Form 10-K for VAPOR GROUP, INC.
31-Mar-2015
Annual Report
The principal business of Vapor Group, Inc., www.vaporgroup.com, (“Vapor Group”) is in the designing, developing, manufacturing and marketing high quality, vaporizers and e-cigarettes and accessories which use state-of-the-art electronic technology and specially formulated, “Made in the USA” e-liquids, which may or may not contain nicotine. Vapor Group offers a range of products and unique e-liquid flavors that it believes are unmatched in its industry. Its products are marketed under the Vapor Group, Total Vapor, Vapor 123, and Vapor Products brands, each of which is also a wholly-owned subsidiary of the same name. It sells nationwide through distributors, wholesalers and directly to consumers through its own websites and direct response advertising, and also owns as a wholly-owned subsidiary, Total Vapor Opportunities, Inc., a pending franchisor of “Total Vapor” retail stores in the continental U.S. In addition, Vapor Group owns as a wholly-owned subsidiary, VGR Media, Inc., www.vgr-media.com, a full service interactive advertising agency, offering Vapor Group’s products, and more generally customized performance marketing solutions to help marketers of consumer products acquire new customers and maximize their return on investment. VGR Media operates in the U.S. and sells domestically and internationally.
Operating Expenses:
Operating expenses increased by $2,942,127 or 343% to $3,798,786 for the year ended December 31, 2014 from $856,659 for the year ended December 31, 2013. The increase in operating expenses was primarily due to an increase in Advertising and Promotion, Commissions and General and administrative expenses.
Loss from Operations:
Loss from continuing operations was $740,369 for the year ended December 31, 2014 compared to a profit from continuing operations of $267,614 for the year ended December 31, 2013 mainly due to the increase in Operating Expenses described above.
Interest Income:
The company had no interest income to report.
Net Loss:
Net Loss was $804,828 for the year ended December 31, 2014 compared to a net profit of $161,720 for the year ended December 31, 2013 mainly due to the increase in Operating Expenses described above.
Going Concern
As reflected in the accompanying consolidated financial statements, for the year ended December 31, 2014, the Company had a net loss and net cash used in operations of $804,828 and ($2,186,824), respectively, and a total stockholders’ deficit of $361,569. These matters have raised substantial doubt about the Company’s ability to continue as a going concern. Going forward, the ability of the Company to continue as a going concern is dependent on its ability to raise additional capital, further implement or augment its business model and business plan, and to generate additional revenues.
The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2014, we had net current liabilities of $3,553,250 compared to $855,009 as of December 31, 2013. Our balance of cash and cash equivalents at December 31, 2014 was $413,230 as compared to $48,177 on December 31, 2013.
Operational cash flow
We had operating cash outflows in the year ended December 30, 2014 of $2,186,824, and $236,567 in the year ended December 30, 2013. Our primary uses of cash have been for marketing expenses and general working capital purposes. All cash we received over the reported periods has been expended in the furtherance of growing assets.
Financing cash flows
Going forward, we may not have sufficient resources to fully develop any new products or technologies or expand our inventory levels unless we are able to raise additional financing. We can make no assurances these required funds will be available on favorable terms, if at all. If additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in dilution to our existing stockholders. Additionally, these conditions may increase costs to raise capital and/or result in further dilution. Our failure to raise capital when needed would adversely affect our business, financial condition and results of operations, and could force us to reduce or cease our operations.
We believe that we will be able to meet the costs of growth and public reporting with funds generated from operations and additional amounts generated through debt and equity financing, Although management believes that the required financing to fund product development and increasing inventory levels can be secured at terms satisfactory to the Company, there is no guarantee these funds will be made available, and if funds are available, that the terms will be satisfactory to the Company.
Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition. Some of the critical accounting estimates are detailed below.
Critical Accounting Estimates and New Accounting Pronouncements
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made, and if changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition.
We base our estimates and judgments on our experience, our current knowledge, and our beliefs of what could occur in the future, our observation of trends in the industry, information provided by our customers and information available from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have identified the following accounting policies and estimates as those that we believe are most critical to our financial condition and results of operations and that require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties: share-based compensation expense, income taxes, and derivative financial instruments.
Share-Based Compensation Expense. We plan to calculate share-based compensation expense for option awards and warrant issuances (“Share-based Awards”) based on the estimated grant/issue-date fair value using the Black-Scholes-Merton option pricing model (“Black-Sholes Model”), and recognize the expense on a straight-line basis over the vesting period, net of estimated forfeitures. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the vesting period of the Share-based Award in determining the fair value of Share-based Awards. Although we believe our assumptions used to calculate share-based compensation expense are reasonable, these assumptions can involve complex judgments about future events, which are open to interpretation and inherent uncertainty. In addition, significant changes to our assumptions could significantly impact the amount of expense recorded in a given period.
Income Taxes. As part of the process of preparing our consolidated financial statements, we will be required to estimate income taxes in each of the jurisdictions in which we operate. Our provision for income taxes is determined using the asset and liability approach to account for income taxes. A current liability is recorded for the estimated taxes payable for the current year. Deferred tax assets and liabilities are recorded for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which the timing differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates or tax laws are recognized in the provision for income taxes in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount more-likely-than-not to be realized. Changes in valuation allowances will flow through the statement of operations unless related to deferred tax assets that expire unutilized or are modified through translation, in which case both the deferred tax asset and related valuation allowance are similarly adjusted. Where a valuation allowance was established through purchase accounting for acquired deferred tax assets, any future change will be credited or charged to income tax expense.
The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. In the ordinary course of our business, there are transactions and calculations for which the ultimate tax determination is uncertain. In spite of our belief that we have appropriate support for all the positions taken on our tax returns, we acknowledge that certain positions may be successfully challenged by the taxing authorities. We determine the tax benefits more likely than not to be recognized with respect to uncertain tax positions. Although we believe our recorded tax assets and liabilities are reasonable, tax laws and regulations are subject to interpretation and inherent uncertainty; therefore, our assessments can involve both a series of complex judgments about future events and rely on estimates and assumptions. Although we believe these estimates and assumptions are reasonable, the final determination could be materially different than that which is reflected in our provision for income taxes and recorded tax assets and liabilities.
New Accounting Pronouncements
In December 2011, FASB issued Accounting Standards Update (“ASU”) 2011-11, Balance Sheet – Offsetting. This guidance requires disclosures about offsetting and related arrangements for recognized financial instruments and derivative instruments. The standard is effective for us as of January 1, 2013 and will not materially impact our financial statement disclosures.
In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment.” This guidance provides the option to evaluate prescribed qualitative factors to determine whether a calculated goodwill impairment test is necessary. The standard is effective for us as of January 1, 2012 and will not materially impact on our financial condition, results of operations, or financial statement disclosures.
In May 2011, FASB issued Accounting Standards Update (“ASU”) 2011-05, Comprehensive Income: Presentation of Comprehensive Income, to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments do not change the guidance regarding the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments should be applied retrospectively, and is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The adoption is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the “Boards”) on fair value measurement, and results in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” These amendments change some of the terminology used to describe many of the existing requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments should be applied prospectively, and they are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The adoption is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.
Management does not believe there would be a material effect on the accompanying financial statements had any other recently issued but not yet effective accounting standards been adopted in the current period.
Recent Events
“Convertible Notes Payable” and “Accrued Interest” Reductions
Since January 1, 2015, the Company has directly paid down in cash $285,987.99 in principal, interest and additional fees and penalties (the “Prepayments”) specific to early payments of portions of the outstanding balances of “Convertible notes payable” and “Accrued Interest” stated on its Consolidated Balance Sheet which for the period ended December 31, 2014 were $3,153,792 and $245,751 respectively, or a total of $3,399,543.
In addition, from January 1, 2015 through March 30, 2015, several respective note holders of various and specific “Convertible notes payable” converted $1,738,614 of the aggregate principal and interest, as reported for the period ended December 31, 2014, of the total of “Convertible notes payable” and “Accrued Interest” into shares of common stock of the Company, in accordance with federal law and regulation (the “Conversions”).
Adjusted for the Prepayments, net of fees and penalties, and the Conversions, which together total $1,958,229 in reduction of such debt, the remaining outstanding balance of “Convertible notes payable” and “Accrued Interest” on the Consolidated Balance Sheet for the period ended December 31, 2014, would be reduced to $1,441,314 from $3,399,543.
Increases in Authorized Shares of Common Stock
As of the date of the filing of this Annual Report, March 30, 2015, the Company on separate occasions has filed two amendments to its Articles of Incorporation with State of Florida, each of which increased its authorized shares of common stock. The amendments were accepted by the State of Florida respectively on January 29, 2015 and March 10, 2015, thereby increasing the Company’s authorized shares from 2,500,000,000 to 3,500,000,000 and 4,500,000,000 respectively.
As reported on our Form 8-K filed December 4, 2014, and as reported in the Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements of the Registrant filed on Form 10-Q for the quarter ended September 30, 2014 and filed with the SEC on November 14, 2014 (collectively referred to as the “Filings”), the Registrant had accumulated “convertible notes payable” in aggregate amount of $3,583,423 (the “Aggregate Convertible Notes Payable”) as of September 30, 2014. As previously noted, since the Filings, several holders of said convertible promissory notes (the “Notes” or individually, a “Note”) have exercised their right to convert all or a portion of their Note(s), in accordance with Federal and State law and regulation, into free-trading shares of common stock of the Registrant pursuant to the exemption from registration under Rule 144 of the Securities Act of 1933, as amended and per the terms of each holder’s respective Note.
Also, as reported on Form 8-K filed with the SEC on February 4, 2015 by the Registrant, included in the documentation related to each Note is often the requirement that the Registrant authorize its transfer agent to reserve a quantity of shares of common stock in advance of any conversion of debt to shares of common stock in the event that the Note holder decides to convert all or any part of the outstanding balance of their respective Note (each a “Reserve”). Such Reserves are frequently variable in that downward changes in the market price of the Registrant’s common stock may trigger an increase in the quantity of shares required to be reserved by the Note holder. Moreover, such Notes allow the Note holder to convert all or a portion of the outstanding balance of each Note, in accordance with Federal and State law and regulation, without the approval of the Registrant, meaning that such conversions of debt into free trading shares of common stock of the Registrant are outside of the Registrant’s control.
As a result of the continuing low market price of the Registrant’s common stock, several Note holders have again required increases in their Reserves equivalent to many times the total possible number of shares that could be issued from their conversions greatly inflating the total number of shares set aside as Reserves. Such increases have repeatedly resulted in a significant reduction in the number of authorized shares of common stock in the Registrant’s treasury which need to be available for general business purposes. Therefore to maintain an adequate quantity of common stock in its treasury for future uses, the Registrant has been required to repeatedly amend its Articles of Incorporation, to increase the number of shares of its authorized common stock.
Off-Balance Sheet Arrangements
As of December 31, 2014, we had no material off-balance sheet arrangements.
In the ordinary course of business, we enter into agreements with third parties that include indemnification provisions which, in our judgment, are normal and customary for companies in our industry sector. These agreements are typically with business partners, and suppliers. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred by the indemnified parties with respect to our product candidates, use of such product candidates, or other actions taken or omitted by us. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of liabilities relating to these provisions is minimal. Accordingly, we have no liabilities recorded for these provisions as of December 31, 2014.
In the normal course of business, we may be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims, environmental actions or the actions of various regulatory agencies. We consult with counsel and other appropriate experts to assess the claim. If, in our opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the U.S., an estimate is made of the loss and the appropriate accounting entries are reflected in our financial statements.
Impact of Inflation
The business will have to absorb any inflationary increases on development costs in the short-term, with the expectation that it will be able to pass inflationary increases on costs on to our customers through price increases on the release of these new/enhanced products into the market and hence the management do not expect inflation to be a significant factor in our business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and as such, is not required to provide the information required under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements are included and may be found at pages F-1 through F-11.
MAPH Enterprises, LLC | (305) 414-0128 | 1501 Venera Ave, Coral Gables, FL 33146 | new@marijuanastocks.com
