Merger With Vaporin, Inc.

3 Months Ended

Mar. 31, 2015

Business Combinations [Abstract]

Merger With Vaporin, Inc.

Note 3. MERGER WITH VAPORIN, INC.

Merger with Vaporin, Inc.

On December 17, 2014, the Company entered into the Merger Agreement with Vaporin pursuant to which Vaporin was to merge with and into the Company with Vapor being the surviving and controlling entity (as a result of the current stockholders of the Company maintaining more than 50% ownership in the Company’s outstanding shares of common stock and the current Vapor directors comprising the majority of the board). The Merger closed on March 4, 2015 and the purchase price consideration paid by the Company consisted of the following:

1.

100% of the issued and outstanding shares of Vaporin common stock (including shares of common stock issued upon conversion of Vaporin preferred stock immediately prior to the consummation of the merger in accordance with the Merger Agreement) were converted into, and became 13,591,533 shares of the Company’s common stock such that the former Vaporin stockholders collectively hold approximately 45% of the issued and outstanding shares of the Company’s common stock following consummation of the Merger. The aggregate value of these shares issued was $14,949,328, or approximately $1.10 per share, and was based on the closing price of the Company’s common stock on March 4, 2015.

2.

100% of the issued shares of Vaporin restricted stock units were converted into the right to receive 1,890,237 shares of the Company’s common stock. The restricted stock units became fully-vested in connection with the Merger and as a result, were included as a part of the Company’s purchase price as no further services from the holders is required to be provided to the Company. The 1,890,237 restricted stock units remain outstanding as of March 31, 2015. The aggregate value of these shares issued was $2,079,071, or approximately $1.10 per share, and was based on the closing price of the Company’s common stock on March 4, 2015. Based on the terms of the Merger Agreement, the Company has agreed to issue these in twelve equal monthly instalments, with the first delivery date being the date of the closing of the Merger, however, all shares of common stock to be delivered on March 15, 2016 to the extent they are not previously delivered.

The Merger Agreement contained customary conditions that were satisfied prior to the closing of the merger, including the requirement for the Company to receive gross proceeds from a $3.5 million equity offering (See Note 5).

Additionally, as required by the Merger Agreement the Company received non-binding 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 by the Company.

The fair value of the purchase consideration issued to the sellers of Vaporin was allocated to fair value of the net tangible assets acquired, with the resulting excess allocated to separately identifiable intangibles, and the remainder recorded as goodwill.  Goodwill recognized from the transactions mainly represented the expected operational synergies upon acquisition of the combined entity and intangibles not qualifying for separate recognition. Goodwill is not expected to be deductible for income tax purposes in the tax jurisdiction of the acquired business. The purchase price allocation was based, in part, on management’s knowledge of Vaporin’s business and the results of a preliminary third party appraisal commissioned by management. The fair value was based on a preliminary valuation.

Purchase Consideration
Value of consideration paid:	$	17,735,084
Tangible assets acquired and liabilities assumed at fair value
Cash	$	136,468
Due from merchant credit card processor		201,141
Accounts receivable		81,256
Inventories		981,558
Property and Equipment		206,668
Other Assets		28,021
Notes payable, net of debt discount of $54,623		(512,377	)
Notes payable – related party		(1,000,000	)
Accounts Payable and accrued expenses		(775,753	)
Derivative Liabilities		(49,638	)
Excess liabilities over assets assumed	$	(706,685	)
Consideration:
Value of common stock issued		17,028,399
Excess liabilities over assets assumed		706,685
Total purchase price	$	17,735,084
Identifiable intangible assets
Trade names and technology		1,500,000
Customer relationships		488,274
Assembled workforce		92,326
Total Identifiable Intangible Assets		2,080,600
Goodwill		15,654,484
Total allocation to identifiable intangible assets and goodwill	$	17,735,084

In addition, in connection with the Merger, an aggregate $354,029 of a note and interest payable by the Company to Vaporin was forgiven.

In connection with the Merger Agreement, the Company also issued 247,962 warrants to purchase the Company’s common stock to certain warrant holders of Vaporin as replacement for warrants issued in connection with previous Vaporin note payable issuances. In addition, the Company also issued 19,733 options to purchase common stock to certain holders of Vaporin as replacement for options issued for services. The Company determined that based on the remaining term of the warrants and options as well as the nature of the remaining services to be provided by the holders that the value of the warrants and options at the date of the Merger was not material.

The Company was unable to report the financial results of Vaporin for the period from the date the Merger closed on March 4, 2015 through March 31, 2015. The accounting and reporting operations of Vaporin were fully integrated into the Company at Merger and it is impracticable to separate. The following presents the unaudited pro-forma combined results of operations of the Company with Vaporin as if the acquisition occurred on January 1, 2014.

	For the three months Ended
	March 31,
	2015			2014
Revenues	$	2,584,884		$	4,975,337
Net Loss	$	(5,378,927	)	$	(2,590,724	)
Net Loss per share	$	(0.17	)	$	(0.08	)
Weighted Average number of shares outstanding		31,260,183			30,766,022

The unaudited pro-forma results of operations are presented for information purposes only. The unaudited pro-forma results of operations are not intended to present actual results that would have been attained had the acquisition been completed as of January 1, 2014 or to project potential operating results as of any future date or for any future periods.

In connection with the acquisition of Vaporin, the Company acquired net deferred tax assets consisting of net operating loss carryforwards offset by the difference between the book and tax basis of intangible assets acquired. At the acquisition date, this net deferred tax asset has been completely offset by a valuation allowance.

The Joint Venture

On December 17, 2014, the Company and Vaporin agreed to enter into the Joint Venture through Emagine, a Delaware limited liability company of which the Company and Vaporin are 50% members. The Operating Agreement provides that Vaporin will serve as the initial manager of Emagine and will manage the day-to-day operations of Emagine, subject to certain customary limitations on managerial actions that require the unanimous consent of the Company and Vaporin, including but not limited to making or guaranteeing loans, distributing cash or other property to the members of Emagine, entering into affiliate transactions, amending or modifying limited liability company organizational documents, and redeeming or repurchasing membership interests from any of the members. The results of operations of Emagine from January 1, 2015 through the date of the Merger were not material.

In connection with the completion of the Merger on March 4, 2015, Emagine became a wholly-owned subsidiary of the Company.