UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

(Mark One)

☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

or

 

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 333-185083

 

 

VAPIR ENTERPRISES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada   27-1517938
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

3511 Ryder St.,

Santa Clara, California 95051

Telephone: (800) 841-1022

(Address and telephone number of Registrant’s principal executive offices)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☐  No  ☒

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).   Yes  ☒   No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☒
  Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐  No  ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of August 15, 2017, there were 49,766,819 shares of common stock, par value $0.005, outstanding.

 

 

 

 

 

VAPIR ENTERPRISES, INC.

 

QUARTERLY REPORT ON FORM 10-Q

For the Period Ended June 30, 2017

 

TABLE OF CONTENTS

 

    Page
PART 1 - FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 18
     
PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 19
Item 1A. Risk Factors 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Mine Safety Disclosures 21
Item 5. Other Information 21
Item 6. Exhibits 21
     
SIGNATURES 22

 

 

 

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.

 

We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.

 

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.

 

Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.

 

CERTAIN TERMS USED IN THIS REPORT

 

When this report uses the words “we,” “us,” “our,” and the “Company,” they refer to Vapir Enterprises, Inc. “SEC” refers to the Securities and Exchange Commission.

 

 

 

PART 1 - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

VAPIR ENTERPRISES, INC. AND SUBSIDIARY

For the quarterly period ended June 30, 2017

INDEX TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CONTENTS

  

Condensed Consolidated Balance Sheets at June 30, 2017 (Unaudited) and December 31, 2016 2
   
Condensed Consolidated Statements of Operations - For the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited) 3
   
Condensed Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 2017 and 2016 (Unaudited) 4
   
Notes to Condensed Consolidated Financial Statements (Unaudited) 5

 

1

 

 

VAPIR ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    As of     As of  
    June 30,
2017 		    December 31, 2016  
    (unaudited)        
ASSETS            
             
CURRENT ASSETS:            
Cash   $ 1,913     $ 12,022  
Accounts receivable, net     4,043       4,773  
Inventory, net     111,584       155,938  
Prepaid expense and other current assets     18,708       12,486  
Advances to suppliers     113,752       103,274  
                 
Total Current Assets     250,000       288,493  
                 
OTHER ASSETS:                
Property and equipment, net     51,534       64,562  
Intangible assets, net     162,373       181,574  
Deposit     2,813       2,813  
                 
Total Other Assets     216,720       248,949  
                 
Total Assets   $ 466,720     $ 537,442  
                 
 LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
CURRENT LIABILITIES:                
                 
Accounts payable and accrued expenses   $ 281,385     $ 299,356  
Loan payable     197,000       197,000  
Notes payable - current maturities     16,926       21,722  
Customer deposits     67,958       27,633  
Advances from related party     827,513       795,984  
Deferred rent     15,165       14,191  
Derivative liabilities     145,051       305,913  
                 
Total Current Liabilities     1,550,998       1,661,799  
                 
LONG-TERM LIABILITIES:                
Convertible notes payable, net of debt discounts     500,000       500,000  
Notes payable, net of current maturities     11,812       20,410  
                 
Total Long-term Liabilities     511,812       520,410  
                 
Total Liabilities     2,062,810       2,182,209  
                 
COMMITMENTS AND CONTINGENCIES                
                 
STOCKHOLDERS’ DEFICIT:                
Preferred stock $0.001 par value: 20,000,000 shares authorized; none issued and outstanding     -       -  
Common stock $0.001 par value: 100,000,000 shares authorized; 49,766,819 shares issued and outstanding, respectively.     49,767       49,767  
Additional paid in capital     910,869       807,132  
Accumulated deficit     (2,556,727 )     (2,501,666 )
                 
Total Stockholders’ Deficit     (1,596,091 )     (1,644,767 )
                 
Total Liabilities and Stockholders’ Deficit   $ 466,719     $ 537,442  

 

See accompanying notes to the condensed consolidated financial statements.

 

2

 

  

VAPIR ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    For the Three Months Ended     For the Six Months Ended  
    June 30,
2017 		    June 30,
2016 		    June 30,
2017 		    June 30,
2016 		 
                         
Revenues, net   $ 216,442     $ 269,104     $ 406,602     $ 645,176  
                                 
Cost of revenues     109,933       160,566       186,835       396,197  
                                 
Gross profit     106,509       108,538       219,767       248,979  
                                 
OPERATING EXPENSES:                                
                                 
Selling expenses     10,675       33,485       19,350       90,489  
Compensation     94,569       214,793       215,092       463,592  
Professional and consulting fees     17,547       53,556       48,159       425,719  
General and administrative     43,637       85,002       106,875       185,992  
                                 
Total Operating Expenses     166,428       386,836       389,476       1,165,792  
                                 
LOSS FROM OPERATIONS     (59,919 )     (278,298 )     (169,709 )     (916,813 )
                                 
OTHER INCOME (EXPENSE):                                
Change in fair value of derivative liabilities     310,378       6,723       160,862       112,587  
Interest expense, net     (23,397 )     (107,038 )     (46,214 )     (212,252 )
                                 
Other expense, net     286,981       (100,315 )     114,648       (99,665 )
                                 
LOSS BEFORE INCOME TAX PROVISION     227,062       (378,613 )     (55,061 )     (1,016,478 )
                                 
INCOME TAX PROVISION     -       -       -       -  
                                 
NET INCOME (LOSS)   $ 227,062     $ (378,613 )   $ (55,061 )   $ (1,016,478 )
                                 
LOSS PER SHARE:                                
Basic and diluted   $ 0.005     $ (0.01 )   $ (0.001 )   $ (0.02 )
                                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                                
Basic and diluted     49,766,819       49,766,819       49,766,819       49,694,841  

 

See accompanying notes to the condensed consolidated financial statements.

  

3

 

 

VAPIR ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  

    For the Six Months Ended  
    June 30,
2017 		    June 30,
2016 		 
             
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss   $ (55,061 )   $ (1,016,478 )
Adjustments to reconcile net loss to net cash used in operating activities                
Bad debt expense     25,361       1,002  
Depreciation     13,028       12,994  
Amortization of intangible assets     19,201       33,588  
Amortization of deferred financing cost     -       7,460  
Amortization of debt discount     -       165,756  
Change in fair value of derivative liabilities     (160,862 )     (112,587 )
Stock based compensation     103,737       546,641  
Changes in assets and liabilities:                
Accounts receivable     (24,630 )     20,971  
Prepaid expense and other current assets     (6,222 )     (9,085 )
Advances to suppliers     (10,478 )     16,773  
Inventory     44,354       27,289  
Accounts payable and accrued expenses     (17,971 )     (16,113 )
Deferred rent     974       1,883  
Customer deposits     40,325       19,906  
                 
NET CASH USED IN OPERATING ACTIVITIES     (28,244 )     (300,000 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Advances from related party     31,529       300,000  
Repayments to related party for advances     -       (25,000 )
Proceeds received from notes payable     -       50,000  
Repayments of notes payable     (13,394 )     (15,095 )
                 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES     18,135       309,905  
                 
NET CHANGE IN CASH     (10,109 )     9,905  
                 
CASH  - beginning of period     12,022       7,858  
                 
CASH - end of period   $ 1,913     $ 17,763  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Interest paid   $ 959     $ 18,875  
Income taxes paid   $ -     $ -  

 

See accompanying notes to the condensed consolidated financial statements.

  

4

 

 

Vapir Enterprises, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 1 - Organization and Operations

 

Vapir Enterprises, Inc.

 

Vapir Enterprises Inc. (“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. Vapir, Inc. (“Vapir”) is a wholly owned subsidiary of the Company and was incorporated in the State of California in October 2006. 

 

Note 2 - Significant and Critical Accounting Policies and Practices

 

Basis of Presentation

 

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information, which includes condensed consolidated financial statements and present the consolidated financial statements of the Company and its wholly-owned subsidiary as of June 30, 2017. All intercompany transactions and balances have been eliminated. Accordingly, the condensed consolidated financial statements do not include all the information and notes necessary for a comprehensive presentation of financial position and results of operations and should be read in conjunction with the Annual Report, Form 10-K for the year ended December 31, 2016.  It is management’s opinion that all material adjustments (consisting of normal recurring adjustments) have been made, which are necessary for a fair financial statement presentation. Significant intercompany accounts and transactions have been eliminated in consolidation. The results for the interim period are not necessarily indicative of the results to be expected for the year ending December 31, 2017.

 

Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions

 

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, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In preparing the unaudited condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet, and revenues and expenses for the period then ended. Actual results may differ significantly from those estimates. Significant estimates made by management include, but are not limited to allowance for doubtful accounts, inventory obsolescence and markdowns, the useful life of property and equipment, the valuation of deferred tax assets and liabilities, valuation of intangible assets, the assumptions used to calculate fair value of stock options and warrants granted, stock-based compensation and the fair value of common stock issued. 

 

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 June 30, 2017, 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.

 

Accounts receivable and allowance for doubtful accounts

 

The Company has a policy of providing on allowance for doubtful accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to bad debt expense and included in the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of June 30, 2017, the Company has included $27,369 in the allowance for doubtful accounts. The Company recorded bad debt expense of $25,361 during the six months ended June 30, 2017. During the six months ended June 30, 2016, the Company recorded bad debt expense of $1,002.

 

5

 

 

Vapir Enterprises, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 2 - Significant and Critical Accounting Policies and Practices (continued)  

 

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. For the six months ended June 30, 2017 and 2016, the Company recorded a reserve for slow-moving inventory of $0 and $15,320, respectively.

 

Inventory Obsolescence and Markdowns

 

The Company evaluates its current level of inventory considering historical sales and other factors and, based on this evaluation, classifies inventory markdowns in the income statement as a component of cost of goods sold pursuant to ASC 420 – “Exit or Disposal Cost Obligations”, 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 six months ended June 30, 2017 or 2016. There was no lower of cost or market adjustments for the six months ended June 30, 2017 or 2016.

 

Advances to suppliers

 

Advances to a supplier represents the cash paid in advance which is usually in three installment payments for the purchase of inventory. The advances to a supplier are interest free and unsecured. As of June 30, 2017 and 2016, advances to the Company’s major supplier amounted to $113,752 and $103,274, respectively. Upon shipment of the purchase inventory, the Company reclassifies or records such advances to the supplier into inventory.

  

Property and Equipment

 

Property and equipment are carried at cost less accumulated depreciation.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired, or disposed of, the cost and accumulated depreciation are removed, and any resulting gains or losses are included in the consolidated statement of operations.

 

Revenue recognition

 

The Company follows ASC 605 – “Revenue Recognition” in accounting for revenue related transactions. 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.

 

Consideration paid to promote and sell the Company’s products to customers is typically recorded as marketing costs incurred by the Company. If the amount of consideration paid to customers exceeds the marketing costs, any excess is recorded as a reduction of revenue. The Company follows the requirements of ASC 605-50-45-2, Revenue Recognition—Customer Payments and Incentives.

 

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 ASC 605. 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 goods sold were $40,953 and $63,739 for the six months ended June 30, 2017 and 2016, respectively.

 

6

 

  

Vapir Enterprises, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 2 - Significant and Critical Accounting Policies and Practices (continued)

 

Advertising Costs

 

The Company applies ASC 720 “Other Expenses” to account for advertising related costs. Pursuant to ASC 720-35-25-1, the Company expenses the advertising costs when the first time the advertising takes place. Advertising costs were $2,116 and $7,693 for the six months ended June 30, 2017 and 2016, respectively.

 

The amounts paid to customers for marketing expenses incurred on behalf of the Company are recorded as marketing cost and not as a reduction of revenue in accordance with ASC 605-50-45-2, Revenue Recognition—Customer Payments and Incentives. For the six months ended June 30, 2017, the Company did not pay customers for marketing expenses. During the six months ended June 30, 2016, the Company recorded expenses in the amount of $30,000.

 

Income Taxes

 

The Company discloses tax years that remain subject to examination by major tax jurisdictions pursuant to the ASC Paragraph 740. 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. The Company’s 2016, 2015 and 2014 tax years are still subject to federal and state tax examination.

 

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 ASC 260 – “Earnings per Share”. Pursuant to ASC 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 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 ASC 260-10-45-35 through 45-36 and ASC 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 ASC 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 ASC 260-10-45-29 and AS 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 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 which were excluded from the computation of loss per share because their impact was antidilutive: 

 

    For the
Six Months
Ended
June 30,
2017 		    For the
Six Months
Ended
June 30,
2016 		 
Stock Options     1,940,000       2,440,100  
Convertible Debt     5,674,152       5,374,152  
Stock Warrants     500,000       500,000  
Total contingent shares issuance arrangement, convertible debt, stock options or warrants     8,114,152       8,314,252  

 

7

 

 

Vapir Enterprises, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 2 - Significant and Critical Accounting Policies and Practices (continued)

 

Recently Issued Accounting Pronouncements

 

In July 2017, the FASB issued the FASB Accounting Standards Update No. 2017-11 “Derivatives and Hedging (Topic 815)” (“ASU 2017-09”)

 

The guidance addresses the complexity of accounting for certain financial instruments with down round features on equity-linked instruments (or embedded features) that result in a strike price being reduced on the basis of the pricing of future equity offerings. As a result of this amendment, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For public business entities, the amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is considering the impact of this amendment on the Company’s financials.

  

In May 2014, the FASB issued the FASB Accounting Standards Update No. 2014-09 “ Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”)

 

This guidance amends the existing FASB Accounting Standards Codification, creating a new Topic 606, Revenue from Contracts with Customer. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For a public entity, this amendment is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company has assessed the impact of this pronouncement and will continue to evaluate new transactions. The Company has not identified any transactions, and does not expect transactions, that will have a material impact on the financial statements as a result of this pronouncement.

 

Note 3 - Going Concern

 

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 has an accumulated deficit of approximately $2.55 million at June 30, 2017, a net loss of approximately $50,000 and net cash used in operating activities of approximately $30,000 for the six months ended June 30, 2017. 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 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.

 

Note 4 - Property and Equipment

 

Property and equipment, stated at cost, less accumulated depreciation consisted of the following:

  

    Estimated life   As of
June 30,
2017
(Unaudited) 		    As of
December 31,
2016 		 
                 
Auto   3 years   $ 12,522     $ 12,522  
Furniture and fixtures   5 years     23,743       23,743  
Tooling equipment   4 years     100,510       100,510  
Leasehold improvements   5 years     35,206       35,206  
Less: Accumulated depreciation         (120,447 )     (107,419 )
        $ 51,534     $ 64,562  

 

  (i) Depreciation Expense

 

Depreciation expense amounted to $13,028 and $12,994 for the six months ended June 30, 2017 and 2016, respectively.

 

  (ii) Impairment

 

The Company completes its annual impairment testing of property and equipment every fourth 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 June 30, 2017 and December 31, 2016, respectively.

 

8

 

 

Vapir Enterprises, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 5 - Intangible Assets

 

Intangible assets consist of the following:

  

    As of
June 30,
2017
(Unaudited) 		    As of
December 31,
2016 		 
             
Customer relationships   $ 1,001,212     $ 1,001,212  
Trademarks     6,910       6,430  
      1,008,122       1,007,642  
Accumulated amortization     (845,749 )     (826,646 )
Intangible assets, net   $ 162,373     $ 181,574  

 

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 trademarks are being capitalized. The Company filed trademarks for its company logos with an estimated useful life of 15 years. The Company is amortizing the costs of trademarks over their estimated useful lives on a straight-line basis. Amortization of trademarks 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 June 30, 2017 and 2016, respectively.

  

Amortization expense was $19,201 and $33,588 for the six months ended June 30, 2017 and 2016, respectively. Future amortization of intangible assets is as follows:

 

2017 (remainder of the year)   $ 20,161  
2018     39,361  
2019     39,361  
2020     39,361  
2021 and thereafter     24,131  
Total   $ 162,373  

 

Note 6 - Loan and Notes Payable

 

    As of
June 30,
2017
(Unaudited) 		    As of
December 31,
2016 		 
             
The Company obtained a business loan in May 2011 from a financial institution with a credit line up to $200,000 and secured by all assets of the Company. This loan bears a variable interest based on changes in the Bank of the West Prime Rate and is due on demand. As of June 30, 2017, the variable interest rate was 4.75%.   $ 197,000     $ 197,000  
                 
Notes payable                
                 
The Company has a 4.75% Promissory note of $100,000 issued with the same financial institution 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 and are due in full by on April 23, 2017. This note has been repaid accordingly.     -       5,250  
Unsecured Promissory note of $50,000 bearing interest of 5.28%, issued in February 2016 payable over 36 consecutive monthly installments of $1,506 starting in March 2016 and is due on March 9, 2019.     28,738       36,882  
                 
Less: Current maturities     (16,926 )     (21,722 )
Note payable, net of current maturities   $ 11,812     $ 20,410  

 

9

 

 

Vapir Enterprises, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 6 - Loan and Notes Payable (continued)

 

Future minimum Loan and Notes Payable principal payments are as follows:

 

2017 (Remainder of Year)   $ 8,344  
2018     15,907  
2019     4,487  
Total Remaining Payments   $ 28,738  

  

Convertible Notes payable

 

On April 3, 2015, the Company closed a financing transaction by entering into a Securities Purchase Agreement with two accredited investors for an aggregate subscription amount of $500,000. Pursuant to the Securities Purchase Agreement, the Company issued 6% Convertible Debentures and warrants to acquire 500,000 shares of the Company’s common stock at an exercise price of $0.10 per share.

 

The terms of the Debenture and the Warrants are as follows:

 

6% Convertible Debenture

 

The total principal amount of the Debenture is $500,000. The Debenture accrues interest at 6% per annum and matured on 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 $0.10 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 was initially recorded as prepaid financing cost and was amortized over the term of the Debenture. The note was initially issued on April 3, 2015 at a discount of $500,000. The unpaid principal balance due as of December 31, 2016 and June 30, 2017 was $500,000.

 

Debt discount was fully amortized during the year ended December 31, 2016.

 

On March 23, 2017, the Company completed the extension of its $500,000 6% Senior Convertible Debenture. The Company and the investors held on-going discussions prior to and post maturity to extend the original agreement. As a result of the extension, the new maturity date is amended to July 26, 2018. Accordingly, the outstanding Convertible Debenture was classified as a Long-term Liability.

 

Warrants

 

In April 2015, 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 $0.10 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.

 

Note 7 - Related Party Transactions

 

Advances from Executive Officer, Significant Stockholder

 

From time to time, the Company’s Chairman, CEO and significant stockholder advances funds to the Company for working capital purposes. These advances are unsecured, due upon demand and bear interest at 5% per annum.

 

At June 30, 2017 and December 31, 2016, these advances amounted to $862,613 and $831,084, respectively. Included in the advances are accrued interest due to the Company’s CEO totaling $53,113 and $37,583, at June 30, 2017 and December 31, 2016, respectively.

   

10

 

   

Vapir Enterprises, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 8 - 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 ASC 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 Black Scholes 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 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 change in fair value of these convertible instruments was $160,862 for the six months ended June 30, 2017 compared to a gain of $112,587 for the six months ended June 30, 2016. At June 30, 2017, the Company recorded a warrant derivative liability of $14,298 and note derivative liability of $130,753.

 

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 June 30, 2017:

 

    As of
June 30,
2017 		 
    (Unaudited)  
Stock price   $ 0.03  
Weighted average strike price   $ 0.10  
Remaining contractual term (years)     1.07 to 2.75 years  
Volatility     270% to 290 %
Risk-free rate     1.24% to 1.55 %
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
six months
ended
June 30,
2017 		 
Beginning balance   $ 305,913  
Change in fair value of derivative liabilities     (160,862 )
Ending balance   $ 145,051  

 

Note 9 - 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 amended 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.

 

Effective September 15, 2016, the Company entered into a one year lease of space consisting of approximately 1,819 square feet located in San Jose, California, with the term expiring in September 14, 2017. The base rent for the new agreement is $1,819 per month. As a result, the Company entered into a sublease agreement (“Sub Lessee”) to sublease the previous office and warehousing space in San Jose, California with a term commencing on September 1, 2016 and expiring October 31, 2017. The sublease agreement requires the sub lessee to pay to the Company a base rent of $5,050 plus pro rata share of operating expenses beginning September 1, 2016. The base rent increased beginning in November 2016 as defined in the amended lease agreement, to $5,202.

 

11

 

   

Vapir Enterprises, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 9 - Commitments and Contingencies (continued)

 

Future minimum rental payments required under this operating lease are as follows:

 

Years ending December 31:      
       
2017   $ 35,150  
2018     64,236  
Total   $ 99,386  

 

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 10 - Stockholders’ Deficit

 

Shares Authorized

 

The authorized capital of the Company consists of 300,000,000 shares of common stock, par value $0.001 per share and 20,000,000 shares of preferred stock, par value $0.001 per share.

 

12

 

  

Vapir Enterprises, Inc. and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 10 - Stockholders’ Deficit (continued)

 

Warrants

 

In April 2015, the Company issued a 6% Convertible Debenture (the “Debenture”) and warrants exercisable into 500,000 shares of common stock at an exercise price of $0.60 per share which was adjusted down to $0.10 as a result of the Company’s issuance of options with an exercise price of $0.10 in January 2016 (the “Warrants”). Refer to debt footnote for additional detail. Additionally, during the six months ended June 30, 2017, a total of 1,243 warrants expired. Stock warrant activities for the six months ended June 30, 2017 are summarized as follows:

    

    Number of Warrants     Weighted Average Exercise
Price 		    Weighted Average Remaining Contractual Life
(Years) 		    Aggregate Intrinsic
Value 		 
Balance at December 31, 2016     501,243       3.73       3.25       -  
Expired     (1,243 )     1,264       -                  -  
Balance at June 30, 2017     500,000       .10       2.76       -  
Warrants exercisable at June 30, 2017     500,000     $ .10       2.76     $ -  

 

Options

 

During the six months ended June 30, 2017, 100 stock options expired. Stock option activities for the six months ended June 30, 2017 are summarized as follows:

  

    Number of Options     Weighted Average Exercise
Price 		    Weighted Average Remaining Contractual Life
(Years) 		    Aggregate Intrinsic
Value 		 
Balance at December 31, 2016     1,940,100       .14       4.04                   -  
Expired     (100 )     700               -  
Balance at June 30, 2017     1,940,000       .10       3.54       -  
Options exercisable at June 30, 2017     -     $ -       -     $ -  

 

As of the balance sheet date, total compensation cost related to unvested stock options not yet recognized equaled $177,609 and is expected to be recognized over a weighted-average period of 3.54 years.

 

Note 11 - Concentration of Credit Risk

 

Concentration of Revenue and Supplier  

 

During the six months ended June 30, 2017, sales to two customers represented approximately 35% of the Company’s net sales relative to 38% during the six months ended June 30, 2016.

 

As of June 30, 2017, and December 31, 2016, the Company had two customers representing approximately 29% of accounts receivable and one customer representing approximately 29% of accounts receivable, respectively.

 

Additionally, we use electronic contract manufacturers (EMS) to make our products (primarily located in China). We specify the requirements and specification and the products are built based on the Specification and Design. We have been able to extend our credit with our suppliers but there are always risk that suppliers reduce their credit limit or terms of credit.

  

13

 

 

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Except for the historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. Our actual results or actions may differ materially from these forward-looking statements for many reasons. Our discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes and with the understanding that our actual future results may be materially different from what we currently expect.  

 

Forward-Looking Statements

 

Certain information contained in this Quarterly Report on Form 10-Q, as well as other written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the Securities and Exchange Commission, press releases, conferences or otherwise, may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. This information includes, without limitation, statements concerning the Company’s future financial position and results of operations, planned expenditures, business strategy and other plans for future operations, the future mix of revenues and business, customer retention, project reversals, commitments and contingent liabilities, future demand and industry conditions. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Generally, the words “anticipate,” “believe,” “estimate,” “expect,” “may” and similar expressions, identify forward-looking statements, which generally are not historical in nature. Actual results could differ materially from the results described in the forward-looking statements due to the risks and uncertainties set forth in this Quarterly Report on Form 10-Q, the specific risk factors identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, and those described from time to time in our future reports filed with the Securities and Exchange Commission.

 

The following discussion is qualified in its entirety by, and should be read in conjunction with, the Company’s financial statements, including the notes thereto, included in this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

As used herein, the terms “we,” “us,” “our” and the “Company” refers to Vapir Enterprises, Inc., a Nevada corporation and its subsidiaries unless otherwise stated.

 

Overview

 

Vapir Enterprises, Inc. was originally incorporated under the laws of the State of Nevada on December 17, 2009 under the name Apps Genius Corp. Our original business was to develop, market, publish and distribute social games and software applications that consumers could use on a variety of platforms, including social networks, wireless devices and stand-alone websites. We were unsuccessful in operating our business and on October 7, 2013 we entered into a Membership Interest Purchase Agreement with FAL Minerals LLC and we changed our name to FAL Exploration Corp. The agreement with FAL Minerals LLC has since been terminated and we have now entered into an Exchange Agreement with Vapir, Inc. and its shareholders. In addition, we changed our name to Vapir Enterprises, Inc. to better represent our new business operations.

 

On December 30, 2014, Vapir, Inc., a private California corporation (“Vapir”), which is the historical business of the Company’s wholly-owned subsidiary, 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. 

 

Vapir, Inc., our wholly-owned subsidiary, was incorporated on October 26, 2006 in the State of California.

 

Vapir, Inc. specializes in the revolutionary technology of digital aromatherapy which is the art and science of utilizing naturally extracted aromatic essences from plants to balance and harmonize while freshening the environment with pleasant and distinctive fragrances. We invent, develop and produce revolutionary and easy to use digital aromatherapy devices by utilizing heat and convection air.

 

14

 

 

Results of Operations

 

Three and Six Months Ended June 30, 2017 Compared to the Three and Six Ended June 30, 2016 

 

Net Revenues

 

Our Net Sales for the three months ended June 30, 2017 and 2016 were $216,442 and $269,104 respectively, a decrease of $50,677 or approximately 19%. The decrease in sales during the three months ended June 30, 2017 was primarily attributable to a decrease in sales of our Prima vaporizer product as a result of a decline in demand.

 

Our Net Sales for the six months ended June 30, 2017 and 2016 were $406,602 and $645,176 respectively, a decrease of $236,589 or approximately 53%. The decrease in sales during the six months ended June 30, 2017 was primarily attributable to a decrease in sales of our Prima vaporizer product as a result of a decline in demand.

 

Management views future sales level with a fair degree of uncertainty in that management has not been able to identify whether our sales level are trending up or down over the near term. As a result, we believed our sales level are subject to high level of uncertainty and unless market conditions and competitive conditions dramatically improve, we may not achieve or maintain sufficient sales volumes at levels that will allow us to achieve or maintain any profitability or positive cash flow. Our Total Liabilities as of June 30, 2017 far exceed our Total Assets. As a result we are insolvent and face a clear, existential risk that we facing potential bankruptcy.

 

Cost of Revenues

 

Cost of goods sold for the three months ended June 30, 2017 and 2016 were $109,933 and $160,566, respectively, a decrease of $49,795 or approximately 31%. The decrease is primarily due to the decrease in sales of our vaporizer products.

 

Cost of goods sold for the six months ended June 30, 2017 and 2016 were $186,835 and $396,189, respectively, a decrease of $208,524 or approximately 53%. The decrease is primarily due to the decrease in sales of our vaporizer products.

  

Operating Expenses

 

Total operating expenses for the three months ended June 30, 2017 and 2016 were $166,428 and $386,836, respectively, a decrease of $224,213 or approximately 58%. The decrease in operating expenses during the three months ended June 30, 2017 is primarily due to stock based consulting expense of approximately $120,000 during the second three months of 2016. Additionally, an overall decrease in Selling General and Administrative costs of approximately $104,000 as a result of cost cutting measures. While we implemented these cost cutting measures, we cannot assure you that these measures can be sustained or, if sustained that we will not incur other costs that far exceed the benefits obtained from these cost cutting measures.

 

Total operating expenses for the six months ended June 30, 2017 and 2016 were $389,476 and $1,165,792, respectively, a decrease of $780,121 or approximately 67%. The decrease in operating expenses during the six months ended June 30, 2017 is primarily due to stock based consulting expense of approximately $441,938 during the first three months of 2016. Additionally, an overall decrease in Selling General and Administrative costs of approximately $150,468 as a result of cost cutting measures. While we implemented these cost cutting measures, we cannot assure you that these measures can be sustained or, if sustained that we will not incur other costs that far exceed the benefits obtained from these cost cutting measures. These and other factors would likely cause us to continue to incur significant and protracted losses in the future with the result that we may be facing claims by our creditors that we cannot satisfy since we are insolvent. As a result, there can be no guarantee that we will be successful in reducing our operating costs to a level that would allow us to achieve profitability, positive cash flow or both of them or if we do achieve these objectives that we can sustain profitability, positive cash flow or both of them. As of June 30, 2017, our Total Liabilities were $2,062,810 and our Total Assets as of that date were $466,720. As a result we are insolvent and any person who acquires our Common Stock or any other instrument that we have or will issue faces a high likelihood that they will lose their entire investment as we face a clear prospect of bankruptcy.

 

We continue to evaluate our operating cost with an aim of reducing our operating expenses in the future. However, some of our costs are fixed and we face intense competition from others who have more favorable operating cost structures and greater unit volumes that allows them to have an ability to compete aggressively on pricing. These and other factors would likely cause us to continue to incur significant and protracted losses in the future. As a result, there can be no guarantee that we will be successful in reducing our operating costs to a level that would allow us to achieve profitability, positive cash flow or both of them or if we do achieve these objectives that we can sustain profitability, positive cash flow or both of them.

 

Other Income (Expense), net

 

Total other (expense) income, net, for the three months ended June 30, 2017 and 2016 were $286,981 and ($100,315). The decrease in other expense is the primary result of the increase in derivative expense from the increase in fair value of derivative liabilities during the six-month period. 

 

Total other (expense) income, net, for the six months ended June 30, 2017 and 2016 were $114,648 and ($99,665). The decrease in other expense is the primary result of the increase in derivative expense from the increase in fair value of derivative liabilities during the six-month period. 

 

15

 

 

Net loss

 

Our net income/(loss) for the three months ended June 30, 2017 and 2016 was $227,062 and ($378,613), respectively, as a result of the items discussed above.

 

Our net loss for the six months ended June 30, 2017 and 2016 was ($55,061) and ($1,016,478), respectively, as a result of the items discussed above.

 

As a result, we face significant and protracted challenges if we are to exist as a corporate entity and avoid bankruptcy. If we are not successful, then anyone who acquires our securities faces the near total loss of their investment.

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. As of June 30, 2017, our total current liabilities exceeded our total current assets and, as a result, we had a working capital deficit and a further deterioration in our liquidity over the past 12 months. More than that, our Total Liabilities exceed our Total Assets. As a result, we are insolvent and we face a clear risk of bankruptcy.

 

We are not aware of any known demands, commitments or events that will result in our liquidity increasing or decreasing in any material way. We are not aware of any matters that would have a positive impact on future operations. But over the past twelve months we have had losses that is likely to continue if current market conditions continue with the result that anyone who acquires our common stock or any other security that we issue, faces a clear risk of the total loss of their investment.

 

Our net revenues are not sufficient to fund our operating expenses. At June 30, 2017, we had a working capital deficit of $1,296,766. Our cash decreased during the six months ended June 30, 2017 by approximately $10,109 from our cash balance at December 31, 2016 of $12,022. We currently have no material commitments for capital expenditures.

 

We are facing increasing demands that will likely require that we raise additional funds. If circumstances and market conditions allow, we may be able to raise additional capital but it may be under market conditions that are not favorable with the result that we may incur dilution or be required to accept debt covenants or other conditions that are onerous or which otherwise limit our ability to gain or attract additional financing in the future. Further, there can be no assurance that we will be successful in raising any additional funds or if we are successful, that we will be able to do so on terms that are reasonable in light of our current circumstances. As a small company with a limited product line and limited customer base, we face continuing risks and uncertainties that serve to make our company and an investment in our common stock subject to risks that are beyond our control. We estimate that based on current plans and assumptions, that our cash is not sufficient to satisfy our cash requirements under our present operating expectations, without further financing, for the next 12 months.

 

Our ability to generate and maintain a positive cash flow from our operations cannot be assured and we have no track record of achieving any positive cash flow. Based solely on our own internal estimates without the benefit of any independent third party evaluation, we anticipate that our cash and cash flow will not be sufficient to satisfy our cash requirements and we will likely require significant additional external financing. The magnitude of the additional financing and its timing is not yet precisely known and depending on the level of our sales revenues and other operating needs we may be facing a prolonged multi-period scenario of negative cash flows with increasing losses. As a result, we face increasing risks and persons who acquire our common stock or any other security that we have issued will likely incur a very high risk of the loss of all or substantially all of their investment.

 

Currently, we have no other known alternative source for any additional financing except those sources which we have previously used and we cannot be assured that our any of prior sources will have any willingness to provide us with additional capital or, if they do, that the terms of any such additional financing will be reasonable in light of our current insolvent financial condition. Further, we cannot assure you that we can continue to rely upon those existing financing sources in the future. We may not have sufficient working capital and funds from the collection of revenues that may allow us to maintain or expand our existing operations, to provide sufficient working capital to meet our operating needs and our outstanding financial obligations since we are insolvent.

 

For this reason we anticipate that, based on current market conditions and our existing tenuous financial condition, we will likely need to obtain significant additional capital in sufficient amounts and on reasonable if not extremely generous terms if we are to avoid serious existential financial and legal problems that include but would not be limited to bankruptcy. In the event of bankruptcy or any state insolvency proceedings or any other litigation, any person who owns our common stock, our debentures, or any other security that we have issued or may issue in the future should know that there is a clear and un mistakably high risk that they will lose all of their investment.

 

In the event that we are able to secure a sufficient amount additional financing on a timely basis and on extremely generous terms, it may include the issuance of equity or debt securities, obtaining credit facilities, or entering into other financing arrangements on such terms as then existing market conditions require. The capital market for small or micro-cap companies has been and likely will remain very difficult in the near future. As a result our ability to obtain additional capital on terms that are reasonable and current market conditions cannot be assured. We may be forced to obtain additional capital on terms that could limit our long term ability to remain in business or otherwise materially restrict our operations and our creditors may take dramatic legal action against us. Further, our current financial structure and the demands of our existing creditors is such that we face a clear risk of not being able to meet the obligations to our creditors. In that event, we face existential risks - clear risk of insolvency with the result that persons who acquire our common stock and any person who holds any other security that we have issued lose all or substantially all of their investment.

 

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Further, the market price of our common stock and the uncertainties of the U.S. economy and other factors will likely negatively impact us and the financing options that we may have. Any downturn in the U.S. equity and debt markets could also make it more difficult for us to obtain additional financing.

 

Even if we are able to raise the additional financing it is possible that we could incur unexpected costs and expenses, fail to collect amounts owed to us, or experience significant and protracted unexpected cash requirements and litigation from our existing creditors that would force us to seek other, less-attractive alternative financing on terms that could result in significant dilution and with other terms that are not reasonable in light of our current circumstances assuming any such financing is available which, under those circumstances is very unlikely.

 

Currently we do not have any commitment from any outside financing source to meet our anticipated financing needs and we have no basis to believe that any such commitment is forthcoming. Furthermore, in the event that we were to issue additional equity or debt securities, stockholders may experience significant additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. And in the case of any issuance of one or more debt securities, the debt covenants may restrict our operating ability and our ability to raise additional financing from debt.

 

Overall if we are unable to raise additional capital on terms that are reasonable in light of current market conditions we will likely restrict our ability to grow and may reduce our ability to exist as a corporation or, for that matter, to continue to conduct business operations. We face a clear risk of insolvency unless we are able to successfully raise significant additional capital on terms that will allow us to reduce our financial obligations and improve our profitability and cash flow. If we are unable to obtain significant additional financing, we will likely be required to curtail our marketing and development plans and possibly cease our operations with the clear risk of insolvency.

 

We anticipate that unless our financial condition dramatically improves, we will incur further significant and protracted operating losses in the foreseeable future with the result that we are facing bankruptcy.

 

Inflation and Changing Prices

 

Neither inflation nor changing prices for the nine months ended June 30, 2017 had a material impact on our operations.

 

Off-Balance Sheet Arrangements

 

None.

 

Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires our management to make assumptions, estimates, and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments.

 

We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements.   We believe the critical accounting policies in Note 2 to the consolidated financial statements appearing in the Annual Report, Form 10-K for the year ended December 31, 2016, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.  

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant matters requiring the use of estimates and assumptions include, but may not be limited to, accounts receivable allowances and evaluation of impairment of long lived assets and intangible assets and the fair value of common stock issued. Management believes that its estimates and assumptions are reasonable, based on information that is available at the time they are made.  

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

As a smaller reporting company, we are not required to provide this information.

 

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Item 4. Controls and Procedures.

 

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

With respect to the quarterly period ending June 30, 2017, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, our management has concluded that our disclosure controls and procedures were not effective as of June 30, 2017 due to our limited internal resources and lack of ability to have multiple levels of transaction review. In connection with this evaluation, management identified the following control deficiencies that represent material weaknesses as of June 30, 2017:

 

  (1) Lack of an independent audit committee or audit committee financial expert. Although our board of directors serves as the audit committee it has no independent directors. These factors are counter to corporate governance practices as defined by the various stock exchanges and lead to less supervision over management.
     
  (2) We do not have sufficient experience from our accounting personnel with the requisite U.S. GAAP public company reporting experience that is necessary for adequate controls and procedures due to our limited resources with appropriate skills, training and experience to perform the review processes to ensure the complete and proper application of generally accepted accounting principles. 
     
  (3) Need for greater integration, oversight, communication and financial reporting of the books and records of our office.
     
  (4) Lack of sufficient segregation of duties such that the design over these areas relies primarily on detective controls and could be strengthened by adding preventative controls to properly safeguard company assets.

  

Changes in Internal Controls.

 

There have been no changes in our internal controls over financial reporting or in other factors during the fiscal quarter ended June 30, 2017, that materially affected, or is likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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 our business, results of operations, financial condition or cash flows.

 

Item 1A. Risk Factors

 

The application of the Federal Food, Drug and Cosmetic Act to all tobacco products, including products like the Company’s vaporizers, will have a material adverse effect on our business.

 

On May 9, 2016, the Food and Drug Administration (FDA) announced the issuance of a final rule (the “Rule”) deeming all tobacco products, including “electronic cigarettes” and their components and parts, subject to the Federal Food, Drug, and Cosmetic Act (the FD&C Act), as amended by the Family Smoking Prevention and Tobacco Control Act (Tobacco Control Act). As a result of the new Rule, all electronic cigarette products will be subject to the same FD&C Act provisions and relevant regulatory requirements to which cigarettes are subject, with respect to the following:

 

1. Enforcement action against products determined to be adulterated or misbranded (other than enforcement actions based on lack of a marketing authorization during an applicable compliance period);

 

2. Required submission of ingredient listing and reporting of HPHCs;

 

3. Required registration of tobacco product manufacturing establishments and product listing;

 

4. Prohibition against sale and distribution of products with modified risk descriptors (e.g., “light,” “low,” and “mild” descriptors) and claims unless FDA issues an order authorizing their marketing;

 

5. Prohibition on the distribution of free samples (same as cigarettes);

 

6. Premarket review requirements;

 

7. Implementation of minimum age and identification restrictions to prevent sales to individuals under age 18;

 

8. Inclusion of a health warning; and

 

9. Prohibition of sale of electronic cigarettes in vending machines, unless in a facility that never admits youth.

 

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The application of the Rule will result in additional expenses, could affect the markets we sell our products in, could require us to change our advertising and labeling and method of marketing our products, any of which would have a substantial adverse effect on our business, results of operation and financial condition.  In addition, the application process of our products by the FDA could cost the Company several hundred thousand dollars.

 

We may face the same governmental actions aimed at conventional cigarettes and other tobacco products.

 

The tobacco industry expects significant regulatory developments to take place over the next few years, driven principally by the World Health Organization’s Framework Convention on Tobacco Control, or the FCTC. The FCTC is the first international public health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. Regulatory initiatives that have been proposed, introduced or enacted include:

 

  ● the levying of substantial and increasing tax and duty charges;
     
  ● restrictions or bans on advertising, marketing and sponsorship;
     
  ● the display of larger health warnings, graphic health warnings and other labeling requirements;
     
  ● restrictions on packaging design, including the use of colors and generic packaging;
     
  ● restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;
     
  ● requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels;
     
  ● requirements regarding testing, disclosure and use of tobacco product ingredients;
     
  ● increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;
     
  ● elimination of duty free allowances for travelers; and
     
  ● encouraging litigation against tobacco companies.

 

If vaporizers and/or electronic cigarettes are subject to one or more significant regulatory initiates enacted under the FCTC, our business, results of operations and financial condition could be materially and adversely affected.

 

We are a small public company and we face ever-increasing challenges in fulfilling the ever-rising costs of regulatory compliance under our federal, state, and other laws.

 

As a small company we have limited financial resources and we face compliance and regulatory costs that are increasing yearly. While we believe that our business strategies are sound, we cannot assure you that we will not incur such costs and have the ability to pass these increased costs onto our customers. As a result we may incur significant operating losses and negative cash flow for the foreseeable future with resulting adverse impact on our continued existence as a corporation.

 

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Our Total Current Liabilities were greater than our Total Current Assets as of June 30, 2017.

 

As of June 30, 2017, our Total Current Liabilities were $1,550,998 and our Total Current Assets were $250,000. As a result we do not have sufficient cash or other liquid current assets to meet our current financial obligations that become due over the next twelve months. Further, our Total Liabilities exceed our Total Assets. As a result we are insolvent and we are facing a clear and unmistakable risk of bankruptcy.

 

We need to raise additional external capital but we have received no commitment from any source to provide this capital and there can be no assurance that we can raise any additional capital.

 

We estimate that we may need to raise at least $300,000 to $500,000 in additional external capital or even as much as $1,500,000 to meet our current and projected financial needs. Currently we do not have any existing commitments from any reliable source to provide this capital and we cannot assure you that we will be successful in raising the additional capital that we need or, if we are successful, that we will be able to raise it on a timely basis and on terms that are reasonable in light of our present circumstances. If we are not successful in these efforts we may be facing additional serious and existential financial and legal problems and every person who holds our securities will likely lose all of their investment.

 

Our cash flow is limited and volatile with the result that we face constant financial challenges in meeting our monthly operating and other financial obligations.

 

As a small company, our cash flow is limited and we do not have a diversified customer base with diversified customers and markets compared to larger companies. As a result, our monthly cash flow is limited and more volatile than other larger companies. For this reason we are exposed to greater financial risks and persons who acquire our common stock lose all or substantially all of their investment.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosure.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

31.1 Section 302 Certification by the Registrant’s Principal Executive Officer and Principal Financial Officer*
32.1 Section 906 Certification by the Registrant’s Principal Executive Officer and Principal Financial Officer*
101.ins XBRL Instance Document
101.sch XBRL Taxonomy Schema Document
101.cal XBRL Taxonomy Calculation Document
101.def XBRL Taxonomy Linkbase Document
101.lab XBRL Taxonomy Label Linkbase Document
101.pre XBRL Taxonomy Presentation Linkbase Document

 

* Filed herein

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Vapir Enterprises, Inc.
   
Date: August 15, 2017 By: /s/ Mitra Sadeghzadeh
    Mitra Sadeghzadeh
   

Chief Executive Officer

(Principal Executive Officer and

Principal Financial Officer)

 

 

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