Exhibit 99.1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Vaporin Inc.
We have audited the accompanying balance sheet of Vaporin Inc. as of December 31, 2014 and the related statement of operations, stockholders’ deficit, and cash flows for the year ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vaporin, Inc. as of December 31, 2014 and the results of its operations, stockholders’ deficit, and cash flows for the year then ended in conformity accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered losses from operations, which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| /s/ RBSM LLP | |
| Las Vegas Nevada | |
| May 12, 2015 |
New York, NY, Washington DC, San Francisco, CA, Athens, Greece, Beijing, China, and Mumbai, India
Member of Antea Alliance with affiliated offices worldwide
VAPORIN, Inc.
(FORMERLY VALOR GOLD CORP.)
CONSOLIDATED BALANCE SHEETS
| December 31, 2014 | December 31, 2013 | ||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 865,737 | $ | 25,221 | ||||
| Due from merchant credit card processor, net of reserve | 160,216 | – | ||||||
| Accounts receivable – trade net Allowance for uncollectable accounts | 88,614 | 16,587 | ||||||
| Prepaid expenses and other current assets | 42,996 | 32,522 | ||||||
| Inventory | 1,173,124 | 316,195 | ||||||
| Total Current Assets | 2,330,687 | 390,525 | ||||||
| FIXED ASSETS | ||||||||
| Property and equipment, net | 160,620 | 8,395 | ||||||
| OTHER ASSETS | ||||||||
| Intangible assets, net | 1,472 | 12,276 | ||||||
| Goodwill | 3,732,268 | – | ||||||
| Total Other Assets | 3,894,360 | 12,276 | ||||||
| TOTAL ASSETS | $ | 6,225,047 | $ | 411,196 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued liabilities | $ | 824,104 | $ | 31,312 | ||||
| Accrued interest – related party | – | 804 | ||||||
| Notes payable | – | 75,000 | ||||||
| Notes payable – related party | 1,000,000 | 260,899 | ||||||
| Derivative liabilities | 43,944 | – | ||||||
| Total Current Liabilities | 1,868,048 | 368,015 | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred Stock, $.0001 par value per share, 50,000,000 shares authorized, as of December 31, 2014 and December 31, 2013, respectively. | ||||||||
| Preferred Stock Series A, $0.0001 par value per share, 100,000 shares authorized and 0 shares issued and outstanding, as of December 31, 2014 and December 31, 2013, respectively. | – | – | ||||||
| Preferred Stock Series B, $0.0001 par value per share, 5,000,000 shares authorized, 100,000 and 0 shares issued and outstanding, as of December 31, 2014 and December 31, 2013, respectively. | 10 | – | ||||||
| Preferred Stock Series C, $0.0001 par value per share, 100,000 shares authorized 1,550 and 0 shares issued and outstanding, as December 31, 2014 and December 31, 2013, respectively. | – | – | ||||||
| Preferred Stock Series E, $0.0001 par value per share, 2 shares authorized 0 shares issued and outstanding, as of December 31, 2014 and December 31, 2013. | – | – | ||||||
| Common Stock, $0.0001 par value per share, 200,000,000 shares authorized, 4,893,254 and 700,000 shares issued and outstanding, as of December 31, 2014 and December 31, 2013, respectively. | 489 | 70 | ||||||
| Additional paid-in capital | 10,864,408 | 349,930 | ||||||
| Accumulated deficit | (6,502,903 | ) | (306,819 | ) | ||||
| Total Vaporin Stockholders’ Equity | 4,362,004 | 43,181 | ||||||
| Non-Controlling Interest in Subsidiary | (5,005 | ) | – | |||||
| Total Stockholders’ Equity | 4,356,999 | – | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 6,225,047 | $ | 411,196 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 2 |
VAPORIN, Inc.
(FORMERLY VALOR GOLD CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
| For
the Year Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Revenues | $ | 3,281,838 | $ | 23,268 | ||||
| Cost of sales | 1,790,098 | 10,851 | ||||||
| Gross margin | 1,491,740 | 12,417 | ||||||
| Costs and expenses | ||||||||
| Promotional and marketing | 983,507 | 57,189 | ||||||
| General and administrative | 6,131,510 | 238,999 | ||||||
| Depreciation and amortization | 19,987 | 6,082 | ||||||
| Professional fees | 315,086 | 15,779 | ||||||
| Total operating costs and expenses | 7,450,090 | 318,049 | ||||||
| Operating loss | (5,958,350 | ) | (305,632 | ) | ||||
| Other income and (expense) | ||||||||
| Derivative expense | (86,484 | ) | – | |||||
| Change in fair value of derivatives | 251,625 | (219 | ) | |||||
| Interest expense – related party | (407,890 | ) | (804 | ) | ||||
| Total other income and expense | (242,749 | ) | (1,023 | ) | ||||
| Loss before provision for income tax | (6,201,099 | ) | (306,655 | ) | ||||
| Provision for income tax | – | – | ||||||
| Net loss | $ | (6,201,099 | ) | $ | (306,655 | ) | ||
| Loss attributable to common stockholders and loss per common share: | ||||||||
| Net loss | (6,196,084 | ) | (306,655 | ) | ||||
| Non-Controlling interest | 5,015 | – | ||||||
| Net loss | (6,201,099 | ) | (306,655 | ) | ||||
| Weighted average shares outstanding, basic and diluted | 3,554,486 | 700,000 | ||||||
| Net loss per basic and diluted share | $ | (1.74 | ) | $ | (0.44 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
VAPORIN, INC.
(FORMERLY VALOR GOLD CORP.)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2014 AND DECEMBER 31, 2013
| Preferred Stock | Additional | Non- | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A | Series B | Series C | Series E | Common Stock | Paid in | Accumulated | Controlling | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Total | |||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2013 | – | – | – | – | – | – | – | – | 700,000 | 70 | $ | 349,930 | $ | (306,819 | ) | – | $ | 43,181 | ||||||||||||||||||||||||||||||||||||||
| Recapitalization of the company | 60,000 | 6 | – | – | 2,000 | – | – | – | 1,883,250 | 188 | 66,026 | – | – | 66,220 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock – private placement | – | – | 100,000 | 10 | – | – | – | – | 820,993 | 82 | 4,357,378 | 4,357,470 | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for services | – | – | – | – | – | – | – | – | 363,250 | 36 | 1,294,459 | – | – | 1,294,495 | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued for the conversion of debt | – | – | – | – | – | – | – | – | 44,333 | 5 | 321,395 | – | – | 321,400 | ||||||||||||||||||||||||||||||||||||||||||
| Series E issued in connection with an acquisition | – | – | – | – | – | – | 2 | – | – | – | 3,142,854 | – | – | 3,142,854 | ||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series E into common shares | – | – | – | – | – | – | (2 | ) | – | 571,428 | 57 | (57 | ) | – | – | |||||||||||||||||||||||||||||||||||||||||
| Reclassification of derivative liability to equity | – | – | – | – | – | – | – | – | – | – | 90,064 | – | – | 90,064 | ||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation in connection with restricted stock grants | – | – | – | – | – | – | – | – | – | – | 1,239,130 | – | – | 1,239,130 | ||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation in connection with stock option grants | – | – | – | – | – | – | – | – | – | – | 3,284 | – | – | 3,284 | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued for conversion of preferred stock | (60,000 | ) | (6 | ) | – | – | (450 | ) | – | – | – | 510,000 | 51 | (45 | ) | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Non-Controlling interest in subsidiary | – | – | – | – | – | – | – | – | (10 | ) | – | 10 | – | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | – | – | – | – | (6,196,084 | ) | (5015 | ) | (6,201,099 | ) | |||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2014 | – | $ | – | 100,000 | 10 | 1,550 | – | – | – | 4,893,254 | $ | 489 | $ | 10,864,408 | (6,502,903 | ) | (5,005 | ) | $ | 4,356,999 | ||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
| 4 |
VAPORIN, Inc.
(FORMERLY VALOR GOLD CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Twelve
Months Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (6,201,099 | ) | $ | (306,655 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 19,987 | 6,082 | ||||||
| Amortization of debt discount | 253,844 | – | ||||||
| Derivative expense | 86,484 | – | ||||||
| Change in fair value of derivative liabilities | (251,625 | ) | – | |||||
| Interest expense in connection with the grant of warrants | 78,869 | – | ||||||
| Interest expense in connection with conversion of debt | 26,400 | – | ||||||
| Stock based compensation | 2,536,909 | – | ||||||
| Changes in operating assets and liabilities | ||||||||
| Due from merchant credit card processor | (160,216 | ) | – | |||||
| Trade and related party receivable | (72,027 | ) | (16,587 | ) | ||||
| Inventory | (517,908 | ) | (316,195 | ) | ||||
| Other current assets | (3,877 | ) | (32,522 | ) | ||||
| Accounts payable and accrued liabilities | 746,312 | 31,312 | ||||||
| Accrued Interest – Related party | – | 804 | ||||||
| NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | (3,457,947 | ) | (633,761 | ) | ||||
| INVESTING ACTIVITIES | ||||||||
| Acquisition of business, net of cash acquired | (798,000 | ) | – | |||||
| (Increase) decrease in intangible assets | – | (17,678 | ) | |||||
| (Increase) decrease in fixed assets | (61,007 | ) | (9,075 | ) | ||||
| NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | (859,007 | ) | (26,753 | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Payment of notes payable | (100,000 | ) | – | |||||
| Proceeds received from issuance of note payable | – | 75,000 | ||||||
| Proceeds received from issuance of note payable - related party | 1,000,000 | 610,735 | ||||||
| Proceeds received from issuance of note prior to recapitalization | 100,000 | – | ||||||
| Issuance of common stock, net of issuance costs | 3,857,470 | – | ||||||
| Issuance of preferred stock | 500,000 | – | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 5,157,470 | 685,735 | ||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 840,516 | 25,221 | ||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 25,221 | – | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 865,737 | $ | 25,221 | ||||
| Supplemental disclosures: | ||||||||
| Non cash activities: | ||||||||
| Reclassification of derivative liability to equity | 90,064 | – | ||||||
| Note payable converted to common stock | 295,000 | – | ||||||
| Note payable – related party exchanged to preferred stock pursuant to the Share Exchange | 285,710 | – | ||||||
| Issuance of note payable
in connection with the acquisition of business | 200,000 | – | ||||||
| Purchase of inventory
and other assets upon acquisition of business | 345,618 | – | ||||||
| Purchase of property
and equipment upon acquisition of business | 100,401 | – | ||||||
| Assumption of liabilities upon acquisition of business | 37,433 | – | ||||||
| Preferred Series A shares issued for conversion of debt | – | 350,000 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
| 5 |
NOTE 1 – NATURE OF OPERATIONS
Vaporin, Inc. (the “Company”), (formerly Valor Gold Corp.), was incorporated under the laws of the State of Delaware in June 2009. In January 2014, the Company entered into a Share Exchange Agreement (the “Share Exchange”) with Vaporin Florida, Inc., a privately-held Florida corporation (“Vaporin Florida”). Pursuant to the Exchange Agreement, all of the issued and outstanding common stock of Vaporin Florida was exchanged for an aggregate of 35 million shares of the Company’s common stock. The Share Exchange was accounted for as a reverse acquisition and re-capitalization, whereas Vaporin Florida is deemed the accounting acquirer and Vaporin, Inc. the legal acquirer. As a result, the assets and liabilities and the historical operations that are reflected in the Company’s financial statements are those of Vaporin Florida, and the Company’s assets, liabilities and results of operations will be consolidated with the assets, liabilities and results of operations of Vaporin Florida effective January 24, 2014. The Company is a distributor and marketer of vaporizers, e-liquids and related products.
Effective August 29, 2014 (the “Closing”), the Company , Vaporin Acquisitions, Inc., a Florida corporation and wholly-owned subsidiary of the Company (the “Merger Sub”), The Vape Store, Inc., a Florida corporation (“Vape Store”), and Steve and Christy Cantrell, holders of all outstanding Vape Store shares (the “Cantrells”) entered into and closed an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, Vape Store merged with and into Merger Sub (the “Merger”), with Merger Sub continuing as the surviving corporation and a wholly-owned subsidiary of the Company (see Note 7).
On September 8, 2014, the Company filed an amendment to its Certificate of Incorporation with the Secretary of State of Delaware effecting a 1-for-50 reverse stock split of the Company’s common stock (the “Reverse Split”). As a result of the Reverse Split, every 50 shares of the Company’s common stock were combined into one share of common stock. All shares and per share values for all periods presented in the accompanying consolidated financial statements are retroactively restated for the effect of the reverse stock split (see Note 10).
On November 6, 2014, the Company executed a binding Term Sheet to merge with and into Vapor Corp., a NASDAQ listed issuer. Shareholders of the Company will receive 45% of the combined company as merger consideration. On December 17, 2014, Vaporin, Inc. (“Vaporin”) and Vapor Corp. (“Vapor”) entered into an Agreement and Plan of Merger (the “Vapor Merger Agreement”) providing for the acquisition of Vaporin by Vapor. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Vaporin will be merged with and into Vapor (the “Vapor Merger”). Following the Merger, current shareholders of Vaporin common and preferred stock will own 45% of the outstanding shares of common stock of the combined company. On the same date, Vapor also entered into a joint venture with Vaporin (the “Joint Venture”) through the execution of an operating agreement (the “Operating Agreement”) of Emagine the Vape Store, LLC, a Delaware limited liability company (“Emagine”), pursuant to which the Registrant and Vaporin are 50% members of Emagine.
On March 4, 2015, the acquisition of Vaporin by Vapor (the “Vapor Merger”) was completed pursuant to the terms of the Merger Agreement. In connection with the Merger, Emagine became a wholly-owned subsidiary of the Vapor.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) and present the consolidated financial statements of the Company and its wholly-owned subsidiary. In the preparation of consolidated financial statements of the Company, all intercompany transactions and balances were eliminated.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
Risks and Uncertainties
The Company operates in an industry that is subject to rapid change and intense competition. The Company’s operations will be subject to significant risk and uncertainties including financial, operational, technological, regulatory and other risks, including the potential risk of business failure.
Cash and cash equivalents
The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. At December 31, 2014 and December 31, 2013, the Company had no cash equivalents.
Accounts receivable
The Company accounts receivable, represents our estimate of the amount that ultimately will be realized in cash. The Company reviews the adequacy and adjusts its allowance for doubtful accounts on an ongoing basis, using historical payment trends and the age of the receivables and knowledge of its individual customers. However, if the financial condition of our customers were to deteriorate, additional allowances may be required. While estimates are involved, bad debts historically have not been a significant factor given the diversity of its customer base and well established historical payment patterns. As of December 31, 2014 and December 31, 2013, the Company recorded allowance for uncollectable accounts of $61,000 and $0 respectively.
Inventory
Inventories are stated at the lower of cost or market value. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand, production availability and/or our ability to sell the product(s) concerned. Demand for our products can fluctuate significantly. Factors that could affect demand for our products include unanticipated changes in consumer preferences, general market and economic conditions or other factors that may result in cancellations of advance orders or reductions in the rate of reorders placed by customers and/or continued weakening of economic conditions. Additionally, our estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory. Product-related inventories are primarily maintained using the average cost method.
Fixed Assets
Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. The Company uses other depreciation methods (generally accelerated) for tax purposes where appropriate. The estimated useful lives for significant property and equipment categories are as follows:
| Equipment | 3-5 years | |
| Furniture | 7 years |
The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets.
Intangible assets
ASC 350 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of ASC 350. This standard also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment. The Company did not record any impairment charges on its intangible assets during the twelve months ended December 31, 2014 and 2013.
The Company’s intangible assets consist of the costs of building company’s website. Amortization will be recorded over the estimated useful life of the assets using the straight-line method for financial statement purposes.
Website Development Costs
Costs incurred in the planning stage of a website are expensed, while costs incurred in the development stage are capitalized and amortized over the estimated useful life of the asset.
Revenue recognition
The Company recognizes ecommerce revenues and the related cost of goods sold at the time the products are delivered to customers. Revenue generated through the Company’s brick and mortar locations is recognized at the point of sale. Discounts provided to customers are accounted for as a reduction of sales. The Company records a reserve for estimated product returns in each reporting period. Shipping and handling fees charged to the customer are recognized as revenue at the time the products are delivered to the customer. Revenues are presented net of any taxes collected from customers and remitted to governmental authorities.
Cost of sales
Cost of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost of merchandise, inbound freight expenses, freight-to-store expenses and other inventory related costs such as shrinkage, damages and replacements. Occupancy expenses consist of rent, depreciation and other occupancy costs, including common area maintenance, property taxes and utilities. Shipping costs consist of third party delivery services and shipping materials.
Shipping and Handling
Product sold to customers is shipped from our warehouse. Any freight billed to customers is offset against shipping costs and included in cost of goods sold.
Income taxes
The Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”) Income Taxes. Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Fair Value of Financial Instruments
We hold certain financial assets, which are required to be measured at fair value on a recurring basis in accordance with the Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” (“ASC Topic 820-10”). ASC Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). ASC Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Level 1 instruments include cash, account receivable, prepaid expenses, inventory and account payable and accrued liabilities. The carrying values are assumed to approximate the fair value due to the short term nature of the instrument. The carrying amount of the notes payable at December 31, 2014 approximate their respective fair value based on the Company’s incremental borrowing rate.
The following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis using significant unobservable input (Level 3) from January 1, 2014 to December 31, 2014:
| Conversion feature derivative liability | Warrant liability | |||||||
| Balance at January 1, 2014 | $ | 41,881 | $ | – | ||||
| Recognition of derivative liability | 72,064 | 271,688 | ||||||
| Reclassification of derivative liability to equity | (90,064 | ) | – | |||||
| Change in fair value included in earnings | (23,881 | ) | (227,742 | ) | ||||
| Balance at December 31, 2014 | $ | - | $ | 43,944 | ||||
The three levels of the fair value hierarchy under ASC Topic 820-10 are described below:
| ● | Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access. We believe our carrying value of level 1 instruments approximate their fair value at December 30, 2014. | |
| ● | Level 2 - Valuations based on quoted prices for similar assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. | |
| ● | Level 3 - Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. We consider depleting assets, asset retirement obligations and net profit interest liability to be Level 3. We determine the fair value of Level 3 assets and liabilities utilizing various inputs, including NYMEX price quotations and contract terms. |
Advertising
The Company expenses advertising costs as incurred. The Company’s advertising expenses totaled $983,507 and $0 during the twelve months ended December 31, 2014 and 2013.
Earnings (Loss) Per Share
Net earnings (loss) per share is computed by dividing net income (loss) less preferred dividends for the period by the weighted average number of common stock outstanding during each period. Diluted earnings (loss) per share is computed by dividing net income (loss) less preferred dividends for the period by the weighted average number of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.
For the year ended December 31, 2014, diluted net loss per share did not include the effect of a total of 1,680,374 shares of stock represented by 11,000 shares of common stock issuable upon the exercise of outstanding stock options, 119,374 shares of common stock issuable upon the exercise of outstanding warrants, and 1,650,000 shares of common stock issuable on the conversion of the preferred stock as their effect would be anti-dilutive.
Warranty
A return program for defective goods is offered to all of the Company’s online customers. Customers are allowed to return defective goods within a specified period of time (90 days), after shipment. The Company records a liability for its defective goods allowance program at the time of sale for the estimated costs that may be incurred. The liability for defective goods is included in warranty provisions on the Consolidated Balance Sheets.
Changes in the Company’s obligations for return and allowance programs are presented in the following table:
| Year Ended | ||||||||
| December 31, 2014 | December 31, 2013 | |||||||
| Estimated return and allowance liabilities at beginning of period | $ | 0 | $ | 0 | ||||
| Costs accrued for new estimated returns and allowances | $ | 4,500 | $ | 0 | ||||
| Return and allowance obligations honored | (0 | ) | (0 | ) | ||||
| Estimated return and allowance liabilities at end of period | $ | 4,500 | $ | 0 | ||||
Concentration of Business and Credit Risk
The Company has no significant off-balance sheet risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company’s financial instruments that are exposed to concentration of credit risks consist primarily of cash. The Company maintains its cash in bank accounts which, may at times, exceed federally-insured limits. We review a customer’s credit history before extending credit.
The following table shows significant concentrations in our revenues and accounts receivable for the periods indicated.
| Percentage of Revenue during the | Percentage of Accounts Receivable | |||||||||||||||
| period ended, | period ended, | |||||||||||||||
| December 31, 2014 | December 31, 2013 | December 31, 2014 | December 31, 2013 | |||||||||||||
| Customer A | 17 | % | 51 | % | 26 | % | 71 | % | ||||||||
| Customer B | 5 | % | 14 | % | 18 | % | 0 | % | ||||||||
Recent accounting pronouncements
Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
Year-end
The Company has adopted December 31 as its fiscal year end.
NOTE 3 – GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Since its inception, the Company has been engaged substantially in financing activities and developing its business plan and marketing. As a result, the Company incurred accumulated net losses during the year ended December 31, 2014 of $6,201,099. In addition to raising capital from the sale of equity, the Company’s development activities since inception have been financially sustained through capital contributions from note holders.
The ability of the Company to continue as a going concern is dependent upon its ability to raise additional capital from the sale of common stock or through debt financing and, ultimately, the achievement of significant operating revenues. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
NOTE 4 – INVENTORY
Inventories consist of the following:
| December 31, 2014 | December 31, 2013 | |||||||
| Finished goods | $ | 1,173,124 | $ | 316,195 | ||||
NOTE 5 – PROPERTY & EQUIPMENT
The following is a summary of property and equipment:
| December 31, 2014 | December 31, 2013 | |||||||
| Leasehold Improvements | $ | 47,443 | – | |||||
| Computer Equipment | 8,413 | $ | 8,413 | |||||
| Furniture, Fixtures and Equipment | 114,627 | 662 | ||||||
| Less: accumulated depreciation | (9,863 | ) | (680 | ) | ||||
| $ | 160,620 | $ | 8,395 | |||||
Depreciation for the twelve months ended December 31, 2014 and 2013 was $9,183 and $680, respectively.
NOTE 6 – INTANGIBLE ASSETS
Intangible assets consist of the following:
| December 31, 2014 | December 31, 2013 | |||||||
| Website, capitalized | $ | 17,678 | $ | 17,678 | ||||
| Less: accumulated amortization | (16,206 | ) | (5,402 | ) | ||||
| $ | 1,472 | $ | 12,276 | |||||
Amortization for the twelve months ended December 31, 2014 and 2013 was $10,804 and $5,402 respectively.
NOTE 7 – ACQUISITION
Effective August 29, 2014 (the “Closing”), the Company, Vaporin Acquisitions, Inc., a Florida corporation and wholly-owned subsidiary of the Company (the “Merger Sub”), The Vape Store, Inc., a Florida corporation (“Vape Store”), and Steve and Christy Cantrell, holders of all outstanding Vape Store shares (the “Cantrells”) entered into and closed an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, Vape Store merged with and into Merger Sub (the “Merger”), with Merger Sub continuing as the surviving corporation and a wholly-owned subsidiary of the Company.
In connection with the Merger Agreement, the Company paid the Cantrells $800,000 at the Closing and agreed to pay the Cantrells an additional $200,000 within 30 days of the Closing. In addition, the Company issued the Cantrells two shares of the Company’s newly created Series E Convertible Preferred Stock. On September 8, 2014, the Company’s Series E shares were converted to 571,428 shares of the Company’s common stock 10% of the shares of common stock will remain in escrow until completion of an audit of Vape Store’s balance sheet as of Closing. Additionally, the Company agreed to assume certain liabilities and business obligations of Vape Store, with respect to which the Company will indemnify the Cantrells. The Company valued these common shares at the fair market value on the date of grant at $5.50 per share or $3,142,854 based on a recent sale of common stock in a private placement. The total purchase price aggregated to $4,142,854. The transaction resulted in a business combination and caused Vape Store to become a wholly-owned subsidiary of the Company.
Pursuant to the Merger Agreement, the Company has an irrevocable option to repurchase from the Cantrells up to a total of 280,000 shares of the Company’s common stock at a price of $5.00 per share during the first 12 months following the Closing and at a price of $7.50 per share during the second 12 months following the Closing.
In connection with the Merger, the Company entered into an employment agreement, dated as of August 29, 2014 (the “Employment Agreement”) with Steve Cantrell. Under the terms of the Employment Agreement, Mr. Cantrell will serve as Vice President of the Company and receive an annual salary of $200,000. The Employment Agreement has an initial term of two years and is automatically renewable for successive one-year terms unless either party opts not to renew. In the event of termination by the Company other than for Cause or Abandonment, or in the event of termination by Mr. Cantrell for Good Reason (as capitalized terms are defined in the Employment Agreement), Mr. Cantrell will be entitled to severance in an amount equal to $400,000 less all salary previously received under the Employment Agreement. In accordance with the Employment Agreement, on September 5, 2014 the Company appointed Mr. Cantrell to serve as Vice President and as a Director of the Company.
The Company accounted for the acquisition utilizing the purchase method of accounting in accordance with ASC 805 “Business Combinations”. The Company is the acquirer for accounting purposes and Vape Store is the acquired company. Accordingly, the Company applied push–down accounting and adjusted to fair value all of the assets and liabilities directly on the financial statements of the subsidiary. The net purchase price paid by the Company was allocated to assets acquired and liabilities assumed on the records of the Company as follows:
| Current assets (including cash of $2,000) | $ | 341,021 | ||
| Other Assets | 6,597 | |||
| Property and equipment | 100,401 | |||
| Goodwill | 3,732,268 | |||
| Liabilities assumed | (37,433 | ) | ||
| Net purchase price | $ | 4,142,854 |
The following table summarizes the unaudited pro forma consolidated results of operations as though the Company and Vape Store acquisition had occurred on January 1, 2014:
| For the twelve months Ended | ||||||||
| December 31, 2014 | ||||||||
| As Reported | Pro Forma | |||||||
| Net Revenues | $ | 3,281,838 | $ | 5,056,029 | ||||
| Loss from operations | (5,958,350 | ) | (5,348,336 | ) | ||||
| Net Loss | (6,201,099 | ) | (5,534,088 | ) | ||||
| Loss per common share: | ||||||||
| Basic | $ | (1.74 | ) | $ | (1.56 | ) | ||
| Diluted | $ | (1.74 | ’) | $ | (1.56 | ) | ||
The unaudited pro forma consolidated income statements are for informational purposes only and should not be considered indicative of actual results that would have been achieved if the Company and Vape Store acquisition had been completed at the beginning of 2014, or results that may be obtained in any future period.
NOTE 8 – MERGER WITH VAPOR CORP.
On December 17, 2014, Vaporin, Inc. (“Vaporin”) and Vapor Corp. (“Vapor”) entered into an Agreement and Plan of Merger (the “Vapor Merger Agreement”) providing for the acquisition of Vaporin by Vapor. The Vapor Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Vapor Merger Agreement, Vaporin will be merged with and into Vapor (the “Vapor Merger”).The merger closed on March 4, 2015 whereby 100% of the issued and outstanding shares of Vaporin common stock (including shares of common stock issued upon conversion of Vaporin preferred stick immediately prior to the consummation of the merger agreement in accordance with the Vapor Merger Agreement) were converted into, and became 13,591,533 shares of Vapor common stock such that the former Vaporin stockholders collectively hold approximately 45% of the issued and outstanding shares of Vapor’s common stock following the consummation of the merger.
The options and warrants to acquire Vaporin common stock that are issued and outstanding as of the effective time of the Merger, as well as 910,000 restricted stock units which are exchangeable for Vaporin common stock, will be assumed by Vapor in the Merger and the number of shares issuable under such securities shall be adjusted to give effect to the Per Share Merger Consideration (as defined in the Merger Agreement).
The Merger Agreement contained customary representations and warranties of the Company and Vapor relating to their respective businesses. The Company and Vapor have agreed to use commercially reasonable efforts to preserve intact its business organization and that of its significant subsidiaries, as well as maintain its rights, franchises and existing relations with customers, suppliers and employees. The Merger Agreement also contains covenants by each party to furnish current information to the other party.
The Merger Agreement contained customary conditions that were satisfied prior to the closing of the merger, including the requirement for the Vapor to receive gross proceeds from a $3.5 million equity offering disclosed in Note 13. Additionally, the Vapor must have received commitments from certain third parties for financing of up to $25 million to be used for the construction of retail stores and which is contingent on the achievement of certain performance metrics.
NOTE 9 – NOTES PAYABLE
Convertible notes payable
On January 24, 2014, following the closing of the Share Exchange, the Company assumed convertible notes payable for a total of $350,000. On January 24, 2014, the debt discount on the convertible notes has a remaining balance of $253,844. These convertible notes payable consisted of the following:
$75,000 10% secured convertible promissory note due in June 2014 with a 5-year warrant to purchase 75,000 shares of the Company’s common stock at an exercise price of $10 per share for gross proceeds to the Company of $75,000. The note was convertible into shares of the Company’s common stock at an initial conversion price of $10 per share. In September 2014, the Company issued 11,000 shares of common stock for the conversion of principal debt of $75,000 including accrued interest of $7,500. The warrants have an exercise price of $0.50 per share, as a result of being reduced from $10 per share pursuant to full-ratchet anti-dilution protection. The Company accounted for the reduction of the conversion price from $10 to a lower price per share and such conversion under ASC 470-20-40 “Debt with Conversion and Other Options” and accordingly recorded an additional interest expense of $9,900 which is equal to the fair value of shares issued in excess of the fair value issuable pursuant to the original conversion terms.
$175,000 10% secured convertible promissory notes due in August 2014 with a 5-year warrant to purchase 30,000 shares of the Company’s common stock at an exercise price of $0.50 per share for gross proceeds to the Company of $175,000. The notes are convertible into shares of the Company’s common stock at an initial conversion price of $10 per share. In February 2014, the Company paid back the principal plus accrued interest owed to one of the investors for a sum total of $52,433. In September 2014, the Company issued 18,333 shares of common stock for the conversion of principal debt of $125,000 including accrued interest of $12,500. The warrants have an exercise price of $0.50 per share, as a result of being reduced from $10 per share pursuant to full-ratchet anti-dilution protection. The Company accounted for the reduction of the conversion price from $10 to a lower price per share and such conversion under ASC 470-20-40 “Debt with Conversion and Other Options” and accordingly recorded an additional interest expense of $16,500 which is equal to the fair value of shares issued in excess of the fair value issuable pursuant to the original conversion terms.
$100,000 of its 10% convertible promissory notes due in January 2015 with warrants to purchase up to an aggregate of 20,000 shares of the Company’s common stock at an exercise price of $5.00 per share for gross proceeds to the Company of $100,000. The notes are convertible into shares of the Company’s common stock at an initial conversion price of $5.00 per share, subject to adjustment. On January 22, 2014, prior to the closing of the Share Exchange, the Company issued 10,000 shares of the Company’s common stock in connection with the conversion of $50,000 of the notes at a conversion price of $5.00 per share. The warrants have an initial exercise price of $5.00 per share.
In accordance with ASC 470-20-25, the convertible notes were considered to have an embedded beneficial conversion feature because the effective conversion price was less than the fair value of the Company’s common stock. These convertible notes were fully convertible at the issuance date thus the value of the beneficial conversion and the warrants were treated as a discount on the convertible notes to be amortized over the term of the convertible notes. The fair value of this warrant was estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: expected dividend yield of 0%; expected volatility ranging from 120% to 131%; risk-free interest rate ranging from 1.39% to 1.73% and an expected holding period of five years. During the nine months ended December 31, 2014, amortization of debt discount amounted to $253,844 and was included in interest expense.
On January 14, 2014, prior to the closing of the Share Exchange, the Company granted warrants to purchase up to an aggregate of 12,500 shares of the Company’s common stock at an exercise price of $0.50 (collectively the “Additional Warrants”) to a certain note holder in connection with a note that is due in August 2014. The Company issued the Additional Warrants in connection with certain protection clause contained in the note holder’s respective securities purchase agreements as a result of the Company’s subsequent issuance in January 2014 of its warrants related to a convertible note payable at a per share price lower than the per share price paid by the note holder. The fair value of this warrant was estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: expected dividend yield of 0%; expected volatility of 131%; risk-free interest rate of 1.65% and an expected holding period of five years. During the year ended December 31, 2014, the Company recognized an interest expense of $78,869 and a corresponding derivative liability in connection with the Additional Warrants.
The initial conversion price of the notes above and initial exercise prices of warrants issued above are subject to full-ratchet anti-dilution protection. In accordance with ASC Topic 815 “Derivatives and Hedging”, these convertible notes include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings (see Note 7). Instruments with down-round protection are not considered indexed to a company’s own stock under ASC Topic 815, because neither the occurrence of a sale of common stock by the company at market nor the issuance of another equity-linked instrument with a lower strike price is an input to the fair value of a fixed-for-fixed option on equity shares.
Notes payable
On December 19, 2013, the Company issued a six month 10% note payable of $50,000. The note was scheduled to mature on June 18, 2014. In April 2014, the Company paid off the note including interest in the amount of $51,762.
On December 19, 2013, the Company issued a six month 10% note payable of $25,000. The note was scheduled to mature on June 18, 2014. In February 2014, the Company issued 5,000 shares of the Company’s common stock in connection with the full conversion of this note.
Notes payable – related party
In connection with the Merger Agreement, the Company agreed to pay the Cantrells $200,000 within 30 days of the Closing. The Company subsequently paid the $200,000 in October 2014.
At the closing of the Share Exchange, $285,710 in principal amount plus accrued interest of the notes were cancelled in exchange for the issuance of an aggregate of 100,000 shares of Series C Preferred Stock of the Company.
On December 8, 2014, Emagine the Vape Stores, LLC, a Delaware limited liability company (“Emagine”) managed by Vaporin, Inc., a Delaware corporation (the “Company”), entered into a Secured Line of Credit Agreement (the “Agreement”), effective as of December 1, 2014, with one affiliated shareholder of the Company and two unaffiliated investors (the “Lenders”). Under the Agreement, the Lenders agreed to advance up to $3,000,000 in three equal tranches in exchange for secured promissory notes which mature on March 31, 2016, bear interest at 12% per annum, and are secured by a first lien on the assets of Emagine. The first tranche of funding under the Agreement was provided on December 1, 2014.
The funds will be used to purchase and/or open Vape Stores similar to those operated by the Company. In connection with the completion of the Vapor Merger on March 4, 2015, Emagine became a wholly-owned subsidiary of Vapor.
NOTE 10 – DERIVATIVE LIABILITIES
In connection with the issuance of the 10% convertible notes (see Note 9), the Company determined that the terms of the convertible notes include a down-round provision under which the conversion price and exercise price could be affected by future equity offerings undertaken by the Company. Accordingly, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging - Contracts in an Entity’s Own Stock”, the convertible instrument was accounted for as a derivative liability at the date of issuance and adjusted to fair value through earnings at each reporting date. The Company has recognized a derivative liability of $43,944 and $0 at December 31, 2014 and December 31, 2013, respectively. The gain resulting from the decrease in fair value of this convertible instrument was $251,625 for year ended December 31, 2014. The derivative expense was $86,484, for year ended December 31, 2014. The Company reclassified $90,064 to paid-in capital due to the payment of convertible notes during the twelve months ended December 31, 2014.
The Company used the following assumptions for determining the fair value of the convertible instruments under the Black-Scholes option pricing model:
| December 31, 2014 | ||||
| Dividend rate | 0 | % | ||
| Term (in years) | 0.33 - 5 Years | |||
| Volatility | 126% - 131 | % | ||
| Risk-free interest rate | 0.05% - 1.73 | % | ||
NOTE 11 – STOCKHOLDERS’ EQUITY
The Company is authorized to issue up to 200,000,000 shares of common stock, par value $0.0001 per share, and 50,000,000 shares of blank check preferred stock, par value $0.0001 per share. On September 8, 2014, the Company filed an amendment to its Certificate of Incorporation with the Secretary of State of Delaware effecting the Reverse Split (the “Reverse Split”). As a result of the Reverse Split, every 50 shares of the Company’s common stock were combined into one share of common stock. Immediately after the September 8, 2014 effective date, the Company had approximately 3,826,493 shares of common stock outstanding. The authorized number of shares of the Company’s common stock and the par value remained the same. The Reverse Split did not affect the number of shares of preferred stock and certain derivative securities outstanding; however it did affect the number of shares issuable to holders upon conversion or exercise of such securities. All share and per share values for all periods presented in the accompanying consolidated financial statements are retroactively restated for the effect of the reverse stock split.
On May 30, 2014, the Board of Directors of the Company approved an amendment (the “Amendment”) to the 2014 Equity Incentive Plan (the “Plan”) which provides for the grant of incentive stock options, non-qualified stock options, restricted stock, restricted stock units (“RSUs”) and stock appreciation rights to employees, consultants, officers and directors of the Company in order to help the Company attract, retain and incentivize qualified individuals that will contribute to the Company’s success. The Amendment increased the maximum number of shares of the Company’s common stock that may be issued under the Plan from a total of 500,000 shares to a total of 1,000,000 shares.
Series A Preferred Stock
On April 8, 2014, the holders of all shares of the Company’s Series A Preferred Stock converted the shares of Series A Preferred Stock into a total of 60,000 shares of common stock. At December 31, 2014, the Company did not have any shares of Series A Preferred Stock outstanding.
Series B Preferred Stock
The Company has outstanding 100,000 shares of Series B Preferred Stock. Each share has a liquidation preference equal to $0.0001 per share. Shares of Series B Preferred Stock are convertible at any time on a share-for-share basis, subject to a limitation that the holder shall not at any time be a beneficial owner of more than 9.99% of the Company’s common stock outstanding at such time. The Series B votes on an as-converted basis, subject to this limitation. Holders of Series B have no dividend preference.
Series C Preferred Stock
The Company has outstanding 1,550 shares of Series C Preferred Stock. Each share has a liquidation preference equal to $0.0001 per share. Shares of Series C Preferred Stock are convertible at any time on a 1 share of Series C Preferred Stock-for-1,000 shares of common stock basis, subject to a limitation that the holder shall not at any time be a beneficial owner of more than 9.99% of the Company’s common stock outstanding at such time. The Series C votes on an as-converted basis, subject to this limitation. Holders of Series C have no dividend preference.
Series E Preferred Stock
On September 2, 2014, the Company filed a Certificate of Designation creating the Series E Convertible Preferred Stock of the Company. The Series E shares: (i) automatically convert into shares of the Company’s common stock at a rate of 285,714.29 shares of common stock for each share of Series E at such time that the Company has sufficient authorized capital, (ii) are entitled to vote on all matters submitted to shareholders of the Company on an as-converted basis and (iii) have a nominal liquidation preference. The Series E converted into common stock on September 8, 2014.
| (A) | Share Exchange |
| In January 2014, the Company entered into the Share Exchange with Vaporin Florida. Pursuant to the Exchange Agreement, all of the issued and outstanding common stock of Vaporin Florida was exchanged for an aggregate of 700,000 shares of the Company’s common stock. Additionally, the holders of all of Vaporin Florida’s issued and outstanding Series A Preferred Stock and the holders of outstanding notes of Vaporin Florida in the aggregate principal amount of $285,710 (the “Vaporin Florida Notes”) exchanged all of the outstanding shares of Vaporin Florida’s Series A Preferred Stock and converted the Vaporin Florida Notes into an aggregate of 2,000 shares of the Company’s Series C Preferred Stock. This transaction was accounted for as a reverse recapitalization of Vaporin Florida whereby Vaporin Florida is considered the acquirer for accounting purposes. The Company is deemed to have issued 1,883,250 shares of common stock and 60,000 shares of Series A Preferred Stock which represents the outstanding common and preferred stock of the Company just prior to the closing of the transaction. | |
| (B) | Private Placement |
| In January 2014, the Company entered into stock purchase agreements with accredited investors pursuant to which they purchased 115,000 shares of common stock and 100,000 shares of Series B Preferred Stock at a price of $5.00 per share for net proceeds of $1,043,500. The Company paid placement agent fees of $31,500 in connection with the sale of common and preferred stock. | |
| On April 1, 2014, the Company closed on a private placement of 503,993 shares of the Company’s common stock to accredited investors at a price per share of $5.00. Subsequent closings took place on April 7, 2014 and May 6, 2014. The offering generated gross proceeds to the Company of $2,529,965. As compensation, the acting placement agent for the offering received a commission of 10% of the gross proceeds from the shares it sold and a number of five-year warrants equal to 10% of the shares it sold. To date, the Company has paid the placement agent $144,997 and issued the placement agent 28,999 five-year warrants exercisable at $5.00 per share. The net proceeds to the Company, after deducting placement agent fees, legal fees, filing fees and escrow expenses, were $2,290,768. | |
| On August 29, 2014, the Company raised $880,000 in gross proceeds from the sale of 160,000 shares of common stock at a price of $5.50 per share in a private placement offering to four accredited investors. The Company has paid legal fees and escrow expenses related to the private placement of approximately $58,000 which resulted to a net proceeds to the Company of approximately $822,000. | |
| On September 29, 2014, the Company raised $220,000 in gross proceeds from the sale of 40,000 shares of common stock at a price of $5.50 per share in a private placement offering to four accredited investors. The Company has paid legal fees, filing fees and escrow expenses related to the private placement of approximately $18,700 which resulted to a net proceeds to the Company of approximately $201,000. | |
| The securities were not registered under the Securities Act and were issued and sold in reliance upon the exemption from registration contained in Section 4(a)(2) of the Act and Rule 506(b) promulgated thereunder. | |
| (C) | Common stock for services |
| In March 2014, the Company issued an aggregate of 51,000 shares of the Company’s common stock to two consultants for consulting services rendered. The Company valued these common shares at the fair market value on the date of grant at approximately $5.00 per share or $255,000 based on the sale of commons stock in a private placement at $5.00 per common share. In connection with the issuance of these common shares, the Company recorded stock based consulting for the year ended December 31, 2014 of $255,000. | |
| Between April 2014 and May 2014, the Company issued an aggregate of 102,000 shares of the Company’s common stock to various consultants for consulting and accounting service rendered. The Company valued these common shares at the fair market value on the date of grant at approximately $5.00 per share or $510,000 based on the sale of commons stock in a private placement at $5.00 per common share. In connection with the issuance of these common shares, the Company recorded stock based consulting for the year ended December 31, 2014 of $510,000. |
On May 30, 2014, the Board of Directors approved the grant under the Plan of 400,000 restricted stock units (“RSU”) to Marlin Capital Investments, LLC, a consultant to the Company, 200,000 RSU’s to Greg Brauser, the Company’s Chief Operating Officer, and 200,000 RSU’s to Scott Frohman, the Company’s Chief Executive Officer and Director. All the RSU’s will vest quarterly in approximately equal installments over a three-year period from the date of issuance or upon a “change in control” as defined in the Plan, subject to the consultant’s or individual’s continued service to the Company on each applicable vesting date, with delivery of shares taking place on the third anniversary of the date of issuance. In connection with the grant of these RSU’s, the Company recorded stock based compensation and consulting in the year ended December 31, 2014 of $1,239,129.
Between July 2014 and August 2014, the Company issued an aggregate of 34,250 shares of the Company’s common stock to various consultants for consulting service rendered. In connection with the issuance of these common shares, the Company recorded stock based consulting for twelve year ended December 31, 2014 of $124,375.
In July 2014, the Company entered into a one-year employment agreement for a Vice President of Internet Marketing. The Company granted the executive 10,000 restricted shares of common stock and 5,000 stock options exercisable at $4.15 vesting quarterly over a three-year period. The Company valued these common shares at the fair market value on the date of grant at $5.00 per share or a total of $50,000 based on the quoted trading price on the grant date. In connection with the issuance of these common shares, the Company recorded stock based compensation for the year ended December 31, 2014 of $50,000. The 5,000 stock options were valued on the grant date at approximately $17,650 or $3.53 per option using a Black-Scholes option pricing model with the following assumptions: stock price of approximately $4.15 per share, volatility of 127%, expected term of 5 years, and a risk free interest rate of 1.70%.
Between October 2014 and December 2014, the Company issued an aggregate of 196,000 shares of the Company’s common stock to various consultants for consulting service rendered. In connection with the issuance of these common shares, the Company recorded stock based consulting for year ended December 31, 2014 of $355,120.
(D) Stock Options
A summary of the stock options for the twelve months ending December 31, 2014 and for the year ending December 31, 2013 and changes during the period are presented below:
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | ||||||||||
| Recapitalization on January 24, 2014 | 6,000 | 20.00 | 8.69 | |||||||||
| Granted | 5,000 | 4.15 | 5.00 | |||||||||
| Exercised | - | - | - | |||||||||
| Forfeited | - | - | - | |||||||||
| Cancelled | - | - | - | |||||||||
| Balance outstanding at December 31, 2014 | 11,000 | $ | 12.80 | 6.29 | ||||||||
| Options exercisable at December 31, 2014 | 4,917 | $ | 19.00 | |||||||||
| Options expected to vest | 4,583 | |||||||||||
| Weighted average fair value of options granted during the twelve months ended December 31, 2014 | $ | 3.53 |
Stock options outstanding at December 31, 2014 as disclosed in the above table have no intrinsic value at the end of the period. For the twelve months ended December 31, 2014, total stock-based compensation related to the options was $3,284. The value of stock based compensation expense not yet recognized pertaining to unvested options and stock grants was approximately $2,047,883 at December 31, 2014.
(E) Stock Warrants
A summary of the status of the Company’s outstanding stock warrants for the twelve months ending December 31, 2014 and for the year ending December 31, 2013 and changes during the period then ended is as follows:
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | |||||||||||
| Recapitalization on January 24, 2014 | 90,375 | 14.00 | 4.32 | ||||||||||
| Granted | 28,999 | 5.00 | 5.00 | ||||||||||
| Cancelled | - | - | - | ||||||||||
| Forfeited | - | - | - | ||||||||||
| Exercised | - | - | - | ||||||||||
| Balance at December 31, 2014 | 119,374 | $ | 12.00 | 3.60 | |||||||||
| Warrants exercisable at December 31, 2014 | 119,374 | $ | 12.00 | 3.60 | |||||||||
| Weighted average fair value of warrants granted during the twelve months ended December 31, 2014 | $ | 5.00 | |||||||||||
NOTE 12 – RELATED PARTY TRANSACTIONS
The Company purchases most of its products from Direct Source China, LLC. , an entity controlled by Gregory Brauser, our Chief Operating Officer. This entity purchases the products directly from the manufacturers in China and charges the Company an 8% premium. The Company paid Direct Source net of all credits approximately $509,000 for products for the twelve months ended December 31, 2014.
Note Payable – Related Party – See Note 9
During the year ended December 31, 2014, the Company paid total of $24,500 in consulting fees to related parties.
The Company purchases most of its products from Direct Source China, LLC. , an entity controlled by Gregory Brauser, our Chief Operating Officer. This entity purchases the products directly from the manufacturers in China and charges the Company an 8% premium. The Company paid Direct Source net of all credits approximately $509,000 for products for the twelve months ended December 31, 2014.
NOTE 13 – SUBSEQUENT EVENTS
On January 20, 2015, Vaporin, Inc. (the “Company”) and Vapor Corp. (“Vapor”) entered into a Securities Purchase Agreement with certain accredited investors providing for the sale of $350,000 of the Company’s Convertible Notes (the “Notes”). The Notes accrue interest on the outstanding principal at an annual rate of 10%. The principal and accrued interest on the Notes is due and payable on January 20, 2016. Assuming the merger between the Company and Vapor (“Merger”) closes, the Notes will be convertible into Vapor common stock at the lower of (i) $1.08 or (ii) a 15% discount to a 20-trading day VWAP following the closing of the merger (subject to a maximum issuance of 525,000 shares). If the Merger does not close, the Notes will not be convertible into either the Company’s or Vapor’s stock. Investors were provided with standard piggyback registration rights which are conditioned on the Merger closing.
On January 29, 2015, Vaporin, Inc. (the “Company”) was issued a $350,000 note by Vapor Corp. (“Borrower”) in consideration for a loan of $350,000. The note accrues interest on the outstanding principal at an annual rate of 12%. The principal and accrued interest on the note is due and payable on January 29, 2016 (the “Maturity Date”). If the merger between the Company and the Borrower (“Merger”) does not close by May 31, 2015 (the “End Date”), the Maturity Date will accelerate and become due June 1, 2015. Additionally, if the Merger does not close by the End Date or in the event of a default by the Borrower, the note will be convertible into the Borrower’s common stock at 85% of the Borrower’s closing price on May 29, 2015. If the merger closes prior to the End Date, the note shall not be convertible. The note shall not be convertible until such time as the Nasdaq Stock Market (“Nasdaq”) approves the issuance of the shares underlying the note.
On March 4, 2015, the acquisition of Vaporin by Vapor (the “Vapor Merger”) was completed pursuant to the terms of the Merger Agreement. In connection with the Merger, Emagine became a wholly-owned subsidiary of the Vapor.