HCMC Healthier Choices Management Corporation (PK)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. ORGANIZATION, GOING CONCERN, AND BASIS OF PRESENTATION

Organization

Vapor Corp. (the “Company” or “Vapor”) is a retailer of vaporizers, e-liquids and electronic cigarettes. The Company operates thirteen vape retail stores in the Southeast of the United States of America. Vapor offers e-liquids, vaporizers, e-cigarettes and related products through its vape retail stores and online. The Company sold its wholesale business on July 31, 2016. The sale of the wholesale business was not contemplated prior to July 1, 2016. The sale of the wholesale vapor business qualifies as a discontinued operations and accordingly the Company has excluded results for the wholesale business operations from the Company’s continuing operations in the unaudited condensed consolidated Statements of Operations for all periods presented.

On June 1, 2016, the Company acquired the assets that comprised the business of Ada’s Whole Food Market LLC, a natural and organic grocery store, through its wholly owned subsidiary Healthy Choice Markets, Inc. The grocery store has been a leader in the natural grocery market in Fort Myers, Florida for the past 40 years, offering fresh, natural and organic products and specializing in facilitating a healthy, well balanced lifestyle. In addition to a comprehensive selection of vitamins and health & beauty products, the grocery store provides a fresh café and an organic juice bar.

Going Concern and Liquidity

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which contemplate the continuation of the Company as a going concern and realization of assets and satisfaction of liabilities in the normal course of business and do not include any adjustments that might result from the outcome of any uncertainties related to our going concern assessment. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values.

In July 2015, the Company closed a registered public offering of 3,761,657 Units (the “Units”). Collectively, the Units consisted of Series A Convertible Preferred Stock (the “Series A Preferred Stock”) convertible into shares of common stock and Series A Warrants exercisable into 54 shares of common stock (the “Series A Warrants”). The Units separated into the Series A Preferred Stock and Series A Warrants as of January 25, 2016. (See Note 11- Stockholders’ Deficit – Series A Unit Public Offering.)

Holders of Series A Warrants may exercise such warrants by paying the exercise price in cash or, in lieu of payment of the exercise price in cash, by electing to receive a cash payment from us (subject to certain conditions not being met by the Company) equal to the Black Scholes Value (as defined in the Series A Warrant) of the number of shares of the Company’s common stock (the “Common Stock”) the holder elects to exercise, which we refer to as the Black Scholes Payment; provided that we have discretion as to whether to deliver the Black Scholes Payment or, subject to meeting certain conditions, to deliver shares of Common Stock. The number of shares of Common Stock that the Company is obligated to issue in connection with the exercise of the Series A Warrants is based on the closing bid price of the Common Stock two trading days prior to the date of exercise.

On May 2, 2016, the OTCQB staff notified the Company that, based upon its non-compliance with the minimum $0.01 bid price requirement for the prior 30 consecutive business days, the Company – in accordance with the OTCQB Standards – had been provided a grace period through October 31, 2016, to regain compliance with the minimum bid price requirement. If the Company’s common stock bid price did not close at or above $0.01 for a period of ten consecutive trading days prior to October 31, 2016, the Company would move to the OTC Pink marketplace.

On October 31, 2016, the Company received notice from OTC Markets Group that the Company's common stock would be moved from the OTCQB to the OTC Pink marketplace on November 1, 2016, as a result of the Company's failure to cure its bid price deficiency. On November 1, 2016, the date of the delisting from OTCQB, the Company no longer meets the “Equity Conditions” required to allow the Company to elect to issue common stock to fulfill a cashless exercise pursuant to Section 1(d) of its Series A Warrants. Holders of the Series A Warrants may still undertake a cashless exercise of their warrants and agree to permit the Company to issue common stock to fulfill such exercise.

On June 24, 2016, the Company determined that it had insufficient shares of Common Stock authorized to allow for the exercise of the Series A Warrants or stock options, or allow the conversion of the Series A Preferred Stock. On August 4, 2016 an amendment to the Company’s Amended and Restated Certificate of Incorporation was filed to increase the number of shares of the authorized common stock from 5,000,000,000 to 750,000,000,000. If all of the warrants were exercised simultaneously at stock prices lower than $0.0001, the Company would not have sufficient authorized common stock to satisfy all the warrant exercises and it may be required to use cash

to pay Series A warrant holders. Since it is not possible to predict the future stock price or when the warrant holders will exercise warrants and sell the underlying common shares, management cannot predict if the Company will have sufficient cash resources to satisfy its obligation to the current warrant holders. The amounts payable to the holders of the Series A Warrants if all such warrants were fully exercised as of November 11, 2016 on a cashless basis would be approximately $64 million, using a Black Scholes Value of approximately $1,516,896 per Series A Warrant.

The Company reported a net loss of approximately $19.7 million for the nine months ended September 30, 2016. The Company also had negative working capital of approximately $33.4 million and a total stockholders’ deficit of approximately $28 million as of September 30, 2016. The Company expects to continue incurring operating losses for the foreseeable future and may need to satisfy exercises of Series A Warrants on a cashless basis. Accordingly, the material uncertainty related to the exercise of Series A Warrants and the sufficiency of cash reserves to satisfy obligations related to such exercises raises substantial doubt about the Company’s ability to continue as a going concern.

Notice of Late Filing

In connection with the sale of the Company’s wholesale vapor business and acquisition of Ada’s Whole Food Market LLC (“Ada’s”). during the nine months ended September 30, 2016, the Company was required to file a Form 8-K with Ada’s audited financial statements, unaudited interim financial statements, and pro forma financial statements within 4 days and 75 days of the closing of the respective disposition and acquisition transactions. The Securities and Exchange Commission (“SEC”) notified the Company that it could not review its future registration statements effective until such time as the Company furnished two years of audited financial statements of Ada’s Whole Food Market LLC as the acquisition was deemed significant.

Basis of Presentation and Principles of Consolidation

The Company’s unaudited condensed consolidated financial statements are prepared in accordance with GAAP. The unaudited condensed consolidated financial statements include the accounts of all subsidiaries in which the Company holds a controlling financial interest as of the financial statement date.

The unaudited condensed consolidated financial statements include the accounts of Vapor and its wholly-owned subsidiaries, Healthy Choice Markets, Inc., The Vape Store, Inc. (“Vape Store”), Vaporin, Inc. (“Vaporin”), Smoke Anywhere U.S.A., Inc. (“Smoke”), Emagine the Vape Store, LLC (“Emagine”), IVGI Acquisition, Inc., Vapormax Franchising LLC., Vaporin LLC., and Vaporin Florida, Inc. All intercompany accounts and transactions have been eliminated in consolidation.

On February 1, 2016, the Company filed an amendment to its Certificate of Incorporation to increase its authorized Common Stock to 5,000,000,000, and change its par value to $0.0001 per share. On March 4, 2016, the Company filed an amendment to its Certificate of Incorporation to effectuate a one-for-seventy reverse stock split to its Common Stock. On June 1, 2016, the Company filed an amendment to its Certificate of Incorporation to effectuate a one-for-twenty thousand reverse stock split to its Common Stock. On August 4, 2016, the Company filed an amendment to its Amended and Restated Certificate of Incorporation to increase the number of shares of the authorized common stock from 5,000,000,000 to 750,000,000,000. All warrant, convertible preferred stock, option, common stock shares and per share information included in these unaudited condensed consolidated financial statements gives retroactive effect to the aforementioned reverse splits of the Company’s common stock. (See Note 11- Stockholders’ Deficit for additional details regarding the Company’s authorized capital.)

Unaudited Interim Financial Information

The unaudited condensed consolidated financial statements have been prepared by the Company and reflect all normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the interim financial information. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the year ending December 31, 2016. Certain information and footnotes normally included in financial statements prepared in accordance with GAAP have been condensed or omitted under the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements for the three months and nine months ended September 30, 2016 and 2015 and notes included herein should be read in conjunction with the audited consolidated financial statements and related notes thereto as of and for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K for such year as filed with the SEC on April 8, 2016.

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reclassifications

Certain prior period amounts in the unaudited condensed consolidated financial statements have been reclassified to conform to the current period’s presentation. No changes to the Company’s net loss were made as a result of such reclassifications.

Use of Estimates in the Preparation of the Financial Statements

The preparation of unaudited condensed consolidated financial statements in conformity with GAAP 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 of the unaudited condensed consolidated financial statements, and the reported amounts of net revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include allowances, reserves and write-downs of receivables and inventory, valuing equity securities and hybrid instruments, share-based payment arrangements, and deferred taxes and related valuation allowances, and the valuation of assets and liabilities in business combinations. Certain of our estimates could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and records adjustments when necessary.

Revenue Recognition

The Company recognizes revenue from product sales or services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability is reasonably assured.

Vapor retail sales revenues are recorded at the point of sale when both title and risk of loss is transferred to the customer. The Company periodically provides incentive offers to its customers to encourage vapor product purchases. Such offers include discounts and rebates. Discounts offered to customers are reflected as a reduction to the sales price. Vapor wholesale product sales revenues, net of promotional discounts, rebates, and return allowances, are recorded when the products are shipped, title passes to customers and collection is reasonably assured. The Company sold its wholesale business in July 2016, and the vapor wholesale product sales are classified as discontinued operations for all financial reporting periods presented. Return allowances, which reduce product revenue, are estimated using historical experience. Vapor revenue from product sales is recorded net of sales and consumption taxes.

Grocery merchandise sales are recognized at the point of sale to the customer. Sales tax is excluded from revenue. Discounts provided to customers through in-store and manufacturers coupons and loyalty programs are recognized as a reduction of sales as the products are sold.

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In connection with this review, the Company also reevaluates the depreciable lives for these assets. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the projected future discounted cash flows as compared to the asset’s carrying value.

Fair Value Measurements

The Company applies the provisions of Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” (“ASC 820”). The Company’s short term financial instruments include cash, due from merchant credit card processors, accounts receivable, accounts payable and accrued expenses, each of which approximate their fair values based upon their short term nature. The Company’s other financial instruments include derivative liabilities. The carrying value of these instruments approximates fair value, as they bear terms and conditions comparable to market value, for obligations with similar terms and maturities.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value: Level 1 – quoted prices in active markets for identical assets or liabilities; Level 2 – quoted prices for similar assets and liabilities in active market or inputs that are observable; and Level 3 – inputs that are unobservable.

Stock-Based Compensation

The Company accounts for stock-based compensation for employees and directors under ASC Topic No. 718, “Compensation-Stock Compensation” (“ASC 718”). These standards define a fair value based method of accounting for stock-based compensation. In accordance with ASC 718, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using an appropriate valuation model, whereby compensation cost is the fair value of the award as determined by the valuation model at the grant date. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Stock-based compensation for non-employees is measured at the grant date, is re-measured at subsequent vesting dates and reporting dates, and is amortized over the service period.

Derivative Instruments

The Company accounts for free-standing derivative instruments and hybrid instruments that contain embedded derivative features in accordance with ASC Topic No. 815, “Derivative Instruments and Hedging Activities” (“ASC 815”), as well as related interpretations of this topic. In accordance with this topic, derivative instruments and hybrid instruments are recognized as either assets or liabilities on the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, giving consideration to all of the rights and obligations of each instrument.

The Company estimates fair values of derivative instruments and hybrid instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective of measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For complex instruments, the Company utilizes custom Monte Carlo simulation models. For less complex instruments, such as free-standing warrants, the Company generally uses the Binomial Lattice model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as the Binomial Lattice model or the Black-Scholes-Merton valuation model) are highly volatile and sensitive to changes in the trading market price of the Common Stock. Since derivative financial instruments are initially and subsequently carried at fair values, the Company’s net income (loss) going forward will reflect the volatility in these estimates and assumption changes. Under ASC 815, increases in the trading price of the Common Stock and increases in fair value during a given financial quarter result in the application of non-cash derivative losses. Conversely, decreases in the trading price of the Common Stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative gains.

Sequencing Policy

Under ASC 815-40-35, the Company has adopted a sequencing policy whereby, in the event that reclassification of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to the Company's inability to demonstrate it has sufficient authorized shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of shares. 

Preferred Stock

The Company applies the accounting standards for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Shares that are subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. The Company classifies conditionally redeemable preferred shares, which include preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity. At all other times, preferred shares are classified as stockholders' equity.

Treasury Stock

When the Company acquires its own common stock (“treasury stock”), the consideration paid, including any directly attributable incremental costs (net of tax), is deducted from equity. No gain is recognized on the purchase, sale, or cancellation of the treasury stock. When a loss results from the purchase of treasury stock at a premium, the related costs are expensed in the period incurred. The difference between the carrying amount and the consideration on sale is recognized as capital surplus.

Discontinued Operations

On July 31, 2016, the Company sold its wholesale inventory and related operations. The sale of the wholesale business qualifies as discontinued operations and accordingly the Company has excluded results for the wholesale business operations from the Company’s continuing operations in the unaudited condensed consolidating Statements of Operations for all periods presented.

Recently Issued Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15 (Topic 230), “Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments”. The new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017. The Company will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated cash flows and related disclosures.

In April 2016, the FASB issued ASU 2016-10 (Topic 606) “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” (“ASU2-16-10”). ASU 2016-10 clarifies the principle for determining whether a good or service is “separately identifiable” from other promises in the contract and, therefore, should be accounted for as a separate performance obligation. In that regard, ASU 2016-10 requires that an entity determine whether its promise is to transfer individual goods or services to the customer, or a combined item (or items) to which the individual goods and services are inputs. In addition, ASU 2016-10 categorizes intellectual property, or IP, into two categories: “functional” and “symbolic.” Functional IP has significant standalone functionality. All other IP is considered symbolic IP. Revenue from licenses of functional IP is generally recognized at a point in time, while revenue from licenses of symbolic IP is recognized over time. ASU 2016-10 has the same effective date and transition requirements as ASU 2014-09, as amended by ASU 2015-14. The Company is currently evaluating the effect that adoption of ASU 2016-10 will have on its consolidated financial statements or disclosures.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718)” (“ASU 2016-09”). ASU 2016-09 requires an entity to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating ASU 2016-09 and its impact on its consolidated financial statements or disclosures.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This ASU amends the principal versus agent guidance in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which was issued in May 2014 (“ASU 2014-09”). The effective date and transition requirements for the amendment to ASU 2014-09 are the same as those of ASU 2014-09, which was deferred for one year by ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. That is, the guidance under these standards is to be applied using a full retrospective method or a modified retrospective method, as outlined in the guidance, and is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted only for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The Company is currently evaluating the provisions of each of these standards and assessing their impact on the Company’s condensed consolidated financial statements and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and annual and interim periods thereafter, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements.

Note 3. SALE OF WHOLESALE BUSINESS AND DISCONTINUED OPERATIONS

On July 29, 2016, the Company, entered into an Asset Purchase Agreement (the “Wholesale Business Purchase Agreement”) with VPR Brands, L.P. (the “Purchaser”) and the Purchaser’s Chief Executive Officer, Kevin Frija (the former Chief Executive Officer of the Company) pursuant to which the Company sold its wholesale vapor inventory and the related business operations (collectively, “Wholesale Business Assets”), which previously operated at 3001 Griffin Road, Dania Beach, Florida 33312 and to purchase 1,405,910,203 shares of the Company’s Common Stock held by Mr. Frija. The sale transaction was approved by the Company’s Board of Director’s on July 26, 2016 and completed on July 31, 2016. The consideration for the Wholesale Business Assets is (i) the transfer to the Company by Mr. Frija of 1,405,910,203 shares of the Company’s common stock that he had acquired on the open market; (ii) a secured, one-year promissory note in the principal amount of $370,000 (the “Acquisition Note”) bearing an interest rate of 4.5%, which payments thereunder are $10,000 monthly, with such payments commencing on October 28, 2016, with a balloon payment of the remainder of principal and interest on July 29, 2017; (iii) A secured, 36-month promissory note in the principal amount of $500,000 bearing an interest rate of prime plus 2%, resetting annually on July 29 ^th ,which payments thereunder are $14,000 per month, with such payments deferred and commencing on January 26, 2017, with subsequent installments payable on the same day of each

month thereafter and in the 37 ^th month, a balloon payment for all remaining accrued interest and principal; and (iv) the assumption by the Purchaser of certain liabilities related to the Company’s wholesale operations, including but not limited to the month-to-month lease for the premises. Pursuant to the Wholesale Business Purchase Agreement, the Company shall continue to collect the accounts receivable from its wholesale operations as of July 29, 2016. The Company agreed to use its commercially reasonable efforts, consistent with standard industry practice, to collect such accounts receivable, and any and all amounts so collected (i) up to $150,000 (net of any refunds) in the aggregate shall be credited against payment of the Acquisition Note; and (ii) in excess of $150,000 (up to $95,800) will be transferred to the Purchaser’s Chief Executive Officer. The Company incurred costs to buy back it shares of its Common Stock in conjunction with the sale of its wholesale vapor business. The costs includes approximately $43,000 of discounts on the notes receivable to related party, that were issued at below market rates, and $35,000 of professional fees. These costs were recorded as incurred as selling general and administrative expense, a component of the loss from discontinued operations.

The sale of the wholesale business qualifies as discontinued operations and accordingly the Company has excluded results for the wholesale business operations from the Company’s continuing operations in the unaudited condensed consolidated Statements of Operations for all periods presented. The following table shows the results of the Company’s wholesale operations included in the loss from discontinued operations.

The major classes of assets and liabilities of discontinued operations on the balance sheet are as follow:

Due from related party:

Subsequent to the transfer of the wholesale business, the Company sold and purchased inventory to/from the Purchaser and incurred costs on behalf of the Purchaser during a transition period. The net amount due from the Purchaser was $75,130 at September 30, 2016.

Note 4. ACQUISITION OF ADA’S NATURAL MARKET

On June 1, 2016, the Company’s wholly owned subsidiary Healthy Choice Markets Inc., entered into a Business Sale Agreement with Ada’s Whole Food Market LLC (the “Seller”) to purchase certain operating assets and assumed certain payables and a store lease obligation related to that constituted the business of Ada’s Natural Market grocery store (the “Grocery Acquisition”). The Company operates the grocery store under the same name, location, and management. The Company also entered into an employment agreement with the store manager.

The purchase consideration paid to the Seller was allocated to the preliminary fair value of the net tangible assets acquired, with the remainder recorded as goodwill on a preliminary basis. Goodwill recognized from the transaction mainly represented the expected operational synergies upon acquisition of the combined entity and intangibles not qualifying for separate recognition. Goodwill is not expected to be deductible for income tax purposes in the tax jurisdiction of the acquired business. The preliminary purchase price allocation was based, in part, on management’s knowledge of Ada’s Natural Market business and the results of a third party appraisal commissioned by management for equipment.

The following presents the unaudited pro-forma combined results of operations of the Company with Ada’s Whole Food Market and Vaporin, which was acquired on March 4, 2015, as if both Acquisitions occurred on January 1, 2015.

The unaudited pro-forma results of operations are presented for information purposes only and are based on estimated financial operations. The unaudited pro-forma results of operations are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2015 or to project potential operating results as of any future date or for any future periods.

Note 5. SEGMENT INFORMATION

Prior to the second quarter of 2016, the Company had a single reportable business segment, as it was a distributor and retailer of vapor products including vaporizers, e-liquids and electronic cigarettes. On June 1, 2016, the Company completed the Grocery Acquisition (See Note 4) and added a reportable segment. On July 31, 2016, the Company sold its wholesale vapor inventory and related business operations. The Company has excluded the results for the wholesale vapor business, as discontinued operations, from the Company’s continuing operations for all periods presented. Management determines the reportable segments based on the internal reporting used by our Chief Operating Decision Makers to evaluate performance and to assess where to allocate resources. The Company evaluates segment performance based on the segment gross profit before corporate expenses.

Summarized below are the Net Sales and Segment Gross Profit for each reporting segment:

For the three months ended September 30, 2016 depreciation and amortization was $20,388 and $53,305 for Vapor and Grocery, respectively. For the nine months ended September 30, 2016 depreciation and amortization was $153,015 and $70,756 for Vapor and Grocery, respectively.

Summarized below are the assets for each reporting segment:

Note 6. MERGER WITH VAPORIN, INC.

On December 17, 2014, the Company entered into an Agreement and Plan of Merger with Vaporin (the “Merger”) pursuant to which Vaporin was to merge with and into the Company with the Company being the surviving and controlling entity (as a result of the stockholders of the Company maintaining more than 50% ownership in the Company’s outstanding shares of Common Stock and the Vapor directors comprising the majority of the board at the date of the Merger). The Merger closed on March 4, 2015 and was accounted for as a business combination.

The following presents the unaudited pro-forma combined results of operations of the Company with Vaporin as if the Merger occurred on January 1, 2015.

The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2015 or to project potential operating results as of any future date or for any future periods.

Note 7. RETAIL VAPOR STORES AND KIOSKS

Retail Stores

During 2015, the Company acquired the assets and business operations of established retail vapor stores. The purchase prices were generally allocated to inventory, leasehold improvements, fixtures, security deposits, intangible assets, and goodwill. No liabilities were assumed from the sellers and the Company has no obligation to retain existing employees.

The Company holds back a portion of the sellers’ purchase price for three to nine months during the operational transition period (the “hold back period”). If the stores’ gross minimum revenues during the holdback period do not reach an amount agreed upon by the Company and the respective seller at closing, then the hold back amount due to the seller is reduced in the final settlement. The holdback amount due to sellers of $860,000 was recorded in accrued liabilities at December 31, 2015 as the achievement of the minimum revenue milestones are considered probable. The hold back liability is considered contingent consideration recorded at fair value at each respective acquisition date and is re-measured each reporting period. During the nine months ended September 30, 2016, the Company made $220,000 of aggregate holdback payments and the remaining holdback amount as of September 30, 2016 included in accrued expenses is $640,000.

The accounting and reporting of the acquired vape retail store operations were fully integrated into the Company at dates of the individual acquisitions and it is impracticable to separate them. Unaudited pro-forma combined results of operations of the Company are not presented, as it is unfeasible to obtain complete, reliable and financial information prepared in accordance with GAAP. The prior owners of the retail store businesses were individuals without reporting requirements and, accordingly, the financial data available is incomplete, inconsistent, and the presentation would not add value to the Company’s pro-forma financial disclosure.

During the fourth quarter of 2015, the Company ceased its plans to increase the number of vape retail stores due to adverse industry trends and increasing federal and state regulations. After evaluating retail store operations, management decided to close two of its Atlanta area vape retail stores on February 15, 2016, and September 30, 2016, respectively, and five of its Florida retail vapor stores were closed between May 31, and September 30, 2016. In connection with the vape retail store closing, for the nine months ended September 30, 2016, the Company incurred approximately $332,503 of exit costs including $181,153 of settlement of non-cancellable lease obligations, and $103,312 of loss on abandonment or disposal of property and equipment, and $48,038 loss on write-off of inventory and other exit costs.

  Note 8. NOTES RECEIVABLE FROM RELATED PARTY

In connection with the sale of its wholesale business, the Company entered into two notes receivable with the Purchaser, a related party. (See Note 3 for additional details.) As consideration for the sale of wholesale inventory and business the Company received a secured, one-year promissory note in the principal amount of $370,000 (the “Acquisition Note”) bearing an interest rate of 4.5%, which payments thereunder are $10,000 monthly, with such payments commencing on October 28, 2016, with a balloon payment of the remainder of principal and interest due on July 29, 2017.

In connection with the sale of the wholesale business, the Purchaser and the Company also entered into a secured, 36-month promissory note in the principal amount of $500,000 (the “Promissory Note”) bearing an interest rate of prime plus 2%, resetting annually on July 29 ^th , which payments thereunder are $14,000 per month, with such payments deferred and commencing on January 26, 2017, with subsequent installments payable on the same day of each month thereafter and in the 37 ^th month, and a balloon payment for all remaining accrued interest and principal due on July 29, 2019.

The rates of interest for both the Acquisition Note and the Promissory Notes were below market rates. Discounts were recorded to reflect the interest that would be received a market rate, approximating 12%. The discount is accreted over the terms of the loans.

The composition of notes receivable from related party balances and unamortized discounts are in the following table:

Note 9. GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the premium paid over the fair value of the intangible and net tangible assets acquired in the Merger and other retail and grocery store business acquisitions. The Company assesses the carrying value of its goodwill on at least an annual basis. At December 31, 2015 and September 30, 2016, management assessed relevant events and circumstances in evaluating whether it was more likely than not that its fair values were less than the respective carrying amounts of the acquired subsidiaries pursuant to ASC 350, “Intangibles, Goodwill and Other”. The Company then evaluated the carrying value of its goodwill by estimating the fair value of its consolidated business operations through the use of discounted cash flow models, which required management to make significant judgments as to the estimated future cash flows. During the fourth quarter of 2015, the Company revised its plans to increase the number of vape retail stores due to changes in the industry and increasing federal and state regulations that may potentially reduce both wholesale and retail revenues. The ceased vape retail store expansion plan and potential reduction in revenue resulting from pending regulations adversely impacted the Company’s projected cash flows and profits. Accordingly, the Company’s goodwill was evaluated for impairment. During the nine months ended September 30, 2016, the Company’s wholesale and online operations did not generate positive cash flows and are projected to continue incurring operating losses for the foreseeable future. As a result of such analyses, the Company concluded that goodwill was impaired and recorded an impairment charges of $1,199,484 for the nine months ended September 30, 2016.

The changes in the carrying amount of goodwill for the nine months ended September 30, 2016 is as follows:

The Company records an impairment charge on its intangible assets if it determines that their carrying value may not be recoverable. The carrying value is not recoverable if it exceeds the undiscounted cash flows resulting from the use of the asset and its eventual disposition. When the Company determines that the carrying value of its intangible assets may not be recoverable, the Company measures the potential impairment based on a projected discounted cash flow method using a discount rate determined by its management to be commensurate with the risk inherent in its current business model. An impairment loss is recognized only if the carrying amount of the intangible assets exceeds its estimated fair value. An impairment charge is recorded to reduce the pre-impairment carrying amount of the intangible assets to their estimated fair value. Determining the fair value is highly judgmental in nature and requires the use of significant estimates and assumptions considered to be Level 3 fair value inputs, including anticipated future revenue opportunities, operating margins, and discount rates, among others. The estimated fair value of the intangible assets was determined based on the income approach, as it was deemed to be most indicative of the Company’s fair value in an orderly transaction between market participants. During the nine months ended September 30, 2016, the Company determined its trade names and technology carrying value exceeded the potential cash flow from their disposition. The Company recorded an impairment charge of $778,345. Subsequent to September 30, 2016, the Company entered into a sale and license agreement for its trade names for consideration of $100,000. The changes in the carrying amount of intangible assets for the nine months ended September 30, 2016 are as follows:

On July 21, 2016, Liquid Science entered into an asset purchase and license agreement with the Company, whereby the Company irrevocably sold, assigned or transferred certain trademark, intellectual property, formulations and technology, and granted rights to sell and distribute certain brand named products internationally. In conjunction with the sale, the royalty agreement between the Company and Liquid Science was terminated.

See Note 7 - Retail Stores and Kiosks for more information related to accrued vape retail store hold back payments from acquisitions. (See Note 13 – Commitments and Contingencies – Legal Proceedings for additional information related to the accrual of legal settlements and royalty fees.)

Note 11. STOCKHOLDERS’ DEFICIT

Reverse Splits

On July 7, 2015, the Company filed an amendment to its Certificate of Incorporation to effectuate a one-for-five reverse stock split to its Common Stock. On February 1, 2016, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to (i) effect a reverse stock split of the Common Stock at a ratio between 1-for-10 and 1-for-70, such ratio to be determined by the Board, (ii) reduce the par value of the Common Stock from $0.001 to $0.0001 and (iii) increase the number of authorized shares of the Common Stock from 500,000,000 shares to 5,000,000,000 shares. Each share entitles the holder to one vote. On March 8, 2016, the Board effected a reverse stock split of the Common Stock at a ratio of 1-for-70. On March 21, 2016, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a reverse stock split of the Common Stock at a ratio between 1-for-10,000 and 1-for-20,000, such ratio to be determined by the Board. On June 1, 2016, the Board effected a reverse stock split of the Common Stock at a ratio of 1-for-20,000.

Series A Preferred Stock Conversions

On January 25, 2016, the Units sold pursuant to the Company’s July 2015 registered offering automatically separated into 1 share of Series A Preferred Stock and Series A Warrants, exercisable into 54 shares of common stock. From January 25, 2016 through September 30, 2016, 1 share of Series A Preferred Stock was converted and the Company issued 26 shares of Common Stock to settle these conversions.

Compensatory Common Stock Summary

The Company did not recognize stock-based compensation expense related to compensatory Common Stock during the three months ended September 30, 2016 and 2015. During the nine months ended September 30, 2016 and 2015, the Company recognized stock-based compensation expense related to compensatory Common Stock in the amount of $52,000 and $621,067, respectively. Stock-based compensation expense is included as part of selling, general and administrative expense in the accompanying condensed consolidated statements of operations. As of September 30, 2016, there was no unamortized expense remaining related to stock awards because the remaining non-vested shares vested on April 1, 2016.

A summary of compensatory Common Stock activity for the nine months ended September 30, 2016 is presented below:

Warrants

On May 2, 2016, the OTCQB staff notified the Company that, based upon its non-compliance with the minimum $0.01 bid price requirement for the prior 30 consecutive business days, the Company – in accordance with the OTCQB Standards – had been provided a grace period through October 31, 2016, to regain compliance with the minimum bid price requirement. If the Company’s common stock bid price did not close at or above $0.01 for a period of ten consecutive trading days prior to October 31, 2016, the Company would move to the OTC Pink marketplace.

On May 3, 2016, the Series A Warrant Standstill Agreements (the “Amended Standstill Agreements”) were amended and restated pursuant to which, among other things, each holder of the Series A Warrants agreed not to exercise their Series A Warrants pursuant to the "cashless exercise" provisions of the Series A Warrants prior to the earlier of (1) June 2, 2016, or (2) the date the Company completes its previously approved 70 for 1 reverse stock split. Pursuant to the terms of the Amended Standstill Agreements, the holders agreed to receive only common stock (and not cash) pursuant to any exercise of their Series A Warrants until the date of the 20,000 for 1 reverse stock split. For the period through the June 1, 2016, the number of Series A Warrants the Holders would have been permitted to exercise will roll over and cumulated and was exercisable after the June 1, 2016. More than 85% of the Series A Warrants were subject to the Amended Standstill Agreement on May 3, 2016.

On May 4, 2016, the Company determined that it had insufficient shares of Common Stock authorized to allow for the exercise of Series A Warrants or stock options, or allow the conversion of the Series A Preferred Stock. The Company received the necessary approval from FINRA to implement a reverse stock split filed an amendment to its Certificate of Incorporation to effectuate a one-for-twenty thousand reverse stock split to its Common Stock on June 1, 2016.

On June 21, 2016, the Series A Warrant Standstill Agreements were amended and restated to permit the repurchase or exchange of the Series A Warrants in certain additional circumstances (the “Amended Standstill Agreements”). These circumstances include the repurchase of the Series A Warrants below a certain price per warrant and pursuant to the terms of the recently announced potential exchange offer for the Series A Warrants. In addition, pursuant to the terms of the Amended Standstill Agreements, the Holders agreed, in certain circumstances, to receive only common stock (and not cash) pursuant to Section 1(d) of their Series A Warrants. Those circumstances include if the Company is deemed not to meet the "Equity Conditions" of the Series A Warrants because of the failure of the closing price of the Common Stock to be at or above $0.01 per share. The Company elected not to proceed with the aforementioned exchange offer.

On June 24, 2016, the Company determined that it again had insufficient shares of Common Stock authorized to allow for the exercise of its warrants or stock options, or allow the conversion of preferred stock. On August 4, 2016, the Company received the approval from its stockholders to increase the authorized common stock to 750 billion shares and the Certificate of Amendment to the Company’s Certificate of Incorporation was filed. If all of the warrants were exercised simultaneously at a stock price lower than $0.0001, then the