Item 4.02—Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or
Completed Interim Review
On August 11, 2011, the Board of Directors of Vapor Corp.(the “Company”), based on consultation
with management, concluded that the Company’s consolidated audited financial statements for the
fiscal years ended December 31, 2010 and 2009 and the unaudited interim consolidated financial
statements for the quarters ended March 31, 2011, September 30, 2010, June 30, 2010 and March 31,
2010, each as previously filed with the Securities and Exchange Commission (“SEC”), should no
longer be relied upon because the Company failed to record share-based compensation expense for
employee and non-employee stock options in accordance with ASC Topic 718, “Compensation-Stock
Compensation. (“ASC Topic 18”)” and the Company failed to properly calculate the weighted average
number of shares outstanding. In addition the deferred tax asset recorded in the unaudited interim
consolidated financial statements for the quarter ended March 31, 2011 should have had a full
valuation allowance recorded against it since management determined as of that date, it wasn’t more
likely than not such benefit would be utilized.
The Company will restate the audited and unaudited consolidated financial statements identified
above. The Company will file an amended Annual Report on Form 10-K for the fiscal years ended
December 31, 2010 and December 31, 2009, amended Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2011, September
30, 2010, June 30, 2010 and March 31, 2010 to include such restated consolidated financial
statements with the SEC as soon as practicable.
The estimated effects of the restatements to record share-based compensation expense for employee
and non-employee stock options in accordance with ASC Topic 718 are as follows:
The Company expects that the total amount of stock option expense that will be recorded for the
eighteen-month period of October 1, 2009 through March 31, 2011 will be approximately $1,200,000.
The Company expects that the stock option expense for the year ended December 31, 2010 and 2009
will be approximately $902,000 and $289,000, or $0.02 and $0.00 per basic and diluted share,
respectively. The Company expects that the stock option expense for the nine-month period ended
September 30, 2010 and the six-month period ended June 30, 2010 will be approximately $893,000 and
$595,000 or $0.01 and $0.01 per basic and diluted shares, respectively. The Company expects that
the stock option expense for the quarters ended March 31, 2011, December 31, 2010, September 30,
2010, June 30, 2010, March 31, 2010, and December 31, 2009 will be approximately $9,000, $9,000,
$298,000, $298,000, $298,000 and $289,000, respectively.
The Company expects the change in calculating the weighted average number of shares outstanding in
each of the restated periods will not change the basic and diluted earnings (loss) per share in
each of the restated periods.
The Company expects the income tax expense for the quarter ended March 31, 2011 will increase by
approximately $92,000 as a result of providing a full valuation allowance against the deferred tax
asset.
The Company believes that the restatements do not have an effect on the operations of the business.
The Company believes that the effects of the Restatements did not affect the Company’s cash flows.
In addition to the financial statement impacts of this restatement, management acknowledges the
implications of the misstatement on the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2010 and 2009, as well as the quarters ended March 31, 2011,
September 30, 2010, June 30, 2010 and March 31, 2010. A material weakness is a deficiency, or
combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis. Based on the definition of
“material weakness” in the Public Company Accounting Oversight Board’s Auditing Standard No. 5, “An
Audit of Internal Control Over Financial Reporting That Is Integrated with an Audit of Financial
Statements,” the restatement of financial statements in prior filings with the SEC is a strong
indicator of the existence of a “material weakness” in the design or operation of internal control
over financial reporting. Accordingly, the Company has concluded that as of December 31, 2010 and
2009, a material weakness existed due to the fact that the Company did not maintain effective
controls over its accounting for share-based compensation expense for employee and non-employee
stock option in accordance with ASC Topic 718, its accounting for weighted average number of
outstanding shares, and inadequate review of the valuation of deferred tax assets. In addition,
the Company has concluded that its disclosure controls and procedures were ineffective at December
31, 2010 and 2009, March 31, 2011, September 30, 2010, June 30, 2010 and March 31, 2010 because of
this material weakness. If not remediated, this material weakness could result in further
misstatements of annual or interim consolidated financial statements.
The Company’s Board of Directors and management have discussed these matters disclosed in this
Current Report on Form 10-Q with Marcum LLP, the Company’s current independent registered public
accounting firm, and Paritz & Company, P.A., the Company’s prior independent registered public
accounting firm.
As a result of the decision to restate such consolidated financial statements, the Company was
informed by Paritz & Company, P.A. in a letter dated August 11, 2011 that it was withdrawing its
audit report on the consolidated financial statements included in the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2010. Such withdrawal is required by the standards
of the Public Company Accounting Oversight Board (U.S.).