Notes
to Unaudited Condensed Consolidated Financial Statements
Note
1 - Organization and Operations
Vapir
Enterprises, Inc.
Vapir
Enterprises Inc. (formerly FAL Exploration Corp.) (“Vapir Enterprises” or the “Company”) was incorporated
in the State of Nevada on December 17, 2009. The Company’s principal business is focused on inventing, developing and producing
aromatherapy devices and vaporizers. The Company’s aromatherapy devices utilize heat and convection air and thereby extract
natural essences and produce fresh fragrances. Vapir, Inc. (“Vapir”) is a wholly owned subsidiary of the Company and
was incorporated in the State of California in October 2006.
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
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 September 30, 2016. 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, 2015. 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, 2016. 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.
Use
of 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 September 30, 2016, the Company has not reached
bank balances exceeding the FDIC insurance limit. To reduce its risk associated with the failure of such financial institution,
the Company evaluates at least annually the rating of the financial institution in which it holds deposits.
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
September 30, 2016 and December 31, 2015, the Company recorded $2,009 and $1,373 in the allowance for doubtful accounts, respectively.
The Company recorded bad debt expense of $1,619 and $0 during the nine months ended September 30, 2016 and 2015, respectively.
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. At September 30, 2016 and 2015, the Company recorded a reserve for slow-moving inventory of $23,162 and $0,
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 Paragraph 420-10-S99 of
the FASB Accounting Standards Codification to adjust inventory to net realizable value. These markdowns are estimates, which could
vary significantly from actual requirements if future economic conditions, customer demand or competition differ from expectations.
There
was no inventory obsolescence for the reporting period ended September 30, 2016 or 2015. There was no lower of cost or market
adjustments for the reporting period ended September 30, 2016 or 2015.
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 September 30, 2016, advance to the Company’s major supplier
amounted $107,565. Upon shipment of the purchase inventory, the Company reclass or records such advances to 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 paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company will
recognize revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned
when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped
or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is
reasonably assured.
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 FASB 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 paragraph 605-45-45-19 of the FASB Accounting Standards Codification.
While amounts charged to customers for shipping products are included in revenues, the related costs are classified in cost of
goods sold as incurred. Shipping costs included in cost of goods sold were $89,074 and $79,638 for the nine months ended September
30, 2016 and 2015, respectively.
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 follows the guidance of the Section 720-35-25 of the FASB Accounting Standards Codification (“Section 720-35-25”)
as to when advertising costs should be expensed. Pursuant to ASC Paragraph 720-35-25-1 the Company expenses the advertising costs
when the first time the advertising takes place. Advertising costs were $9,876 and $24,021 for the nine months ended September
30, 2016 and 2015, respectively.
The
amounts paid to customers for marketing expenses incurred in behalf of the Company are recorded as marketing cost and not as a
reduction of revenue in accordance with FASB ASC 605-50-45-2, Revenue Recognition—Customer Payments and Incentives. During
the nine months ended September 30, 2016, the Company recorded a total of marketing cost of approximately $71,500 as consideration
paid to promote and sell the Company’s products to customers.
Income
Taxes
The
Company discloses tax years that remain subject to examination by major tax jurisdictions pursuant to the ASC Paragraph 740-10-50-15.
The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally
for three years after they are filed. The Company's 2015, 2014 and 2013 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 section 260-10-45 of the FASB Accounting Standards
Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16 Basic EPS shall be computed by dividing income available
to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the
period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred
stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned)
from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation
of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect
the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options
or warrants.
Pursuant
to ASC Paragraphs 260-10-45-45-21 through 260-10-45-45-23 Diluted EPS shall be based on the most advantageous conversion rate
or exercise price from the standpoint of the security holder. The dilutive effect of outstanding call options and warrants (and
their equivalents) issued by the reporting entity shall be reflected in diluted EPS by application of the treasury stock method
unless the provisions of paragraphs 260-10-45-35 through 45-36 and 260-10-55-8 through 55-11 require that another method be applied.
Equivalents of options and warrants include non-vested stock granted to employees, stock purchase contracts, and partially paid
stock subscriptions (see paragraph 260-10-55-23). Anti-dilutive contracts, such as purchased put options and purchased call options,
shall be excluded from diluted EPS. Under the treasury stock method: a. Exercise of options and warrants shall be assumed at the
beginning of the period (or at time of issuance, if later) and common shares shall be assumed to be issued. b. The proceeds from
exercise shall be assumed to be used to purchase common stock at the average market price during the period. (See paragraphs 260-10-45-29
and 260-10-55-4 through 55-5.) c. The incremental shares (the difference between the number of shares assumed issued and the number
of shares assumed purchased) shall be included in the denominator of the diluted EPS computation. Pursuant to ASC Paragraphs 260-10-45-40
through 45-42 convertible securities shall be reflected in diluted EPS by application of if converted method. The convertible
preferred stock or convertible debt shall be assumed to have been converted at the beginning of the period (or at time of issuance,
if later). In applying the if-converted method, conversion shall not be assumed for purposes of computing diluted EPS if the effect
would be anti-dilutive. The Company’s contingent shares issuance arrangement, stock options or warrants are as follows:
|
|
For the Period Ended
September 30,
2016
|
|
|
For the Period Ended
September 30,
2015
|
|
Stock Options
|
|
|
1,940,100
|
|
|
|
100
|
|
Stock Warrants
|
|
|
501,243
|
|
|
|
501,263
|
|
|
|
|
|
|
|
|
|
|
Total contingent shares issuance arrangement, stock options or warrants
|
|
|
2,441,343
|
|
|
|
501,363
|
|
There
were no incremental common shares under the Treasury Stock Method for the reporting period ended September 30, 2016 or 2015.
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
February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to apply a dual approach, classifying
leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase
by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or
on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability
for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less
will be accounted for similar to existing guidance for operating leases. The new guidance will be effective for annual reporting
periods beginning after December 15, 2018, including interim periods within that reporting period and is applied retrospectively.
Early adoption is permitted. The Company is currently in the process of assessing the impact the adoption of this guidance will
have on the Company’s consolidated financial statements. Management does not believe that any recently issued, but not yet
effective accounting pronouncements, when adopted, will have a material effect on the accompanying financial statements.
Note
3 - Going Concern
The
Company has elected to adopt early application of Accounting Standards Update No. 2014-15, “Presentation of Financial Statements-Going
Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU
2014-15”). The Company’s condensed consolidated financial statements have been prepared assuming that it will continue
as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the
normal course of business. As reflected in the condensed consolidated financial statements, the Company had an accumulated deficit
of approximately $1.97 million at September 30, 2016, a net loss of approximately $1.5 million and net cash used in operating
activities of approximately $397,000 for the nine months ended September 30, 2016. These factors raise substantial doubt about
the Company’s ability to continue as a going concern.
The
Company is attempting to further implement its business plan and generate sufficient revenue; however, the Company’s cash
position may not be sufficient to support its daily operations. Management intends to raise additional funds by way of a private
or public offering. While the Company believes in the viability of its strategy to further implement its business plan and generate
sufficient revenue and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the
Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient
revenue and its ability to raise additional funds by way of a public or private offering. The 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
September 30,
2016
(Unaudited)
|
|
|
As of
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Auto
|
|
3 years
|
|
$
|
12,522
|
|
|
$
|
12,522
|
|
Furniture and fixtures
|
|
5 years
|
|
|
23,743
|
|
|
|
23,743
|
|
Tooling equipment
|
|
4 years
|
|
|
100,510
|
|
|
|
97,710
|
|
Leasehold improvements
|
|
5 years
|
|
|
35,206
|
|
|
|
35,206
|
|
Less: Accumulated depreciation
|
|
|
|
|
(101,121
|
)
|
|
|
(81,513
|
)
|
|
|
|
|
$
|
70,860
|
|
|
$
|
87,668
|
|
Depreciation
expense amounted to $19,608 and $7,277 for the nine months ended September 30, 2016 and 2015, respectively.
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 September 30,
2016 and December 31, 2015, respectively.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
Note
5 - Intangible Assets
Intangible
assets consist of the following:
|
|
As of
September 30,
2016
(Unaudited)
|
|
|
As of
December 31,
2015
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
1,001,212
|
|
|
$
|
1,001,212
|
|
Trademarks
|
|
|
6,430
|
|
|
|
6,430
|
|
|
|
|
1,007,642
|
|
|
|
1,007,642
|
|
Accumulated amortization
|
|
|
(682,848
|
)
|
|
|
(632,466
|
)
|
Intangible assets, net
|
|
$
|
324,794
|
|
|
$
|
375,176
|
|
Customer
Relationships are amortized based upon the estimated percentage of annual or period projected cash flows generated by such relationships,
to the total cash flows generated over the estimated fifteen-year life of the Customer Relationships.
Legal
costs associated with serving and protecting 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 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 September 30, 2016 and December 31, 2015, respectively.
Amortization
expense was $50,382 and $50,382 for the nine months ended September 30, 2016 and 2015, respectively. Future amortization of intangible
assets is as follows:
2016 (remainder of the year)
|
|
$
|
16,794
|
|
2017
|
|
|
67,176
|
|
2018
|
|
|
67,176
|
|
2019
|
|
|
67,176
|
|
2020 and thereafter
|
|
|
106,472
|
|
Total
|
|
$
|
324,794
|
|
Note
6 - Loan and Notes Payable
Loan
payable
|
|
As of
September 30,
2016
(Unaudited)
|
|
|
As of
December 31,
2015
|
|
Business loan obtained in May 2011 from Bank of the West with a credit line up to $200,000 and secured by all assets of the Company. This loan bears interest at 4.75% per annum and it is due on demand.
|
|
$
|
197,000
|
|
|
$
|
197,000
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
As of
September 30,
2016
(Unaudited)
|
|
|
As of
December 31,
2015
|
|
|
|
|
|
|
|
|
Promissory note of $100,000 bearing interest at 4.75%, issued to Bank of the West on May 10, 2011 payable over 60 consecutive monthly installments with monthly principal payment of $1,650 and interest starting in June 2012. Amounts outstanding under this loan and note are personally guaranteed by the CEO of the Company.
|
|
$
|
10,200
|
|
|
$
|
25,050
|
|
Unsecured Promissory note of $50,000 bearing interest of 5.28%, issued to Bank of the West in February 2016 payable over 36 consecutive monthly installments of $1,506 starting in March 2016
|
|
|
40,873
|
|
|
|
-
|
|
Less : Current maturities
|
|
|
(20,243
|
)
|
|
|
(19,800
|
)
|
Notes payable, net of current maturities
|
|
$
|
30,830
|
|
|
$
|
5,250
|
|
Vapir
Enterprises, Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
Note
6 - Loan and Notes Payable (continued)
Future
minimum principal payments under the notes are as follows:
For Fiscal Year:
|
|
|
|
|
|
|
|
2016 (remainder of the year)
|
|
$
|
8,924
|
|
2017
|
|
|
21,721
|
|
2018
|
|
|
15,907
|
|
2019
|
|
|
4,521
|
|
Total remaining payments
|
|
$
|
51,073
|
|
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.
Between
January 2016 and September 2016, the Company’s CEO provided advances to the Company for working capital purposes of $400,000
and the Company repaid $25,000 of these advances. At September 30, 2016 and December 31, 2015, these advances amounted to $762,675
and $370,614, respectively. Included in the advances are accrued interest due to the Company’s CEO totaling $18,175 and
$7,114, at September 30, 2016 and December 31, 2015 respectively.
Note
8 - Convertible Notes Payable
On
April 3, 2015, the Company closed a financing transaction by entering into a Securities Purchase Agreement dated April 3, 2015
(the “Securities Purchase Agreement”) with certain accredited investors (the “Purchasers”) for an aggregate
subscription amount of $500,000 (the “Purchase Price”). Pursuant to the Securities Purchase Agreement, the Company
issued a 6% Convertible Debenture (the “Debenture”) and warrants to acquire 500,000 shares of the Company's common
stock at an exercise price of $0.60 per share (the “Warrants”).
The
total principal amount of the Debentures is $500,000. The Debenture accrues interest at 6% per annum and the Debenture matured
on October 3, 2016 and is convertible any time after its issuance date. The Purchaser has the right to convert the Debenture into
shares of the Company’s common stock at $0.50 per share. The conversion price, however, is subject to full ratchet anti-dilution
in the event that the Company issues any securities at a per share price lower than the conversion price then in effect. The Company
paid financing costs of $22,500 in connection with this Debenture, which was initially recorded as prepaid financing cost and
is being amortized over the term of the Debenture.
The
Warrants issued in this transaction are immediately exercisable at an exercise price of $0.60 per share, subject to applicable
adjustments, including full ratchet anti-dilution in the event that the Company issues 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.
The
Company is currently in negotiations with the note holders to convert these notes payable into common stock. The Company has not
received any default notice from the note holders.
Convertible
notes payable consisted of the following:
|
|
As
of
September 30,
2016
(Unaudited)
|
|
|
As
of
December 31,
2015
|
|
6% Convertible promissory notes
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Initial Discount
|
|
|
(500,000
|
)
|
|
|
(500,000
|
)
|
Accumulated amortization of discount
|
|
|
496,358
|
|
|
|
247,724
|
|
Remaining discount
|
|
|
(3,642
|
)
|
|
|
(252,276
|
)
|
Convertible notes payable, net
|
|
$
|
496,358
|
|
|
$
|
247,724
|
|
Vapir
Enterprises, Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
Note
8 - Convertible Notes Payable (continued)
For
the nine months ended September 30, 2016 and 2015 the Company recognized $248,634 and $163,935, respectively of amortization of
debt discount. For the nine months ended September 30, 2016 and 2015 the Company recognized $11,189 and $7,377, respectively of
amortization of deferred financing cost. The amortization of debt discount and deferred financing cost were included in interest
expense. As of September 30, 2016 and December 31, 2015, accrued interest related to this Debenture amounted to $44,977 and $22,456,
respectively.
Note
9 - Derivative Liabilities
Since
the terms of the Debentures and Warrants in the April 2015 closing include a down-round provision under which the conversion price
and exercise price could be affected by future equity offerings undertaken by the Company under the provisions of FASB ASC Topic
No. 815-40, “Derivatives and Hedging - Contracts in an Entity’s Own Stock”, the embedded conversion feature
and the warrants were accounted for as derivative liabilities at the date of issuance and adjusted to fair value through earnings
at each reporting date. In accordance with ASC 815, the Company has bifurcated the conversion feature of the convertible Debentures,
along with the free-standing warrant derivative instruments and recorded derivative liabilities on their issuance date. The Company
uses the Simple Binomial Lattice model to value the derivative liabilities. The Debentures were all discounted in full based on
the valuations and the Company recognized an additional derivative expense of $188,378 upon initial recording of the derivative
liabilities. The total debt discount of $500,000 consisted of initial valuation of the derivatives of $250,407 and the valuation
of the warrants of $249,593 to be amortized over the terms of the note. These derivative liabilities are then revalued on each
reporting date. The gain resulting from the decrease in fair value of these convertible instruments was $75,670 and $456,083 for
the nine months ended September 30, 2016 and 2015, respectively. At September 30, 2016, the Company recorded a warrant derivative
liability of $78,270 and note derivative liability of $48,713.
The
following table presents the derivative financial instruments, measured and recorded at fair value on the Company’s consolidated
balance sheets on a recurring basis, and their level within the fair value hierarchy as of September 30, 2016:
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability - Embedded conversion
|
|
$
|
48,713
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
48,713
|
|
Derivative liabilities - Tainted Warrants
|
|
|
78,270
|
|
|
|
-
|
|
|
|
-
|
|
|
|
78,270
|
|
|
|
$
|
126,983
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
126,983
|
|
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 September 30, 2016:
|
|
As
of
September 30,
2016
|
|
Stock price
|
|
$
|
0.16
|
|
Weighted average strike price
|
|
$
|
0.50
|
|
Remaining contractual term (years)
|
|
|
0.25 to 3.50 years
|
|
Volatility
|
|
|
300% to 303
|
%
|
Risk-free rate
|
|
|
0.29% to 0.88
|
%
|
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 nine months ended
September 30,
2016
|
|
Beginning balance
|
|
$
|
202,653
|
|
Change in fair value of derivative liabilities
|
|
|
(75,670
|
)
|
Ending balance
|
|
$
|
126,983
|
|
Vapir
Enterprises, Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
Note
10 - Commitments and Contingencies
Operating
lease
In
June 2014, a lease agreement was signed for an office and warehousing space consisting of approximately 5,000 square feet located
in San Jose, California with a term commencing in June 2014 and expiring in October 2015. In August 2015, the Company entered
into an amendment agreement to extend the term of the lease which will expire on December 31, 2018. Pursuant to the amendment
agreement, the lease requires the Company to pay a monthly base rent of $5,050 plus a pro rata share of operating expenses beginning
November 1, 2015. The base rent is subject to an annual increase beginning in November 2016 as defined in the amended lease agreement.
This lease agreement is personally guaranteed by the President of the Company.
In
September 2016, the Company entered into a sublease agreement with an unrelated party (“Sub Lessee”) to sublease the
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 is subject to an annual increase beginning in November 2016 as defined in the amended
lease agreement. The Company collected rental income of $6,300 from sub lessee and was recorded to rent expense during the nine
months ended September 30, 2016.
In
September 2016, a lease agreement was signed for an office and warehousing space consisting of approximately 1,750 square feet
located in Santa Clara, California with a term commencing in September 2016 and expiring in September 2017. Pursuant to this lease
agreement, the lease requires the Company to pay a monthly base rent of $1,750.
Future
minimum rental payments required under this operating lease are as follows:
Fiscal Year ending December 31:
|
|
|
|
|
|
|
|
2016 (remainder of the year)
|
|
$
|
35,578
|
|
2017
|
|
|
62,721
|
|
2018
|
|
|
64,236
|
|
|
|
|
|
|
Total
|
|
$
|
162,535
|
|
Rent
expense was $51,985 and $43,455 for the nine months ended September 30, 2016 and 2015, respectively.
Litigation
From
time to time, the Company is involved in litigation matters relating to claims arising from the ordinary course of business. While
the results of such claims and legal actions cannot be predicted with certainty, the Company’s management does not believe
that there are claims or actions, pending or threatened against the Company, the ultimate disposition of which would have a material
adverse effect on the Company’s business, results of operations, financial condition or cash flows.
Note
11 - Stockholders’ Deficit
Shares
Authorized
The
authorized capital of the Company consists of 100,000,000 shares of common stock, par value $0.001 per share and 20,000,000 shares
of preferred stock, par value $0.001 per share.
Common
Stock
On
January 7, 2016, the Company entered into a seven month consulting agreement for strategic consulting and business advisory services.
Pursuant to the consulting agreement, the Company issued 500,000 shares of the Company’s common stock. The Company revalued
these common shares at the fair value of $60,000 or $0.12 per common share based on the quoted trading price at the end of the
reporting period, September 30, 2016. In connection with the issuance of these common shares, the Company recorded stock based
compensation of $60,000 for the nine months ended September 30, 2016.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
Note
11 - Stockholders’ Deficit (continued)
On
January 12, 2016, the Company issued an aggregate of 200,000 shares of the Company’s common stock to two board of directors
of the Company. These shares vested immediately on the date of issuance. The Company valued these common shares at the fair value
of $70,000 or $0.35 per common share based on the quoted trading price on the date of grant. In connection with the issuance of
these common shares, the Company recorded stock based compensation of $70,000 for the nine months ended September 30, 2016.
On
January 12, 2016, the Company issued 100,000 shares of the Company’s common stock to a consultant and such consultant will
also receive $5,600 per month in connection with a consulting agreement. These shares vested immediately on the date of issuance.
The Company valued these common shares at the fair value of $35,000 or $0.35 per common share based on the quoted trading price
on the date of grant. In connection with the issuance of these common shares, the Company recorded stock based compensation of
$35,000 for the nine months ended September 30, 2016.
On
January 12, 2016, the Company issued 500,000 shares of the Company’s common stock to a consultant. These shares vested immediately
on the date of issuance. The Company valued these common shares at the fair value of $175,000 or $0.35 per common share based
on the quoted trading price on the date of grant. In connection with the issuance of these common shares, the Company recorded
stock based compensation of $175,000 for the nine months ended September 30, 2016.
Warrants
Stock
warrant activities for the nine months ended September 30, 2016 are summarized as follows:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Aggregate Intrinsic
Value
|
|
Balance at December 31, 2015
|
|
|
501,263
|
|
|
$
|
3.74
|
|
|
|
4.25
|
|
|
$
|
-
|
|
Forfeited
|
|
|
(20
|
)
|
|
|
250.00
|
|
|
|
-
|
|
|
|
-
|
|
Balance at September 30, 2016
|
|
|
501,243
|
|
|
|
3.50
|
|
|
|
3.50
|
|
|
|
-
|
|
Warrants exercisable at September 30, 2016
|
|
|
501,243
|
|
|
$
|
3.50
|
|
|
|
3.50
|
|
|
$
|
-
|
|
Options
Stock
option activities for the nine months ended September 30, 2016 are summarized as follows:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Aggregate Intrinsic
Value
|
|
Balance at December 31, 2015
|
|
|
100
|
|
|
$
|
700
|
|
|
|
1.17
|
|
|
$
|
-
|
|
Granted
|
|
|
2,480,000
|
|
|
|
0.10
|
|
|
|
5.00
|
|
|
|
-
|
|
Forfeited
|
|
|
(540,000
|
)
|
|
|
0.10
|
|
|
|
5.00
|
|
|
|
-
|
|
Balance at September 30, 2016
|
|
|
1,940,100
|
|
|
|
0.14
|
|
|
|
4.29
|
|
|
|
114,460
|
|
Options exercisable at September 30, 2016
|
|
|
100
|
|
|
$
|
700
|
|
|
|
0.42
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the period
|
|
|
|
|
|
|
|
|
|
$
|
0.35
|
|
|
|
|
|
On
January 12, 2016, the Company granted an aggregate of 2,080,000 five year options to purchase shares of common stock to the CEO
of the Company and six employees of the Company. The options granted vest one third at the end of each of the first three years
from the date of issuance and are exercisable at $0.10 per share. The 2,080,000 options were valued on the grant date at approximately
$0.35 per option or a total of $728,000 using a Black-Scholes option pricing model with the following assumptions: stock price
of $0.35 per share (based on the quoted trading prices on the date of grant), volatility of 286% (based from volatilities of similar
companies), expected term of 5 years, and a risk free interest rate of 1.55%. In March 2016, 40,000 of these unvested options
were forfeited due to termination of an employee.
Vapir
Enterprises, Inc. and Subsidiary
Notes
to Unaudited Condensed Consolidated Financial Statements
Note
11 - Stockholders’ Deficit (continued)
On
January 12, 2016, the Company granted 400,000 five year options to purchase shares of common stock to a consultant of the Company.
The options granted vest one third at the end of each of the first three years from the date of issuance and are exercisable at
$0.10 per share. The 400,000 options were revalued on September 30, 2016 at approximately $0.12 per option or a total of $48,000
using a Black-Scholes option pricing model with the following assumptions: stock price of $0.12 per share (based on the quoted
trading prices), volatility of 331% (based from volatilities of similar companies), expected term of 5 years, and a risk free
interest rate of 1.01%.
During
the nine months ended September 30, 2016, the Company recorded stock-based compensation expense in connection with stock option
awards of $333,322. As of September 30, 2016, there were total unrecognized compensation costs related to non-vested
share-based compensation arrangements of $385,081. At September 30, 2016 there was approximately $114,460 of intrinsic value for
the stock options outstanding in the above table.
Note
12 - Concentration of Credit Risk
Concentration
of Revenue and Supplier
During
the nine months ended September 30, 2016 sales to two customers represented approximately 30% of the Company’s net sales.
During the nine months ended September 30, 2015 sales to one customer represented approximately 43% of the Company’s net
sales.
As
of September 30, 2016 and December 31, 2015, accounts receivable from one customer represented approximately 87% and two customers
represented 92% of the accounts receivable, respectively.
The
Company purchased inventories and products from one vendor totaling approximately $454,000 (99% of the purchases) and $755,000
(99% of the purchases) during the nine months ended September 30, 2016 and 2015, respectively.
Note
13 - Subsequent Events
The
Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were
issued to determine if they must be reported. The Management of the Company determined that there were no reportable subsequent
event(s) to be disclosed.