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VPCO > SEC Filings for VPCO > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for VAPOR CORP.

Form 10-Q for VAPOR CORP.


14-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Forward-Looking Statements

This quarterly report contains forward-looking statements and information relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, our management. When used in this report, the words "believe," "anticipate," "expect," "will," "estimate," "intend", "plan" and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved. Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the "Risk Factors" section of and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and in our subsequent filings with the SEC, and include, among others, the following: competition, consumer acceptance of our products, changes in customer preferences, reliance on Chinese suppliers and manufacturers, government regulation, product liability claims, the availability, terms and deployment of capital and our completion of the pending acquisition of IVG's online, wholesale and retail operations and our post-closing integration of IVG's operations. The terms "Vapor Corp.," "Vapor," "we," "us," "our," and the "Company" refer to Vapor Corp. and its wholly owned subsidiary Smoke Anywhere USA, Inc. and the terms "Smoke Anywhere USA," and "Smoke" refer to our wholly owned subsidiary Smoke Anywhere USA, Inc."

Executive Overview

The Company designs, markets and distributes electronic cigarettes, vaporizers, e-liquids and accessories under the Krave®, VaporX®, Hookah Stix®, Alternacig®, Fifty-One® (also known as Smoke 51), EZ Smoker®, Green Puffer®, Americig®, FumaréTM, and Smoke Star® brands. "Electronic cigarettes" or "e-cigarettes," are battery-powered products that enable users to inhale nicotine vapor without fire, smoke, tar, ash, or carbon monoxide.

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

The Company's business strategy leverages its ability to design, market and develop multiple e-cigarette brands and to bring those brands to market through its multiple distribution channels. The Company sells its products through its online stores, its direct response television marketing efforts, to retail channels through its direct sales force, and through third-party wholesalers, retailers, and value-added resellers. Reference is made to Note 3 to the consolidated condensed financial statements included elsewhere in this report, regarding the Company's pending acquisition of IVG's on-line, wholesale and retail operations.

Listing on The NASDAQ Capital Market

Effective at the opening of trading on May 30, 2014, the Company's common stock was listed and began trading on The NASDAQ Capital Market under its existing symbol "VPCO." Prior to May 30, 2014, the Company's common stock was quoted on the OTCQB under the same symbol.

Reconstitution of the Board of Directors

Effective April 25, 2014, the Board of Directors (the "Board") of the Company reconstituted itself to consist of five (5) members, a majority of whom each qualify as an "independent director" as defined in NASDAQ Marketplace Rule 5605(a)(2) and the related NASDAQ interpretative guidance. Specifically, the Board's reconstitution consisted of the following:
? the Board elected each of Robert J Barrett III, Angela Courtin, Frank E.
Jaumot (the "New Directors") as a member of the Board to serve until his/her successor is duly elected or until his/her earlier resignation or removal from office. The New Directors each qualify as an "independent director" as defined by NASDAQ Marketplace Rule 5605(a)(2) and the related NASDAQ interpretative guidance;
? Kevin Frija, and Doron Ziv, incumbent members of the Board, resigned; ? The Board elected Jeffrey Holman, President and an incumbent member of the Board, as Chairman of the Board; and ? the size of the Board was increased to and fixed at five (5) members from four (4) members.

After reconstituting the Board, the five (5) members of the Board are Jeffrey Holman, Robert J Barrett III, Angela Courtin, Frank E. Jaumot and Ryan Kavanaugh.

Mr. Ziv, a founder of the Company, will continue to serve as an employee of the Company and as a director of the Company's subsidiary Smoke Anywhere USA, Inc. ("Smoke") and is a greater than 5% stockholder of the Company.

Critical Accounting Policies and Estimates

In response to the SEC's financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have selected for disclosure our revenue recognition process and our accounting processes involving significant judgments, estimates and assumptions. These processes affect our reported revenues and current assets and are therefore critical in assessing our financial and operating status. We regularly evaluate these processes in preparing our condensed consolidated financial statements. The processes for determining allowances, reserves and write-downs of trade receivables and inventory, the valuation of equity securities, stock-based payment arrangements, deferred taxes and related valuation allowances involve certain assumptions and estimates that we believe to be reasonable under present facts and circumstances. These estimates and assumptions, if incorrect, could adversely impact our operations and financial position. There were no changes to our critical accounting policies during the quarter ended June 30, 2014 as described in Item 7. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Results of Operations for the Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013

Sales, net for the six months ended June 30, 2014 and 2013 were $10,873,566 and $12,546,591, respectively, a decrease of $1,673,025 or approximately 13.3%. The decrease in sales is primarily attributable to decreased sales of our television direct marketing campaign for our Alternacig® brand, a decrease in sales from our on-line stores, distributor inventory build leveling off and continued pipeline load in the e-cigarette category in 2013, and the increasing prevalence of vaporizers, tanks and open system vapor products that are marginalizing the e-cigarette category, net of increases in sales to our wholesale and distributor customers. Sales were also negatively impacted by new national competitors' launches of their own branded products during the second quarter of 2014. Due to low conversion rates, we limited the direct marketing campaign during the six months ended June 30, 2014, resulting in lower sales of our Alternacig brand. In addition, sales decreased due to certain wholesale and distribution customers selling off their current inventory of electronic cigarette products so they can switch to the vaporizers, tanks and open system vapor products ("e-vapor products"). During the six months ended June 30, 2014 we introduced several new e-vapor products under the Vapor X brand, including premium USA manufactured e-liquids. 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 are in the process of altering our product mix to include more e-vapor products e-liquids and vaporizer accessories.

Cost of goods sold for the six months ended June 30, 2014 and 2013 were $8,374,522 and $7,430,415, respectively, an increase of $944,107, or approximately 12.7%. The increase is primarily due to the change in product mix to higher distributor and wholesaler sales, which have lower gross margins than our direct sales to consumers, an inventory provision of approximately $415,000 to reduce the carrying value of certain products as the Company transitioned to new product packaging, and an increase in sales incentives to assist customers in selling off certain product lines. As customers complete the migration to vaporizers, tanks and open vaporizer systems, our sales incentives should decrease. Our gross margins decreased to 23.0% from 40.8% primarily due to the inventory provision, increase in sales incentives and the change in the product mix.

Selling, general and administrative expenses for the six months ended June 30, 2014 and 2013 were $5,211,742 and $3,159,455, respectively, an increase of $2,052,287 or approximately 65%. The increase is primarily attributable to increases in non-cash stock compensation expense of $928,316 primarily attributable to the consulting agreement with Knight Global Services, professional fees of $637,097 due to implementing the corporate actions we agreed to take in connection with the private placement of common stock we completed in October 2013, including registering the shares for resale with the SEC, reincorporating to the State of Delaware from the State of Nevada, effecting the 1-for-5 reverse stock split of our common stock and uplisting to the NASDAQ Capital Market, plus costs incurred in connection with the pending acquisition of International Vapor Group, Inc.'s online, wholesale and retail operations. We also incurred additional personnel cost of $80,792 primarily attributable to accrued severance related to the resignation of our Chief Executive Officer, variable selling expenses of $161,604 primarily related to increases in postage due to the mailing of new product catalogues, filing and listing fees related to our uplisting to The NASDAQ Capital Market, business insurance due to the increases in coverage limits and increases in travel due to increased presence at trade shows and conferences, net of decreased merchant card processing fees due to lower transaction volumes.

Advertising expense was approximately $1,143,633 and $1,735,238 for the six months ended June 30, 2014 and 2013, respectively, a decrease of $591,605 or approximately 34.1%. During the six months ended June 30, 2014, we decreased our Internet advertising and television direct marketing campaign for our Alternacig® brand, increased our print advertising programs, participation at trade shows, initiated several new marketing campaigns in which we sponsored several music concerts and continued various other advertising campaigns.

Interest expense was approximately $56,616 and $143,409 for the six months ended June 30, 2014 and 2013, respectively. The 2014 interest expense was attributable to the term loan and the 2013 interest expense was attributable to the $300,000 Senior Convertible Notes, as amended, the $50,000 Senior Convertible Note, as amended, and the Senior Note, as amended, issued in the second and third quarters of 2012, and the 2013 Senior Convertible Note issued in January 2013.

Income tax (benefit) expense for the six months ended June 30, 2014 and 2013 was ($1,409,724) and $9,180, respectively. The increase in the income tax benefit directly relates to the Company's increase in it's deferred tax asset at June 30, 2014, mainly resulting to the net operating losses generated in the first six months of 2014. The effective tax rate for the six months ended June 30, 2014 differs from the U.S. federal statutory rate of 34% primarily due to utilization of net operating losses, the under accrual of state income taxes from prior years and certain permanent differences between tax reporting purposes and financial reporting purposes. The effective tax rate for the six months ended June 30, 2013 differs from the U.S. federal statutory rate of 34% primarily due to utilization of net operating losses, the under accrual of state income taxes from prior years and certain permanent differences between tax reporting purposes and financial reporting purposes.

Net (loss) income for the six months ended June 30, 2014 and 2013 was ($2,503,923) and $68,894, respectively, as a result of the items discussed above.

Results of Operations for the Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013

Sales, net for the three months ended June 30, 2014 and 2013 were $6,081,322 and $6,185,842, respectively, a decrease of $104,520 or approximately 1.7%. The decrease in sales is primarily attributable to decreased sales of our television direct marketing campaign for our Alternacig® brand, a decrease in sales of from our on-line stores, distributor inventory build leveling off and continued pipeline load in the e-cigarette category in 2013, and the increasing prevalence of vaporizers, tanks and open system vapor products that are marginalizing the e-cigarette category, net of increases in sales to our wholesale and distributor customers. Sales were also negatively impacted by new national competitors' launches of their own branded products during the second quarter of 2014. Due to low conversion rates, we limited the direct marketing campaign during the first quarter of 2014, resulting in lower sales of our Alternacig brand. In addition, sales decreased due to certain wholesale and distribution customers selling off their current inventory of electronic cigarette products so they can switch to e-vapor products. During the three months ended June 30, 2014 we introduced several new e-vapor products under the Vapor X brand, including premium USA manufactured e-liquids. 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 are in the process of altering our product mix to include more e-vapor products e-liquids and vaporizer accessories.

Cost of goods sold for the three months ended June 30, 2014 and 2013 were $4,542,594 and $3,721,609, respectively, an increase of $820,985, or approximately 22.1%. The increase is primarily due to the change in product mix to higher distributor and wholesaler sales, which have lower gross margins than our direct sales to consumers, an inventory provision of approximately $415,000 to reduce the carrying value of certain products and an increase in sales incentives to assist customers in selling off certain product lines. As customers complete the migration to vaporizers, tanks and open vaporizer systems, our sales incentives should decrease. Our gross margins decreased to 25.3% from 39.8% primarily due to the inventory provision, increase in sales incentives and the change in the product mix.

Selling, general and administrative expenses for the three months ended June 30, 2014 and 2013 were $2,442,018 and $1,553,357, respectively, an increase of $888,661 or approximately 57.2%. The increase is primarily attributable to increases in non-cash stock compensation expense of $333,507 primarily attributable to the consulting agreement with Knight Global Services, professional fees of $323,028 due to completing the corporate actions we agreed to take in connection with the private placement of common stock we completed in October 2013, including registering the shares for resale with the SEC, uplisting to The NASDAQ Capital Market and costs incurred in connection with the pending acquisition of International Vapor Group, Inc.'s online, wholesale and retail operations, variable selling expenses of $173,571 primarily related to increases in postage due to the mailing of new product catalogues, filing and listing fees related to our uplisting to the NASDAQ Capital Market and increases in travel due to increased presence at trade shows and conferences, net of decreased merchant card processing fees due to lower transaction volumes.

Advertising expense was approximately $776,017 and $884,037 for the three months ended June 30, 2014 and 2013, respectively, a decrease of $108,020 or approximately 12.2%. During the three months ended June 30, 2014, we decreased our Internet advertising and television direct marketing campaign for our Alternacig® brand, increased our print advertising programs, participation at trade shows, initiated several new marketing campaigns in which we sponsored several music concerts and continued various other advertising campaigns.

Interest expense was approximately $29,182 and $76,899 for the three months ended June 30, 2014 and 2013, respectively. The 2014 interest expense was attributable to the term loan and the 2013 interest expense was attributable to the $300,000 Senior Convertible Notes, as amended, the $50,000 Senior Convertible Note, as amended, and the Senior Note, as amended, issued in the second and third quarters of 2012, and the 2013 Senior Convertible Note issued in January 2013.

Income tax (benefit) expense for the three months ended June 30, 2014 and 2013 was ($657,324) and $4,590, respectively. The increase in the income tax benefit directly relates to the Company's increase in it's deferred tax asset at June 30, 2014, mainly resulting to the net operating losses generated in the first six months of 2014. The effective tax rate for the three months ended June 30, 2014 differs from the U.S. federal statutory rate of 34% primarily due to utilization of net operating losses, the under accrual of state income taxes from prior years and certain permanent differences between tax reporting purposes and financial reporting purposes. The effective tax rate for the three months ended June 30, 2013 differs from the U.S. federal statutory rate of 34% primarily due to utilization of net operating losses, the under accrual of state income taxes from prior years and certain permanent differences between tax reporting purposes and financial reporting purposes.

Net loss for the three months ended June 30, 2014 and 2013 was $1,051,164 and $54,650, respectively, as a result of the items discussed above.

Liquidity and Capital Resources

We are not aware of any factors that are reasonably likely to adversely affect liquidity trends, other than those factors summarized under the caption "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. We are not involved in any hedging activities and had no forward exchange contracts outstanding at June 30, 2014. In the ordinary course of business we enter into purchase commitments by issuing purchase orders, which may or may not require vendor deposits. These transactions are recognized in our condensed consolidated financial statements in accordance with GAAP.

Our liquidity and capital resources have decreased as a result of the net operating loss we incurred during the six months ended June 30, 2014. At June 30, 2014, we had working capital of $8,154,997 compared to $11,657,615 at December 31, 2013, a decrease of $3,502,618. Subsequent to June 30, 2014 we made a secured loan to IVG for an aggregate principal amount of $500,000 under the Purchase Agreement. In addition, the Company will be required to pay $1.7 million in cash in connection with closing the pending acquisition of IVG's business (the "Acquired Business"), which is expected to occur in September 2014.

Although the Company can provide no assurances, it believes its cash on hand and anticipated cash flow from operations will provide sufficient liquidity and capital resources to fund its business and the Acquired Business after closing of the acquisition for at least the next twelve months. In the event the Company continues to experience liquidity and capital resources constraints because of continuing operating losses from its existing business, the Acquired Business does not perform as anticipated, greater than anticipated sales growth or otherwise or any combination of the foregoing, the Company may need to raise additional capital in the form of equity and/or debt financing. In addition, the Company believes that it may need to raise additional capital to fund the expansion of the retail operations of the Acquired Business. If such additional capital is not available on terms acceptable to the Company or at all then the Company may need to curtail its operations and/or take additional measures to conserve and manage its liquidity and capital resources, any of which would have a material adverse effect on our business, results of operations and financial condition.

Our net cash used in operating activities was $2,756,588 and $422,093 for the six months ended June 30, 2014 and 2013, respectively, an increase of $2,334,495. Our net cash used in operating activities for the six months ended June 30, 2014 resulted from increases in inventories, other assets and accounts payable, net of decrease in due from credit card processors, accounts receivable, prepaid expenses, accrued expenses, and customer deposits which are attributable to our efforts to increase sales, alter our product mix to include more e-vapor products and accommodate anticipated future sales growth.

Our net cash used in investing activities was $5,846 and $8,057 for the six months ended June 30, 2014 and 2013, respectively, for purchases of property and equipment.

Our net cash (used in) provided by financing activities was ($478,334) and $499,680 for the six months ended June 30, 2014 and 2013, respectively. These financing activities relate to the Company's repayment of the term loan and offering costs in 2014 and the issuance of the 2013 Senior Convertible Note, principal repayments of the senior note payable to stockholder and proceeds from exercise of stock options in 2013.

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 June 30, 2014 and December 31, 2013, we had $541,540 and $782,363 in vendor deposits, respectively, which are included in prepaid expenses and vendor deposits on the condensed consolidated balance sheets included elsewhere in this report. At June 30, 2014 and December 31, 2013, we do not have any material financial guarantees or other contractual commitments that are reasonably likely to have an adverse effect on liquidity.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Seasonality

We do not consider our business to be seasonal.

Inflation and Changing Prices

Neither inflation or changing prices for the three and six months ended June 30, 2014 had a material impact on our operations.

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