- CEO Dror Svorai previously committed 3 criminal offenses, has 12 federal tax liens, was accused of breach of fiduciary duty and securities fraud.
- Dror Svorai has been involved in a number of failed penny stocks; one of which was suspended by the Securities and Exchange Commission.
- Clear violation of Exchange Act Section 10A(a) in tandem with the resignation of the company's accountant.
(Editors' Note: This article is an updated version of the author's previous article published on the morning of March 27, 2014. This version addresses information from a company press release issued after publication of the initial version.)
On Jan. 22, 2014, AvWorks Aviation Corp. (SPLI) entered into a merger agreement with Vapor Group, Incorporated. After the consummation of the merger, the public entity retained ownership of all intellectual property, licensing and marketing and other assets of Vapor Group, including equipment, product designs, logos, trademarks, copyrights and websites. Simultaneously with the closing, the Company agreed to change its name to Vapor Group, Inc. from AvWorks Aviation Corp.
To date, only a limited amount of post-merger financial information has been made available to the public since it was finalized less than 90 days ago so it is not possible to accurately analyze important factors such as:
- Specific month-over-month revenue growth;
- Gross margins on all products sold;
- Marketing and advertising expenditures;
- Total assets, total liabilities and the company's ability to pay short-term obligations;
According to a press release dated Mar. 27, 2014, final audited financial statements for 2013 will be released in the coming weeks. For now, we know that audited gross revenues exceeded $1,975,000 and that Vapor Group was profitable in its first year of operations.
283,353,478 shares outstanding
"outpacing 2013 in terms of revenue and anticipated profit."
While post-merger financial information is scarce and thus difficult to evaluate, our biggest concern for SPLI investors is the very questionable past conduct by the company's president.
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.
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 billion dollar multi-national corporations, but Vapor Group 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 (top) to his more recent one dated Jan. 22, 2014 (bottom):
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.
Vapor Group's President has also committed three criminal offenses and has twelve federal tax liens.
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 proceedingsin 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 Expose, 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. (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).
There are two reasons why we are so confident that SPLI and other marijuana-related penny stocks will soon implode. Aside from the hyper inflated valuations that remind us of Internet stocks in 2000, these marijuana-related stocks are not thriving businesses and probably never will be. Almost all penny stocks that are perceived to be within the marijuana sector are bleeding cash and have very few assets. In fact, many have zero sales and enormous accumulated deficits. Vapor Group is one of the few profitable companies in the sector but there are few differences between their products and the products offered by hundreds of other e-Cigarette companies. With increasing competition and very few barriers to entry, it will be incredibly difficult for an e-Cigarette company such as Vapor Group to capture significant market share without advanced and patentable devices. For now, no run of the mill e-Cigarette company like Vapor Group deserves to trade with a price-to-sales ratio anywhere near 55.17, let alone a company with such a dubious management team.
Disclosure: I am short SPLI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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.
Editor's Note: This article covers one or more stocks 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.