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EX-32.1 - CERTIFICATION - VAPIR ENTERPRISES INC.f10q0616ex32i_vapirenterpris.htm
EX-31.1 - CERTIFICATION - VAPIR ENTERPRISES INC.f10q0616ex31i_vapirenterpris.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended June 30, 2016

 

or

 

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

 

Commission File Number: 333-185083

 

 

 

VAPIR ENTERPRISES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

2365 Paragon Dr., Suite B

San Jose, California 95131

Telephone: (800) 841-1022

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

 

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

 

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

 

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

 

Large Accelerated Filer   Accelerated Filer
Non-Accelerated Filer (Do not check if a smaller reporting company) Smaller Reporting Company

 

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

 

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

 

As of August 12, 2016, there were 49,766,819 shares of common stock, par value $0.001, outstanding.

 

 

 

 

 

 

VAPIR ENTERPRISES, INC.

 

QUARTERLY REPORT ON FORM 10-Q

For the Period Ended June 30, 2016

 

TABLE OF CONTENTS

 

    Page
PART 1 - FINANCIAL INFORMATION    
     
Item 1. Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
     
PART II - OTHER INFORMATION    
     
Item 1. Legal Proceedings 22
Item 1A. Risk Factors 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Mine Safety Disclosures 24
Item 5. Other Information 24
Item 6. Exhibits 24
     
SIGNATURES 25

 

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

 

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

 

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

 

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

 

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

 

CERTAIN TERMS USED IN THIS REPORT

 

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

 

 2 
 

 

PART 1 - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

VAPIR ENTERPRISES, INC. AND SUBSIDIARY

June 30, 2016 and 2015

INDEX TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CONTENTS

 

Condensed Consolidated Balance Sheets at June 30, 2016 (Unaudited) and December 31, 2015 4
   
Condensed Consolidated Statements of Operations - For the Three and Six Months Ended June 30, 2016 and 2015 (Unaudited) 5
   
Condensed Consolidated Statements of Cash Flows -For the Six Months Ended June 30, 2016 and 2015 (Unaudited) 6
   
Notes to the Condensed Consolidated Financial Statements (Unaudited) 7

 

 3 
 

 

VAPIR ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   As of
June 30,
2016
   As of
December 31,
2015
 
   (Unaudited)     
ASSETS        
         
CURRENT ASSETS:        
Cash  $17,763   $7,858 
Accounts receivable, net   2,545    24,518 
Inventory, net   185,122    212,411 
Prepaid expense and other current assets   28,620    18,424 
Advances to suppliers   119,654    136,427 
           
Total Current Assets   353,704    399,638 
           
OTHER ASSETS:          
Property and equipment, net   74,674    87,668 
Intangible assets, net   341,588    375,176 
Deposit   2,813    2,813 
           
Total Other Assets   419,075    465,657 
           
Total Assets  $772,779   $865,295 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
CURRENT LIABILITIES:          
Accounts payable and accrued expenses  $204,363   $225,882 
Convertible notes payable, net of debt discounts   413,480    247,724 
Loan payable   197,000    197,000 
Notes payable - current maturities   31,179    19,800 
Customer deposits   40,515    20,609 
Advances from related party   651,020    370,614 
Deferred rent   12,611    10,728 
Derivative liabilities   90,066    202,653 
           
Total Current Liabilities   1,640,234    1,295,010 
           
LONG-TERM LIABILITIES:          
Notes payable, net of current maturities   28,776    5,250 
           
Total Long-term Liabilities   28,776    5,250 
           
Total Liabilities   1,669,010    1,300,260 
           
COMMITMENTS AND CONTINGENCIES          
           
STOCKHOLDERS' DEFICIT:          
Preferred stock $0.001 par value: 20,000,000 shares authorized; none issued and outstanding   -    - 
Common stock $0.001 par value: 100,000,000 shares authorized; 49,766,819 and 48,466,819 shares issued and outstanding, respectively.   49,767    48,467 
Additional paid in capital   585,286    31,374 
Accumulated deficit   (1,531,284)   (514,806)
           
Total Stockholders' Deficit   (896,231)   (434,965)
           
Total Liabilities and Stockholders' Deficit  $772,779   $865,295 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 4 
 

 

VAPIR ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

   For the Three Months Ended   For the Six Months Ended 
   June 30,
2016
   June 30,
2015
   June 30,
2016
   June 30,
2015
 
                 
Net revenues  $269,104   $584,627   $645,176   $919,242 
                     
Cost of revenues   160,566    358,552    396,197    544,327 
                     
Gross profit   108,538    226,075    248,979    374,915 
                     
OPERATING EXPENSES:                    
                     
Selling expenses   33,485    33,012    90,489    54,830 
Compensation   214,793    172,487    463,592    315,446 
Professional and consulting fees   53,556    71,816    425,719    211,462 
General and administrative   85,002    62,402    185,992    153,823 
                     
Total Operating Expenses   386,836    339,717    1,165,792    735,561 
                     
LOSS FROM OPERATIONS   (278,298)   (113,642)   (916,813)   (360,646)
                     
OTHER INCOME (EXPENSE):                    
Derivative expense   -    (188,378)   -    (188,378)
Change in fair value of derivative liabilities   6,723    293,930    112,587    293,930 
Interest expense, net   (107,038)   (98,833)   (212,252)   (105,907)
                     
Other income (expense), net   (100,315)   6,719    (99,665)   (355)
                     
LOSS BEFORE INCOME TAX PROVISION   (378,613)   (106,923)   (1,016,478)   (361,001)
                     
INCOME TAX PROVISION   -    -    -    - 
                     
NET LOSS  $(378,613)  $(106,923)  $(1,016,478)  $(361,001)
                     
LOSS PER SHARE:                    
Basic and diluted  $(0.01)  $-   $(0.02)  $(0.01)
                     
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                    
Basic and diluted   49,766,819    48,405,962    49,694,841    48,370,741 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 5 
 

 

VAPIR ENTERPRISES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the Six Months Ended 
   June 30,
2016
  

June 30,

2015

 
         
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(1,016,478)  $(361,001)
Adjustments to reconcile net loss to net cash used in operating activities          
Bad debt expense   1,002    - 
Depreciation   12,994    780 
Amortization of intangible assets   33,588    33,584 
Amortization of deferred financing cost   7,460    3,607 
Amortization of debt discount   165,756    80,146 
Derivative expense   -    188,378 
Change in fair value of derivative liabilities   (112,587)   (293,930)
Stock based compensation   546,641    62,500 
Changes in assets and liabilities:          
Accounts receivable   20,971    (74,605)
Prepaid expense and other current assets   (9,085)   (3,000)
Advances to suppliers   16,773    (64,693)
Inventory   27,289    (70,633)
Accounts payable and accrued expenses   (16,113)   (55,568)
Deferred rent   1,883    - 
Customer deposits   19,906    (38,729)
           
NET CASH USED IN OPERATING ACTIVITIES   (300,000)   (593,164)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Advances from related party   300,000    130,000 
Repayments to related party for advances   (25,000)   (3,000)
Proceeds received from notes payable   50,000    477,500 
Payments of notes payable   (15,095)   (9,900)
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   309,905    594,600 
           
NET CHANGE IN CASH   9,905    1,436 
           
CASH - beginning of period   7,858    27,304 
           
CASH - end of period  $17,763   $28,740 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:          
Interest paid  $18,875   $12,534 
Income taxes paid  $-   $- 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 6 
 

 

Vapir Enterprises, Inc. and Subsidiary

Notes to the Unaudited Condensed Consolidated Financial Statements

 

Note 1 - Organization and Operations

 

Vapir Enterprises, Inc.

 

Vapir Enterprises Inc. (formerly FAL Exploration Corp.) (“Vapir Enterprises” or the “Company”) was incorporated in the State of Nevada on December 17, 2009. The Company’s principal business is focused on inventing, developing and producing aromatherapy devices and vaporizers. The Company’s aromatherapy devices utilize heat and convection air and thereby extract natural essences and produce fresh fragrances. Vapir, Inc. (“Vapir”) is a wholly owned subsidiary of the Company and was incorporated in the State of California in October 2006. 

 

Note 2 - Significant and Critical Accounting Policies and Practices

 

Basis of Presentation 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 June 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 account, inventory obsolescence and markdowns, the useful life of property and equipment, the valuation of deferred tax assets and liabilities, valuation of intangible assets, the assumptions used to calculate fair value of stock options and warrants granted, stock-based compensation and the fair value of common stock issued. 

 

Cash equivalents

 

The Company considers all highly liquid debt instruments and other short-term investments with maturities of three months or less, when purchased, to be cash equivalents.  The Company maintains cash and cash equivalent balances at one financial institution that is insured by the Federal Deposit Insurance Corporation. The Company’s account at this institution is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of June 30, 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 June 30, 2016 and December 31, 2015, there was $1,431 and $1,373 allowance for doubtful accounts, respectively. The Company recorded bad debt expense of $1,002 and $0 during the six months ended June 30, 2016 and 2015, respectively.

 

 7 
 

 

Vapir Enterprises, Inc. and Subsidiary

Notes to the 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 June 30, 2016 and 2015, the Company recorded a reserve for slow-moving inventory of $15,320 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 June 30, 2016 or 2015. There was no lower of cost or market adjustments for the reporting period ended June 30, 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 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.

 

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 $63,739 and $55,317 for the six months ended June 30, 2016 and 2015, respectively.

 

Advertising Costs

 

The Company follows the guidance of the Section 720-35-25 of the FASB Accounting Standards Codification (“Section 720-35-25”) as to when advertising costs should be expensed. Pursuant to ASC Paragraph 720-35-25-1 the Company expenses the advertising costs when the first time the advertising takes place.

 

Advertising costs were $7,693 and $10,300 for the six months ended June 30, 2016 and 2015, respectively.

 

 8 
 

 

Vapir Enterprises, Inc. and Subsidiary

Notes to the Unaudited Condensed Consolidated Financial Statements

 

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

 

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 may still be 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
June 30,
2016
   For the Period Ended
June 30,
2015
 
Stock Options   2,440,100    100 
Stock Warrants   501,343    501,263 
           
Total contingent shares issuance arrangement, stock options or warrants   2,941,443    501,363 

 

There were no incremental common shares under the Treasury Stock Method for the reporting period ended June 30, 2016 or 2015.

 

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.

 

 9 
 

 

Vapir Enterprises, Inc. and Subsidiary

Notes to the Unaudited Condensed Consolidated 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 $1.5 million at June 30, 2016, a net loss of approximately $1.0 million and net cash used in operating activities of approximately $300,000 for the six months ended June 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   June 30,
2016
(Unaudited)
   December 31,
2015
 
                
Auto   3 years   $12,522   $12,522 
Furniture and fixtures   5 years    23,743    23,743 
Tooling equipment   4 years    97,710    97,710 
Leasehold improvements   5 years    35,206    35,206 
Less: Accumulated depreciation        (94,507)   (81,513)
        $74,674   $87,668 

 

  (i) Depreciation Expense

 

Depreciation expense amounted to $12,994 and $780 for the six months ended June 30, 2016 and 2015, respectively.

 

  (ii) Impairment

 

The Company completes its annual impairment testing of property and equipment every 4 th quarter of the fiscal year to evaluate the recoverability of property and equipment or whenever events or changes in circumstances indicate that the property and equipment’s carrying amount may not be recoverable. The Company did not record any impairment of its property and equipment at June 30, 2016 and December 31, 2015, respectively.

 

Note 5 - Intangible Assets

 

Intangible assets consist of the following:

 

   June 30,
2016
(Unaudited)
   December 31,
2015
 
         
Customer relationships  $1,001,212   $1,001,212 
Trademarks   6,430    6,430 
    1,007,642    1,007,642 
Accumulated amortization   (666,054)   (632,466)
Intangible assets, net  $341,588   $375,176 

 

 10 
 

 

Vapir Enterprises, Inc. and Subsidiary

Notes to the Unaudited Condensed Consolidated Financial Statements

 

Note 5 - Intangible Assets (continued)

 

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 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 value for any impairment to the carrying values. The Company did not record any impairment of its intangible assets at June 30, 2016 and December 31, 2015, respectively.

  

Amortization expense was $33,588 and $33,584 for the six months ended June 30, 2016 and 2015, respectively. Future amortization of intangible assets is as follows:

 

2016 (remainder of the year)  $33,588 
2017   67,176 
2018   67,176 
2019   67,176 
2020 and thereafter   106,472 
Total  $341,588 

 

Note 6 - Loan and Notes Payable

 

Loan payable

 

   June 30,
2016
   December 31,
2015
 
Business loan obtained in May 2011 from Bank of the West with a credit line up to $200,000 and secured by all assets of the Company. This loan bears interest at 4.75% per annum and it is due on demand.  $197,000   $197,000 

 

Notes payable

    June 30,
2016
    December 31,
2015
 
             
4.75% Promissory note of $100,000 issued to Bank of the West on May 10, 2011 payable over 60 consecutive monthly installments with monthly principal payment of $1,650 and interest starting in June 2012. Amounts outstanding under this loan and note are personally guaranteed by the CEO of the Company.   $ 15,150     $ 25,050  
5.28% unsecured Promissory note of $50,000 issued to Bank of the West in February 2016 payable over 36 consecutive monthly installments of $1,506 starting in March 2016     44,805       -  
Less : Current maturities     (31,179 )     (19,800 )
Notes payable, net of current maturities   $ 28,776     $ 5,250  

 

 

Future minimum principal payments under the notes are as follows:

 

For Fiscal Year:    
     
2016 (remainder of the year)  $17,806 
2017   21,721 
2018   15,907 
2019   4,521 
Total remaining Payments  $59,955 

 

 11 
 

 

Vapir Enterprises, Inc. and Subsidiary

Notes to the Unaudited Condensed Consolidated Financial Statements

 

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 June 2016, the Company’s CEO provided advances to the Company for working capital purposes of $300,000 and the Company repaid $25,000 of these advances. At June 30, 2016 and December 31, 2015, these advances amounted to $651,020 and $370,614, respectively. Included in the advances are accrued interest due to the Company’s CEO totaling $12,520 and $7,114, at June 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 has a maturity date of 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.

 

Convertible notes payable consisted of the following:

 

  

June 30,
2016

   December 31,
2015
 
6% Convertible promissory notes  $500,000   $500,000 
Initial Discount   (500,000)   (500,000)
Accumulated amortization of discount   413,480    247,724 
Remaining discount   (86,520)   (252,276)
Convertible notes payable, net  $413,480   $247,724 

 

For the six months ended June 30, 2016 and 2015 the Company recognized $165,756 and $80,146, respectively of amortization of debt discount. For the six months ended June 30, 2016 and 2015 the Company recognized $7,460 and $3,607, respectively of amortization of deferred financing cost. The amortization of debt discount and deferred financing cost were included in interest expense. As of June 30, 2016 and December 31, 2015, accrued interest related to this Debenture amounted to $37,415 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 $112,587 and $293,930 for the six months ended June 30, 2016 and 2015, respectively. At June 30, 2016, the Company recorded a warrant derivative liability of $59,560 and note derivative liability of $30,506.

 

 12 
 

 

Vapir Enterprises, Inc. and Subsidiary

Notes to the Unaudited Condensed Consolidated Financial Statements

 

Note 9 - Derivative Liabilities (continued)

 

 

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 June 30, 2016:

 

   Amount   Level 1   Level 2   Level 3 
Derivative liability - Embedded conversion  $30,506   $-   $-   $30,506 
Derivative liabilities - Tainted Warrants   59,560    -    -    59,560 
   $90,066   $-   $-   $90,066 

 

The following table summarizes the values of certain assumptions used by the Company’s custom model to estimate the fair value of the derivative liabilities as of June 30, 2016:

 

   June 30,
2016  
 
Stock price  $0.12 
Weighted average strike price  $0.50 
Remaining contractual term (years)   0.25 to 3.75 years 
Volatility   301% to 331%
Risk-free rate   0.26% to 0.49%
Dividend yield   0.0%

 

The following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities that are measured at fair value on a recurring basis:

 

  

For the
six months
ended
June 30,
2016

 
Beginning balance  $202,653 
Change in fair value of derivative liabilities   (112,587)
Ending balance  $90,066 

 

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.

 

 13 
 

 

Vapir Enterprises, Inc. and Subsidiary

Notes to the Unaudited Condensed Consolidated Financial Statements

 

Note 10 - Commitments and Contingencies (continued)

 

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

 

Fiscal Year ending December 31:    
     
2016 (remainder of the year)  $30,603 
2017   62,721 
2018   64,236 
      
Total  $157,560 

 

Rent expense was $41,552 and $28,402 for the six months ended June 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, June 30, 2016. In connection with the issuance of these common shares, the Company recorded stock based compensation of $51,429 for the six months ended June 30, 2016 and prepaid expense of $8,571 as of June 30, 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 six months ended June 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 six months ended June 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 six months ended June 30, 2016.

 

 14 
 

 

Vapir Enterprises, Inc. and Subsidiary

Notes to the Unaudited Condensed Consolidated Financial Statements

 

Note 11 - Stockholders’ Deficit (continued)

 

Warrants

 

Stock warrant activities for the six months ended June 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 June 30, 2016   501,243    3.73    3.75    - 
Warrants exercisable at June 30, 2016   501,243   $3.73    3.75   $- 

 

Options

 

Stock option activities for the six months ended June 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    48,800 

Forfeited

   (40,000)   0.10    5.00    - 
Balance at June 30, 2016   2,440,100    0.13    4.54    48,800 
Options exercisable at June 30, 2016   100   $700    0.67   $- 
                     
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.

 

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 June 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 six months ended June 30, 2016, the Company recorded stock-based compensation expense in connection with stock option awards of $215,212.  As of June 30, 2016, there were total unrecognized compensation costs related to non-vested share-based compensation arrangements of $548,570. At June 30, 2016 there was approximately $48,800 of intrinsic value for the stock options outstanding in the above table.

 

 15 
 

 

Vapir Enterprises, Inc. and Subsidiary

Notes to the Unaudited Condensed Consolidated Financial Statements

 

Note 12 - Concentration of Credit Risk

 

Concentration of Revenue and Supplier

 

During the six months ended June 30, 2016 sales to two customers represented approximately 38% of the Company’s net sales. During the six months ended June 30, 2015 sales to one customer represented approximately 46% of the Company’s net sales.

 

As of June 30, 2016 and December 31, 2015, accounts receivable from one customer represented approximately 58% and two customers represented 92% of the accounts receivable, respectively.

 

The Company purchased inventories and products from one vendor totaling approximately $299,000 (100% of the purchases) and $529,000 (100% of the purchases) during the six months ended June 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.

 

 16 
 

 

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

 

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

 

Forward-Looking Statements

 

Certain information contained in this Quarterly Report on Form 10-Q, as well as other written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the Securities and Exchange Commission, press releases, conferences or otherwise, may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. This information includes, without limitation, statements concerning the Company's future financial position and results of operations, planned expenditures, business strategy and other plans for future operations, the future mix of revenues and business, customer retention, project reversals, commitments and contingent liabilities, future demand and industry conditions. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Generally, the words “anticipate,” “believe,” “estimate,” “expect,” “may” and similar expressions, identify forward-looking statements, which generally are not historical in nature. Actual results could differ materially from the results described in the forward-looking statements due to the risks and uncertainties set forth in this Quarterly Report on Form 10-Q, the specific risk factors identified in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, and those described from time to time in our future reports filed with the Securities and Exchange Commission.

 

The following discussion is qualified in its entirety by, and should be read in conjunction with, the Company's financial statements, including the notes thereto, included in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

 

Overview

 

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

 

On December 30, 2014, Vapir, Inc., a private California corporation (“Vapir”), which is the historical business of the Company’s wholly-owned subsidiary, entered into a Share Exchange Agreement with the Company, all of the stockholders of Vapir (the “Vapir Shareholders”), and the Company’s controlling stockholders whereby the Company agreed to acquire all of the issued and outstanding capital stock of Vapir in exchange for 38,624,768 shares of the Company’s common stock. On December 30, 2014, the transaction closed and Vapir is now a wholly-owned subsidiary of the Company. The number of shares issued represented approximately 80.0% of the issued and outstanding common stock immediately after the consummation of the Share Exchange Agreement. In addition, Vapir’s board of directors and management obtained the board and management control of the combined entity stock immediately after the consummation of the Share Exchange Agreement. 

 

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

 

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

 

 17 
 

 

Results of Operations

 

Three and Six Months Ended June 30, 2016 Compared to the Three and Six Months Ended June 30, 2015 

 

Net Revenues

 

Net sales for the three months ended June 30, 2016 and 2015 were $269,104 and $584,627 respectively, a decrease of $315,523 or approximately 54%. The decrease in sales during the three months ended June 30, 2016 was primarily attributable to a decrease in sales of our Prima vaporizer product. Additionally, revenues from our 2 customers decreased by approximately $293,000 during the three months ended June 30, 2016 as compared to the prior period.

 

Net sales for the six months ended June 30, 2016 and 2015 were $645,176 and $919,242 respectively, a decrease of $274,066 or approximately 30%. The decrease in sales during the six months ended June 30, 2016 was primarily attributable to a decrease in sales of our Prima vaporizer product. Additionally, revenues from our 2 customers decreased by approximately $280,000 during the six months ended June 30, 2016 as compared to the prior period.

 

Management views future sales level with a fair degree of uncertainty in that management has not been able to identify whether our sales level are trending up or down over the near term. As a result, we believed our sales level are subject to high level of uncertainty.

 

Cost of Revenues

 

Cost of goods sold for the three months ended June 30, 2016 and 2015 were $160,566 and $358,552, respectively, a decrease of $197,986 or approximately 55%. The decrease is primarily due to the decrease in sales of our vaporizer products.

 

Cost of goods sold for the six months ended June 30, 2016 and 2015 were $396,197 and $544,327, respectively, a decrease of $148,130 or approximately 27%. The decrease is primarily due to the decrease in sales of our vaporizer products.

 

Operating Expenses

 

Total operating expenses for the three months ended June 30, 2016 and 2015 were $386,836 and $339,717, respectively, an increase of $47,119 or approximately 14%. The increase in operating expenses during the three months ended June 30, 2016 is primarily due to an increase in stock based consulting of approximately $23,000 and an increase in stock based compensation of $109,000 in connection with common stock and stock options granted to CEO, Directors, employees and consultants of the Company during the three months ended June 30, 2016. Such increases were offset by a decrease in cash compensation to our employees of approximately $65,000 and a decrease in legal fees of approximately $30,000.

 

Total operating expenses for the six months ended June 30, 2016 and 2015 were $1,165,792 and $735,561, respectively, an increase of $430,231 or approximately 58%. The increase in operating expenses during the six months ended June 30, 2016 is primarily due to an increase in marketing and advertising fees of our vaporizer products of approximately $35,000, an increase in stock based consulting of approximately $282,000, an increase in stock based compensation of $202,000 in connection with common stock and stock options granted to our CEO, Directors, employees and consultants of the Company and an increase of approximately $13,000 of rent expense during the six months ended June 30, 2016. Such increases were offset by a decrease in cash compensation to our employees of approximately $54,000 and a decrease in legal fees and accounting fees of approximately $49,000.

 

The Company’s management continues to evaluate its operating cost with an aim of reducing its operating expenses in the future.

 

Other Income (Expense), net

 

Total other (expense) income, net, for the three months ended June 30, 2016 and 2015 were $(100,315) and $6,719. The increase in other expense is the primary result of the decrease in derivative expense and decreased gain resulting from the decrease in fair value of derivative liabilities during the three month period.

 

Total other expense, net, for the six months ended June 30, 2016 and 2015 were $99,665 and $355, respectively, an increase of $99,310. The increase in other expense is the primary result of the decreased gain resulting from the decrease in fair value of derivative liabilities offset by interest expense from related party advances and convertible debentures and also includes amortization of debt discount and deferred financing cost of approximately $173,000 in connection with the issuance of convertible debentures.

 

 18 
 

 

Net loss

 

Net loss for the three months ended June 30, 2016 and 2015 was $378,613 and $106,923, respectively, as a result of the items discussed above. Net loss for the six months ended June 30, 2016 and 2015 was $1,016,478 and $361,001, respectively, as a result of the items discussed above.

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. As of June 30, 2016, our total current liabilities exceeded our total current assets and, as a result, we had a working capital deficit.

 

We are not aware of any known trends or any known demands, commitments or events that will result in our liquidity increasing or decreasing in any material way. We are not aware of any matters that would have an impact on future operations.

 

Our net revenues are not sufficient to fund our operating expenses. At June 30, 2016, we had a cash balance of approximately $18,000 and working capital deficit of $1,287,000. Our cash increased during the six months ended June 30, 2016 by approximately $10,000 from our cash balance at December 31, 2015 of $8,000. During the six months ended June 30, 2016, we borrowed $50,000 by issuing a note payable which will mature in February 2019 and we also received related party advances for a total of $300,000 to fund our operating expenses, pay our obligations, and grow our company. We currently have no material commitments for capital expenditures.

 

We may be required to raise additional funds at times when market conditions are not favorable with the result that we may incur dilution or be required to accept debt covenants or other conditions that are onerous or which otherwise limit our ability to gain or attract additional financing in the future. As a small company with a limited product line and limited customer base, we face continuing risks and uncertainties that serve to make our company and an investment in our common stock subject to risks that are beyond our control. We estimate that based on current plans and assumptions, that our cash is not sufficient to satisfy our cash requirements under our present operating expectations, without further financing, for the next 12 months.

 

Our ability to generate and maintain a positive cash flow from our operations cannot be assured. Based solely on our own internal estimates without the benefit of any independent third party evaluation, we anticipate that our cash and cash flow will not be sufficient to satisfy our cash requirements and we will likely require significant additional external financing. The magnitude of the additional financing and its timing is not yet precisely known and depending on the level of our sales revenues and other operating needs we may be facing a prolonged multi-period scenario of negative cash flows with increasing losses.

 

Currently, we have no other known alternative source for any additional financing except those sources which we have previously used. Further, we cannot assure you that we can continue to rely upon those existing financing sources in the future. We may not have sufficient working capital and funds from the collection of revenues that may allow us to maintain or expand our existing operations, to provide sufficient working capital to meet our operating needs and our outstanding financial obligations. For this reason we anticipate that, based on current market conditions and our existing financial condition, we will likely need to obtain significant additional capital. In this sense we currently anticipate that we will remain dependent on our ability to secure additional financing.

 

In the event that we are able to secure a sufficient amount additional financing on a timely basis, it may include the issuance of equity or debt securities, obtaining credit facilities, or entering into other financing arrangements on such terms as then existing market conditions require. The capital market for small or micro-cap companies has been and likely will remain very difficult in the near future. As a result our ability to obtain additional capital on terms that are reasonable in light of current market conditions cannot be assured. We may be forced to obtain additional capital on terms that could limit our long term ability to remain in business or otherwise materially restrict our operations.

 

Further, the market price of our common stock and the uncertainties of the U.S. economy, the 2016 U.S. Presidential Election and other factors will likely negatively impact us and the financing options that we may have. Any downturn in the U.S. equity and debt markets could also make it more difficult for us to obtain additional financing.

 

Even if we are able to raise the additional financing that we anticipate that we will require, it is possible that we could incur unexpected costs and expenses, fail to collect amounts owed to us, or experience unexpected cash requirements that would force us to seek other, less-attractive alternative financing.

 

Currently we do not have any commitment from any outside financing source to meet our anticipated financing needs. Furthermore, in the event that we were to issue additional equity or debt securities, stockholders may experience significant additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. And in the case of any issuance of one or more debt securities, the debt covenants may restrict our operating ability and our ability to raise additional financing from debt.

 

 19 
 

 

Overall if we are unable to raise additional capital on terms that are reasonable in light of current market conditions will likely restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our marketing and development plans and possibly cease our operations.

 

We anticipate that depending on market conditions and our plan of operations, we may incur operating losses in the foreseeable future. Therefore, there is substantial doubt about our ability to continue as a going concern.

 

Inflation and Changing Prices

 

Neither inflation nor changing prices for the six months ended June 30, 2016 had a material impact on our operations.

 

Off-Balance Sheet Arrangements

 

None.

 

Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Critical Accounting Policies

 

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

 

We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements.  We believe the critical accounting policies in Note 2 to the consolidated financial statements appearing in the Annual Report, Form 10-K for the year ended December 31, 2015, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. 

 

Use of Estimates

 

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

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

Item 4. Controls and Procedures.

 

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

   

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With respect to the quarterly period ending June 30, 2016, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, our management has concluded that our disclosure controls and procedures were not effective as of June 30, 2016 due to our limited internal resources and lack of ability to have multiple levels of transaction review. In connection with this evaluation, management identified the following control deficiencies that represent material weaknesses as of June 30, 2016:

 

  (1)

Lack of an independent audit committee or audit committee financial expert. Although our board of directors serves as the audit committee it has no independent directors. These factors are counter to corporate governance practices as defined by the various stock exchanges and may lead to less supervision over management.

 

  (2)

We do not have sufficient experience from our accounting personnel with the requisite U.S. GAAP public company reporting experience that is necessary for adequate controls and procedures due to our limited resources with appropriate skills, training and experience to perform the review processes to ensure the complete and proper application of generally accepted accounting principles.

 

  (3) Need for greater integration, oversight, communication and financial reporting of the books and records of our satellite offices.
   

 

 

  (4) Lack of sufficient segregation of duties such that the design over these areas relies primarily on detective controls and could be strengthened by adding preventative controls to properly safeguard company assets.

 

Changes in Internal Controls.

 

There have been no changes in our internal controls over financial reporting or in other factors during the fiscal quarter ended June 30, 2016, that materially affected, or is likely to materially affect, our internal control over financial reporting.

 

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PART II-OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

From time to time, the Company is involved in litigation matters relating to claims arising from the ordinary course of business. While the results of such claims and legal actions cannot be predicted with certainty, the Company’s management does not believe that there are claims or actions, pending or threatened against the Company, the ultimate disposition of which would have a material adverse effect on our business, results of operations, financial condition or cash flows.

 

Item 1A. Risk Factors

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

6. Premarket review requirements;

 

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

 

8. Inclusion of a health warning; and

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our Total Current Liabilities were greater than our Total Current Assets as of June 30, 2016

 

As of June 30, 2016, our Total Current Liabilities were $1,640,234 and our Total Current Assets were $353,704. As a result we do not have sufficient cash or other liquid current assets to meet our current financial obligations that become due within the twelve month period through June 30, 2017.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosure.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

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

 

* Filed herein

 

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SIGNATURES

 

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

 

  Vapir Enterprises, Inc.
   
Date: August 12, 2016  By: /s/ Hamid Emarlou
    Hamid Emarlou
   

Chief Executive Officer

(Principal Executive Officer and

Principal Financial Officer)

 

 

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