- The company's current President & CEO was accused of breach of fiduciary duty and securities fraud.
- Clear violation of Exchange Act Section 10A(a) in tandem with the resignation of the company's accountant.
- Pathetic financials and no material changes lead us to believe that shares are inflated as part of the broader marijuana bubble and thus will pop.
(Editor's note: For an updated version of this article, please see here.)
On Jan. 22, 2014, AvWorks Aviation Corp. (SPLI) entered a merger agreement with Vapor Group, Inc. After consummation of the merger, the surviving public entity retained ownership of all intellectual property, licensing, marketing and other assets of Vapor Group, including equipment, product designs, logos, trademarks, copyrights and websites. As part of that merger, AvWorks Aviation Corp. agreed to change its name to Vapor Group, Inc.
Shares Outstanding (a/o Jan 10, 2014)
Market Value (a/o Mar 25, 2014)
Cash and Cash equivalents (a/o Sept 30, 2013)
Accumulated Deficit (a/o Sept 30, 2013)
Revenue For 3-Months Ending Sept 30, 2013
An Insolvent and Financially Unsound "Going Concern" Company
In our years of reading financial statements, we have rarely encountered a company valued at $112 million with such atrocious financial statements. Vapor Group Inc., is completely insolvent, with minus-$442 cash and cash equivalents and assets totaling just more than $6,000. With such few liquid assets, it will be virtually impossible for this company to raise capital via debt financing. Therefore, we fully expect further dilution in the near future through equity financings.
About The Business
Vapor Group, Inc. sells e-cigarette brands and specially formulated "Made in the USA" e-liquids. Testing labs are FDA-registered, and products are sold nationwide, either through distributors and wholesalers or directly to consumers. Those products are marketed under the Vapor Group™, Total Vapor™, Vapor 123™ and Vapor Products™ brands. The company's e-cigarette liquids are made entirely in the U.S., and all e-cigarettes are manufactured with lifelong batteries.
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According to the company's website, electronic cigarettes are not just a healthier alternative to smoking tobacco cigarettes and cigars but also are a better financial alternative as well. Propylene glycol, one of four ingredients found in e-cigarettes, is "generally recognized as safe" by the Food and Drug Administration (FDA), according to a public health statement summarizing the toxicological profile for propylene glycol.
The market for e-cigarettes continues to grow rapidly. Sales more than doubled to $1.7 billion in 2013 compared to the year prior according to Bonnie Herzog, an industry analyst for Wells Fargo Securities. We remain skeptical about the company's ongoing ability to thrive in this increasingly competitive marketplace with such little capital, but it appears to have forward-looking intentions. On March 12, 2014, the company announced development of "The Vapor Box TBH," which vaporizes dry herbs by gently heating them at a controlled temperature inside a heating chamber. One would assume the demand will increase for products like the Vapor Box TBH as a result of recent legislative changes to marijuana use. But regardless of the external market, the company will fail if its management team does not execute the business plan.
Accusations of Securities Fraud, Inadequate Disclosure and a History of Failed Public Companies
Dror Svorai, SPLI's president and chief executive officer, founded the Vapor Group, Inc. in 2012, along with its subsidiaries Total Vapor Inc., Vapor 123 Inc. and Vapor Products Inc. While his bio suggests Svorai's past experience includes serving in executive positions, it fails to mention anything about Case No. 13-20190-CIV-GRAHAM/GOODMAN, filed in U.S. District Court's Southern District of Florida. In that case, Svorai was accused of breach of fiduciary duty and securities fraud:
- Defendant Dror Svorai and Defendant Jorge Schcolnik (collectively, "Board Defendants") had a fiduciary duty to shareholders which the defendants breached through their intentional misconduct.
- Defendant Dror Svorai also tried to create an untrue employment agreement for the former CEO, Defendant Haim Mayan.
Dror Svorai's bio published in an 8-K dated Jan. 22, 2014 also fails to disclose the specific executive positions he previously held. Compare Svorai's bio dated Nov. 25, 2010 to his more recent one dated Jan. 22, 2014:
Specifically, Svorai failed to mention that he was a former president and chief executive officer of Green LED Technologies, Inc., which later was acquired by Hi Score Corp. (OTC:HSCO). We are convinced that Svorai deliberately omitted his involvement with Hi Score Corp. because HSCO was suspended by the Securities and Exchange Commission on Jan. 27, 2014 due to questions "regarding the accuracy of publicly available information about the company's assets, acquisitions, business activities, control persons, securities offerings, and financing arrangements."
Svorai also has acted as the sole officer and director of Inelco Corp. (OTCPK:INLC) since 2010, alongside barred attorney Diane D. Dalmy, who had charges brought against her in 2013 relating to a pump-and-dump scheme. During Svorai's tenure with the company, Inelco's shares plunged by more than 99 percent.
False Representation and Violation of Section 10A(a) of the Exchange Act
On Nov. 27, 2013, Harris F. Rattray, CPA resigned as the independent registered public accounting firm for SPLI. According to a Public Company Accounting Oversight Board (PCOAB) order instituting disciplinary proceedings in the matter of Harris F. Rattray, dated Nov. 21, 2013, Rattray was barred from being an associated person of a registered public accounting firm, and his license was revoked. Specifically, Rattray violated Section 10(b), Rule 10b-5 and Section 10A(a) of the Exchange Act. These proceedings were in connection with the auditing of financial statements of four public companies: Patient Portal Technologies Inc. (OTCPK:PPRG), AvWorks Aviation Corp, Caribbean Pacific Marketing Inc. and Urban Ag Corp. (OTCPK:AQUM).
AvWorks and the three other respondents misrepresented several audited financial statements as having been conducted in accordance with PCOAB standards. In doing so, all four public companies violated Exchange Act Section 10A(a), failing to include procedures designed to provide reasonable assurance that any illegal acts having a direct and material effect on the determination of financial-statement amounts would be detected.
NVLX Lost 50 Percent after Our Warnings, and We Believe SPLI May Be Next
Unfortunately for current shareholders, we believe the recent catalyst for the surging SPLI share price is marijuana mania. We featured Nuvilex, Inc. (OTCQB:NVLX) in a previous expose and warned investors of the dangers of holding a stock in the midst of a bubble. Sure enough, within 48 hours of our expose, NVLX shares lost nearly 50 percent. It is our opinion that SPLI soon will have a similar pullback. Additional marijuana stocks that inflated into some of the most overvalued stocks on Wall Street include mCig, Inc. (OTCQB:MCIG), Signature Exploration And Production Corp. (SXLP) and Growlife, Inc. (OTC:PHOT).
Marijuana mania aside, we have seen better financial statements for companies that were about to file for bankruptcy. And yet, this tiny e-cigarette company, which has not sold a significant amount of product to date, boasts a market cap of more than $100 million. We believe that aside from the business barely staying afloat, bigger troubles lie at the top of the organization in CEO Dror Svorai and his checkered past relating to failed penny-stock dealings. We also can not forget the company's violation of Section 10A(a) of the Exchange Act as part of its business dealings with a recently barred accountant. These are very serious issues and despite our repeated attempts to contact the company by phone and email, we have never received a response. These unanswered red flags, along with an obscene valuation which no rational investor would take seriously, leave us no choice but to urge investors to reconsider owning this stock, which could see its share prices slashed in half at any moment.
Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.