Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
1 - Organization and Operations
Vapir
Enterprises, Inc.
Vapir
Enterprises Inc. (formerly FAL Exploration Corp.) (“Vapir Enterprises” or the “Company”) was incorporated
in the State of Nevada on December 17, 2009. The Company’s principal business is focused on inventing, developing and producing
aromatherapy devices and vaporizers. The Company’s aromatherapy devices utilize heat and convection air and thereby extract
natural essences and produce fresh fragrances.
Acquisition
of Vapir, Inc. Treated as a Reverse Acquisition
On
December 30, 2014, Vapir, Inc., a private California corporation (“Vapir”), which is the historical business, entered
into a Share Exchange Agreement with the Company, all of the stockholders of Vapir (the “Vapir Shareholders”), and
the Company’s controlling stockholders whereby the Company agreed to acquire all of the issued and outstanding capital stock
of Vapir in exchange for 38,624,768 shares of the Company’s common stock. On December 30, 2014, the transaction closed and
Vapir is now a wholly-owned subsidiary of the Company. The number of shares issued represented approximately 80.0% of the issued
and outstanding common stock immediately after the consummation of the Share Exchange Agreement. In addition, Vapir’s board
of directors and management obtained the board and management control of the combined entity stock immediately after the consummation
of the Share Exchange Agreement.
As
a result of the controlling financial interest of the former stockholders of Vapir, for financial statement reporting purposes,
the business combination between Vapir and Vapir Enterprises has been treated as a reverse acquisition with Vapir deemed the accounting
acquirer and Vapir Enterprises deemed the accounting acquiree under the acquisition method of accounting in accordance with FASB
Accounting Standards Codification (“ASC”) Section 805-10-55. The reverse acquisition is deemed a capital transaction
and the net assets of Vapir (the accounting acquirer) are carried forward to Vapir Enterprises (the legal acquirer and the reporting
entity) at their carrying value before the acquisition. The acquisition process utilizes the capital structure of Vapir Enterprises
and the assets and liabilities of Vapir which are recorded at historical cost. The equity of the combined entity is the historical
equity of Vapir retroactively restated to reflect the number of shares issued by Vapir Enterprises in the transaction.
Vapir,
Inc. was incorporated in the State of California in October 2006.
Note
2 - Significant and Critical Accounting Policies and Practices
Basis
of Presentation- Unaudited Interim Financial Information
The
accompanying unaudited interim condensed consolidated financial statements and related notes have been prepared in accordance
with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial
information, and with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) to
Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S.
GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements furnished reflect all
adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of
the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial
statements of the Company for the year ended December 31, 2015 and notes thereto contained in the Company’s annual report
on Form 10-K for the year ended December 31, 2015.
Use
of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The
Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness
of accounting policies and their application. Critical accounting policies and practices are those that are both most important
to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective,
or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted
accounting principles.
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date(s) of the financial statements and the reported amounts of revenues and expenses
during the reporting period(s).
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
2 - Significant and Critical Accounting Policies and Practices (continued)
Critical
accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact
of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates
and assumptions affecting the financial statements were:
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(i)
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Assumption
as a going concern
: Management assumes that the Company will continue as a going concern, which contemplates continuity
of operations, realization of assets, and liquidation of liabilities in the normal course of business.
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(ii)
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Allowance
for doubtful accounts
: Management’s estimate of the allowance for doubtful accounts is based on historical sales,
historical loss levels, and an analysis of the collectability of individual accounts; and general economic conditions that
may affect a client’s ability to pay. The Company evaluated the key factors and assumptions used to develop the allowance
in determining that it is reasonable in relation to the financial statements taken as a whole.
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(iii)
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Inventory
obsolescence and markdowns
: The Company’s estimate of potentially excess and slow-moving inventories is based on
evaluation of inventory levels and aging, review of inventory turns and historical sales experiences. The Company’s
estimate of reserve for inventory shrinkage is based on the historical results of physical inventory cycle counts.
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(iv)
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Fair
value of long-lived assets
: Fair value is generally determined using the asset’s expected future discounted cash
flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined
remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated
over the newly determined remaining estimated useful lives. The Company considers the following to be some examples of important
indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected
historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s
overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business
strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a
significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The
Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence
of such events.
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(v)
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Valuation
allowance for deferred tax assets
: Management assumes that the realization of the Company’s net deferred tax assets
resulting from its net operating loss (“NOL”) carry-forwards for Federal income tax purposes that may be offset
against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net
loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has
incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily
operations by way of a public or private offering, among other factors.
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(vi)
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Estimates
and assumptions used in valuation of derivative liabilities and equity instruments
: Management estimates expected term
of share options and similar instruments, expected volatility of the Company’s common shares and the method used to
estimate it, expected annual rate of quarterly dividends, and risk free rate(s) to value derivative liabilities, share options
and similar instruments.
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(vii)
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Estimates
and assumptions used in valuation of stock-based compensation
: Management estimates expected term of share options and
similar instruments, expected volatility of the Company’s common shares and the method used to estimate it, expected
annual rate of quarterly dividends, and risk free rate(s) to value share options and similar instruments.
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These
significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached
to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the
financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
2 - Significant and Critical Accounting Policies and Practices (continued)
Management
regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes
in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those
estimates are adjusted accordingly.
Actual
results could differ from those estimates.
Principles
of Consolidation
The
Company applies the guidance of Topic 810
“Consolidation”
of the FASB Accounting Standards Codification
to determine whether and how to consolidate another entity.
Pursuant to ASC Paragraph 810-10-15-10,
all majority-owned subsidiaries-all entities in which a parent has a controlling financial interest-shall be consolidated except
(1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic
940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company
investee.
Pursuant to ASC Paragraph 810-10-15-8,
the usual condition for a controlling financial
interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly
or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation.
The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other
stockholders, or by court decree
. The Company consolidates
all less-than-majority-owned subsidiaries,
if any, in which the parent’s power to control exists.
The
consolidated financial statements include all accounts of the entities as of the reporting period ending date(s) and for the reporting
period(s) as follows:
Name
of consolidated
subsidiary or entity
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State
or other jurisdiction of incorporation or organization
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Date
of incorporation or formation (date of acquisition, if applicable)
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Attributable
interest
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Vapir Enterprises, Inc.
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The State of Nevada, U.S.A.
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December 17, 2009
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100
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%
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Vapir, Inc.
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The State of California, U.S.A.
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October 2006 (December 30, 2014)
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100
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%
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The
consolidated financial statements include all accounts of the Company and Vapir as of March 31, 2016 and for the three months
then ended.
All
inter-company balances and transactions have been eliminated.
Fair
Value of Financial Instruments
The
Company follows paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to
measure the fair value of its financial instruments and paragraph 825-10-50-10 of the FASB Accounting Standards Codification for
disclosures about fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value
in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value
measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37
establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three
(3) broad levels. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
Level
1
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Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
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Level
2
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Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
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Level
3
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Pricing
inputs that are generally observable inputs and not corroborated by market data.
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Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
2 - Significant and Critical Accounting Policies and Practices (continued)
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
The
carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses
and other current assets, advances to suppliers, accounts payable and accrued expenses, and customer deposits approximate their
fair values because of the short maturity of these instruments.
The
Company’s convertible notes payable and notes payable approximate the fair value of such instruments based upon management’s
best estimate of interest rates that would be available to the Company for similar financial arrangements at March 31, 2016 and
December 31, 2015.
The
Company’s Level 3 financial liabilities consist of the embedded conversion feature on convertible notes and derivative warrants
for which there is no current market for these securities such that the determination of fair value requires significant judgment
or estimation and the derivative liability on the conversion feature of the convertible notes payable. The Company valued the
automatic conditional conversion, re-pricing/down-round, change of control; default and follow-on offering provisions using a
lattice model, with the assistance of a third party valuation specialist, for which management understands the methodologies.
These models incorporate transaction details such as Company stock price, contractual terms, maturity, risk free rates, as well
as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.
Transactions
involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive,
free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the
related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such
representations can be substantiated.
Fair
Value of Financial Assets and Liabilities Measured on a Recurring Basis
Level
3 Financial Liabilities - Derivative Warrant Liabilities and Derivative Liability on Conversion Feature
The
Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative
warrant liability and derivative liability on the conversion feature at every reporting period and recognizes gains or losses
in the consolidated statements of operations that are attributable to the change in the fair value of the derivative liabilities.
The
following table presents the derivative financial instruments, measured and recorded at fair value on the Company’s consolidated
balance sheets on a recurring basis, and their level within the fair value hierarchy as of March 31, 2016:
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Amount
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Level
1
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Level
2
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Level
3
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Derivative liability - Embedded
conversion
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$
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42,235
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$
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-
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$
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-
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$
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42,235
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Derivative liabilities
- Tainted Warrants
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54,554
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-
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-
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54,554
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$
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96,789
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$
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-
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$
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-
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$
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96,789
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Fair
Value of Non-Financial Assets or Liabilities Measured on a Recurring Basis
The
Company’s non-financial assets include inventories. The Company identifies potentially excess and slow-moving inventories
by evaluating turn rates, inventory levels and other factors. Excess quantities are identified through evaluation of inventory
aging, review of inventory turns and historical sales experiences. The Company provides lower of cost or market reserves for such
identified excess and slow-moving inventories. The Company establishes a reserve for inventory shrinkage, if any, based on the
historical results of physical inventory cycle counts.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
2 - Significant and Critical Accounting Policies and Practices (continued)
Carrying
Value, Recoverability and Impairment of Long-Lived Assets
The
Company has adopted Section 360-10-35 of the FASB Accounting Standards Codification for its long-lived assets. Pursuant to ASC
Paragraph 360-10-35-17 an impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group)
is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group).
That assessment shall be based on the carrying amount of the asset (asset group) at the date it is tested for recoverability.
An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its
fair value. Pursuant to ASC Paragraph 360-10-35-20 if an impairment loss is recognized, the adjusted carrying amount of a long-lived
asset shall be its new cost basis. For a depreciable long-lived asset, the new cost basis shall be depreciated (amortized) over
the remaining useful life of that asset. Restoration of a previously recognized impairment loss is prohibited.
Pursuant
to ASC Paragraph 360-10-35-21 the Company’s long-lived asset (asset group) is tested for recoverability whenever events
or changes in circumstances indicate that its carrying amount may not be recoverable. The Company considers the following to be
some examples of such events or changes in circumstances that may trigger an impairment review: (a) significant decrease in the
market price of a long-lived asset (asset group); (b) A significant adverse change in the extent or manner in which a long-lived
asset (asset group) is being used or in its physical condition; (c) A significant adverse change in legal factors or in the business
climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator;
(d) An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of
a long-lived asset (asset group); (e) A current-period operating or cash flow loss combined with a history of operating or cash
flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset
group); and (f) A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed
of significantly before the end of its previously estimated useful life. The Company tests its long-lived assets for potential
impairment indicators at least annually and more frequently upon the occurrence of such events.
Pursuant
to ASC Paragraphs 360-10-35-29 through 35-36 Estimates of future cash flows used to test the recoverability of a long-lived asset
(asset group) shall include only the future cash flows (cash inflows less associated cash outflows) that are directly associated
with and that are expected to arise as a direct result of the use and eventual disposition of the asset (asset group). Estimates
of future cash flows used to test the recoverability of a long-lived asset (asset group) shall incorporate the entity’s
own assumptions about its use of the asset (asset group) and shall consider all available evidence. The assumptions used in developing
those estimates shall be reasonable in relation to the assumptions used in developing other information used by the entity for
comparable periods, such as internal budgets and projections, accruals related to incentive compensation plans, or information
communicated to others.
However, if alternative courses of action to recover the carrying amount
of a long-lived asset (asset group) are under consideration or if a range is estimated for the amount of possible future cash
flows associated with the likely course of action, the likelihood of those possible outcomes shall be considered. A probability-weighted
approach may be useful in considering the likelihood of those possible outcomes.
Estimates of future cash flows used to
test the recoverability of a long-lived asset (asset group) shall be made for the remaining useful life of the asset (asset group)
to the entity. For long-lived assets (asset groups) that have uncertainties both in timing and amount, an expected present value
technique will often be the appropriate technique with which to estimate fair value.
Pursuant
to ASC Paragraphs 360-10-45-4 and 360-10-45-5 an impairment loss recognized for a long-lived asset (asset group) to be held and
used shall be included in income from continuing operations before income taxes in the income statement of a business entity.
If a subtotal such as income from operations is presented, it shall include the amount of that loss. A gain or loss recognized
on the sale of a long-lived asset (disposal group) that is not a component of an entity shall be included in income from continuing
operations before income taxes in the income statement of a business entity. If a subtotal such as income from operations is presented,
it shall include the amounts of those gains or losses. The Company did not consider it necessary to record any impairment charges
during the three months ended March 31, 2016 and 2015.
Cash
equivalents
The
Company considers all highly liquid debt instruments and other short-term investments with maturities of three months or less,
when purchased, to be cash equivalents. The Company maintains cash and cash equivalent balances at one financial institution
that is insured by the Federal Deposit Insurance Corporation. The Company’s account at this institution is insured by the
Federal Deposit Insurance Corporation (“FDIC”) up to $250,000.
As
of March 31, 2016, the Company has not reached bank balances exceeding the FDIC insurance limit. To reduce its risk associated
with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution
in which it holds deposits.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
2 - Significant and Critical Accounting Policies and Practices (continued)
Accounts
receivable and allowance for doubtful accounts
Pursuant
to FASB ASC paragraph 310-10-35-47 trade receivables that management has the intent and ability to hold for the foreseeable future
shall be reported in the balance sheet at outstanding principal adjusted for any charge-offs and the allowance for doubtful accounts.
The Company follows FASB ASC paragraphs 310-10-35-7
through 310-10-35-10 to estimate the allowance for doubtful accounts.
Pursuant to FASB ASC paragraph
310-10-
35-9 Losses from uncollectible receivables shall be accrued when both of the following
conditions are met: (a) Information available before the financial statements are issued or are available to be issued (as discussed
in Section 855-10-25) indicates that it is probable that an asset has been impaired at the date of the financial statements, and
(b) The amount of the loss can be reasonably estimated. Those conditions may be considered in relation to individual receivables
or in relation to groups of similar types of receivables. If the conditions are met, accrual shall be made even though the particular
receivables that are uncollectible may not be identifiable.
The Company reviews individually each trade receivable for
collectability and performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history
and the customer’s current credit worthiness, as determined by the review of their current credit information; and determines
the allowance for doubtful accounts based on historical write-off experience, customer specific facts and general economic conditions
that may affect a client’s ability to pay.
Bad
debt expense is included in general and administrative expenses.
Pursuant
to FASB ASC paragraph 310-10-35-41 Credit losses for trade receivables (uncollectible trade receivables), which may be for all
or part of a particular trade receivable, shall be deducted from the allowance. The related trade receivable balance shall be
charged off in the period in which the trade receivables are deemed uncollectible. Recoveries of trade receivables previously
charged off shall be recorded when received. The Company charges off its trade account receivables
against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
As
of March 31, 2016 and December 31, 2015, there was $2,661 and $1,373 allowance for doubtful accounts, respectively. The Company
recorded bad debt expense of $1,297 and $0 during the three months ended March 31, 2016 and 2015, respectively.
Inventory
Inventory
Valuation
The
Company values inventory, consisting of finished goods, at the lower of cost or market. Cost is determined on the first-in and
first-out (“FIFO”) method. The Company reduces inventory for the diminution of value, resulting from product obsolescence,
damage or other issues affecting marketability, equal to the difference between the cost of the inventory and its estimated market
value. Factors utilized in the determination of estimated market value include (i) estimates of future demand, and (ii) competitive
pricing pressures.
Inventory
Obsolescence and Markdowns
The
Company evaluates its current level of inventory considering historical sales and other factors and, based on this evaluation,
classify inventory markdowns in the income statement as a component of cost of goods sold pursuant to Paragraph 420-10-S99 of
the FASB Accounting Standards Codification to adjust inventory to net realizable value. These markdowns are estimates, which could
vary significantly from actual requirements if future economic conditions, customer demand or competition differ from expectations.
There
was no inventory obsolescence for the reporting period ended March 31, 2016 or 2015. There was no lower of cost or market adjustments
for the reporting period ended March 31, 2016 or 2015.
Advances
to suppliers
Advances
to suppliers represent the cash paid in advance for the purchase of inventory. The advances to suppliers are interest free and
unsecured.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
2 - Significant and Critical Accounting Policies and Practices (continued)
Property
and Equipment
Property
and equipment is recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are
charged to operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective
estimated residual values) over the estimated useful lives of the respective assets as follows:
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Estimated
Useful Life (Years)
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Auto
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3
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Furniture and fixture
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5
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Leasehold improvement
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*
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(*)
Amortized on a straight-line basis over the term of the lease or the estimated useful lives, whichever is shorter.
Upon
sale or retirement, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected
in the statements of operations.
Leases
Lease
agreements are evaluated to determine whether they are capital leases or operating leases in accordance with paragraph 840-10-25-1
of the FASB Accounting Standards Codification (“Paragraph 840-10-25-1”). Pursuant to Paragraph 840-10-25-1 a lessee
and a lessor shall consider whether a lease meets any of the following four criteria as part of classifying the lease at its inception
under the guidance in the Lessees Subsection of this Section (for the lessee) and the Lessors Subsection of this Section (for
the lessor): a. Transfer of ownership. The lease transfers ownership of the property to the lessee by the end of the lease term.
This criterion is met in situations in which the lease agreement provides for the transfer of title at or shortly after the end
of the lease term in exchange for the payment of a nominal fee, for example, the minimum required by statutory regulation to transfer
title. b. Bargain purchase option. The lease contains a bargain purchase option. c. Lease term. The lease term is equal to 75
percent or more of the estimated economic life of the leased property. d. Minimum lease payments. The present value at the beginning
of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance,
maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the
fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor
and expected to be realized by the lessor. In accordance with paragraphs 840-10-25-29 and 840-10-25-30, if at its inception a
lease meets any of the four lease classification criteria in Paragraph 840-10-25-1, the lease shall be classified by the lessee
as a capital lease; and if none of the four criteria in Paragraph 840-10-25-1 are met, the lease shall be classified by the lessee
as an operating lease. Pursuant to Paragraph 840-10-25-31 a lessee shall compute the present value of the minimum lease payments
using the lessee's incremental borrowing rate unless both of the following conditions are met, in which circumstance the lessee
shall use the implicit rate: a. It is practicable for the lessee to learn the implicit rate computed by the lessor. b. The implicit
rate computed by the lessor is less than the lessee's incremental borrowing rate. Capital lease assets are depreciated on a straight
line method, over the capital lease assets estimated useful lives consistent with the Company’s normal depreciation policy
for tangible fixed assets. Interest charges are expensed over the period of the lease in relation to the carrying value of the
capital lease obligation.
Operating
leases primarily relate to the Company’s leases of office spaces. When the terms of an operating lease include tenant improvement
allowances, periods of free rent, rent concessions, and/or rent escalation amounts, the Company establishes a deferred rent liability
for the difference between the scheduled rent payment and the straight-line rent expense recognized, which is amortized over the
underlying lease term on a straight-line basis as a reduction of rent expense.
Intangible
assets
The
Company records the purchase of intangible assets not purchased in a business combination in accordance with ASC 350-30-65 “Goodwill
and Other Intangible Assets” and records intangible assets acquired in a business combination or pushed-down pursuant to
acquisition by its parent in accordance with ASC 805 “Business Combinations”.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
2 - Significant and Critical Accounting Policies and Practices (continued)
Customer
Relationships are based upon the estimated percentage of annual or period projected cash flows generated by such relationships,
to the total cash flows generated over the estimated life of the customer relationships.
In
accordance with ASC 350-30-65, “Intangibles - Goodwill and Others”, the Company assesses the impairment of identifiable
intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company
considers to be important which could trigger an impairment review include the following:
|
1.
|
Significant
underperformance relative to expected historical or projected future operating results;
|
|
|
|
|
2.
|
Significant
changes in the manner of use of the acquired assets or the strategy for the overall business; and
|
|
|
|
|
3.
|
Significant
negative industry or economic trends.
|
When
the Company determines that the carrying value of intangibles may not be recoverable based upon the existence of one or more of
the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows,
the Company records an impairment charge. The Company measures any impairment based on a projected discounted cash flow method
using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Significant
management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows. The Company
evaluates the recoverability of intangible assets annually which is every 4
th
quarter of the fiscal year or whenever
events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable.
Customer
Deposits
Customer
deposits consisted of prepayments from customers to the Company. The Company will recognize the prepayments as revenue upon delivery
of the products, in compliance with its revenue recognition policy.
Derivative
Instruments and Hedging Activities
The
Company accounts for derivative instruments and hedging activities in accordance with paragraph 815-10-05-4 of the FASB Accounting
Standards Codification (“Paragraph 815-10-05-4”). Paragraph 815-10-05-4 requires companies to recognize all derivative
instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of
a derivative instrument depends upon: (i) whether the derivative has been designated and qualifies as part of a hedging relationship,
and (ii) the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments,
a company must designate the hedging instrument based upon the exposure being hedged as either a fair value hedge, cash flow hedge
or hedge of a net investment in a foreign operation.
Derivative
Liability
The
Company evaluates its convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and
Section 815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value
of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. In the
event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations
and comprehensive income (loss) as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument,
the instrument is marked to fair value at the date of conversion, exercise or cancellation and then that the related fair value
is reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also
other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative instrument.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject
to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative
instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement
of the derivative instrument is expected within 12 months of the balance sheet date.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
2 - Significant and Critical Accounting Policies and Practices (continued)
The
Company adopted Section 815-40-15 of the FASB Accounting Standards Codification (“Section 815-40-15”) to determine
whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an
entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed
to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The adoption of Section
815-40-15 has affected the accounting for (i) certain freestanding warrants that contain exercise price adjustment features and
(ii) convertible bonds issued by foreign subsidiaries with a strike price denominated in a foreign currency.
The
Company marks to market the fair value of the embedded derivative convertible notes and derivative warrants at each balance sheet
date and records the change in the fair value of the embedded derivative convertible notes and derivative warrants as other income
or expense in the consolidated statements of operations.
The
Company utilizes the Lattice model that values the liability of the derivative convertible notes and derivative warrants. The
reason the Company picks the Lattice model is that in many cases there may be multiple embedded features or the features of the
bifurcated derivatives may be so complex that a Black-Scholes valuation does not consider all of the terms of the instrument.
Therefore, the fair value may not be appropriately captured by simple models. In other words, simple models such as Black-Scholes
may not be appropriate in many situations given complex features and terms of conversion option (e.g., combined embedded derivatives).
The Lattice model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated
into the model included the exercise and full reset features. Based on these features, there are two primary events that can occur;
the Holder exercises the Warrants or the Warrants are held to expiration. Vapir Enterprises, Inc. and Subsidiary
The
Lattice model analyzed the underlying economic factors that influenced which of these events would occur, when they were likely
to occur, and the specific terms that would be in effect at the time (i.e. stock price, exercise price, volatility, etc.). Projections
were then made on the underlying factors which led to potential scenarios. Probabilities were assigned to each scenario based
on management projections. This led to a cash flow projection and a probability associated with that cash flow.
Related
Parties
The
Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure
of related party transactions. Pursuant to Section 850-10-20 the Related parties include a. affiliates of the Company (“Affiliate”
means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries,
controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405
under the Securities Act); b. entities for which investments in their equity securities would be required, absent the election
of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity
method by the investing entity; c. trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed
by or under the trusteeship of management; d. principal owners of the Company and members of their immediate families ; e. management
of the Company and members of their immediate families ; f. other parties with which the Company may deal if one party controls
or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties
might be prevented from fully pursuing its own separate interests; and g. other parties that can significantly influence the management
or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can
significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing
its own separate interests.
Pursuant
to ASC Paragraphs 850-10-50-1 and 50-5 financial statements shall include disclosures of material related party transactions,
other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However,
disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required
in those statements. The disclosures shall include: a. the nature of the relationship(s) involved; b. a description of the transactions,
including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements
are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial
statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects
of any change in the method of establishing the terms from that used in the preceding period; and d. amount due from or to related
parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
2 - Significant and Critical Accounting Policies and Practices (continued)
Commitment
and Contingencies
The
Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain
conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company
but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived
merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected
to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the
assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable
and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would
be disclosed.
Revenue
recognition
The
Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company will
recognize revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned
when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped
or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is
reasonably assured.
Cost
of Sales
The
primary components of cost of sales include the cost of the product and shipping fees.
Shipping
and Handling Costs
The
Company accounts for shipping and handling fees in accordance with paragraph 605-45-45-19 of the FASB Accounting Standards Codification.
While amounts charged to customers for shipping products are included in revenues, the related costs are classified in cost of
goods sold as incurred. Shipping costs included in cost of good sold were $31,856 and $23,421 for the three months ended March
31, 2016 and 2015, respectively.
Advertising
Costs
The
Company follows the guidance of the Section 720-35-25 of the FASB Accounting Standards Codification (“Section 720-35-25”)
as to when advertising costs should be expensed. Pursuant to ASC Paragraph 720-35-25-1 the costs of advertising shall be expensed
either as incurred or the first time the advertising takes place. The accounting policy the Company selected from these two alternatives
was to expense the advertising costs when the first time the advertising takes place. Deferring the costs of advertising until
the advertising takes place assumes that the costs have been incurred for advertising that will occur, such as the first public
showing of a television commercial for its intended purpose and the first appearance of a magazine advertisement for its intended
purpose. Such costs shall be expensed immediately if such advertising is not expected to occur.
Pursuant
to ASC Paragraph 720-35-25-5 costs of communicating advertising are not incurred until the item or service has been received and
shall not be reported as expenses before the item or service has been received, such as the costs of television airtime which
shall not be reported as advertising expense before the airtime is used. Once it is used, the costs shall be expensed, unless
the airtime was used for direct-response advertising activities that meet the criteria for capitalization under ASC paragraph
340-20-25-4.
Advertising
costs were $4,710 and $7,914 for the three months ended March 31, 2016 and 2015, respectively.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
2 – Significant and Critical Accounting Policies and Practices (continued)
Equity
Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The
Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance
of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).
Pursuant
to ASC paragraph 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee
enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments),
then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement
date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement
is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized
as contra-equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to
ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return
for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement
for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such
an asset shall not be displayed as contra-equity by the grantor of the equity instruments. The transferability (or lack thereof)
of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in
which equity instruments are transferred to other than employees in exchange for goods or services.
Pursuant
to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable
by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee
achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and
in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of
paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a stock
option that the counterparty has the right to exercise expires unexercised.
Pursuant
to ASC Paragraphs 505-50-30-2 and 505-50-30-11 share-based payment transactions with nonemployees shall be measured at the fair
value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
The issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement
assumptions as of the earlier of the following dates, referred to as the measurement date: (a) The date at which a commitment
for performance by the counterparty to earn the equity instruments is reached (a performance commitment); or (b) The date at which
the counterparty's performance is complete. If the Company’s common shares are traded in one of the national exchanges the
grant-date share price of the Company’s common stock will be used to measure the fair value of the common shares issued,
however, if the Company’s common shares are thinly traded the use of share prices established in the Company’s most
recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate
than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid
and asked quotes and lack of consistent trading in the market.
Pursuant
to ASC Paragraph 718-10-55-21 if an observable market price is not available for a share option or similar instrument with the
same or similar terms and conditions, an entity shall estimate the fair value of that instrument using a valuation technique or
model that meets the requirements in paragraph 718-10-55-11 and takes into account, at a minimum, all of the following factors:
a.
|
The
exercise price of the option.
|
b.
|
The
expected term of the option, taking into account both the contractual term of the option and the effects of employees’
expected exercise and post-vesting employment termination behavior: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB
Accounting Standards Codification the expected term of share options and similar instruments represents the period of time
the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the
instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments. The
Company uses historical data to estimate holder’s expected exercise behavior. If the Company is a newly formed
corporation or shares of the Company are thinly traded the contractual term of the share options and similar instruments is
used as the expected term of share options and similar instruments as the Company does not have sufficient historical exercise
data to provide a reasonable basis upon which to estimate expected term.
|
c.
|
The
current price of the underlying share.
|
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
2 – Significant and Critical Accounting Policies and Practices (continued)
d.
|
The
expected volatility of the price of the underlying share for the expected term of the option. Pursuant to ASC Paragraph
718-10-55-25 a newly publicly traded entity might base expectations about future volatility on the average volatilities of
similar entities for an appropriate period following their going public. A nonpublic entity might base its expected volatility
on the average volatilities of otherwise similar public entities. For purposes of identifying otherwise similar entities,
an entity would likely consider characteristics such as industry, stage of life cycle, size, and financial leverage. Because
of the effects of diversification that are present in an industry sector index, the volatility of an index should not be substituted
for the average of volatilities of otherwise similar entities in a fair value measurement. Pursuant to paragraph
718-10-S99-1 if shares of a company are thinly traded the use of weekly or monthly price observations would generally be more
appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares
could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the
market. The Company uses the average historical volatility of the comparable companies over the expected term of
the share options or similar instruments as its expected volatility.
|
e.
|
The
expected dividends on the underlying share for the expected term of the option. The expected dividend yield is
based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the
expected term of the share options and similar instruments.
|
f.
|
The
risk-free interest rate(s) for the expected term of the option. Pursuant to ASC 718-10-55-28 a U.S. entity issuing an option
on its own shares must use as the risk-free interest rates the implied yields currently available from the U.S. Treasury zero-coupon
yield curve over the contractual term of the option if the entity is using a lattice model incorporating the option’s
contractual term. If the entity is using a closed-form model, the risk-free interest rate is the implied yield currently available
on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model.
|
Pursuant
to ASC paragraph 505-50-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable
equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received
(that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement
date and no entry should be recorded.
Deferred
Tax Assets and Income Tax Provision
The
Company was a Subchapter S corporation, until December 30, 2014 during which time the Company was treated as a pass through entity
for federal income tax purposes. Under Subchapter S of the Internal Revenue Code stockholder of an S corporation are taxed separately
on their distributive share of the S corporation’s income whether or not that income is actually distributed.
Effective
December 31, 2014, the Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification.
Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely
than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that
includes the enactment date.
The
Company adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”). Section 740-10-25
addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if
it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based
on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Section
740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim
periods and requires increased disclosures.
The
estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying
consolidated balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability
of deferred tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
2 – Significant and Critical Accounting Policies and Practices (continued)
Management
makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous
estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in
these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual
taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Tax
years that remain subject to examination by major tax jurisdictions
The
Company discloses tax years that remain subject to examination by major tax jurisdictions pursuant to the ASC Paragraph 740-10-50-15.
The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally
for three years after they are filed.
Earnings
per Share
Earnings
per share ("EPS") is the amount of earnings attributable to each share of common stock. For convenience, the term is
used to refer to either earnings or loss per share. EPS is computed pursuant to section 260-10-45 of the FASB Accounting Standards
Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16 Basic EPS shall be computed by dividing income available
to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the
period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred
stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned)
from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation
of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect
the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options
or warrants.
Pursuant
to ASC Paragraphs 260-10-45-45-21 through 260-10-45-45-23 Diluted EPS shall be based on the most advantageous conversion rate
or exercise price from the standpoint of the security holder. The dilutive effect of outstanding call options and warrants (and
their equivalents) issued by the reporting entity shall be reflected in diluted EPS by application of the treasury stock method
unless the provisions of paragraphs 260-10-45-35 through 45-36 and 260-10-55-8 through 55-11 require that another method be applied.
Equivalents of options and warrants include non-vested stock granted to employees, stock purchase contracts, and partially paid
stock subscriptions (see paragraph 260-10-55-23). Anti-dilutive contracts, such as purchased put options and purchased call options,
shall be excluded from diluted EPS. Under the treasury stock method: a. Exercise of options and warrants shall be assumed at the
beginning of the period (or at time of issuance, if later) and common shares shall be assumed to be issued. b. The proceeds from
exercise shall be assumed to be used to purchase common stock at the average market price during the period. (See paragraphs 260-10-45-29
and 260-10-55-4 through 55-5.) c. The incremental shares (the difference between the number of shares assumed issued and the number
of shares assumed purchased) shall be included in the denominator of the diluted EPS computation. Pursuant to ASC Paragraphs 260-10-45-40
through 45-42 convertible securities shall be reflected in diluted EPS by application of if converted method. The convertible
preferred stock or convertible debt shall be assumed to have been converted at the beginning of the period (or at time of issuance,
if later). In applying the if-converted method, conversion shall not be assumed for purposes of computing diluted EPS if the effect
would be anti-dilutive. The Company’s contingent shares issuance arrangement, stock options or warrants are as follows:
|
|
Contingent
shares
issuance arrangement,
stock options or warrants
|
|
|
|
For the Period
Ended
March 31, 2016
|
|
|
For the Period
Ended
March 31, 2015
|
|
Stock
Option Shares
|
|
|
2,440,100
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
Sub-total:
stock option shares
|
|
|
2,440,100
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
Warrant
Shares
|
|
|
501,343
|
|
|
|
1,263
|
|
|
|
|
|
|
|
|
|
|
Sub-total:
warrant shares
|
|
|
501,343
|
|
|
|
1,263
|
|
|
|
|
|
|
|
|
|
|
Total
contingent shares issuance arrangement, stock options or warrants
|
|
|
2,941,443
|
|
|
|
1,363
|
|
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
2 – Significant and Critical Accounting Policies and Practices (continued)
There
were no incremental common shares under the Treasury Stock Method for the reporting period ended March 31, 2016 or 2015.
Cash
Flows Reporting
The
Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash
receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions
of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25
of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile
it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and
payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income
that do not affect operating cash receipts and payments. The Company reports the reporting currency equivalent of foreign currency
cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held
in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents
and separately provides information about investing and financing activities not resulting in cash receipts or payments in the
period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.
Subsequent
Events
The
Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent
events. The Company will evaluate subsequent events through the date when the financial statements were issued. Pursuant to ASU
2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when
they are widely distributed to users, such as through filing them on EDGAR.
Recently
Issued Accounting Pronouncements
In
February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to apply a dual approach, classifying
leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase
by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or
on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability
for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less
will be accounted for similar to existing guidance for operating leases. The new guidance will be effective for annual reporting
periods beginning after December 15, 2018, including interim periods within that reporting period and is applied retrospectively.
Early adoption is permitted. The Company is currently in the process of assessing the impact the adoption of this guidance will
have on the Company’s consolidated financial statements.
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material
effect on the accompanying financial statements.
Note
3 - Going Concern
The
Company has elected to adopt early application of Accounting Standards Update No. 2014-15, “Presentation of Financial Statements-Going
Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU
2014-15”).
The
Company’s condensed consolidated financial statements have been prepared assuming that it will continue as a going concern,
which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the condensed consolidated financial statements, the Company had an accumulated deficit of approximately $1.15
million at March 31, 2016, a net loss of approximately $638,000 and net cash used in operating activities of approximately $152,000
for the three months ended March 31, 2016. These factors raise substantial doubt about the Company’s ability to continue
as a going concern.
The
Company is attempting to further implement its business plan and generate sufficient revenue; however, the Company’s cash
position may not be sufficient to support its daily operations. Management intends to raise additional funds by way of a private
or public offering. While the Company believes in the viability of its strategy to further implement its business plan and generate
sufficient revenue and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the
Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient
revenue and its ability to raise additional funds by way of a public or private offering.
The condensed consolidated financial
statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company is unable to continue as a going concern.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
4 - Property and Equipment
Property
and equipment, stated at cost, less accumulated depreciation consisted of the following:
|
|
Estimated
life
|
|
March
31,
2016
(Unaudited)
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Auto
|
|
3 years
|
|
$
|
12,522
|
|
|
$
|
12,522
|
|
Furniture and fixtures
|
|
5 years
|
|
|
23,743
|
|
|
|
23,743
|
|
Tooling equipment
|
|
4 years
|
|
|
97,710
|
|
|
|
97,710
|
|
Leasehold improvements
|
|
5 years
|
|
|
35,206
|
|
|
|
35,206
|
|
Less: Accumulated
depreciation
|
|
|
|
|
(88,010
|
)
|
|
|
(81,513
|
)
|
|
|
|
|
$
|
81,171
|
|
|
$
|
87,668
|
|
Depreciation
expense amounted to $6,497 and $390 for the three months ended March 31, 2016 and 2015, respectively.
The
Company completes its annual impairment testing of property and equipment every 4
th
quarter of the fiscal year to evaluate
the recoverability of property and equipment or whenever events or changes in circumstances indicate that the property and equipment’s
carrying amount may not be recoverable. The Company did not record any impairment of its property and equipment at March 31, 2016
and December 31, 2015, respectively.
Note
5 - Intangible Assets
Intangible
assets consist of the following:
|
|
March 31,
2016
(Unaudited)
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
1,001,212
|
|
|
$
|
1,001,212
|
|
Trademarks
|
|
|
6,430
|
|
|
|
6,430
|
|
|
|
|
1,007,642
|
|
|
|
1,007,642
|
|
Accumulated amortization
|
|
|
(649,260
|
)
|
|
|
(632,466
|
)
|
Intangible assets,
net
|
|
$
|
358,382
|
|
|
$
|
375,176
|
|
Customer
Relationships are amortized based upon the estimated percentage of annual or period projected cash flows generated by such relationships,
to the total cash flows generated over the estimated fifteen-year life of the Customer Relationships.
Legal
costs associated with serving and protecting trademark are being capitalized. The Company filed trademarks for its company logos
with an estimated useful life of 15 years. The Company will amortize the costs of intangible assets over their estimated useful
lives on a straight-line basis. Amortization of intangible assets is included in operating expenses as reflected in the accompanying
condensed consolidated statements of operations. The Company assesses fair value for any impairment to the carrying values.
The Company did not record any impairment of its intangible assets at March 31, 2016 and December 31, 2015, respectively.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
5 - Intangible Assets (continued)
Amortization
expense was $16,794 and $16,790 for the three months ended March 31, 2016 and 2015, respectively. Future amortization of intangible
assets is as follows:
2016 (remainder of the year)
|
|
$
|
50,382
|
|
2017
|
|
|
67,176
|
|
2018
|
|
|
67,176
|
|
2019
|
|
|
67,176
|
|
2020 and thereafter
|
|
|
106,472
|
|
Total
|
|
$
|
358,382
|
|
Note
6 - Loan and Notes Payable
Loan
payable
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Business
loan obtained in May 2011 from Bank of the West with a credit line up to $200,000 and secured by all assets of the Company.
This loan bears interest at 4.75% per annum.
|
|
$
|
197,000
|
|
|
$
|
197,000
|
|
Note
payable
|
|
March
31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
4.75%
Promissory note of $100,000 issued to Bank of the West on May 10, 2011 payable over 60 consecutive monthly installments with
monthly principal payment of $1,650 and interest starting in June 2012. Amounts outstanding under this loan and note are personally
guaranteed by the CEO of the Company.
|
|
$
|
20,100
|
|
|
$
|
25,050
|
|
5.28%
unsecured Promissory note of $50,000 issued to Bank of the West in February 2016 payable over 36 consecutive monthly installments
with monthly payment of $1,506 and interest starting in March 2016
|
|
|
48,684
|
|
|
|
-
|
|
Less
: Current maturities
|
|
|
(33,152
|
)
|
|
|
(19,800
|
)
|
Note
payable, net of current maturities
|
|
$
|
35,632
|
|
|
$
|
5,250
|
|
Future
minimum principal payments under the notes are as follows:
For Fiscal Year:
|
|
|
|
|
|
|
|
2016
(remainder of the year)
|
|
$
|
26,672
|
|
2017
|
|
|
21,757
|
|
2018
|
|
|
15,915
|
|
2019
|
|
|
4,440
|
|
|
|
|
|
|
Total
remaining Payments
|
|
|
68,784
|
|
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
7 - Related Party Transactions
Related
parties
Related
parties with whom the Company had transactions are:
Related
Parties
|
|
Relationship
|
|
|
|
Management
and significant stockholders
|
|
|
|
|
|
Mr.
Hamid Emarlou
|
|
Chairman,
CEO and significant stockholder of the Company
|
Advances
from Executive Officer, Significant Stockholder
From
time to time, Chairman, CEO and significant stockholder of the Company advance funds to the Company for working capital purpose.
These advances are unsecured, due upon demand and bear 5% interest per annum.
During
2014, the Company’s CEO provided advances to the Company for working capital purposes for a total of $266,000 and the Company
repaid $130,000 of these advances. The advances are due on demand and bear 5% interest per annum. Between February 2015 and November
2015, the Company’s CEO provided advances to the Company for working capital purposes for a total of $300,500 and the Company
repaid $73,000 of these advances. Between January 2016 and March 2016, the Company’s CEO provided advances to the Company
for working capital purposes for a total of $155,000. At March 31, 2016 and December 31, 2015, these advances amounted to $531,147
and $370,614, respectively. Included in the advances are accrued interest due to the Company’s CEO totaling $12,647 and
$7,114, at March 31, 2016 and December 31, 2015 respectively.
Note
8 - Convertible Notes Payable
On
April 3, 2015, the Company closed a financing transaction by entering into a Securities Purchase Agreement dated April 3, 2015
(the “Securities Purchase Agreement”) with certain accredited investors (the “Purchasers”) for an aggregate
subscription amount of $500,000 (the “Purchase Price”). Pursuant to the Securities Purchase Agreement, the Company
issued a 6% Convertible Debenture (the “Debenture”) and warrants to acquire 500,000 shares of the Company's common
stock at an exercise price of $0.60 per share (the “Warrants”).
The
terms of the Debenture and the Warrants are as follows:
6%
Convertible Debenture
The
total principal amount of the Debentures is $500,000. The Debenture accrues interest at 6% per annum and the Debenture has a maturity
date of October 3, 2016. The Debenture is convertible any time after its issuance date. The Purchaser has the right to convert
the Debenture into shares of the Company’s common stock at $0.50 per share. The conversion price, however, is subject to
full ratchet anti-dilution in the event that the Company issues any securities at a per share price lower than the conversion
price then in effect. The Company paid financing costs of $22,500 in connection with this Debenture which is initially recorded
as prepaid financing cost and is being amortized over the term of the Debenture.
Warrants
The
Company issued warrants to acquire 500,000 shares of the Company's common stock. The Warrants issued in this transaction are immediately
exercisable at an exercise price of $0.60 per share, subject to applicable adjustments including full ratchet anti-dilution in
the event that the Company issue any securities at a per share price lower than the exercise price then in effect. The Warrants
have an expiration period of five years from the date of the original issuance.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
8 - Convertible Notes Payable (continued)
Convertible
notes payable consisted of the following:
|
|
March 31,
2016
|
|
6% Convertible promissory
notes
|
|
$
|
500,000
|
|
Initial Discount
|
|
|
(500,000
|
)
|
Accumulated amortization of discount
through March 31, 2016
|
|
|
330,602
|
|
Remaining discount as of March
31, 2016
|
|
|
(169,398
|
)
|
Convertible
notes payable, net
|
|
$
|
330,602
|
|
Note
9 - Derivative Liabilities
Since
the terms of the Debentures and Warrants in the April 2015 closing include a down-round provision under which the conversion price
and exercise price could be affected by future equity offerings undertaken by the Company under the provisions of FASB ASC Topic
No. 815-40, “Derivatives and Hedging - Contracts in an Entity’s Own Stock”, the embedded conversion options
and the warrants were accounted for as derivative liabilities at the date of issuance and adjusted to fair value through earnings
at each reporting date. In accordance with ASC 815, the Company has bifurcated the conversion feature of the convertible Debentures,
along with the free-standing warrant derivative instruments and recorded derivative liabilities on their issuance date. The Company
uses the Simple Binomial Lattice model to value the derivative liabilities. The Debentures were all discounted in full based on
the valuations and the Company recognized an additional derivative expense of $188,378 upon initial recording of the derivative
liabilities. The total debt discount of $500,000 consisted of initial valuation of the derivatives of $250,407 and the valuation
of the warrants of $249,593 to be amortized over the terms of the note. These derivative liabilities are then revalued on each
reporting date. The gain resulting from the decrease in fair value of these convertible instruments was $105,864 for the three
months ended March 31, 2016. At March 31, 2016, the Company recorded a warrant derivative liability of $54,554 and note derivative
liability of $42,235.
For
the three months ended March 31, 2016 and 2015 the Company recognized $82,878 and $0, respectively of amortization of debt discount.
For the three months ended March 31, 2016 and 2015 the Company recognized $3,730 and $0, respectively of amortization of deferred
financing cost. The amortization of debt discount and deferred financing cost were included in interest expense. As of March 31,
2016 and December 31, 2015, accrued interest related to this Debenture amounted to $29,936 and $22,456, respectively.
The
following table summarizes the values of certain assumptions used by the Company’s custom model to estimate the fair value
of the derivative liabilities as of March 31, 2016:
|
|
March 31,
2016
|
|
Stock
price
|
|
$
|
0.11
|
|
Weighted average
strike price
|
|
$
|
0.50
|
|
Remaining
contractual term (years)
|
|
|
0.50 to 4.00 years
|
|
Volatility
|
|
|
266%
to 319
|
%
|
Risk-free
rate
|
|
|
0.59%
to 1.21
|
%
|
Dividend
yield
|
|
|
0.0
|
%
|
The
following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities that are measured at
fair value on a recurring basis:
|
|
For
the
three months
ended
March 31,
2016
|
|
Beginning balance
|
|
$
|
202,653
|
|
Change in fair
value of derivative liabilities
|
|
|
(105,864
|
)
|
Ending balance
|
|
$
|
96,789
|
|
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
10 - Commitments and Contingencies
Operating
lease
In
June 2014, a lease agreement was signed for an office and warehousing space consisting of approximately 5,000 square feet located
in San Jose, California with a term commencing in June 2014 and expiring in October 2015. In August 2015, the Company entered
into an amendment agreement to extend the term of the lease which will expire on December 31, 2018. Pursuant to the amendment
agreement, the lease requires the Company to pay a monthly base rent of $5,050 plus a pro rata share of operating expenses beginning
November 1, 2015. The base rent is subject to an annual increase beginning in November 2016 as defined in the amended lease agreement.
This lease agreement is personally guaranteed by the President of the Company.
Future
minimum rental payments required under this operating lease are as follows:
Fiscal Year ending
December 31:
|
|
|
|
|
|
|
|
2016
(remainder of the year)
|
|
$
|
45,753
|
|
2017
|
|
|
62,721
|
|
2018
|
|
|
64,236
|
|
|
|
|
|
|
Total
|
|
$
|
172,710
|
|
Rent
expense was $21,643 and $10,537 for the three months ended March 31, 2016 and 2015, respectively.
Litigation
From
time to time, the Company is involved in litigation matters relating to claims arising from the ordinary course of business. While
the results of such claims and legal actions cannot be predicted with certainty, the Company’s management does not believe
that there are claims or actions, pending or threatened against the Company, the ultimate disposition of which would have a material
adverse effect on the Company’s business, results of operations, financial condition or cash flows.
Note
11 - Stockholders’ Deficit
Shares
Authorized
The
authorized capital of the Company consists of 100,000,000 shares of common stock, par value $0.001 per share and 20,000,000 shares
of preferred stock, par value $0.001 per share.
Common
Stock
On
January 7, 2016, the Company entered into a seven month consulting agreement to provide strategic consulting and business advisory
services. Pursuant to the consulting agreement, the Company issued 500,000 shares of the Company’s common stock. The Company
revalued these common shares at the fair value of $55,000 or $0.11 per common share based on the quoted trading price at the end
of the reporting period, March 31, 2016. In connection with the issuance of these common shares, the Company recorded stock based
compensation of $23,571 for the three months ended March 31, 2016 and deferred stock- based compensation of $31,429 as of March
31, 2016.
On
January 12, 2016, the Company issued an aggregate of 200,000 shares of the Company’s common stock to two board of directors
of the Company for services rendered. The Company valued these common shares at the fair value of $70,000 or $0.35 per common
share based on the quoted trading price on the date of grant. In connection with the issuance of these common shares, the Company
recorded stock based compensation of $70,000 for the three months ended March 31, 2016.
On
January 12, 2016, the Company issued 100,000 shares of the Company’s common stock to a consultant for marketing
services rendered. The Company valued these common shares at the fair value of $35,000 or $0.35 per common share based on the
quoted trading price on the date of grant. In connection with the issuance of these common shares, the Company recorded stock
based compensation of $35,000 for the three months ended March 31, 2016.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
11 - Stockholders’ Deficit (continued)
On
January 12, 2016, the Company issued 500,000 shares of the Company’s common stock to a consultant for business advisory
services rendered. The Company valued these common shares at the fair value of $175,000 or $0.35 per common share based on the
quoted trading price on the date of grant. In connection with the issuance of these common shares, the Company recorded stock
based compensation of $175,000 for the three months ended March 31, 2016.
Warrants
Stock
warrant activities for the three months ended March 31, 2016 are summarized as follows:
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance at December 31, 2015
|
|
|
501,263
|
|
|
$
|
3.74
|
|
|
|
4.25
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(20
|
)
|
|
|
250.00
|
|
|
|
-
|
|
|
|
-
|
|
Balance at March 31, 2016
|
|
|
501,243
|
|
|
|
3.73
|
|
|
|
4.00
|
|
|
|
-
|
|
Warrants exercisable at March 31,
2016
|
|
|
501,243
|
|
|
$
|
3.73
|
|
|
|
4.00
|
|
|
$
|
-
|
|
Options
Stock
option activities for the three months ended March 31, 2016 are summarized as follows:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Aggregate Intrinsic
Value
|
|
Balance at December 31, 2015
|
|
|
100
|
|
|
$
|
700
|
|
|
|
1.17
|
|
|
$
|
-
|
|
Granted
|
|
|
2,480,000
|
|
|
|
0.10
|
|
|
|
5.00
|
|
|
|
-
|
|
Exercised/forfeited/expired
|
|
|
(40,000
|
)
|
|
|
0.10
|
|
|
|
5.00
|
|
|
|
-
|
|
Balance at March 31, 2016
|
|
|
2,440,100
|
|
|
|
0.13
|
|
|
|
4.79
|
|
|
|
-
|
|
Options exercisable at March 31, 2016
|
|
|
100
|
|
|
$
|
700
|
|
|
|
1.42
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of warrants granted during the period
|
|
|
|
|
|
|
|
|
|
$
|
0.35
|
|
|
|
|
|
On
January 12, 2016, the Company granted an aggregate of 2,080,000 five year options to purchase shares of common stock to CEO of
the Company and six employees of the Company. The options granted vest one third at the end of each of the first three years from
the date of issuance and are exercisable at $0.10 per share. The 2,080,000 options were valued on the grant date at approximately
$0.35 per option or a total of $728,000 using a Black-Scholes option pricing model with the following assumptions: stock price
of $0.35 per share (based on the quoted trading prices on the date of grant), volatility of 286% (based from volatilities of similar
companies), expected term of 5 years, and a risk free interest rate of 1.55%. In March 2016, 40,000 of these unvested options
were forfeited due to termination of an employee.
On
January 12, 2016, the Company granted 400,000 five year options to purchase shares of common stock to a consultant of the Company.
The options granted vest one third at the end of each of the first three years from the date of issuance and are exercisable at
$0.10 per share. The 400,000 options were valued on the grant date at approximately $0.35 per option or a total of $140,000 using
a Black-Scholes option pricing model with the following assumptions: stock price of $0.35 per share (based on the quoted trading
prices on the date of grant), volatility of 286% (based from volatilities of similar companies), expected term of 5 years, and
a risk free interest rate of 1.55%.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
11 - Stockholders’ Deficit (continued)
During
the three months ended March 31, 2016, the Company recorded stock-based compensation expense in connection with stock option awards
of $110,509. As of March 31, 2016, there were total unrecognized compensation costs related to non-vested share-based
compensation arrangements of $745,273. At March 31, 2016 there was approximately $24,000 intrinsic value for the stock options
outstanding in the above table.
Note
12 - Concentration of Credit Risk
Concentration
of Revenue and Supplier
During
the three months ended March 31, 2016 sales to two customer represented approximately 40% of the Company’s net sales. During
the three months ended March 31, 2015 sales to two customers represented approximately 41% of the Company’s net sales.
As
of March 31, 2016 and December 31, 2015, accounts receivable from two customers represented approximately 74% and two customer
represented 92% of the accounts receivable, respectively.
The
Company purchased inventories and products from one vendor totaling approximately $176,000 and $177,000 during the three months
ended March 31, 2016 and 2015, respectively.
Note
13 - Subsequent Events
The
Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were
issued to determine if they must be reported. The Management of the Company determined that there were no reportable subsequent
event(s) to be disclosed.