Notes
to the 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 devices utilize heat and convection air and thereby extract natural essences
and produce fresh vapor. 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
The
Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness
of accounting policies and their application. Critical accounting policies and practices are those that are both most important
to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective,
or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted
accounting principles.
Basis
of Presentation
The
Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”).
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 and disclosure
of contingent assets and liabilities at the date(s) of the financial statements and the reported amounts of revenues and expenses
during the reporting period(s).
Critical
accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact
of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates
and assumptions affecting the financial statements were:
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(i)
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Assumption
as a going concern
: Management assumes that the Company will continue as a going concern, which contemplates continuity
of operations, realization of assets, and liquidation of liabilities in the normal course of business.
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(ii)
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Allowance
for doubtful accounts
: Management’s estimate of the allowance for doubtful accounts is based on historical sales,
historical loss levels, and an analysis of the collectability of individual accounts; and general economic conditions that
may affect a client’s ability to pay. The Company evaluated the key factors and assumptions used to develop the allowance
in determining that it is reasonable in relation to the financial statements taken as a whole.
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Note
2 – Significant and Critical Accounting Policies and Practices (continued)
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(iii)
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Inventory
obsolescence and markdowns
: The Company’s estimate of potentially excess and slow-moving inventories is based on
evaluation of inventory levels and aging, review of inventory turns and historical sales experiences. The Company’s
estimate of reserve for inventory shrinkage is based on the historical results of physical inventory cycle counts.
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(iv)
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Fair
value of long-lived assets
: Fair value is generally determined using the asset’s expected future discounted cash
flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined
remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated
over the newly determined remaining estimated useful lives. The Company considers the following to be some examples of important
indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected
historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s
overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business
strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant
decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates
acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.
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(v)
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Valuation
allowance for deferred tax assets
: Management assumes that the realization of the Company’s net deferred tax assets
resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be
offset against future taxable income was considered more likely than not and accordingly, the potential tax benefits of the
net loss carry-forwards are recorded as a deferred tax benefit. Management made this assumption based on its ability to raise
additional funds to support its daily operations by way of a public or private offering, among other factors.
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(vi)
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Estimates
and assumptions used in valuation of derivative liabilities and equity instruments:
Management estimates expected term
of share options and similar instruments, expected volatility of the Company’s common shares and the method used to
estimate it, expected annual rate of quarterly dividends, and risk free rate(s) to value derivative liabilities, share options
and similar instruments.
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(vii)
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Intangible
Assets:
Definite-Lived intangible assets primarily consist of Customer List and Patents. Impairment losses are only recorded
if the asset’s carrying amount is not recoverable through its discounted future cash flows. The Company measures the
impairment loss based on the difference in carrying amount and the estimated fair value.
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(viii)
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Stock
Based Compensation:
The Company accounts for stock-based compensation by measuring and recognizing as compensation expense
the fair value of all share-based payment awards made for stock options and warrants. The determination of fair value involves
a number of significant estimates. We use the Black Scholes option pricing model to estimate the value of stock options which
requires a number of assumptions to determine the model inputs including volatility and risk-free rates.
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These
significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached
to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the
financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Management
regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes
in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those
estimates are adjusted accordingly.
Actual
results could differ from those estimates.
Principles
of Consolidation
The
Company applies the guidance of Topic 810
“Consolidation”
of the FASB Accounting Standards Codification (“ASC”)
to determine whether and how to consolidate another entity.
Note
2 – Significant and Critical Accounting Policies and Practices (continued)
The
consolidated financial statements include all accounts of Vapir Enterprises, Inc. and Vapir, Inc.
All
inter-company balances and transactions have been eliminated.
Fair
Value of Financial Instruments
The
Company follows the FASB Accounting Standards Codification 820 (“ASC 820 – Fair Value Measurements and Disclosures”)
to measure the fair value of its financial instruments and ASC 825 Codification for disclosures about fair value of its financial
instruments. ASC 820 establishes a framework for measuring fair value in accounting principles generally accepted in the United
States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability
in fair value measurements and related disclosures, ASC 820 establishes a fair value hierarchy which prioritizes the inputs to
valuation techniques used to measure fair value into three (3) broad levels. The three (3) levels of fair value hierarchy defined
by ASC 820 are described below:
Level
1
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Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
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Level
2
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Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
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Level
3
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Pricing
inputs that are generally observable inputs and not corroborated by market data.
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Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
Fair
Value of Financial Assets and Liabilities Measured on a Recurring Basis
Level
3 Financial Liabilities - Derivative Warrant Liabilities and Derivative Liability on Conversion Feature
The
Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative
warrant liability and derivative liability on the conversion feature at every reporting period and recognizes gains or losses
in the consolidated statements of operations that are attributable to the change in the fair value of the derivative liabilities.
The
following table presents the derivative financial instruments, measured and recorded at fair value on the Company’s consolidated
balance sheets on a recurring basis, and their level within the fair value hierarchy as of December 31, 2016, and 2015:
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Amount
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|
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Level
1
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Level
2
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Level
3
|
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Derivative
liability - Embedded conversion
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$
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78,471
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|
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$
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-
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|
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$
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-
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|
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$
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78,471
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Derivative
liabilities - Tainted Warrants
|
|
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121,182
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|
|
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-
|
|
|
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-
|
|
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121,182
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December 31, 2015
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$
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202,653
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|
|
|
-
|
|
|
|
-
|
|
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$
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202,653
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Derivative liability
- Embedded conversion
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$
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261,318
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|
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$
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-
|
|
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$
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-
|
|
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$
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261,318
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Derivative
liabilities - Tainted Warrants
|
|
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44,595
|
|
|
|
-
|
|
|
|
-
|
|
|
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44,595
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December 31, 2016
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|
$
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305,913
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|
|
$
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-
|
|
|
$
|
-
|
|
|
$
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305,913
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Note
2 – Significant and Critical Accounting Policies and Practices (continued)
Carrying
Value, Recoverability and Impairment of Long-Lived Assets
The
Company has adopted ASC 360 – Property, Plant, and Equipment for evaluation of its long-lived assets. Pursuant to ASC 360
an impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and
exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). That assessment shall
be based on the carrying amount of the asset (asset group) at the date it is tested for recoverability. An impairment loss shall
be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value. Pursuant to
ASC 360 if an impairment loss is recognized, the adjusted carrying amount of a long-lived asset shall be its new cost basis. For
a depreciable long-lived asset, the new cost basis shall be depreciated (amortized) over the remaining useful life of that asset.
Restoration of a previously recognized impairment loss is prohibited.
Pursuant
to ASC 360-10-45-4 and 360-10-45-5 an impairment loss recognized for a long-lived asset (asset group) to be held and used shall
be included in income from continuing operations before income taxes in the income statement of a business entity. If a subtotal
such as income from operations is presented, it shall include the amount of that loss. A gain or loss recognized on the sale of
a long-lived asset (disposal group) that is not a component of an entity shall be included in income from continuing operations
before income taxes in the income statement of a business entity. If a subtotal such as income from operations is presented, it
shall include the amounts of those gains or losses. The Company did not consider it necessary to record any impairment charges
during the years ended December 31, 2016 and 2015.
Cash
equivalents
The
Company considers all highly liquid debt instruments and other short-term investments with maturities of three months or less,
when purchased, to be cash equivalents. The Company maintains cash and cash equivalent balances at one financial institution that
is insured by the Federal Deposit Insurance Corporation. The Company’s account at this institution is insured by the Federal
Deposit Insurance Corporation (“FDIC”) up to $250,000.
As
of December 31, 2016, the Company has not reached bank balances exceeding the FDIC insurance limit. To reduce its risk associated
with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution
in which it holds deposits.
Accounts
receivable and allowance for doubtful accounts
Pursuant
to ASC 310 – Receivables, trade receivables that management has the intent and ability to hold for the foreseeable future
shall be reported in the balance sheet at outstanding principal adjusted for any charge-offs and the allowance for doubtful accounts.
The Company follows ASC 310-10-35-7 through 310-10-35-10 to estimate the allowance for doubtful accounts. Pursuant to ASC 310-10-35-9
Losses from uncollectible receivables shall be accrued when both of the following conditions are met: (a) Information available
before the financial statements are issued or are available to be issued (as discussed in ASC 855-10-25) indicates that it is
probable that an asset has been impaired at the date of the financial statements, and (b) The amount of the loss can be reasonably
estimated. Those conditions may be considered in relation to individual receivables or in relation to groups of similar types
of receivables. If the conditions are met, accrual shall be made even though the particular receivables that are uncollectible
may not be identifiable. The Company reviews individually each trade receivable for collectability and performs on-going credit
evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness,
as determined by the review of their current credit information; and determines the allowance for doubtful accounts based on historical
write-off experience, customer specific facts and general economic conditions that may affect a client’s ability to pay.
Bad debt expense is included in general and administrative expenses.
Pursuant
to ASC 310-10-35-41 Credit losses for trade receivables (uncollectible trade receivables), which may be for all or part of a particular
trade receivable, shall be deducted from the allowance. The related trade receivable balance shall be charged off in the period
in which the trade receivables are deemed uncollectible. Recoveries of trade receivables previously charged off shall be recorded
when received. The Company charges off its trade account receivables against the allowance after all means of collection have
been exhausted and the potential for recovery is considered remote.
As
of December 31, 2016, and 2015, the Company recorded $2,009 and $1,373 in allowance for doubtful accounts, respectively. The Company
recorded bad debt expense of $1,619 and $1,774 during the years ended December 31, 2016 and 2015, respectively.
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.
Inventory
Obsolescence and Markdowns
The
Company evaluates its current level of inventory considering historical sales and other factors and, based on this evaluation,
classify inventory markdowns in the income statement as a component of cost of goods sold pursuant to ASC 420-10-S99 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.
During
2016, the Company wrote down slow moving inventory in the amount of $39,734. The Company did not record slow moving inventory
during the year ended December 31, 2015. There was no lower of cost or market adjustments for the years ended December 31, 2016
or 2015.
Advances
to suppliers
Advances
to suppliers represent the cash paid in advance for the purchase of inventory. The advances to suppliers are interest free and
unsecured.
Property
and Equipment
Property
and equipment is recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are
charged to operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective
estimated residual values) over the estimated useful lives of the respective assets as follows:
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Estimated
Useful Life (Years)
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Auto
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3
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Furniture and fixture
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5
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Leasehold improvement
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*
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(*)
Amortized on a straight-line basis over the term of the lease or the estimated useful lives, whichever is shorter.
Upon
sale or retirement, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected
in the statements of operations.
Leases
Lease
agreements are evaluated to determine whether they are capital leases or operating leases in accordance with ASC 840-10-25-1.
Pursuant to ASC 840-10-25-1 a lessee and a lessor shall consider whether a lease meets any of the following four criteria as part
of classifying the lease at its inception under the guidance in the Lessees Subsection of this Section (for the lessee) and the
Lessors Subsection of this Section (for the lessor): a. Transfer of ownership. The lease transfers ownership of the property to
the lessee by the end of the lease term. This criterion is met in situations in which the lease agreement provides for the transfer
of title at or shortly after the end of the lease term in exchange for the payment of a nominal fee, for example, the minimum
required by statutory regulation to transfer title. b. Bargain purchase option. The lease contains a bargain purchase option.
c. Lease term. The lease term is equal to 75 percent or more of the estimated economic life of the leased property. d. Minimum
lease payments. The Company did not engage in any other transaction that is deemed to be an operating or a capital lease.
Note
2 – Significant and Critical Accounting Policies and Practices (continued)
The
present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing
executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds
90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment
tax credit retained by the lessor and expected to be realized by the lessor. In accordance with paragraphs 840-10-25-29 and 840-10-25-30,
if at its inception a lease meets any of the four lease classification criteria in Paragraph 840-10-25-1, the lease shall be classified
by the lessee as a capital lease; and if none of the four criteria in Paragraph 840-10-25-1 are met, the lease shall be classified
by the lessee as an operating lease. Pursuant to Paragraph 840-10-25-31 a lessee shall compute the present value of the minimum
lease payments using the lessee's incremental borrowing rate unless both of the following conditions are met, in which circumstance
the lessee shall use the implicit rate: a. It is practicable for the lessee to learn the implicit rate computed by the lessor.
b. The implicit rate computed by the lessor is less than the lessee's incremental borrowing rate. Capital lease assets are depreciated
on a straight line method, over the capital lease assets estimated useful lives consistent with the Company’s normal depreciation
policy for tangible fixed assets. Interest charges are expensed over the period of the lease in relation to the carrying value
of the capital lease obligation.
Operating
leases primarily relate to the Company’s leases of office spaces. When the terms of an operating lease include tenant improvement
allowances, periods of free rent, rent concessions, and/or rent escalation amounts, the Company establishes a deferred rent liability
for the difference between the scheduled rent payment and the straight-line rent expense recognized, which is amortized over the
underlying lease term on a straight-line basis as a reduction of rent expense.
Intangible
assets
The
Company records the purchase of intangible assets not purchased in a business combination in accordance with ASC 350-30-65 “Goodwill
and Other Intangible Assets” and records intangible assets acquired in a business combination or pushed-down pursuant to
acquisition by its parent in accordance with ASC 805 “Business Combinations”.
Customer
Relationships are based upon the estimated percentage of annual or period projected cash flows generated by such relationships,
to the total cash flows generated over the estimated life of the customer relationships.
In
accordance with ASC 350-30-65, “Intangibles - Goodwill and Others”, the Company assesses the impairment of identifiable
intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company
considers to be important which could trigger an impairment review include the following:
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1.
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Significant
underperformance relative to expected historical or projected future operating results;
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2.
|
Significant
changes in the manner of use of the acquired assets or the strategy for the overall business; and
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3.
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Significant
negative industry or economic trends.
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When
the Company determines that the carrying value of intangibles may not be recoverable based upon the existence of one or more of
the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows,
the Company records an impairment charge. The Company measures any impairment based on a projected discounted cash flow method
using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Significant
management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows. The Company
evaluates the recoverability of intangible assets annually or whenever events or changes in circumstances indicate that an intangible
asset’s carrying amount may not be recoverable.
Derivative
Liability
The
Company evaluates its convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-10-05-4 and ASC
815-40-25 of the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the
embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. In the event that
the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations and
comprehensive income (loss) as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument,
the instrument is marked to fair value at the date of conversion, exercise or cancellation and then that the related fair value
is reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also
other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative instrument.
Note
2 – Significant and Critical Accounting Policies and Practices (continued)
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject
to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative
instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement
of the derivative instrument is expected within 12 months of the balance sheet date.
The
Company adopted ASC 815-40-15 to determine whether an instrument (or an embedded feature) is indexed to the Company’s own
stock. ASC 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument
(or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement
provisions.
The
Company marks to market the fair value of the embedded derivative convertible notes and derivative warrants at each balance sheet
date and records the change in the fair value of the embedded derivative convertible notes and derivative warrants as other income
or expense in the consolidated statements of operations.
The
Company utilizes the Black Scholes model that values the liability of the derivative convertible notes and derivative warrants.
The Black-Scholes option valuation model requires the use of subjective assumptions. Changes in these assumptions can materially
affect the fair value of the options. The Company may elect to use different assumptions under the Black-Scholes option pricing
model in the future if there is a difference between the assumptions used in determining stock-based compensation cost and the
actual factors that become known over time.
Customer
Deposits
Customer
deposits consisted of prepayments from customers to the Company. The Company will recognize the prepayments as revenue upon delivery
of the products, in compliance with its revenue recognition policy.
Related
Parties
The
Company follows ASC 850-10 for the identification of related parties and disclosure of related party transactions. Pursuant to
ASC 850-10-20 the Related parties include a. affiliates of the Company (“Affiliate” means, with respect to any specified
Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under
common control with such Person, as such terms are used in and construed under Rule 405 under the Securities Act); b. entities
for which investments in their equity securities would be required, absent the election of the fair value option under the Fair
Value Option Subsection of ASC 825–10–15, to be accounted for by the equity method by the investing entity; c. trusts
for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management;
d. principal owners of the Company and members of their immediate families; e. management of the Company and members of their
immediate families; f. other parties with which the Company may deal if one party controls or can significantly influence the
management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing
its own separate interests; and g. other parties that can significantly influence the management or operating policies of the
transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other
to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
Pursuant
to ASC 850-10-50-1 and 50-5 financial statements shall include disclosures of material related party transactions, other than
compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure
of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those
statements. The disclosures shall include: a. the nature of the relationship(s) involved; b. a description of the transactions,
including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements
are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial
statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects
of any change in the method of establishing the terms from that used in the preceding period; and d. amount due from or to related
parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Note
2 – Significant and Critical Accounting Policies and Practices (continued)
Commitment
and Contingencies
The
Company follows ASC 450-20 to report accounting for contingencies. Certain conditions may exist as of the date the consolidated
financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future
events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise
of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims
that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims
as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the
assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable
and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would
be disclosed.
Revenue
recognition
The
Company follows ASC 605-10-S99-1 “Revenue Recognition” 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 ASC 605-50-45-2, Revenue Recognition—Customer Payments and Incentives. During the
year ended December 31, 2016, the Company recorded total marketing cost of $148,629 as consideration paid to promote and sell
the company’s products to customers of which $60,000 relates to incentives provided to customers.
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 605-45-45-19. 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 and Handling fees
for the years ended December 31, 2016 and 2015 totaled approximately $43,000 and $52,000, respectively.
Advertising
Costs
The
Company follows the guidance of the ASC 720-35-25 “Other Expenses” as to when advertising costs should be expensed.
Pursuant to ASC Paragraph 720-35-25-1 the costs of advertising shall be expensed either as incurred or the first time the advertising
takes place. The accounting policy the Company selected from these two alternatives was to expense the advertising costs when
the first time the advertising takes place. Deferring the costs of advertising until the advertising takes place assumes that
the costs have been incurred for advertising that will occur, such as the first public showing of a television commercial for
its intended purpose and the first appearance of a magazine advertisement for its intended purpose. Such costs shall be expensed
immediately if such advertising is not expected to occur.
Pursuant
to ASC 720-35-25-5 costs of communicating advertising are not incurred until the item or service has been received and shall not
be reported as expenses before the item or service has been received, such as the costs of television airtime which shall not
be reported as advertising expense before the airtime is used. Once it is used, the costs shall be expensed, unless the airtime
was used for direct-response advertising activities that meet the criteria for capitalization under ASC 340-20-25-4.
Advertising
costs were $9,876 and $29,224 for the period ended December 31, 2016 and 2015, respectively and has been included in selling expenses
as reflected in the accompanying consolidated statements of operations.
Note
2 – Significant and Critical Accounting Policies and Practices (continued)
Equity
Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
The
Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under ASC 505-50
“Equity”.
Pursuant
to ASC 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into
an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments), then,
because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date
has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is
entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized
as contra-equity under the requirements of ASC 505-50-45-1) depends on the specific facts and circumstances. Pursuant to ASC 505-50-45-1,
a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable
equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific
performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity
by the grantor of the equity instruments. The transferability (or lack thereof) of the equity instruments shall not affect the
balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other
than employees in exchange for goods or services.
Pursuant
to ASC 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable
by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee
achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and
in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of
paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a stock
option that the counterparty has the right to exercise expires unexercised.
Pursuant
to ASC 505-50-30-2 and 505-50-30-11 share-based payment transactions with nonemployees shall be measured at the fair value of
the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The issuer
shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions
as of the earlier of the following dates, referred to as the measurement date: (a) The date at which a commitment for performance
by the counterparty to earn the equity instruments is reached (a performance commitment); or (b) The date at which the counterparty's
performance is complete. If the Company’s common shares are traded in one of the national exchanges the grant-date share
price of the Company’s common stock will be used to measure the fair value of the common shares issued, however, if the
Company’s common shares are thinly traded the use of share prices established in the Company’s most recent private
placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the
use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked
quotes and lack of consistent trading in the market.
Pursuant
to ASC 718-10-55-21 if an observable market price is not available for a share option or similar instrument with the same or similar
terms and conditions, an entity shall estimate the fair value of that instrument using a valuation technique or model that meets
the requirements in ASC 718-10-55-11 and takes into account, at a minimum, all of the following factors:
a.
|
The
exercise price of the option.
|
b.
|
The
expected term of the option, taking into account both the contractual term of the option and the effects of employees’
expected exercise and post-vesting employment termination behavior: Pursuant to ASC 718-10-50-2(f)(2)(i), the expected term
of share options and similar instruments represents the period of time the options and similar instruments are expected to
be outstanding taking into consideration of the contractual term of the instruments and holder’s expected exercise behavior
into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate holder’s
expected exercise behavior. If the Company is a newly formed corporation or shares of the Company are thinly traded the contractual
term of the share options and similar instruments is used as the expected term of share options and similar instruments as
the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected
term.
|
|
|
c.
|
The
current price of the underlying share.
|
Note
2 – Significant and Critical Accounting Policies and Practices (continued)
d.
|
The
expected volatility of the price of the underlying share for the expected term of the option. Pursuant to ASC 718-10-55-25
“Compensation – Stock Compensation” a newly publicly traded entity might base expectations about future
volatility on the average volatilities of similar entities for an appropriate period following their going public. A nonpublic
entity might base its expected volatility on the average volatilities of otherwise similar public entities. For purposes of
identifying otherwise similar entities, an entity would likely consider characteristics such as industry, stage of life cycle,
size, and financial leverage. Because of the effects of diversification that are present in an industry sector index, the
volatility of an index should not be substituted for the average of volatilities of otherwise similar entities in a fair value
measurement. Pursuant to ASC 718-10-S99-1 if shares of a company are thinly traded the use of weekly or monthly price observations
would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations
for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent
trading in the market. The Company uses the average historical volatility of the comparable companies over the expected term
of the share options or similar instruments as its expected volatility.
|
e.
|
The
expected dividends on the underlying share for the expected term of the option. The expected dividend yield is based on the
Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term
of the share options and similar instruments.
|
f.
|
The
risk-free interest rate(s) for the expected term of the option. Pursuant to ASC 718-10-55-28 “Compensation – Stock
Compensation” a U.S. entity issuing an option on its own shares must use as the risk-free interest rates the implied
yields currently available from the U.S. Treasury zero-coupon yield curve over the contractual term of the option if the entity
is using a lattice model incorporating the option’s contractual term. If the entity is using a closed-form model, the
risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term
equal to the expected term used as the assumption in the model.
|
Pursuant
to ASC 505-50-S99-1 “Equity”, if the Company receives a right to receive future services in exchange for unvested,
forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services
are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition
at the measurement date and no entry should be recorded.
Deferred
Tax Assets and Income Tax Provision
The
Company accounts for income taxes under ASC 740-10-30 “Income Taxes”. Deferred income tax assets and liabilities are
determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced
by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the statements of operations in the period that includes the enactment date.
The
Company adopted ASC 740-10-25. ASC 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed
on a tax return should be recorded in the financial statements. Under ASC 740-10-25, the Company may recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from
such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being
realized upon ultimate settlement. ASC 740-10-25 also provides guidance on de-recognition, classification, interest and penalties
on income taxes, accounting in interim periods and requires increased disclosures.
The
estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying
consolidated balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability
of deferred tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.
Management
makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous
estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in
these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual
taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Note
2 – Significant and Critical Accounting Policies and Practices (continued)
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 260-10-45. 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 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 ASC 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 arrangements, stock options, convertible debt, or warrants which have been excluded
from the computation of diluted loss per share because their impact was anti-dilutive are as follows:
|
|
Contingent
share issuance arrangements
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Stock Option Shares
|
|
|
100
|
|
|
|
100
|
|
Warrant Shares
|
|
|
501,263
|
|
|
|
501,263
|
|
Convertible
Debt
|
|
|
5,525,385
|
|
|
|
1,000,000
|
|
Total
contingent share issuance arrangements, stock options and warrants
|
|
|
6,026,748
|
|
|
|
1,501,363
|
|
Recently
Issued Accounting Pronouncements
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.
Note
2 – Significant and Critical Accounting Policies and Practices (continued)
To
achieve that core principle, an entity should apply the following steps:
|
1.
|
Identify
the contract(s) with the customer
|
|
2.
|
Identify
the performance obligations in the contract
|
|
3.
|
Determine
the transaction price
|
|
4.
|
Allocate
the transaction price to the performance obligations in the contract
|
|
5.
|
Recognize
revenue when (or as) the entity satisfies a performance obligations
|
The
ASU also provides guidance on disclosures that should be provided to enable financial statement users to understand the nature,
amount, timing, and uncertainty of revenue recognition and cash flows arising from contracts with customers. Qualitative and quantitative
information is required about the following:
|
1.
|
Contracts
with customers
– including revenue and impairments recognized, disaggregation of revenue, and information about
contract balances and performance obligations (including the transaction price allocated to the remaining performance
obligations)
|
|
2.
|
Significant
judgments and changes in judgments
– determining the timing of satisfaction of performance obligations (over time
or at a point in time), and determining the transaction price and amounts allocated to performance obligations
|
|
|
|
|
3.
|
Assets
recognized from the costs to obtain or fulfill a contract
.
|
ASU
2014-09 is effective for periods beginning after December 15, 2016, including interim reporting periods within that reporting
period for all public entities. Early application is not permitted. The Company is reviewing existing contracts to determine the
impact to the Company’s financials. As of December 31, 2016, the Company believes the guidance will have minimal or no impact
to the Company’s financials.
In
August 2015, the FASB issued the FASB Accounting Standards Update No. 2015-14 “
Revenue from Contracts with Customers
(Topic 606)
:
Deferral of the Effective Date” (“ASU 2015-14”).
The
amendments in this Update defer the effective date of Update 2014-09 for all entities by one year. Public business entities, certain
not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods
beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted
only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting
period.
In
November 2015, the FASB issued the FASB Accounting Standards Update No. 2015-17 “
Income Taxes (Topic 740)
:
Balance
Sheet Classification of Deferred Taxes” (“ASU 2015-17”).
This update simplifies the presentation of deferred
income taxes; the amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a
classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement
of financial position.
For
public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning
after December 15, 2016, and interim periods within those annual periods.
In
January 2016, the FASB issued the FASB Accounting Standards Update No. 2016-01 “
Financial Instruments—Overall (Subtopic
825-10)
:
Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”).
This
Update makes limited amendments to the guidance in U.S. GAAP on the classification and measurement of financial instruments. The
new standard significantly revises an entity’s accounting related to (1) the classification and measurement of investments
in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value.
It also amends certain disclosure requirements associated with the fair value of financial instruments. For public business entities,
the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years.
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 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 consolidated financial statements, the Company had an accumulated deficit of approximately $2,502,000 at December
31, 2016, a net loss of approximately $1,987,000 and net cash used in operating activities of approximately $435,000 for the year
ended December 31, 2016. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The
Company is attempting to further implement its business plan and generate sufficient revenue; however, the Company’s cash
position may not be sufficient to support its daily operations. Management intends to raise additional funds by way of a private
or public offering. While the Company believes in the viability of its strategy to further implement its business plan and generate
sufficient revenue and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the
Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient
revenue and its ability to raise additional funds by way of a public or private offering.
The
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
|
|
December 31,
2016
|
|
|
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
|
|
Accumulated
depreciation
|
|
|
|
|
(107,419
|
)
|
|
|
(81,513
|
)
|
|
|
|
|
$
|
64,562
|
|
|
$
|
87,668
|
|
(i)
Depreciation Expense
Depreciation
expense amounted to $25,906 and $13,774 for the years ended December 31, 2016 and 2015, respectively.
Note
5 – Intangible Assets
Intangible
assets consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Customer
relationships
|
|
$
|
1,001,212
|
|
|
$
|
1,001,212
|
|
Trademarks
|
|
|
6,430
|
|
|
|
6,430
|
|
Intangible
assets, gross
|
|
|
1,007,642
|
|
|
|
1,007,642
|
|
Accumulated
amortization
|
|
|
(699,643
|
)
|
|
|
(632,466
|
)
|
Impairment
of intangible assets
|
|
|
(126,426
|
)
|
|
|
-
|
|
Intangible
assets, net
|
|
$
|
181,574
|
|
|
$
|
375,176
|
|
Customer
Relationships are amortized based upon the estimated percentage of annual or period projected cash flows generated by such relationships,
to the total cash flows generated over the estimated fifteen-year life of the Customer Relationships.
Legal
costs associated with serving and protecting trademark are being capitalized. The Company filed trademarks for its company logos
with an estimated useful life of fifteen years. The Company will amortize the costs of intangible assets over their estimated
useful lives on a straight-line basis. Amortization of intangible assets is included in operating expenses as reflected in the
accompanying consolidated statements of operations. The Company assesses fair market value for any impairment to the carrying
values.
Amortization
expense was $67,176 and $67,176 for the years ended December 31, 2016 and 2015, respectively.
Note
5 – Intangible Assets (continued)
Future
amortization of intangible assets is as follows:
2017
|
|
$
|
39,378
|
|
2018
|
|
|
39,378
|
|
2019
|
|
|
39,378
|
|
2020
|
|
|
39,378
|
|
2021
and thereafter
|
|
|
24,062
|
|
Total
|
|
$
|
181,574
|
|
Impairment
The
Company completed its annual impairment test of intangibles and determined that there is an impairment related to the Customer
List intangible asset. The Company believes that revenues generated in future periods as a result of the Customer List intangible
asset will decrease at an annual rate of 24%. Additionally, the gross margin in calculating the undiscounted future cash flows
decreased from 45% in prior years to 38%. As a result, the Net Present Value of future cash flows is approximately $177,000 resulting
in an excess book value and impairment charge of $126,000 for the year ended December 31, 2016. No impairment existed as of December
31, 2015 as the fair value of intangibles exceeded their carrying values.
Note
6 – Notes and Loan Payable
Loan
payable
|
|
As
of
December 31,
2016
|
|
|
As
of
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2016, 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.
|
|
|
5,250
|
|
|
|
25,050
|
|
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.
|
|
|
36,882
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Less:
Current maturities
|
|
|
(21,722
|
)
|
|
|
(19,800
|
)
|
Note
payable, net of current maturities
|
|
$
|
20,410
|
|
|
$
|
5,250
|
|
Future
minimum principal and interest payment under the note are as follows:
2017
|
|
$
|
21,722
|
|
2018
|
|
|
15,907
|
|
2019
|
|
|
4,503
|
|
Total Remaining Payments
|
|
|
42,132
|
|
Less:
Current maturities
|
|
|
(21,722
|
)
|
Note
Payable, net of current maturities
|
|
$
|
20,410
|
|
Note
7 – Related Party Transactions
Advances
from Significant Stockholder
From
time to time, our Chairman, CEO and significant stockholder of the Company advances funds to the Company for working capital purposes.
These advances are unsecured, bare an interest rate of 5%, and are due on demand.
During
the years ended December 31, 2016 and 2015, the Company’s CEO provided advances to the Company. Total advances from the
CEO as of December 31, 2016 and 2015 totaled $758,400 and $363,500, respectively. The Company had total accrued interest as a
result of these advances of $37,584 and $7,114 as of December 31, 2016 and 2015, respectively.
Note
8 – 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 Debentures is $500,000. The Debenture accrues interest at 6% per annum and the Debenture 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.
For
the years ended December 31, 2016 and 2015 the Company recognized $252,276 and $247,724, respectively of amortization of debt
discount. For the years ended December 31, 2016 and 2015 the Company recognized $11,352 and $11,148, respectively of amortization
of deferred financing cost. The amortization of debt discount and deferred financing cost were included in interest expense. As
of December 31, 2016, accrued interest related to this Debenture amounted to $52,538.
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
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.
Convertible
notes payable consisted of the following:
|
|
As
of December 31,
2016
|
|
|
As
of December 31,
2015
|
|
6%
Convertible promissory notes
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Initial Discount
|
|
|
(500,000
|
)
|
|
|
(500,000
|
)
|
Remaining
discount
|
|
|
-
|
|
|
|
252,276
|
|
Convertible
notes payable, net
|
|
$
|
(500,000
|
)
|
|
$
|
(247,724
|
)
|
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 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 loss resulting from the change
in fair value of these convertible instruments was $103,260 for the year ended December 31, 2016 compared to a gain of $485,725
for the year ended December 31, 2015. At December 31, 2016, the Company recorded a warrant derivative liability of $44,595 and
note derivative liability of $261,318.
Note
9 – Derivative Liabilities (continued)
The
following table summarizes the values of certain assumptions used by the Company’s Black-Scholes model to estimate the fair
value of the derivative liabilities as of December 31, 2016:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Stock
price
|
|
$
|
0.09
|
|
|
$
|
0.25
|
|
Weighted
average strike price
|
|
$
|
0.1
|
|
|
$
|
0.50
|
|
Remaining
contractual term (years)
|
|
|
0.0
to 3.25 years
|
|
|
|
0.75
to 4.25 years
|
|
Volatility
|
|
|
291%
to 302
|
%
|
|
|
157%
to 293
|
%
|
Risk-free
rate
|
|
|
0.51%
to 1.47
|
%
|
|
|
0.65%
to 1.76
|
%
|
Dividend
yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
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:
|
|
Year
ended December 31,
2016
|
|
|
Year
ended December 31,
2015
|
|
|
|
|
|
|
|
|
Beginning
balance – Derivative Liabilities
|
|
$
|
202,653
|
|
|
$
|
-
|
|
Debt Discount
|
|
|
-
|
|
|
|
500,000
|
|
Excess of fair value
over debt discount
|
|
|
-
|
|
|
|
188,378
|
|
Change
in fair value of derivative liabilities
|
|
|
103,260
|
|
|
|
(485,725
|
)
|
Ending
balance – Derivative Liabilities
|
|
$
|
305,913
|
|
|
$
|
202,653
|
|
Note
10 – Commitments and Contingencies
Joint
Marketing Agreement
On
February 20, 2015, the Company entered into a joint marketing agreement (the “Agreement”) with a third party consultant
(“Consultant”). Pursuant to the Agreement, the Consultant will act as the Company’s advisor to assist the Company
in connection with a best efforts basis in identifying potential sources of capital for an initial term of six (6) months.
Consultant
shall be compensated as follows:
|
●
|
$25,000
initial fee, payable upon completion of $250,000 capital raise or $40,000 initial fee, payable upon completion of $500,000
capital raise.
|
|
|
|
|
●
|
$5,000
per month (prorated for the first month of the capital raise completion), payments begin immediately upon capital raise of
$250,000 and thereafter on the 2nd of each month.
|
|
|
|
|
●
|
125,000
shares of the Company’s common stock, payable within five (5) days of the execution of this Agreement. Another 125,000
shares of the Company’s common stock is due when $250,000 is raised.
|
The
Company valued the 125,000 shares of its common stock issued upon execution of the Agreement at $0.50 per share and recorded as
consulting fees as these shares are fully earned, non-forfeitable and non-assessable upon issuance. Such consultant has not completed
any capital raise for the Company. The Company recognized approximately $364,000 and $137,000 of expense related to this consulting
agreement during the years ended December 31, 2016 and 2015, respectively.
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.
Note
10 – Commitments and Contingencies (continued)
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.
Future
minimum rental payments required under this operating lease are as follows:
Years ending
December 31:
|
|
|
|
|
|
|
|
2017
|
|
$
|
77,273
|
|
2018
|
|
|
64,236
|
|
Total
|
|
$
|
126,957
|
|
Rent
expense was $57,028 and $61,662 for the years ended December 31, 2016 and 2015, respectively.
Litigation
From
time to time, the Company is involved in litigation matters relating to claims arising from the ordinary course of business. While
the results of such claims and legal actions cannot be predicted with certainty, the Company’s management does not believe
that there are claims or actions, pending or threatened against the Company, the ultimate disposition of which would have a material
adverse effect on the Company’s business, results of operations, financial condition or cash flows.
Note
11 – Stockholders’ Deficit
Shares
Authorized
The
authorized capital of the Company consists of 100,000,000 shares of common stock, par value $0.001 per share and 20,000,000 shares
of preferred stock, par value $0.001 per share.
Common
Stock
On
January 7, 2016, the Company entered into a seven-month consulting agreement 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
contract period, August 1, 2016. In connection with the issuance of these common shares, the Company recorded stock based compensation
of $60,000 for the year ended December 31, 2016.
On
January 12, 2016, the Company issued an aggregate of 200,000 shares of the Company’s common stock to two board of directors
of the Company. 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 year ended December 31, 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 year ended December 31, 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 year ended December 31, 2016.
In
February 2015, the Company granted 125,000 shares of its common stock to a consultant in connection with a 6 month investor relations
consulting agreement. The Company valued these common shares at $0.50 per share, the most recent PPM price or $62,500. In connection
with the issuance of these common shares, the Company recorded stock based consulting of $62,500 for the year ended December 31,
2015.
In
July 2015, the Company issued an aggregate of 60,857 shares of its common stock at approximately $0.50 per common share to a consultant
as payment for accounting services rendered pursuant to a consulting agreement. The Company valued these common shares at $0.50
per share, the most recent PPM price or $30,000. In connection with the issuance of these common shares, the Company recorded
stock based accounting expense of $30,000 for the year ended December 31, 2015.
Note
11 - 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.
Stock warrant activities for the years ended December 31, 2016 and 2015 are summarized as follows:
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Balance at December 31, 2014
|
|
|
1,263
|
|
|
$
|
1,248
|
|
|
|
2.11
|
|
|
$
|
-
|
|
Issued
|
|
|
500,000
|
|
|
|
0.6
|
|
|
|
5.00
|
|
|
|
-
|
|
Balance at December 31, 2015
|
|
|
501,263
|
|
|
|
3.74
|
|
|
|
4.25
|
|
|
|
-
|
|
Forfeited
|
|
|
(20
|
)
|
|
|
250
|
|
|
|
-
|
|
|
|
-
|
|
Balance at December
31, 2016
|
|
|
501,243
|
|
|
|
3.73
|
|
|
|
3.25
|
|
|
|
-
|
|
Warrants exercisable
at December 31, 2016
|
|
|
501,243
|
|
|
$
|
3.73
|
|
|
|
3.25
|
|
|
$
|
-
|
|
Options
Stock
option activities for the years ended December 31, 2016 and 2015 are summarized as follows:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Balance at December 31, 2014
|
|
|
100
|
|
|
$
|
700
|
|
|
|
2.17
|
|
|
$
|
-
|
|
Balance at December 31, 2015
|
|
|
100
|
|
|
|
700
|
|
|
|
1.17
|
|
|
|
-
|
|
Issued
|
|
|
2,480,000
|
|
|
|
.10
|
|
|
|
5.00
|
|
|
|
-
|
|
Forfeited
|
|
|
540,000
|
|
|
|
.10
|
|
|
|
5.00
|
|
|
|
-
|
|
Balance at December
31, 2016
|
|
|
1,940,100
|
|
|
|
.14
|
|
|
|
4.04
|
|
|
|
-
|
|
Options exercisable
at December 31, 2016
|
|
|
100
|
|
|
$
|
700
|
|
|
|
.16
|
|
|
$
|
-
|
|
On January 12,
2016, the Company granted an aggregate of 2,480,000 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 2,480,000 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, August, and September of 2016, 40,000, 100,000, and
400,000, respectively, of these unvested options were forfeited due to the termination of employees.
Note
12 – Income Taxes
Deferred income
taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. At December 31, 2016, the Company has a Net Operating Loss
(“NOL”) carryforward of approximately $2,800,000. The NOL expires during the years 2034 to 2036. In the event that
a significant change in ownership of the Company occurs as a result of the Company’s issuance of common stock, the utilization
of the NOL carryforward will be subject to limitation under certain provisions of the Internal Revenue Code. Management does not
presently believe that such a change has occurred. Realization of any portion of the $1,414,030 of net deferred tax assets at
December 31, 2016 is not considered more likely than not by management; accordingly, a valuation allowance has been established
for the full amount. The valuation allowance as of December 31, 2016 was $1,414,030. The change in the valuation allowance during
the year ended December 31, 2016 amounted to $977,137.
Significant
components of the Company’s deferred tax assets are as follows:
|
|
Year
ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Organizational costs, accrued liabilities and other
|
|
$
|
38,608
|
|
|
$
|
15,087
|
|
NOL carryforwards
|
|
|
1,208,386
|
|
|
|
357,214
|
|
Depreciation
|
|
|
11,098
|
|
|
|
5,901
|
|
Compensation related to equity instruments issued for services
|
|
|
155,938
|
|
|
|
58,691
|
|
Valuation allowance
|
|
|
(1,414,030
|
)
|
|
|
(436,893
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Reconciliation
of the differences between income tax benefit computed at the federal and state statutory tax rates and the provision for income
tax benefit for the years ended December 31, 2016 and 2014 is as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Income tax
expense (benefit) at federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State taxes, net of federal
benefit
|
|
|
8.8
|
%
|
|
|
8.8
|
%
|
Change
in valuation allowance
|
|
|
42.8
|
%
|
|
|
-42.8
|
%
|
|
|
|
-
|
|
|
|
-
|
|
Note
13 – Concentration of Credit Risk
Concentration
of Revenue and Supplier
During
the year ended December 31, 2016 sales to two customers represented approximately 35% of the Company’s net sales. During
the year ended December 31, 2015 sales to one customer represented approximately 49% of the Company’s net sales.
As
of December 31, 2016, and 2015, the Company had two customers representing approximately 29% of accounts receivable and one customer
representing approximately 22% 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 product 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
Subsequent
Events
On
March 23, 2017, the Company completed the extension of its $500,000 6% Senior Convertible Debenture dated April 3, 2015. The original
agreement had a maturity date of October 3, 2016. 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.