged from one to five years.

Item 3. Legal Proceedings.

Fontem Matters

On June 22, 2012, Ruyan Investment (Holding) Limited (“Ruyan”) filed a lawsuit against the Company alleging infringement of U.S. Patent No. 8,156,944 (the “944 Patent”). Ruyan also filed separate cases for patent infringement against nine other defendants asserting infringement of the 944 Patent. Ruyan’s second lawsuit against the Company known as Ruyan Investment (Holdings) Limited vs. Vapor Corp. CV-12-5466 is pending in the United States District Court for the Central District of California. All of these lawsuits were consolidated for discovery and pre-trial purposes.

On February 25, 2013, Ruyan’s second patent infringement lawsuit against the Company as well as all of the other consolidated lawsuits were stayed as a result of the Court granting a stay in one of the consolidated lawsuits. The Court granted the motion to stay Ruyan’s separate lawsuits against the Company and the other defendants based on the filing of a request for inter partes reexamination of the 944 Patent at the United States Patent and Trademark Office.

All reexamination proceedings of the 944 Patent had stayed by the United States Patent and Trademark Office Patent Trial and Appeal Board pending its approval of one or more of them. On March 5, 2014, Fontem Ventures, B.V. and Fontem Holdings 1 B.V. (the successors to Ruyan) filed a complaint against the Company alleging infringement of U.S. Patent No. 8,365,742, entitled “Aerosol Electronic Cigarette”, U.S. Patent No. 8,375,957, entitled “Electronic Cigarette”, U.S. Patent No. 8,393,331, entitled “Aerosol Electronic Cigarette” and U.S. Patent No. 8,490,628, entitled “Electronic Atomization Cigarette. On April 8, 2014, plaintiffs amended their complaint to add U.S. Patent No. 8,689,805, entitled “Electronic Cigarette.” The products accused of infringement by the plaintiff are various Krave, Fifty-one and Hookah Stix products and parts. Eight other companies were also sued in separate lawsuits alleging infringement of one or more of the patents listed above. The Company filed its Answer and Counterclaims on May 1, 2014.

On October 21, 2014, Fontem Ventures B.V. and Fontem Holdings 1 B.V. filed a complaint against the Company in the U.S. District Court for the Central District of California, captioned Fontem Ventures B.V., et al. v. Vapor Corp., No. 14-cv-8155. The complaint alleges infringement of United States Patent No. 8,863,752, entitled “Electronic Cigarette”. The products accused of infringement by plaintiffs are various Krave and Fifty-One products and parts On January 15, 2015, the Company filed its Answer and Counterclaims.

On December 2, 2014, Fontem Ventures B.V. and Fontem Holdings 1 B.V. filed a complaint against the Company in the U.S. District Court for the Central District of California, captioned Fontem Ventures B.V., et al. v. Vapor Corp., No. 14-cv-09267. The Complaint alleges infringement by the plaintiffs against the Company relating to various Krave, Vapor X and Fifty-One products and parts. Fontem amended its complaint on December 16, 2014, to allege infringement of United States Patent No. 8,910,641, entitled “Electronic Cigarette” against the same products. On January 15, 2015, the Company filed its Answer and Counterclaims. Fontem, by way of its expert, sought $1,982,504 in monetary damages for alleged past infringement. All of the above referenced cases filed by Fontem were consolidated.

Effective December 16, 2015, the Company entered into a confidential Settlement Agreement and a non-exclusive royalty-bearing confidential Global License Agreement (“License Agreement”) with Fontem Ventures B.V. (“Fontem”) resulting in the dismissal of all of the aforementioned patent infringement cases by Fontem against the Company. On January 15, 2016, the Company made a payment of $1.7 million under the terms of the Settlement and License Agreements. In connection with the License Agreement, Fontem granted the Company a non-exclusive license to certain of its products. As consideration, the Company will make quarterly license and royalty payments to Fontem based on the sale of qualifying products as defined in the License Agreement. The term of the License Agreement will continue until all of the patents on the products subject to the agreement are no longer enforceable. 

California Center for Environment Health Matters

On June 22, 2015, the Center for Environment Health, as plaintiff, filed suit against a number of defendants including Vapor Corp., its wholly-owned subsidiary, the Vape Store, Inc., Vaporin and another wholly-owned subsidiary, Vaporin Florida, Inc. The lawsuit was filed in the Superior Court of the State of California, County of Alameda. The suit seeks relief under California Proposition 65 which makes it unlawful for businesses to knowingly and intentionally expose individuals in California to chemicals known to cause birth defects or other harm without providing clear and reasonable warnings. All of the defendants are alleged to have sold products containing significant quantities of nicotine without warnings in violation of Proposition 65. The plaintiff sought a civil penalty against these defendants in the amount of $2,500 per day for each violation of Proposition 65, together with attorneys’ fees and costs. Discovery commenced in November 2015. On April 6, 2016, the Company and the plaintiff entered into a settlement agreement, which required the Company to (1) make a payment of $45,000 and (2) comply with enhanced product labeling requirements within a set implementation period as defined in the consent judgment.

On March 2, 2016, Hudson Bay Master Fund Ltd., filed a complaint against the Company in the Supreme Court of the State of New York, County of New York, captioned Hudson Bay Master Fund Ltd. versus Vapor Corp., Index No. 651094/2016.  The Complaint alleges that the Company failed to timely exercise its Series A Warrants delivered by the plaintiff and seeks damages of $339,810.  The Company intends to file an answer to dispute these claims. 

Item 4. Mine Safety Disclosures.

None.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is currently listed on the OTCQB Market under the symbol “VPCOD” and our Units were quoted on The NASDAQ Capital Market under the symbol “VPCOU.” On January 25, 2016, the Units separated into Series A Convertible Preferred Stock and Series A Warrants and public trading ceased.

The following table contains, for the periods indicated, the intraday high and low sale prices per share of our common stock and Units.

(1)        The Company effected a 1-for-5 reverse stock split on December 27, 2013, a 1-for-5 reverse stock split on July 9, 2015 and a 1-for-70 reverse stock split on March 9, 2016. Common stock per share information gives effect to the aforementioned reverse splits of the Company’s common stock.

As of April 6, 2016, there were approximately 1,276 stockholders of record for our common stock. A substantially greater number of stockholders may be “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial institutions.

As of April 6, 2016, the last reported sale price of our common stock on OTCQB Market was $0.0029 per share.

We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on any of our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends in the foreseeable future. Future determination as to the declaration and payment of dividends, if any, will be at the discretion of our Board and will depend on then existing conditions, including our operating results, financial conditions, contractual restrictions, capital requirements, business prospects and other factors our Board may deem relevant.

Item 6. Selected Financial Data.

Not required for smaller reporting companies.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included elsewhere in this report. Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

Cautionary Note Regarding Forward Looking Statements

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, liquidity, business strategy, plans and objectives of management for future operations, are forward-looking statements.

Forward-looking statements contained in this report include:

The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “expect,” and similar expressions, as they relate to us, are intended to identify forward-looking statements.  We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.  

The results anticipated by any or all of these forward-looking statements might not occur.  Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements are contained in the Risk Factors contained herein.  We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.  For more information regarding some of the ongoing risks and uncertainties of our business, see the Risk Factors below.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors.”

Company Overview

Vapor Corp. (the “Company” or “Vapor”) is a distributor and retailer of vaporizers, e-liquids and electronic cigarettes. The Company operates twenty retail stores in the Southeast of the United States. Vapor also designs, markets, and distributes vaporizers, e-liquids, electronic cigarettes and accessories under the Vapor X®, Hookah Stix®, Vaporin™, Krave® and, Honey Stick® brands. Vapor also designs and develops private label brands for distribution customers. Third party manufacturers produce Vapor’s products to meet their design specifications.

Vapor offers e-liquids, vaporizers, e-cigarettes and related products through our vape stores, online, retail channels through our direct sales force, and through third party wholesalers, retailers and value-added resellers. Retailers of our products include small-box discount retailers, gas stations, drug stores, convenience stores, and tobacco shops throughout the United States.

On July 7, 2015, the Company filed an amendment to its Certificate of Incorporation to effectuate a one-for-five reverse stock split to its common stock and to increase its authorized common stock to 150,000,000 shares. These amendments were effective on July 8, 2015. On October 28, 2015, the Company filed an amendment to its Certificate of Incorporation to increase its authorized common stock to 500,000,000. On February 1, 2016, the Company filed an amendment to its Certificate of Incorporation to increase its authorized common stock to 5,000,000,000, and change the par value to $0.0001. On March 4, 2016, the Company filed an amendment to its Certificate of Incorporation to effectuate a one-for-seventy reverse stock split to its common stock. All warrant, convertible preferred stock, option, common stock shares and per share information included in these consolidated financial statements gives effect to the aforementioned reverse splits of the Company’s common stock.

Merger with Vaporin, Inc.

On March 4, 2015, Vaporin and its wholly owned subsidiaries including, The Vape Store, Inc. merged with and into the Company with the Company being the surviving entity. In connection with the Merger, Emagine became wholly-owned subsidiaries of the Company.

Retail Stores

The Company acquired eight Florida retail stores in the aforementioned Merger in March 2015, and opened three additional Florida retail stores between April and August 2015. On August 31, 2015 the Company acquired the assets of two established retail stores in Gainesville, Florida. On September 3, 2015, the Company acquired the assets of one established retail store in Fort Myers, Florida. On October 10, 2015 the Company acquired the assets of three established retail stores in Atlanta, Georgia. On November 6, 2015, the Company acquired the assets of two retail stores located in Atlanta, Georgia, and Nashville, Tennessee, and a retail store with an adjoining warehouse located in Birmingham, Alabama. During the fourth quarter of 2015, the Company ceased its plans to increase the number of retail stores due to adverse industry trends and increasing federal and state regulations that, if implemented, may negatively impact future retail revenues.

Series A Units Offering

On July 29, 2015, the Company closed a registered public offering of 3,761,657 Units at $11.00 per Unit for gross proceeds of approximately $41.4 million and net proceeds of approximately $38.7 million. Each Unit is comprised of one-fourth of share of Series A convertible preferred stock and 0.2857 Series A warrants. Each one-fourth of a share of Series A preferred stock is convertible into 0.1429 shares of common stock and each Series A warrant is exercisable into 0.1429 shares of common stock at an exercise price of $86.80 per share.

Going Concern and Liquidity

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of any uncertainties related to our going concern assessment. The Company’s outstanding warrants sold as part of our July 29, 2015 public offering separated from the Series A Units on January 23, 2016. Each warrant may be exercised without cash for the Black Scholes value defined in the warrant agreement. The number of shares of common stock we issue in connection with the exercise of our warrants will be based on our common stock price two days prior to the date of the exercise. If all of the warrants were exercised simultaneously, then the Company would not have sufficient authorized common stock to satisfy all the warrant exercises and it may be required to use cash to pay warrant holders. Since we cannot predict the future stock price and when the warrant holders will exercise warrants and sell the underlying common shares, management cannot predict if the Company will have sufficient cash resources to satisfy its obligation to the current warrant holders.

We reported a net loss allocable to common shareholders of approximately $36.3 million for the year ended December 31, 2015 and had negative working capital of approximately $17.2 million. We expect to continue incurring losses before the impact of changes in the fair value of derivatives for the foreseeable future and may need to raise additional capital to pursue its retail store expansion, satisfy warrant obligations, and to continue as a going concern.

Accordingly, the material uncertainty related to the exercise of warrants and the sufficiency of cash reserves to satisfy obligations raises substantial doubt about the Company’s ability to continue as a going concern.

Factors Affecting Our Performance

We believe the following factors affect our performance:

Wholesale: We believe that our ability to grow consumer store sales of vaporizer products, e-liquids and accessories will affect our revenue and financial results by offsetting the deceleration in e-cigarette sales. We launched a new modular vaporizer display program that represents a Vapor Store in Store concept. We believe these display programs will increase distribution and expand our customer base.

Retail: We believe the operating performance of our retail stores will affect our revenue and financial performance. The Company has a total of twenty retail stores, fourteen retail stores in Florida, four in Georgia, one in Tennessee and one in Alabama. During the fourth quarter of 2015, the Company ceased its plans to increase the number of retail stores due to adverse industry trends and increasing federal and state regulations that, if implemented, may negatively impact future retail revenues.

Online: The Company launched multi-channel web affiliate programs. We have added over a thousand items to our online product offerings.

Inventory Management: Our revenue trends are affected by an evolving product acceptance and consumer demand. The transition to vaporizers and e-liquids products have impacted our wholesale and online sales and our financial performance. We are creating and offering new products to our wholesale and retail customers. Evolving product development and technology impacts our licensing and intellectual properties spending. We expect the transition to vaporizer and advanced technology and enhanced performance products to continue and impact our operating results in the future.

Increased Competition: National competitors’ launches of branded e-cigarette products during 2015 and 2014, have made it more difficult to compete on prices and to secure business. We expect increased e-cigarette product supply and downward pressure on prices to continue and impact our operating results in the future. We market and sell the similar vaporizers and e-liquids as our competitors and we sell our products at substantially similar prices as our competitors; accordingly, the key competitive factors for our success is maintain the quality of service we offer our customers and effective marketing efforts.

Results of Operations

The following table sets forth our Consolidated Statements of Operations for the years ended December 31, 2015, and 2014 that is used in the following discussions of our results of operations:

Net wholesale and online sales decreased by $8,622,198 to $6,521,354 for the year ended December 31, 2015 as compared to $15,143,552 for the year ended December 31, 2015. The net sales decrease is attributable to continued decline in demand from our distributor e-cigarette category inventory, returns of e-cigarette products and to the termination of our television direct marketing campaigns for our Alternacig® and VaporX® brands in June 2015 which negatively impacted sales from our on-line channels. Wholesale sales were also unfavorably impacted by new national competitors’ launches of their own branded products during 2015 and 2014. Increased national and local competition in both the e-cigarette and vaporizers markets caused declines in product sales prices. In addition, sales decreased due to certain wholesale and distribution customers selling off their current inventory of electronic cigarette products and so they can transition to e-vapor products. We anticipate that the demand for e-vapor products will continue to increase, as users want products that have more advanced technology with higher performance and longer battery life. As a result, we have changed our product mix to include more e-vapor products, including premium USA made e-liquids, and have introduced innovative displays for our e-vapor products to expand our customer base.

Net retail sales increased $4,092,372 to $4,228,679 for the year ended December 31, 2015 as compared to $136,307 for the year ended December 31, 2014. The increase in sales is primarily due to the eight retail stores acquired by us in connection with the Merger, and 12 new stores opened or acquired from March through December 2015. The retail sales growth is offset by decrease in retail sales from eight mall kiosks, seven of which were closed by June 30, 2015 and the final one closed on December 31, 2015.

Wholesale and online cost of goods sold for the year ended December 31, 2015 and 2014 were $6,398,082 and $14,296,121 respectively, a decrease of $7,889,039. The decrease is primarily due to the decline in wholesale and online sales. For the years ended December 31, 2015 and 2014, charges to cost of goods sold were taken for $441,915 and $1,834,619, respectively, for obsolete and slow moving wholesale inventories.

Retail cost of goods sold for the year ended December 31, 2015 and 2014 were $1,616,561 and $201,133, respectively. The increase is due to an increase in sales from our retail stores. Gross profit from retail stores was $2,612,118 for the year ended December 31, 2015. There was gross loss of $64,826 from retail mall kiosks for the year ended December 31, 2014 was attributable to products returns and refunds and startup costs.

Advertising expense decreased $2,037,987 to approximately $336,342 for the year ended December 31, 2015 compared to $2,374,329 for the year ended December 31, 2014. During the year ended December 31, 2015, we decreased our internet advertising and television direct marketing campaigns.

Selling, general and administrative expenses increased $4,617,371 to $15,744,130 for the year ended December 31, 2015 compared $11,126,759 to the same period in 2014. An increase of approximately $2.5 million was attributable to additional operating costs generated by the operations of the twenty retail stores. Payroll and employee related costs of $5,447,738 and $2,864,609 respectively for the years ended December 31, 2015 and 2014 increased by $2,583,129 due to headcount growth for the retail locations and severance packages for key employees. Selling, general and administrative expenses for the year ended December 31, 2015 also included $1.9 million of settlements and royalty fees. During 2015, the Company closed eight of its mall kiosks. In connection with the kiosk closings, the Company incurred approximately $463,840 of losses on disposal of computer equipment, fixtures, and furniture and $265,627 of exit costs for non-cancellable leases for the year ended December 31, 2015. Depreciation and amortization expense increased by $405,667 to $462,102 from $56,435 for the years ended December 31, 2015 and 2014.

During the fourth quarter of 2015, the Company revised its plans to increase the number of retail stores due to adverse industry trends and increasing federal and state regulations that may potentially reduce both wholesale and retail revenues. The ceased retail store expansion plan and potential reduction in revenue from proposed regulations could negatively impact the Company’s projected cash flows and profits. Accordingly the Company’s goodwill and intangible assets were evaluated for impairment. Management concluded that goodwill and certain intangible assets were impaired and recorded impairment charges of $14,455,000 and $948,833, respectively, totaling to $15,403,833 for the year ended December 31, 2015.

Net other income and expenses of $30,549,668 for the year ended December 31, 2015 included a $42,221,418 non-cash gain from the change in the fair value of the derivatives, $5,279,003 of costs associated with the underwriting of our July 29, 2015 public offering of Series A Units, stock-based expense of $3,748,063 incurred in connection with the Waiver agreements made in connection with the Company’s private placement offerings, $977,938 of amortization of deferred debt discounts and financing costs, and $1,497,169 of loss on debt extinguishment. The costs associated with the Series A Unit underwriting were expensed as incurred due to the derivative features of the Units. The decrease in the trading price of the Company’s common stock at December 31, 2015, as compared to the date of issuance, directly decreased the trading fair value of derivatives resulting in a non-cash gain of $42,221,418 from the change in the fair value of derivatives for the year ended December 31, 2015. Net other expenses of $ 366,433 for the year ended December 31, 2014 is included interest expense and amortization of deferred debt discount and financing costs of $192,725 and $173,708, respectively.

A non-cash deemed dividend of $38,068,021 was recognized in connection with the public offering of the Units in July 2015.

Liquidity and Capital Resources

Our net cash used in operating activities of $9,286,758 for the year ended December 31, 2015 resulted from our net income of $1,800,753 and a net change of $1,897,889 in operating assets and liabilities offset by non-cash adjustments of $12,985,400. Our net cash used in operating activities of $6,290,997 for the year ended December 31, 2014 resulted from our net loss of $13,852,249 offset by non-cash adjustments of $4,760,737 and by a net change of $2,800,515 in operating assets and liabilities.

The net cash used in investing activities of $1,010,282 for the year ended December 31, 2015 is due to the acquisition of our retail stores of $1,399,079, purchases of property and equipment of $194,766 and $20,000 of tradenames, offset by the collection of a $467,095 loan receivable and $136,468 of cash received in connection with the Merger with Vaporin. The net cash used in investing activities of $1,077,505 for the year ended December 31, 2014 is due to a loan receivable of $517,095 and $560,410 of property and equipment purchase.

The net cash provided by financing activities of $37,040,837 for the year ended December 31, 2015 is due to proceeds of $41,378,227 from the July 29, 2015 public offering of Units net of $3,726,586 of associated cost, net proceeds of $2,941,960 from a private place of common stock and warrants less $196,250 of offering costs, net proceeds of $1,662,500 from the issuance of convertible debenture, and $350,000 of loan proceeds from Vaporin offset by the debt repayments of $1,750,000 of convertible debentures, and $1,250,000 of senior notes payables to related parties. $1,000,000 of notes payable to related party, $567,000 of convertible notes payable, $750,000 of a term loan payable, and $52,015 of a capital lease obligation. The increase in cash provided by financing activities for the year ended December 31, 2014 is due to proceeds of $1,000,000 from the issuance of a note payable to a related party, proceeds of $1,250,000 from senior convertible note payable to related parties and proceeds of $5,000 from the exercise of stock options offset the debt repayments of $728,847 of term loan payable and $7,901 of capital lease obligations and payments of $109,104 offering costs and $139,667 deferred financing costs.

In the ordinary course of our business, we enter into 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 December 31, 2015 and December 31, 2014, the Company has vendor deposits of $310,936 and $319,563, respectively, and vendor deposits are included as a component of prepaid expenses and vendor deposits on the consolidated balance sheets included herewith.

At December 31, 2015 and December 31, 2014, we do not have any material financial guarantees or other contractual commitments with these vendors that are reasonably likely to have an adverse effect on liquidity.

Our cash balances are kept liquid to support our growing acquisition and infrastructure needs for operational expansion. The majority of our cash and cash equivalents are concentrated in one large financial institution.

The Company reported a net loss allocable to common shareholders of approximately $36.3 million for the year ended December 31, 2015. The Company had negative working capital approximately of $17.2 million as of December 31, 2015. The Company expects to continue incurring losses before the impact of changes in fair value of derivatives for the foreseeable future and may need to raise additional capital to satisfy warrant obligations, and to continue as a going concern. As of April 6, 2016 the Company had approximately $22.4 million of cash. The decrease in cash from December 31, 2015 is primarily attributable to payment of settlements and related legal fees and hold back payments for retail store acquisitions.

The Company’s outstanding warrants sold as part of our July 29, 2015 public offering separated from the Units on January 25, 2016. Each warrant may be exercised without cash for the Black Scholes value defined in the warrant agreement. The number of shares common stock we issue in connection with the exercise of our warrants will be based on our common stock price as of the date of the exercise. If all of the warrants were exercised simultaneously, then the Company would not have sufficient authorized common stock to satisfy all the warrant exercises and it may be required to use cash to pay warrant holders. Since the Company cannot predict the future stock price and when the warrant holders will exercise warrants and sell the underlying common shares, Management cannot predict if the Company will have sufficient cash resources to satisfy its obligation to the current warrant holders. Accordingly, we have concluded that the material uncertainty related to the exercise of warrants and the sufficiency of cash reserves to satisfy obligations raises substantial doubt about the Company’s ability to continue as a going concern. See “Risk Factors” at page 23.

Critical Accounting Policies and Estimates

Use of Estimates in the Preparation of Financial Statements

To understand our financial statements, it is important to understand our critical accounting estimates. The preparation of our financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions include allowances, reserves and write-downs of receivables and inventory, valuing equity securities and hybrid instruments, share-based payment arrangements, deferred taxes and related valuation allowances, and the valuation of the net assets acquired in the Merger and retail store acquisitions. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates. Actual results may differ significantly from our estimates. Our estimates often are based on complex judgments, probabilities and assumptions that we believe to be reasonable but that are inherently uncertain and unpredictable. For any given individual estimate or assumption made by us, there may also be other estimates or assumptions that are reasonable.

We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition results of operations or cash flows.

Revenue Recognition

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

Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded when the products are shipped, 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 the purchase price of the related transaction based on estimated future redemption rates. Redemption rates are estimated using the Company’s historical experience for similar inducement offers. The Company reports sales, net of current discount offers and inducement offers on its consolidated statements of operations.

Identifiable Intangible Assets and Goodwill

Identifiable intangible assets are recorded at cost, or when acquired as part of a business acquisition, at estimated fair value. Certain identifiable intangible assets are amortized over 5 and 10 years. Similar to tangible personal property and equipment, the Company periodically evaluates identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Indefinite-lived intangible assets, such as goodwill are not amortized. The Company assesses the carrying amounts of goodwill for recoverability on at least an annual basis or when events or changes in circumstances indicate evidence of potential impairment exists, using a fair value based test. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, and the useful life over which cash flows will occur. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for the Company.

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In connection with this review, the Company also reevaluates the depreciable lives for these assets. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the projected future discounted cash flows as compared to the asset’s carrying value.

Derivative Instruments

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

The Company estimates the fair values of derivative instruments and hybrid instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective of measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For complex instruments, we utilize custom Monte Carlo simulation models. For less complex instruments, such as free-standing warrants, the Company generally uses the Binomial Lattice model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as the Binomial Lattice model or the Black-Scholes-Merton valuation model) are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair values, the Company’s net income (loss) going forward will reflect the volatility in these estimates and assumption changes. Under ASC 815, increases in the trading price of the Company’s common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative 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 be bifurcated from their host instruments in accordance with ASC 815. The Company records discounts to convertible notes for the fair value of bifurcated embedded conversion options embedded in debt instruments and the relative fair value of freestanding warrants issued in connection with convertible debt instruments. The Company amortizes the respective debt discount over the term of the notes, using the straight-line method, which approximates the effective interest method over a short-term period.

Preferred Stock

The Company applies the accounting standards for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Shares that are subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. The Company classifies conditionally redeemable preferred shares, which include preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, preferred shares are classified as stockholders’ equity.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 - Revenue Recognition and most industry-specific guidance throughout the ASC. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. To allow entities additional time to implement systems, gather data and resolve implementation questions, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, in August 2015, to defer the effective date of ASU No. 2014-09 for one year, which is fiscal years beginning after December 15, 2017. Early adoption is permitted commencing January 1, 2017. The Company is currently evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements or disclosures.

In August 2014, FASB issued ASS No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 explicitly requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist which raise substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and annual and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the impact of adopting this new standard on its financial statement disclosures.

In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). The ASU 2015-03 standard amends the existing guidance to require that debt issuance costs be presented in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. ASU 2015-03 is effective on a retrospective basis for annual and interim reporting periods beginning after December 15, 2015, earlier adoption is permitted. Additionally, in August 2015 the FASB issued guidance expanding the April 2015 update (ASU No. 2015-15). It states that, given the absence of authoritative guidance within the update, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset for revolving lines of credit and subsequently amortizing the deferred debt issuance costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on the line of credit. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted for financial statements that have not been previously issued. Full retrospective application is required. The Company does not believe the implementation of this standard will have a material impact on its consolidated financial statements when adopted.

 In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. It is effective for annual reporting periods beginning after December 15, 2016. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company has not yet determined the effect of the adoption of this standard and it is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The FASB issued this ASU as part of its ongoing Simplification Initiative, with the objective of reducing complexity in accounting standards. The amendments in ASU 2015-17 require entities that present a classified balance sheet to classify all deferred tax liabilities and assets as a noncurrent amount. This guidance does not change the offsetting requirements for deferred tax liabilities and assets, which results in the presentation of one amount on the balance sheet. Additionally, the amendments in this ASU align the deferred income tax presentation with the requirements in International Accounting Standards (IAS) 1, Presentation of Financial Statements.  The amendments in ASU 2015-17 are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating ASU 2016-02 and its impact on its consolidated financial statements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Seasonality

We do not consider our business to be seasonal.

Non-GAAP – Financial Measure

The following discussion and analysis includes both financial measures in accordance with GAAP, as well as a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternative to, net income, operating income, and cash flow from operating activities, liquidity or any other financial measures. Non-GAAP financial measures may not be indicative of the historical operating results of the Company nor are they intended to be predictive of potential future financial results. Investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP.

We believe that the Company’s management and shareholders benefit from referring to the Adjusted EBITDA in planning, forecasting, and analyzing future periods. Our management uses this non-GAAP financial measure in evaluating its financial and operational decision making and as a means of evaluating period to period comparison.

We define Adjusted EBITDA as net loss allocable to common stockholders before interest expense, income taxes, depreciation and amortization, stock-based compensation, non-cash change in fair value of derivatives, non-recurring acquisition costs, offering restructuring, or other non-recurring settlements or expenses, loss on debt extinguishment, loss on sale or abandonment of assets, and impairment charges against goodwill, intangible and long lived assets, if any. The Company’s management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investor and analysts to evaluate and assess our core operating results from period to period after removing the impact of acquisition and offering related costs, debt extinguishment, and other items of a non-operating nature that effect comparability. Our management recognizes that Adjusted EBITDA has inherent limitations because of the excluded items.

We have included a reconciliation of our non-GAAP financial measure to the most comparable financial measure calculated in accordance with GAAP. We believe that providing the non-GAAP financial measure, together with the reconciliation to GAAP, helps investors make comparisons between the Company and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to specific definition being used and to the reconciliation between such measures and the corresponding GAAP measure provided by each company under applicable SEC rules. The following table presents a reconciliation of Adjusted EBITDA to loss from operations allocable to common stockholders, a GAAP financial measure:

RISK FACTORS

Investing in our common stock involves a high degree of risk.  You should carefully consider the following Risk Factors before deciding whether to invest in Vapor.  Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition.  If any of the events discussed in the Risk Factors below occur, our business, consolidated financial condition, results of operations or prospects could be materially and adversely affected.  In such case, the value and marketability of the common stock could decline.

Risks Relating to Our Business

We have incurred significant operating losses in the past and cannot assure you that we will achieve and/or maintain profitable operations or liquidity; the report of our independent registered public accounting firm contains an explanatory paragraph that expresses substantial doubt about our inability to continue as a going concern.

The Company reported a net loss allocable to common shareholders of approximately $36.3 million and $13.9 million for the years ended December 31, 2015 and 2014. The Company had negative working capital of approximately of $17.2 million as of December 31, 2015. Our operating losses are primarily due to, among other reasons, consumer shift from e-cigarettes to vaporizers which caused a significant decline in our wholesale business, increasing competition, and the establishment of our business infrastructure and operations. Until the sale of the Units in July of 2015, the Company’s liquidity and capital resources had decreased significantly as a result of the net operating losses. We cannot assure you that we will be able to generate operating profits in the future on a sustainable basis or at all as we continue to expand our infrastructure, further develop our marketing efforts and otherwise implement our growth initiatives. Future working capital limitations could impinge on our day-to-day operations, thus contributing to continued operating losses.

The Company’s outstanding Series A Warrants may be exercised without cash for the Black Scholes value defined in the warrant agreement. The number of shares common of stock we issue in connection with the exercise of our warrants will be based on our common stock price as of the date of the exercise. If all of the warrants were exercised simultaneously, then the Company would not have sufficient authorized common stock to satisfy all the warrant exercises and it may be required to use cash to pay warrant holders. Since the Company cannot predict the future stock price and when the warrant holders will exercise warrants and sell the underlying common shares, the Management cannot predict if the Company will have sufficient cash resources to satisfy its obligation to the current warrant holders. If the Company did not have sufficient authorized common stock to satisfy all the warrant exercises and did not have enough cash resources, the Company may have to cease operations or seek protection under the bankruptcy laws and your investment could be lost.

Our financial statements for the year ended December 31, 2015 indicate there is substantial doubt about our ability to continue as a going concern as described above. We must ultimately generate sufficient cash flow to meet our obligations on a timely basis, attain profitability in our business operations, and be able to fund our long term business development and growth plans. Our business will require significant amounts of capital to sustain operations and make the investments we need to execute our longer-term business plan. Our existing liquidity is not sufficient to fund our operations, anticipated capital expenditures, working capital and other financing requirements for the foreseeable future. Because of the risk with the exercise of the Company’s Series A Warrants outlined in the above paragraph and later in this Report, we could need to seek and obtain additional debt or equity financing or seek relief from the bankruptcy courts.

Because of changes in our industry, it is difficult to accurately predict our future sales and appropriately budget our expenses.

We acquired Smoke Anywhere, a distributor of electronic cigarettes, in November 2009 and Vaporin in March 2015. Smoke Anywhere commenced its business in 2008 and Vaporin commenced its operations in 2013. Because our industry is still evolving, it is difficult to accurately predict our future sales and appropriately budget our expenses. Additionally, our operations will be subject to risks inherent in the establishment of a developing new business, including, among other things, efficiently deploying our capital, costs or difficulties relating to the integration of the merger with Vaporin, developing our products, developing and implementing our marketing campaigns and strategies and developing brand awareness and acceptance of our products. Our ability to generate future sales will be dependent on a number of factors, many of which are beyond our control, including the pricing of competing products, overall demand for our products, changes in consumer preferences, market competition and government regulation. We will continue to expand our retail stores and incur related operational expenditures in anticipation of future sales growth. If our sales do not increase as anticipated, we could incur significant losses due to our higher infrastructure expense levels if we are not able to decrease our advertising and operating expenses in a timely manner to offset any shortfall in future sales.

If the FDA passes anticipated regulations to extend its authority to e-vapor products, including e-cigarettes, vaporizers and e-liquids, necessitating stringent and costly product review requirements, such regulations could curtail or prevent our ability to sell e-vapor products and significantly reduce the number of e-vapor products available for sale to the public.

FDA regulations are anticipated extending that agency’s regulatory authority to e-vapor products and e-liquids. If the FDA regulates e-vapor products, including requiring costly formal product approvals, limiting the manufacture and distribution of e-vapor products, then the number of products available could be limited. Any such proposed regulations and approval process would make product development and manufacture cost prohibitive for the Company.  A reduction in available e-vapor products would diminish the need for our dedicated retail stores. We have halted our plans to acquire additional retail stores, but these potential regulations could materially and adversely affect our existing retail business.  

The recent development of electronic cigarettes has not allowed the medical profession to study the long-term health effects of electronic cigarette use.

Because electronic cigarettes were recently developed the medical profession has not had a sufficient period of time to study the long-term health effects of electronic cigarette use. Currently, therefore, there is no way of knowing whether or not electronic cigarettes are safe for their intended use. If the medical profession were to determine conclusively that electronic cigarette usage poses long-term health risks, electronic cigarette usage could decline, which could have a material adverse effect on our business, results of operations and financial condition.

Our business, results of operations and financial condition could be adversely affected if our products are taxed like other tobacco products or if we are required to collect and remit sales tax on certain of our Internet sales.

Presently the sale of electronic cigarettes is not subject to federal, state and local excise taxes like the sale of conventional cigarettes or other tobacco products, all of which have faced significant increases in the amount of taxes collected on their sales. Should federal, state and local governments and or other taxing authorities impose excise taxes similar to those levied against conventional cigarettes and tobacco products on our products, it may have a material adverse effect on the demand for our products, as consumers may be unwilling to pay the increased costs for our products.

We may be unable to establish the systems and processes needed to track and submit the excise and sales taxes we collect through Internet sales, which would limit our ability to market our products through our websites which would have a material adverse effect on our business, results of operations and financial condition. A number of states including New York, North Carolina, Texas and California have begun collecting sales taxes on Internet sales where companies have used independent contractors in those states to solicit sales from residents of that state. The requirement to collect, track and remit sales taxes based on independent affiliate sales may require us to increase our prices, which may affect demand for our products or conversely reduce our net profit margin, either of which would have a material adverse effect on our business, results of operations and financial condition.

The market for electronic cigarettes is a niche market, subject to a great deal of uncertainty and is still evolving.

Vaporizers and electronic cigarettes, having recently been introduced to market, are at an early stage of development, represent a niche market and are evolving rapidly and are characterized by an increasing number of market entrants. Our future sales and any future profits are substantially dependent upon the widespread acceptance and use of electronic cigarettes. Rapid growth in the use of, and interest in, electronic cigarettes is recent, and may not continue on a lasting basis. The demand and market acceptance for these products is subject to a high level of uncertainty. Therefore, we are subject to all of the business risks associated with a new enterprise in a niche market, including risks of unforeseen capital requirements, failure of widespread market acceptance of electronic cigarettes, in general or, specifically our products, failure to establish business relationships and competitive disadvantages as against larger and more established competitors.

Because we face intense competition from big tobacco companies and other competitors, our failure to compete effectively could have a material adverse effect on our business, results of operations and financial condition.

Competition in the electronic cigarette industry is intense. The nature of our competitors is varied as the market is highly fragmented and the barriers to entry into the business are low.

We compete primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, advertising and price. We are subject to highly competitive conditions in all aspects of our business. The competitive environment and our competitive position can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors’ introduction of low-priced products or innovative products, cigarette excise taxes, higher absolute prices and larger gaps between price categories, and product regulation that diminishes the ability to differentiate tobacco products.

Our principal competitors are “big tobacco”, U.S. cigarette manufacturers of both conventional tobacco cigarettes and electronic cigarettes like Altria Group, Inc., Lorillard, Inc. and Reynolds American Inc. We compete against “big tobacco” which offers not only conventional tobacco cigarettes and electronic cigarettes but also smokeless tobacco products such as “snus” (a form of moist ground smokeless tobacco that is usually sold in sachet form that resembles small tea bags), chewing tobacco and snuff. Furthermore, we believe that “big tobacco” will devote more attention and resources to developing and offering electronic cigarettes (including vaporizers) as the market grows. Because of their well-established sales and distribution channels, marketing expertise and significant financial and marketing resources, “big tobacco” is better positioned than small competitors like us to capture a larger share of the electronic cigarette market. We also compete against numerous other smaller manufacturers or importers of cigarettes. There can be no assurance that we will be able to compete successfully against any of our competitors, some of whom have far greater resources, capital, experience, market penetration, sales and distribution channels than us. If our major competitors were, for example, to significantly increase the level of price discounts offered to consumers, we could respond by offering price discounts, which could have a materially adverse effect on our business, results of operations and financial condition.

Sales of conventional tobacco cigarettes have been declining, which could have a material adverse effect on our business.

The overall U.S. market for conventional tobacco cigarettes has generally been declining in terms of volume of sales, as a result of restrictions on advertising and promotions, funding of smoking prevention campaigns, increases in regulation and excise taxes, a decline in the social acceptability of smoking, and other factors, and such sales are expected to continue to decline. In September 2014, CVS, a leading national drug store chain ceased selling tobacco products. If other national drug store chains also decide to cease selling tobacco products, cigarette sales could decline further. While the sales of vaporizers have been increasing over the last several years, the vaporizer and electronic cigarettes market is only developing and is a fraction of the size of the conventional tobacco cigarette market. A continual decline in cigarette sales may adversely affect the growth of the vaporizer and electronic cigarette market, which could have a material adverse effect on our business, results of operations and financial condition.

If we are subject to intellectual property litigation, we may incur substantial additional costs which will adversely affect our results of operations.

The cost to prosecute infringements of our intellectual property or the cost to defend our products against patent infringement or other intellectual property litigation by others could be substantial. We cannot assure you that:

Both the patent application process and the process of managing patent disputes can be time consuming and expensive. In addition, changes in the U.S. patent laws could prevent or limit us from filing patent applications or patent claims to protect our products and/or technologies or limit the exclusivity periods that are available to patent holders. In September 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law and includes a number of significant changes to U.S. patent law, including the transition from a “first-to-invent” system to a “first-to-file” system and changes to the way issued patents are challenged. These changes may favor larger and more established companies that have more resources than we do to devote to patent application filing and prosecution. The U.S. Patent and Trademark Office issued new regulations effective March 16, 2013 to administer the Leahy-Smith Act. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will ultimately have on the cost of prosecuting our patent applications, our ability to obtain patents based on our discoveries and our ability to enforce or defend our issued patents. However, it is possible that in order to adequately protect our patents under the “first-to-file” system, we will have to allocate significant additional resources to the establishment and maintenance of a new patent application process designed to be more streamlined and competitive in the context of the new “first-to-file” system, which would divert valuable resources from other areas of our business. In addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, and corporate partners. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate.

If a third party asserts that we are infringing on its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or require us to obtain expensive licenses, and our business may be adversely affected.

Although we have filed patent applications, we do not own any patents relating to our vaporizers and electronic cigarettes. The vaporizer and electronic cigarette industry is nascent and third parties may claim patent rights over one or more types of vaporizers and electronic cigarettes. For example, Fontem Ventures B.V. (“Fontem”), previously made certain public claims as to their ownership of patents relating to our products and has filed a number of separate lawsuits against us. In December 2015, the Company entered into a confidential Settlement Agreement and a non-exclusive royalty-bearing Global License Agreement with Fontem Ventures B.V. (“Fontem”) resulting in the dismissal of all of the patent infringement cases by Fontem against the Company. On January 15, 2016, the Company made a payment of $1.7 million under the terms of the Settlement and License Agreement. In connection with the License Agreement, Fontem granted the Company a non-exclusive license to certain of its products. As consideration, the Company will make quarterly license and royalty payments to Fontem based on the sale of qualifying products as defined in the confidential License Agreement. The term of the License Agreement will continue until all of the patents on the products subject to the agreement are no longer enforceable.  For a description of these lawsuits against us, please see the section titled “Legal Proceedings” contained herein. Third party lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights could cause us to do one or more of the following:

Third party lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights could have a material adverse effect on our business, results of operations and financial condition.

If we cannot protect our intellectual property rights, we may be unable to compete with competitors developing similar technologies.

We believe that patents, trademarks, trade secrets and other intellectual property we use and are developing are important to sustaining and growing our business. We utilize third party manufacturers to manufacture our products in China, where the validity, enforceability and scope of protection available under intellectual property laws are uncertain and still evolving. Implementation and enforcement of Chinese intellectual property-related laws have historically been deficient, ineffective and hampered by corruption and local protectionism. Accordingly, we may not be able to adequately protect our intellectual property in China, which could have a material adverse effect on our business, results of operations and financial condition. Furthermore, policing unauthorized use of our intellectual property in China and elsewhere is difficult and expensive, and we may need to resort to litigation to enforce or defend our intellectual property or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial costs and diversion of resources and management attention, which could harm our business and competitive position.

If vaporizers continue to face intense media attention and public pressure, our operations may be adversely affected.

Since the introduction of electronic cigarettes and vaporizers, certain members of the media, politicians, government regulators and advocate groups, including independent medical physicians, have called for an outright ban of all electronic cigarettes and vaporizers, pending regulatory review and a demonstration of safety. A partial or outright ban would have a material adverse effect on our business, results of operations and financial condition and we may have to shut down our operations in the locations implemented any such ban.

If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.

Our future depends, in part, on our ability to attract and retain key personnel and the continued contributions of our executive officers, each of whom may be difficult to replace. In particular, Jeffrey Holman, our Chief Executive Officer, is important to the management of our business and operations and the development of our strategic direction. The loss of the services of this officer, and the process to replace him would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.

We may experience product liability claims in our business, which could adversely affect our business.

The tobacco industry in general has historically been subject to frequent product liability claims. As a result, we may experience product liability claims from the marketing and sale of electronic cigarettes. Any product liability claim brought against us, with or without merit, could result in:

Any one or more of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

If we experience product recalls, we may incur significant and unexpected costs and our business reputation could be adversely affected.

We may be exposed to product recalls and adverse public relations if our products are alleged to cause illness or injury, or if we are alleged to have violated governmental regulations. A product recall could result in substantial and unexpected expenditures and could harm our reputation, which could have a material adverse effect on our business, results of operations and financial condition. In addition, a product recall may require significant management time and attention and may adversely impact on the value of our brands. Product recalls may lead to greater scrutiny by federal or state regulatory agencies and increased litigation, which could have a material adverse effect on our business, results of operations and financial condition.

If we experience a high amount of product exchanges, returns and warranty claims, our business will be adversely affected.

If we are unable to maintain an acceptable degree of quality control of our products, we will incur costs associated with the exchange and return of our products as well as servicing our customers for warranty claims. In addition, customers may require us to take back unsold products which we may be unable to resell. Any of the foregoing on a significant scale may have a material adverse effect on our business, results of operations and financial condition.

If the economy declines, such decline may adversely affect the demand for our products.

Vaporizers and electronic cigarettes may be regarded by users as a novelty item and expendable as such demand for our products may be extra sensitive to economic conditions. When economic conditions are prosperous, discretionary spending typically increases; conversely, when economic conditions are unfavorable, discretionary spending often declines. Any significant decline in economic conditions that affects consumer spending could have a material adverse effect on our business, results of operations and financial condition.

Generating foreign sales will result in additional costs and expenses and may expose us to a variety of risks.

Generating sales of our products in foreign jurisdictions will require us to incur additional costs and expenses. Furthermore, our entry into foreign jurisdictions may expose us to various risks, which differ in each jurisdiction, and any of such risks may have a material adverse effect on our business, financial condition and results of operations. Such risks include the degree of competition, fluctuations in currency exchange rates, difficulty and costs relating to compliance with different commercial, legal, regulatory and tax regimes and political and economic instability.

Our future growth and profitability will depend in large part upon the effectiveness of our marketing and advertising expenditures.

Our future growth and profitability will depend in large part upon our media performance, including our ability to:

Our planned marketing expenditures may not result in increased revenue. If our media performance is not effective, our future results of operations and financial condition will be adversely affected. 

If we are unable to promote and maintain our brands, our results of operations will be adversely affected.

We believe that establishing and maintaining the brand identities of our products is a critical aspect of attracting and expanding a large customer base. Promotion and enhancement of our brands will depend largely on our success in continuing to provide high quality products. If our customers and end users do not perceive our products to be of high quality, or if we introduce new products or enter into new business ventures that are not favorably received by our customers and end users, we will risk diluting our brand identities and decreasing their attractiveness to existing and potential customers.

Moreover, in order to attract and retain customers and to promote and maintain our brand equity in response to competitive pressures, we may have to increase substantially our financial commitment to creating and maintaining a distinct brand loyalty among our customers. If we incur significant expenses in an attempt to promote and maintain our brands, our business, results of operations and financial condition could be adversely affected.

We rely on the efforts of third party agents to generate sales of our products, and loss of any such agents may be time consuming to replace.

We rely on the efforts of independent distributors to purchase and distribute our products to wholesalers and retailers. No single distributor currently accounts for a material percentage of our sales and we believe that should any of these relationships terminate we would be able to find suitable replacements and do so on a timely basis. However, any loss of distributors or our ability to timely replace any given distributor could have a material adverse effect on our business, financial condition and results of operations.

We rely, in part, on the efforts of independent salespersons who sell our products to distributors and major retailers and Internet sales affiliates to generate sales of products. No single independent salesperson or Internet affiliate currently accounts for a material percentage of our sales and we believe that should any of these relationships terminate we would be able to find suitable replacements and do so on a timely basis. However, any loss of independent sales persons or Internet sales affiliates or our ability to timely replace any one of them could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to adapt to trends in our industry, our results of operations will be adversely affected.

We may not be able to adapt as the vaporizer and electronic cigarette industry and customer demand evolve, whether attributable to regulatory constraints or requirements, a lack of financial resources or our failure to respond in a timely and/or effective manner to new technologies, customer preferences, changing market conditions or new developments in our industry. Any of the failures to adapt for the reasons cited herein or otherwise could make our products obsolete and would have a material adverse effect on our business, financial condition and results of operations.

If our third party manufacturers produce unacceptable or defective products or do not provide products in a timely manner, our business will be adversely affected.

We depend on third party manufacturers for our electronic cigarettes, vaporizers and accessories. Our customers associate certain characteristics of our products including the weight, feel, draw, unique flavor, packaging and other attributes of our products to the brands we market, distribute and sell. Any interruption in supply, consistency of our products may adversely impact our ability to deliver our products to our wholesalers, distributors and customers and otherwise harm our relationships and reputation with customers, and have a materially adverse effect on our business, results of operations and financial condition.

Although we believe that several alternative sources for the components, chemical constituents and manufacturing services necessary for the production of our products are available, any failure to obtain any of the foregoing would have a material adverse effect on our business, results of operations and financial condition.

Because we rely on Chinese manufacturers to produce our products, we are subject to potential adverse safety and other issues.

The majority of our manufacturers are based in China. Certain Chinese factories and the products they export have recently been the source of safety concerns and recalls, which is generally attributed to lax regulatory, quality control and safety standards. Should Chinese factories continue to draw public criticism for exporting unsafe products, whether those products relate to our products or not we may be adversely affected by the stigma associated with Chinese production, which could have a material adverse effect on our business, results of operations and financial condition.

We expect that new products and/or brands we develop will expose us to risks that may be difficult to identify until such products and/or brands are commercially available.

We are currently developing, and in the future will continue to develop, new products and brands, the risks of which will be difficult to ascertain until these products and/or brands are commercially available. For example, we are developing new formulations, packaging and distribution channels. Any negative events or results that may arise as we develop new products or brands may adversely affect our business, financial condition and results of operations.

If we are unable to manage our anticipated future growth, our business and results of operations could suffer materially.

Our business has grown rapidly during our limited operating history. Our future operating results depend to a large extent on our ability to successfully manage our anticipated growth. To manage our anticipated growth we believe we must effectively, among other things:

We are increasing our investment in marketing and distribution channels and other functions to grow our business. We are likely to incur the costs associated with these increased investments earlier than some of the anticipated benefits and the return on these investments, if any, may be lower, may develop more slowly than we expect or may not materialize.

If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new products, and we may fail to satisfy product requirements, maintain product quality, execute our business plan or respond to competitive pressures, any of which could have a material adverse effect on our business, results of operations and financial condition.

We face competition from foreign importers who do not comply with government regulation which may result in the loss of customers and result in adverse effects to our results of operations.

We face competition from foreign sellers of electronic cigarettes and vaporizers that may illegally ship their products into the United States for direct delivery to customers. These market participants will not have the added cost and expense of complying with U.S. regulations and taxes and as a result will be able to offer their product at a more competitive price than us and potentially capture market share. Moreover, should we be unable to sell certain of our products during any regulatory approval process we have no assurances that we will be able to recapture those customers that we lost to our foreign domiciled competitors during any “blackout” periods, during which we are not permitted to sell our products. This competitive disadvantage may have a material adverse effect on our business, results of operations and our financial condition.

Information technology system failures or interruptions or breaches of our network security may interrupt our operations, subject us to increased operating costs and expose us to litigation.

At present we generate a portion of our sales through e-commerce sales on our websites. We manage our websites and e-commerce platform internally and as a result any compromise of our security or misappropriation of proprietary information could have a material adverse effect on our business, financial condition and results of operations. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure Internet transmission of confidential information, such as credit and other proprietary information. Despite our implementation of security measures, all of our technology systems are vulnerable to damage, disability or failures due to hacking or physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. If our technology systems were to fail, and we were unable to recover in a timely way, we could experience an interruption in our operations. Furthermore, if unauthorized access to or use of our systems were to occur, data related to our proprietary information and personal information of customers could be compromised. The occurrence of any of these incidents could have a material adverse effect on our business, financial condition and results of operations. To the extent that some of our reporting systems require or rely on manual processes, it could increase the risk of a breach. We may be required to expend significant capital and other resources to protect against security breaches or to minimize problems caused by security breaches. To the extent that our activities or the activities of others involve the storage and transmission of proprietary information, security breaches could damage our reputation and expose us to a risk of loss and/or litigation. Our security measures may not prevent security breaches. Our failure to prevent these security breaches may result in consumer distrust, expose us to litigation either of which would adversely affect our business, results of operations and financial condition.

Our results of operations could be adversely affected by currency exchange rates and currency devaluations.

Our functional currency is the U.S. dollar; substantially all of our purchases and sales are currently generated in U.S. dollars. However, our manufacturers and suppliers are located in China. The Chinese currency, the renminbi, has appreciated significantly against the U.S. dollar in recent years. Fluctuations in exchange rates between our respective currencies could result in higher production and supply costs to us which would have a material adverse effect on our results of operations if we are not willing or able to pass those costs on to our customers. 

Risks Related to Government Regulation

Changes in laws, regulations and other requirements could adversely affect our business, results of operations or financial condition.

In addition to the anticipated regulation of our business by the FDA, our business, results of operations or financial condition could be adversely affected by new or future legal requirements imposed by legislative or regulatory initiatives, including, but not limited to, those relating to health care, public health and welfare and environmental matters. For example, in recent years, states and many local and municipal governments and agencies, as well as private businesses, have adopted legislation, regulations or policies which prohibit, restrict, or discourage smoking; smoking in public buildings and facilities, stores, restaurants and bars; and smoking on airline flights and in the workplace. At present, it is not clear if electronic cigarettes, which omit no smoke or noxious odors, are subject to such restrictions. Furthermore, some states and localities prohibit and others are prohibiting the sales of electronic cigarettes and vaporizers to minors. Other similar laws and regulations are currently under consideration and may be enacted by state and local governments in the future. If electronic cigarettes and vaporizers are subject to restrictions on smoking in public and other places, our business, operating results and financial condition could be materially and adversely affected. New legislation or regulations may result in increased costs directly for our compliance or indirectly to the extent such requirements increase the prices of goods and services because of increased costs or reduced availability. We cannot predict whether such legislative or regulatory initiatives will result in significant changes to existing laws and regulations and/or whether any changes in such laws or regulations will have a material adverse effect on our business, results of operations or financial condition.

Restrictions on the public use of vaporizers and electronic cigarettes may reduce the attractiveness and demand for our products.

Certain states, cities, businesses, providers of transportation and public venues in the U.S. have already banned the use of vaporizers and electronic cigarettes, while others are considering banning their use. If the use of vaporizers and electronic cigarettes are banned anywhere the use of traditional tobacco burning cigarettes is banned, our products may lose their appeal as an alternative to traditional tobacco burning cigarettes, which may reduce the demand for our products and, thus, have a material adverse effect on our business, results of operations and financial condition.

Limitation by states on sales of vaporizers and electronic cigarettes may have a material adverse effect on our ability to sell our products.

On February 15, 2010, in response to a civil investigative demand from the Office of the Attorney General of the State of Maine, we voluntarily executed an assurance of discontinuance with the State of Maine, which prohibits us from selling electronic cigarettes in the State of Maine until such time as we obtain a retail tobacco license in the state. While suspending sales to residents of Maine is not material to our operations, other electronic cigarette companies have entered into similar agreements with other states, such as the State of Oregon. If one or more states from which we generate or anticipate generating significant sales bring actions to prevent us from selling our products unless we obtain certain licenses, approvals or permits and if we are not able to obtain the necessary licenses, approvals or permits for financial reasons or otherwise and/or any such license, approval or permit is determined to be overly burdensome to us then we may be required to cease sales and distribution of our products to those states, which would have a material adverse effect on our business, results of operations and financial condition.

The FDA has issued an import alert which has limited our ability to import certain of our products.

As a result of FDA import alert 66-41 (which allows the detention of unapproved drugs promoted in the U.S.), the U.S. Customs has from time to time temporarily and in some instances indefinitely detained products sent to us by our Chinese suppliers. If the FDA modifies the import alert from its current form which allows U.S. Customs discretion to release our products to us, to a mandatory and definitive hold we will no longer be able to ensure a supply of saleable product, which will have a material adverse effect on our business, results of operations and financial condition. We believe that FDA import alert will become less relevant to us as and when the FDA regulates electronic cigarettes and vaporizers under the Tobacco Control Act.

The application of the Prevent All Cigarette Trafficking Act and/or the Federal Cigarette Labeling and Advertising Act to vaporizers and/or electronic cigarettes would have a material adverse effect on our business.

At present, neither the Prevent All Cigarette Trafficking Act (which prohibits the use of the U.S. Postal Service to mail most tobacco products and which amends the Jenkins Act, which would require individuals and businesses that make interstate sales of cigarettes or smokeless tobacco to comply with state tax laws) nor the Federal Cigarette Labeling and Advertising Act (which governs how cigarettes can be advertised and marketed) apply to vaporizers and/or electronic cigarettes. The application of either or both of these federal laws to either vaporizers and/or electronic cigarettes could result in additional expenses, could prohibit us from selling products through the Internet and require us to change our advertising and labeling and method of marketing our products, any of which would have a material adverse effect on our business, results of operations and financial condition.

We may face the same governmental actions aimed at conventional cigarettes and other tobacco products.

The tobacco industry expects significant regulatory developments to take place over the next few years, driven principally by the World Health Organization’s Framework Convention on Tobacco Control, or the FCTC. The FCTC is the first international public health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. Regulatory initiatives that have been proposed, introduced or enacted include:

•the levying of substantial and increasing tax and duty charges;

•restrictions or bans on advertising, marketing and sponsorship;

•the display of larger health warnings, graphic health warnings and other labeling requirements;

•restrictions on packaging design, including the use of colors and generic packaging;

•restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;

•requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels;

•requirements regarding testing, disclosure and use of tobacco product ingredients;

•increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;

•elimination of duty free allowances for travelers; and

•encouraging litigation against tobacco companies.

If vaporizers and/or electronic cigarettes are subject to one or more significant regulatory initiatives enacted under the FCTC, our business, results of operations and financial condition could be materially and adversely affected.

Risks Related to Our Securities

The Series A Warrants contain a cashless exercise feature with the potential for a highly dilutive issuance of common stock, which could adversely affect the value of the common stock.

The Series A Warrants, described on page 19 of this report, became exercisable commencing January 23, 2016. The Series A warrants contain a cashless exercise feature that provides for the issuance of a number of shares of our common stock that increases as the trading market price of our common stock decreases. Approximately 43,100 Series A Warrants have been exercised in cashless exercises through April 6, 2016, resulting in the issuance of 64.3 million shares of common stock. If all of the remaining 1,031,670 Series A warrants were exercised pursuant to a cashless exercise and the closing bid price of our common stock as of the two trading days prior to the time of such exercise was $0.0037 per share or less and the Black Scholes Value is $75.7567 (the Black Scholes Value as of April 6, 2016), then a total of approximately 21.1 billion shares of our common stock would need to be issued to the holders of such Series A warrants. This amount exceeds the 4.94 billion shares the Company has available to issue. The potential for such highly dilutive exercise of the Series A Warrants may depress the price of our common stock regardless of the Company’s business performance, and could encourage short selling by market participants, especially if the trading price of our common stock begins to decrease. In any such event, your investment will be adversely affected.

If we are required to make cash payments with respect to the exercise of the Series A warrants, all or a significant portion of our available capital may be used to make cash payments with respect to the exercise of the Series A Warrants, and the Company may seek protection under the federal bankruptcy laws.

In the event we do not continue to have our common stock quoted on the OTCQB, we may be required to make cash payments with respect to the exercise of the Series A Warrants.  Cash payments of approximately $78.2 million may be required based on all the remaining Series A Warrants outstanding at April 6, 2016 at the Black Scholes Value of $75.7567 at April 6, 2016. In order to continue to be listed on the OTCQB, we must maintain a stock price of $0.01 per common share. At April 6, 2016, our common stock price was $0.0029 per share. As of April 6, 2016, we had cash of approximately $22.4 million. As a result, we may be required to use all or a significant portion of our available capital to make cash payments to the holders of the Series A Warrants which will adversely affect our ability to implement our business plan. Additionally, if we are unable to make all of the payments required because we do not meet the Equity Conditions required under the Series A Warrants, we may be required to cease operations or to seek protection under the federal bankruptcy laws. In either such event, your investment will be lost.

The market price of our common stock has been and may continue to be volatile.

The market price of our common stock has been volatile, and fluctuates widely in price in response to various factors, which are beyond our control. The price of our common stock is not necessarily indicative of our operating performance or long-term business prospects. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock. Factors such as the following could cause the market price of our common stock to fluctuate substantially:

•our quarterly operating and financial results;

•government regulation of our industry;

•the introduction of new products by our competitors;

•conditions in the electronic cigarette and tobacco industries;

•developments concerning proprietary rights; or

•litigation or public concern about the safety of our products.

The stock market in general experiences from time to time extreme price and volume fluctuations. Periodic and/or continuous market fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock. Price volatility may be worse if the trading volume of our common stock is low.

The volatility in our common stock price may subject us to securities litigation.

The market for our common stock is characterized by significant price volatility, especially since the Series A Units separation in January 2016, when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities to us and could divert our management’s attention and resources from managing our operations and business.

Future sales of our common stock may depress our stock price.

As of April 6, 2016, we had approximately 64.9 million shares of our common stock outstanding. Approximately 4.96 billion of our outstanding shares are eligible for resale without restrictions, in addition to a significant number of shares underlying the Series A warrants. If any significant number of these shares are sold, such sales could have a depressive effect on the market price of our stock. The remaining shares are eligible, and some of the shares underlying the restricted stock units, and warrants and options upon issuance, will be eligible to be offered from time to time in the public market pursuant to registration statements we have filed and Rule 144 of the Securities Act of 1933, which we refer to as the “Securities Act”, and any such sale of these shares may have a depressive effect as well. We are unable to predict the effect, if any, that the sale of shares, or the availability of shares for future sale, will have on the market price of the shares prevailing from time to time. Sales of substantial amounts of shares in the public market, or the perception that such sales could occur, could depress prevailing market prices for the shares. Such sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price, which we deem appropriate.

Costs incurred because we are a public company may affect our profitability.

As a public company, we incur significant legal, accounting, and other expenses, and we are subject to the SEC’s rules and regulations relating to public disclosure that generally involve a substantial expenditure of financial resources.  In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC, requires changes in corporate governance practices of public companies.  We expect that full compliance with such rules and regulations will significantly increase our legal and financial compliance costs and make some activities more time-consuming and costly, which may negatively impact our financial results.  To the extent our earnings suffer as a result of the financial impact of our SEC reporting or compliance costs, our ability to develop an active trading market for our securities could be harmed.

There is currently a limited public trading market for our common stock and we cannot assure you that a more active public trading market for our common stock will develop or be sustained. Even if a market further develops, you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.

There is currently a limited public trading market for our common stock. The numbers of institutions or persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or nonexistent. This situation may be attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume. Even if we came to the attention of such persons, they tend to be risk averse and may be reluctant to follow a relatively unproven company such as ours or purchase or recommend the purchase of our shares until such time as we become more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot assure you that an active public trading market for our common stock will develop or be sustained.

We do not expect to pay dividends for the foreseeable future, and we may never pay dividends.

We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including but not limited to, our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our common stock may be limited by state law. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize certain returns on their investment.

Our common stock may be considered a “penny stock,” and thereby be subject to additional sale and trading regulations that may make it more difficult to sell.

Our common stock is considered to be a “penny stock.” It does not qualify for one of the exemptions from the definition of “penny stock” under Section 3a51-1 of the Exchange Act. The principal result or effect of being designated a “penny stock” is that securities broker-dealers participating in sales of our common stock are subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9 promulgated under the Securities Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.

FINRA sales practice requirements may limit a shareholder’s ability to buy and sell our common shares.

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. 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, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common shares, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares. 

Our Board of Directors’ ability to issue undesignated preferred stock and the existence of anti-takeover provisions may depress the value of our common stock.

Our authorized capital includes 1,000,000 shares of preferred stock. Of this amount, all of such shares have been designated as Series A convertible Preferred Stock and 13,434 are issued and outstanding. Our Board of Directors has the power to issue any or all of the shares of undesignated preferred stock, including the authority to establish one or more series and to fix the powers, preferences, rights and limitations of such class or series, without seeking stockholder approval. Further, as a Delaware corporation, we are subject to provisions of the Delaware General Corporation Law regarding “business combinations.” We may, in the future, consider adopting additional anti-takeover measures. The authority of our Board of Directors to issue undesignated stock and the anti-takeover provisions of Delaware law, as well as any future anti-takeover measures adopted by us, may, in certain circumstances, delay, deter or prevent takeover attempts and other changes in control of the company not approved by our Board of Directors. As a result, our stockholders may lose opportunities to dispose of their shares at favorable prices generally available in takeover attempts or that may be available under a merger proposal and the market price, voting and other rights of the holders of common stock may also be affected.

Future sales and issuances of our common stock or rights to purchase common stock could result in additional dilution of the percentage ownership of our stockholders and could cause our share price to fall.

We also expect that additional capital will be needed in the future to continue our planned operations. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common stock, convertible securities, or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing stockholders. In addition, in the past, we have issued warrants to acquire shares of common stock. To the extent these warrants are ultimately exercised, you will sustain further dilution.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, we could become subject to sanctions or investigations by regulatory authorities and/or stockholder litigation, which could harm our business and have an adverse effect on our stock price.

As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, including periodic reports, disclosures and more complex accounting rules. As directed by Section 404 of Sarbanes-Oxley, the SEC adopted rules requiring public companies to include a report of management on a company’s internal control over financial reporting in their Annual Report on Form 10-K. Based on current rules, we are required to report under Section 404(a) of Sarbanes-Oxley regarding the effectiveness of our internal control over financial reporting. If we were to determine that we have material weaknesses, it may be necessary to make restatements of our consolidated financial statements and investors will not be able to rely on the completeness and accuracy of the financial information contained in our filings with the SEC and this could potentially subject us to sanctions or investigations by the SEC or other regulatory authorities or stockholder litigation.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable to smaller reporting companies.

Item 8. Financial Statements and Supplementary Data.

See pages F-1 through F-36.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. Our management carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act. Based on their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). Our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of the end of the period covered by this report. In making this assessment, our management used the criteria set forth by the Committee of Sponsor Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of the end of the period covered by this report based on that criteria.

Our internal control over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles, or GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

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 policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

No Attestation Report of Registered Public Accounting Firm

This Annual Report does not contain an attestation report of our independent registered public accounting firm regarding internal control over financial reporting since the rules for smaller reporting companies provide for this exemption.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Directors and Executive Officers

The following table sets forth information regarding our executive officers and directors as of April 6, 2016:

Executive Officers

Jeffrey Holman has been our Chairman of the Board and Chief Executive Officer since April 2014. From February 2013 until March 4, 2015, Mr. Holman serviced as our President. Mr. Holman has been a member of our Board since May 2013 and has served as a member of the Board of Directors of our subsidiary Smoke Anywhere, USA since its inception on March 24, 2008. Since 1998, Mr. Holman has been the President of Jeffrey E. Holman & Associates, P.A., a South Florida based law firm. He has also been a Partner in the law firm of Holman, Cohen & Valencia since 2000. Mr. Holman was selected as a director for his business and legal experience. In addition, as one of the founders of Smoke Anywhere, Mr. Holman possesses an in-depth understanding of the challenges, risks and characteristics unique to our industry.

Gregory Brauser has served as President and a director since March 4, 2015. Prior to that, Mr. Brauser served as Chief Operating Officer of Vaporin beginning in January 2014. Mr. Brauser founded Direct Source China in 2009, a sourcing company headquartered in Shanghai, China, that assists mid-size U.S. businesses with their direct manufacturing overseas. Since 2010, Mr. Brauser has served as Vice Chairman and director of Dog-E-Glow, Inc., a manufacturer and distributer of LED lighted dog collars and leashes, which he formed. Mr. Brauser was appointed as a Vaporin designee in connection with the merger with Vaporin, Inc.

Gina Hicks has served as our Chief Financial Officer since September 15, 2015. Ms. Hicks previously served as the interim Chief Financial Officer of Health Revenue Assurance Holdings, Inc. (“HRAH”) (OTCPink: HRAA), a medical coding company, and from July 2014 until October 2014, Ms. Hicks served as HRAH’s reorganization consultant. From March 2011 until October 2013, Ms. Hicks served as the Vice President of Finance and Financial Reporting of MeetMe, Inc. (NASDAQ: MEET), a social network both on the web and on mobile platforms. Prior to that Ms. Hicks was an independent consultant providing accounting and business advisory services. Ms. Hicks is a Certified Public Accountant in the State of Florida, a member of the American Institute of Certified Public Accountants, and is a Chartered Global Management Accountant.

Christopher Santi has been our Chief Operating Officer since December 12, 2012. Prior to that Mr. Santi served as Director of Operations of Vapor beginning in October 2011. Mr. Santi served as the National Sales Manager of Collages.net from November 2007 to October 2011.

Non-Employee Directors

William Conway III has been a director since June 2015. Since 2008, Mr. Conway has served in management positions with City Furniture, with the latest being Director of Operations and Customer Service. Mr. Conway was appointed as a director for his business and operating expertise.

Daniel MacLachlan has been a director since April 18, 2015. Since May 2015, MacLachlan has served as an Executive Advisor to Cousins Logistics, Inc., a logistics and transport company. Mr. MacLachlan served as the Chief Financial Officer of The Best One, Inc., from October 2014 through early February 2015, facilitating its merger with IDI, Inc. (FKA, Tiger Media, Inc.) (NYSE MKT: IDI). Mr. MacLachlan served as Director of Finance and Chief Financial Officer for TransUnion Risk and Alternative Data Solutions, Inc., after it acquired substantially all the assets of TLO, LLC (“TLO”), a leading provider of data fusion technology-driven investigative products and solutions, in December 2013. Mr. MacLachlan was Chief Financial Officer of TLO since its inception in 2009. Mr. MacLachlan was appointed a director for his financial and accounting expertise.

Corporate Governance

Board Responsibilities

The Board oversees, counsels, and directs management in the long-term interest of Vapor and its stockholders. The Board’s responsibilities include establishing broad corporate policies and reviewing the overall performance of Vapor. The Board is not, however, involved in the operating details on a day-to-day basis.

Board Committees and Charters

The Board and its Committees meet throughout the year and act by written consent from time-to-time as appropriate. The Board delegates various responsibilities and authority to different Board Committees. Committees regularly report on their activities and actions to the Board.

The Board currently has and appoints the members of: the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee. Each of these committees have a written charter which can be found on our corporate website at ir.vapor-corp.com/committee-charters.

The following table identifies the independent and non-independent current Board and committee members:

Director Independence

Our Board has determined that William Conway III and Daniel MacLachlan are independent in accordance with standards under the Nasdaq Listing Rules. Our Board determined that as a result of being executive officers, Messrs. Jeffrey Holman and Gregory Brauser were not independent under the Nasdaq Listing Rules. Our Board has also determined that William Conway III and Daniel MacLachlan are independent under the Nasdaq Listing Rules independence standards for Audit and Compensation Committee members.

Committees of the Board

Audit Committee

The Audit Committee, which currently consists of William Conway III and Daniel MacLachlan (chair), reviews Vapor’s financial reporting process on behalf of the Board and administers our engagement of the independent registered public accounting firm. The Audit Committee approves all audit and non-audit services, and reviews the independence of our independent registered public accounting firm.

Audit Committee Financial Expert

Our Board has determined that Daniel MacLachlan is qualified as an Audit Committee Financial Expert, as that term is defined by the rules of the SEC and in compliance with the Sarbanes-Oxley Act of 2002.

Compensation Committee

The function of the Compensation Committee is to determine the compensation of our executive officers. The Compensation Committee has the power to set performance targets for determining periodic bonuses payable to executive officers and may review and make recommendations with respect to stockholder proposals related to compensation matters. Additionally, the Compensation Committee is responsible for administering Vapor’s equity compensation plans including the Plan.

The members of the Compensation Committee are all independent directors within the meaning of applicable Nasdaq Listing Rules and all of the members are “non-employee directors” within the meaning of Rule 16b-3 under the Exchange Act.

Nominating and Corporate Governance Committee

The responsibilities of the Nominating and Corporate Governance Committee include the identification of individuals qualified to become Board members, the selection of nominees to stand for election as directors, the oversight of the selection and composition of committees of the Board, establish procedures for the nomination process including procedures and the oversight of the evaluations of the Board and management. The Nominating and Corporate Governance Committee has not established a policy with regard to the consideration of any candidates recommended by stockholders since no stockholders have made any recommendations. If we receive any stockholder recommended nominations, the Nominating Committee will carefully review the recommendation(s) and consider such recommendation(s) in good faith.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee has ever been an officer or employee of the Company. None of our executive officers serve, or have served during the last fiscal year, as a member of our Board, compensation committee or other Board committee performing equivalent functions of any entity that has one or more executive officers serving on our Board or on our compensation committee.

Board Assessment of Risk

The Board is actively involved in the oversight of risks that could affect Vapor. This oversight is conducted primarily through the Audit Committee, but the full Board has retained responsibility for general oversight of risks. The Audit Committee considers and reviews with our independent public accounting firm and management the adequacy of our internal controls, including the processes for identifying significant risks and exposures, and elicits recommendations for the improvements of such procedures where desirable. In addition to the Audit Committee’s role, the full Board is involved in oversight and administration of risk and risk management practices. Members of our senior management have day-to-day responsibility for risk management and establishing risk management practices, and members of management are expected to report matters relating specifically to the Audit Committee directly thereto, and to report all other matters directly to the Board as a whole. Members of our senior management have an open line of communication to the Board and have the discretion to raise issues from time-to-time in any manner they deem appropriate, and management’s reporting on issues relating to risk management typically occurs through direct communication with directors or committee members as matters requiring attention arise. Members of our senior management regularly attend portions of the Board’s meetings, and often discuss the risks related to our business.

Presently, the largest risks affecting Vapor is the Company’s ability to manage and satisfy the Series A Warrant obligations and evaluation of potential adverse impact of the FDA’s final regulations on vaporizers and e-liquids on the retail business operations. The Board actively interfaces with management on seeking solutions. 

Code of Ethics

The Company has a code of ethics, “Business Conduct: “Code of Conduct and Policy,” that applies to all of the Company’s employees, including its principal executive officer, principal financial officer and principal accounting officer, and the Board. A copy of this code is available on the Company’s website at www.vapor-corp.com. The Company intends to disclose any changes in or waivers from its code of ethics by posting such information on its website or by filing a Current Report on Form 8-K. 

Shareholder Communications

Although we do not have a formal policy regarding communications with our Board, shareholders may communicate with the Board by writing to us at Vapor Corp., 3001 Griffin Road, Dania Beach FL 33312, Attention: Corporate Secretary, or by facsimile (954) 367-6306.  Shareholders who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and the other equity securities. Officers, directors and greater than ten percent shareholders are required by SEC rules to furnish us with copies of all Section 16(a) reports they file.

Based solely on a review of the reports furnished to us, or written representations from reporting persons that all reportable transactions were reported and that no Form 5s were required, we believe that during 2015 our officers, directors and greater than 10% owners timely filed all reports they were required to file under Section 16(a).

ITEM 11. Executive Compensation

The following information is related to the compensation paid, distributed or accrued by us for fiscal 2015 and 2014 to all Chief Executive Officers (principal executive officers) serving during the last fiscal year and the two other most highly compensated executive officers serving at the end of the last fiscal year whose compensation exceeded $100,000. We refer to these individuals as our “named executive officers.”

Summary Compensation Table

(1)   Amounts reflect the aggregate grant date fair value, without regard to forfeitures, computed in accordance with ASC 718. These amounts represent awards of the Company’s common stock and do not reflect the actual amounts that may be realized by the Named Executive Officers. Our assumptions with respect to the calculation of the stock award value are set forth in Note 2 to the consolidated financial statements contained herein.

Named Executive Officer Employment Agreements

On August 10, 2015, the Company entered into three-year Employment Agreements with Jeffrey Holman, the Company’s Chief Executive Officer, and Gregory Brauser, the Company’s President. Each of the Employment Agreements provide for an annual base salary of  $300,000 and a target bonus in an amount ranging from 20% to 200% of their base salaries subject to the Company meeting certain adjusted earnings before interest, taxes depreciation and amortization (“Adjusted EBITDA”) performance milestones. Adjusted EBITDA is defined in the Employment Agreements as earnings (loss) from continuing operations before interest expense, income taxes, collateral valuation adjustment, bad debt expense, one-time expenses, depreciation and amortization and amortization of stock compensation or Adjusted EBITDA defined in any filing of the Company with the SEC subsequent to the date of the Employment Agreements. Additionally, the Company approved and paid a bonus of $100,000 to each of Mr. Holman and Mr. Brauser in August 2015. Messrs. Holman and Brauser are also entitled to receive severance payments, including two years of their then base salary and other benefits in the event of a change of control, termination by the Company without cause, termination for good reason by the executive or non-renewal by the Company.

Effective December 12, 2012, the Company entered into a three-year Employment Agreement with Christopher Santi, the Company’s Chief Operating Officer. The Employment Agreement paid a beginning base salary of $156,000 which increased to $170,000 beginning in December 2014. The Employment Agreement automatically renewed for a one-year period in December 2015. In accordance with his Employment Agreement, Mr. Santi received a 10-year option to purchase up to 57 shares of the Company’s common stock at an exercise price of $437.50, vesting monthly at the rate of approximately 2 shares per month. As of the date of this report, the options are fully vested.

Termination Provisions

The table below describes the severance payments that our Named Executive Officers are entitled to in connection with a termination of their employment upon death, disability, dismissal without cause, Change of Control or for Good Reason. All of the termination provisions are intended to comply with Section 409A of the Internal Revenue Code of 1986 and the Regulations thereunder.

(1) Good reason is generally (with certain exceptions) defined as: (i) in the case of Holman and Brauser, (x) a material diminution in their authority, duties or responsibilities, (y) the Company failing to maintain an office in the stated area or (z) any other action or inaction that constitutes a material breach by the Company of the Employment Agreement; and (ii) in the case of Santi (w) a relocation of principal place of employment outside a stated area, (x) a material reduction in Base Salary, (y) the diminution of his duties, or (z) any other action or inaction that constitutes a material failure by Vapor to fulfill its obligations under the Employment Agreement. All of these events are subject to a 30-day cure period.

(2) Change of Control is generally defined (i) in the case of Holman and Brauser, as any Change of Control Event as defined in Treasury Regulation Section 1.409A-3(i)(5); and (ii) in the case of Santi, as (w) a sale of substantially all of the Company, (x) any “person” (as such term is defined under the Exchange Act) becomes the beneficial owners of over 50% of the Company’s voting power, (y) a change in the majority of the composition of the Board or (z) a transaction that results in over 50% of the Company’s voting power ceasing to hold a majority of the voting power post-transaction.

Risk Assessment Regarding Compensation Policies and Practices as they Relate to Risk Management

Our compensation program for employees does not create incentives for excessive risk taking by our employees or involve risks that are reasonably likely to have a material adverse effect on us. Our compensation has the following risk-limiting characteristics:

Outstanding Awards at Fiscal Year End

Listed below is information with respect to unexercised options that have not vested, and equity incentive plan awards for each named executive officer outstanding as of December 31, 2015:

Outstanding Equity Awards at 2015 Fiscal Year-End

Director Compensation

Non-employee directors are paid a monthly fee of $1,000 per month and $1,000 for each meeting attended. Because we do not pay any compensation to employee directors, Messrs. Holman and Brauser are omitted from the following table. Non-employee members of our Board of Directors were compensated for as follows:

Fiscal 2015 Director Compensation

Equity Compensation Plan Information

The 2015 Equity Incentive Plan (the “Plan”) was approved by Vapor’s shareholders at the June 26, 2015 shareholders meeting. The Plan authorizes up to approximately 14,286 shares of our common stock for issuance pursuant to the terms of the Plan. The Plan is a broad-based plan in which all employees, consultants, officers, and directors of the Company are eligible to participate. The purpose of the Plan is to further the growth and development of the Company by providing, through ownership of stock of the Company and other equity-based awards, an incentive to its officers and other key employees and consultants who are in a position to contribute materially to the prosperity of the Company, to increase such persons’ interests in the Company’s welfare, by encouraging them to continue their services to the Company, and by enabling the Company to attract individuals of outstanding ability to become employees, consultants, officers and directors of the Company.

The following chart reflects the number of awards granted under equity compensation plans approved and not approved by shareholders and the weighted average exercise price for such plans as of December 31, 2015.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.

The following table sets forth the number of shares of our common stock beneficially owned as of April 6, 2016 by (i) those persons known by us to be owners of more than 5% of our common stock, (ii) each director, (iii) our Named Executive Officers and (iv) all of our executive officers and directors of as a group. Unless otherwise specified in the notes to this table, the address for each person is: c/o Vapor Corp., 3001 Griffin Road, Dania Beach, Florida 33312. 

* Less than 1%.

(1) Beneficial Ownership. Applicable percentages are based on 64,932,483 shares of common stock outstanding as of April 6, 2016. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants, convertible notes and preferred stock currently exercisable or convertible or exercisable or convertible within 60 days are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. The table includes shares of common stock, options, warrants, and preferred stock exercisable or convertible into common stock and vested or vesting within 60 days. Unless otherwise indicated in the footnotes to this table, we believe that each of the shareholders named in the table has sole voting and investment power with respect to the shares of common stock indicated as beneficially owned by them. The table does not include: (i) restricted stock units that do not have the right to vote until they vest and the shares are delivered or (ii) unvested options that do not vest within 60 days of the date listed above in this footnote.

(7)           Directors and Executive Officers. Includes executive officers who are not Named Executive Officers under the SEC’s rules and regulations.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

As of June 22, 2015, Mr. Michael Brauser, the father of our President, loaned the Company $400,000, through a company he jointly manages, on identical terms as other investors in the offering. The Debentures: (i) matured December 22, 2015, (ii) accrue interest at 10% per year, (iii) were convertible into common stock at $175.00 per share and (iv) were secured by a second lien on substantially all of the Company’s assets. The Debentures, accrued interest, and prepayment penalties were repaid on July 31, 2015. The company that Mr. Brauser jointly manages, received $104,932 of aggregated prepayment penalties and interest.

In November 2014 and March 2015, the Company had engaged in two private placements, each of which precluded the Company from using capital or otherwise issuing shares of common stock or common stock equivalents below $700.00 and $357.00, respectively. In order to raise further capital in the June 2015 private placement, the Company was required to enter into agreements with prior investors (including Mr. Michael Brauser and Alpha Capital Anstalt, a then 5% holder) modifying these covenants. In connection with these modifications, Mr. Brauser received 894 shares of common stock and 1,053 warrants, a company which Mr. Brauser (the father of the Company’s President) jointly manages received 80 shares and 94 warrants and another company, Alpha Capital Anstalt, which acted as the lead investor in the November 2014 and March 2015 private placements, received 3,757 shares of common stock and 2,035 warrants, at an aggregate cost of approximately $59,600 to the Company.

The Company issued shares of common stock in connection with a registered public offering on July 29, 2015. This effectively triggered the need to issue additional shares under the agreements with prior investors (including Mr. Michael Brauser and Alpha Capital Anstalt). Pursuant to the Rules of the Nasdaq Stock Market, the Company needed to seek stockholder approval before issuing a number of these Waiver shares and such approval was obtained on October 16, 2015. On August 18, 2015 and November 10, 2015, the Company issued shares of common stock to certain investors under Waiver agreements. Mr. Brauser received 3,848 of common stock, a company which Mr. Brauser jointly manages received 342 shares and another company, Alpha Capital Anstalt, which acted as the lead investor in the November 2014 and March 2015 private placements, received 9,620 shares of common stock, at an aggregate cost of approximately $504,000 to the Company.

On March 27, 2015, Harlan Press notified the Company of his resignation from the Company, effective April 10, 2015. Mr. Press previously served as Chief Financial Officer of the Company. In connection with the Company’s previously disclosed merger with Vaporin, Inc. in March 2015, Mr. Press was appointed Vice-President of Finance of the Company. Mr. Press received severance compensation and accrued vacation in accordance with his employment agreement in the total amount of $159,810, which is divided into equal weekly payments that ended on January 29, 2016. As of December 31, 2015, $17,503 of accrued severance is included in accrued expenses on the consolidated balance sheet.

During 2015, the Company purchases, at rates comparable to market rates, e-liquids sold in its retail stores and wholesale operations, respectively from Liquid Science, Inc., a company in which Jeffrey Holman (the Company’s Chief Executive Officer), Gregory Brauser (the Company’s President) and Michael Brauser each have a 15% beneficial ownership interest. During 2015, the Company made approximately 56% of its purchases of e-liquid from Liquid Science for its retail stores, which purchases equaled $260,609 in the aggregate. During 2015, the Company made approximately 39% of its purchases of e-liquid from Liquid Science for its wholesale and online operations, which purchases equaled $182,513 in the aggregate. The Company did not make any purchases from Liquid Science during 2014.

On August 13, 2015, the Company entered into consulting agreements with each of GRQ Consultants, Inc. and Grander Holdings, Inc. GRQ Consultants, Inc. will primarily focus on investor relations and presenting the Company and its business plans, strategy and personnel to the financial community. Grander Holdings, Inc. will primarily assist the Company in further developing and executing its acquisitions strategy, focusing on the Company’s “The Vape Store” properties. Mr. Michael Brauser is the Chief Executive Officer of Grander Holdings, Inc. Pursuant to the agreements, each consultant received an initial fee of $50,000, payable immediately, and $20,000 monthly throughout the 12-month term of each agreement. The Company made payments of $130,000 each to Grander Holdings, Inc. and GRQ Consultants, Inc. during the year ended December 31, 2015. The consulting agreements with Grander Holdings, Inc. and GRQ Consultants were terminated effective February 29, 2016.

Policies and Procedures for Related Party Transactions

We have adopted a policy that our executive officers, directors, nominees for election as a director, beneficial owners of more than 5% of any class of our common stock and any members of the immediate family of any of the foregoing persons are not permitted to enter into a related person transaction with us without the prior consent of our audit committee. Our audit committee will review and oversee all transactions with an executive officer, director, nominee for election as a director, beneficial owner of more than 5% of any class of our common stock or any member of the immediate family of any of the foregoing persons and such person would have a direct or indirect interest. In approving or rejecting any such transactions, our audit committee is to consider the material facts of the transaction, including, but not limited to, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related person’s interest in the transaction.

Our Audit Committee pre-approves audit and permissible non-audit services performed by its independent registered public accounting firm, as well as the fees charged for such services.   All of the services related to audit fees and audit-related fees charged by Marcum, LLP, if any, were pre-approved by the Audit Committee.  The following table shows the fees for the years ended December 31, 2015 and 2014.

PART IV

FINANCIAL STATEMENT INDEX

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the

Board of Directors and Shareholders

of Vapor Corp.

We have audited the accompanying consolidated balance sheets of Vapor Corp. (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, changes in stockholders’ (deficit) equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our 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, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vapor Corp. as of December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 1 to the financial statements, the Company has incurred net losses and needs to raise additional funds to meet its obligations and sustain its operations. In addition, the Company currently does not have enough authorized common shares to settle all of its outstanding warrants if such warrants were exercised pursuant to their cashless exercise provisions. As a result, the Company could be required to settle a portion of these warrants with cash. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Marcum LLP

Marcum LLP

New York, NY

April 8, 2016

VAPOR CORP.

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements

VAPOR CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements

VAPOR CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014

See notes to consolidated financial statements

VAPOR CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS