Item 1.
DESCRIPTION OF BUSINESS
Our Business
We are a company engaged in the electronic
cigarette and personal vaporizer industry. We own a portfolio of electronic cigarette and personal vaporizer patents (the “Patents”)
which are the basis for our efforts to:
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Design, market and distribute a line of e liquids under the “HELIUM” brand;
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Design, market and distribute electronic cigarettes;
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Prosecute and enforce our patent rights;
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License our intellectual property; and
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Develop private label manufacturing programs.
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Electronic Cigarettes and Personal Vaporizers
“Electronic cigarettes” or “e-cigarettes,”
are battery-powered products that enable users to inhale nicotine vapor without smoke, tar, ash, or carbon monoxide. Electronic
cigarettes look like traditional cigarettes and, regardless of their construction are comprised of three functional components:
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a mouthpiece, which is a small plastic cartridge that contains a liquid nicotine solution;
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the heating element that vaporizes the liquid nicotine so that it can be inhaled; and
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the electronics, which include: a lithium-ion battery, an airflow sensor, a microchip controller and an LED, which illuminates to indicate use.
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When a user draws air through the electronic
cigarette, the air flow is detected by a sensor, which activates a heating element that vaporizes the solution stored in the mouthpiece
/cartridge, the solution is then vaporized and it is this vapor that is inhaled by the user. The cartridge contains either a nicotine
solution or a nicotine free solution, either of which may be flavored.
Personal vaporizers are similar in form and
function to electronic cigarettes but typically have a larger form factor and are used to vaporize solutions that are not nicotine
based and may include flavors and or flavor combinations.
Our Electronic Cigarettes, Personal Vaporizers
Electronic Cigarettes
We have developed a line of electronic cigarette
e liquids which are currently sold under the brand name “Helium.” We plan to develop a complete line of disposable
and rechargeable electronic cigarettes and personal vaporizers. Our electronic cigarettes will be available in multiple sizes,
puff counts, flavors and nicotine strengths.
Disposable electronic cigarettes feature
a one-piece construction that houses all the components and is utilized until the nicotine or nicotine free solution is depleted.
Rechargeable electronic cigarettes feature
a rechargeable battery and replaceable cartridge. The cartridges are changed when the solution is depleted from use.
Personal Vaporizers
Personal Vaporizers or vaporizers typically
feature a tank and a chamber, a heating element and a battery. The vaporizer user fills the tank with a liquid solution or the
chamber with wax, dry herb or leaf. The vaporizer battery can be recharged and the tank and chamber can be refilled.
Our Patents
We own a portfolio of U.S. and Chinese issued
patents, which include:
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Electronic Cigarette, Patent 8,205,622 as issued by the United States Patent and Trademark Office on May 14, 2012,
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Multifunctional Electronic Inhaler, Patent ZL2011-2-0096290.6 as issued by the Patent Office Of The People’s Republic Of China on 11/23/2011,
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Electronic Pipe, Patent ZL2008-2-0123801.7 as issued by the Patent Office Of The People’s Republic Of China on September 2, 2009,
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Atomizer for Electronic Cigarette, Patent ZL2008-2-0109333.8 as issued by the Patent Office Of The People’s Republic Of China on May 20, 2009,
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Electronic Cigarette, Patent ZL2009-2-0106627.x as issued by the Patent Office Of The People’s Republic Of China on January 3, 2010,
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Disposable Integrated E-Atomizing Inhaler, Patent ZL2008-2-0124683.1 as issued by the Patent Office Of The People’s Republic Of China on January 13, 2010,
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Electronic Atomizer, Patent ZL2008-3-0084421.2 as issued by the Patent Office Of The People’s Republic Of China on May 27, 2009, and
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Electronic Cigar, Patent ZL2008-3-0132968.5 as issued by the Patent Office Of The People’s Republic Of China on October 10, 2009.
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The Market for Electronic Cigarettes, US, China
Electronic cigarettes are generally marketed
as an alternative to traditional tobacco burning cigarettes. Because electronic cigarettes offer a “smoking” experience
without the burning of tobacco leaf, electronic cigarettes offer users the ability to satisfy their nicotine cravings without the
byproducts of smoke, tar, ash or carbon monoxide. In many cases electronic cigarettes are not subject to the use prohibitions of
tobacco-burning cigarettes and therefore may be used in more places than conventional cigarettes, however, certain states, cities,
businesses, providers of transportation and public venues in the U.S. have already banned the use of electronic cigarettes, while
others are considering banning the use of electronic cigarettes. We cannot provide any assurances that the use of electronic cigarettes
will not be banned anywhere traditional tobacco burning cigarette use is banned.
Global Market
The global e-cigarette market is expected
to grow over $50 billion by 2025, at an estimated compound annual growth rate (“CAGR”) of 22.36% from 2015 to 2025.
The market will witness a staggering growth until 2017, by when most of the regulatory and policy framework will fall into place.
The growth rate will significantly increase thereafter, with significant revenue generation from evolving markets of Asia Pacific
(“APAC”) and Europe.
Moreover, while disposable e-cigarettes dominated
the global e-cigarette product market till 2014, rechargeable e-cigarettes, followed by personal vaporizers and mods will soon
take over the top market positions in terms of revenue generation. The U.S. market will continue with its dominance through the
forecast period, however, China is expected to grow at the fastest CAGR to become the second largest revenue generating country
by the end of 2025.
Distribution and Sales
The distribution and sales strategy for our
products is tailored to the characteristics of each market, whether it be geographical or demographical.
Our sales and distribution channels
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Direct Sales and Distribution, where we have set up our own distribution directly to retailers.
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Single independent distributors who are responsible for distribution within a single market.
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Exclusive Territory and Exclusive Channel Distribution, where distributors have an exclusive territory within a country or an exclusive right to sell within a distribution channel (e.g. gas station).
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Distribution through wholesalers, where we supply either national or regional wholesalers who then service retailers.
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Internet/E-commerce Sales, where we sell directly to end users through one of our internet websites and or landing pages.
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Business Strategy
VPR Brands is a holding company, whose assets
include issued U.S. and Chinese patents for atomization related products including technology for medical marijuana vaporizers
and electronic cigarette products and components. The company is also engaged in product development for the vapor or vaping market,
including e-liquids. Electronic cigarettes (also known as ecigs or e-cigs) are electronic devices which deliver nicotine through
atomization, or vaping of e-liquids and without smoke and other chemicals constituents typically found in traditional tobacco burning
cigarette products.
Our portfolio of electronic cigarette and
personal vaporizer patents (the “Patents”) are the basis for our efforts to:
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Design, market and distribute a line of e liquids under the “HELIUM” brand;
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Design, market and distribute electronic cigarettes;
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Prosecute and enforce our patent rights;
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License our intellectual property; and
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Develop private label manufacturing programs.
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Our branded electronic cigarette e-liquids:
HELIUM
We design, develop and market electronic
cigarette e liquids sold under the Helium brand. Our electronic cigarette e liquids are marketed as an alternative to tobacco burning
cigarettes. We launched the Helium brand in limited U.S. markets in the first quarter of 2016 and grow distribution through third
party distributors. Shortly after our U.S. launch we plan to introduce our electronic cigarette brand to the Chinese market. China
is the largest producer and consumer of tobacco products in the world, however we believe that Chinese consumption of electronic
cigarettes trails U.S. adoption and use. We believe that an opportunity exists to develop and expand our business and our Helium
brand electronic cigarette e-liquids in China.
On March 4, 2016, the Company announced a
new e-liquid innovation, namely Helium Hi Definition E-Liquid, that is chilled 20 degrees below room temperature by mini-chillers
or desktop chillers designed by the Company to maintain optimum flavor, freshness and aroma by cooling the e-liquids (reducing
the escape of molecules from the mixture of e-liquids into the headspace). Helium Hi Definition E-Liquid will come in (i) a 50ml,
squeezable bottle with a drip tip, for our mini chillers, (ii) a 180ml bottle for our personal desktop chiller, or (iii) a sample
pack of the 5 flavors offered which are a one-time use in 2ml tubes that are air tight. Helium Hi Definition E-Liquids were available
for pre-orders on March 15, 2016 on VapeHelium.com and will be available for sale in Vape shops in the United States by April 1,
2016.
Patent Rights
We are evaluating our options and conducting
investigations to determine if and which parties may be infringing our intellectual property, both in the United States of American
and in the Peoples Republic of China. In the U.S., we are exploring legal options and strategies related to prosecuting infringers
and pursuing available remedies.
License our Technology
In light of recent lawsuits filed against
several electronic cigarette companies, we believe that an opportunity exists to license our patented technology to companies named
in those lawsuits and others who may be seeking an alternative to the electronic cigarette technologies which are or may be subject
to patent litigation.
Private label
As an extension of our plan to license our
technology to other electronic cigarette companies, we plan to offer private label manufacturing programs for electronic cigarette
companies that would rather purchase a finished
manufactured product, rather than simply purchasing a license to manufacture their
products using our technology. We believe that we have a greater understanding of the manufacturing process than a licensee would
and that we can better oversee the manufacturing process of our patented technologies and offer a more reliable and higher quality
product through our supply chain than can otherwise be achieved by third parties.
Corporate Information
We were incorporated in New York on July
19, 2004, as Jobsinsite.com, Inc. Our articles of incorporation were amended on August 5, 2004, to change our name to Jobsinsite,
Inc. On June 18, 2009, we merged with a Delaware corporation and became Jobsinsite, Inc. On July 1, 2009, we filed articles of
conversion with the secretary of state of Delaware and became Soleil Capital L.P., a Delaware limited partnership. On September
2, 2015, we amended our articles of incorporation to change our name to VPR Brands, LP. We are managed by Soleil Capital Management
LLC, a Delaware limited liability company.
The Company is engaged in various monetization
strategies of a portfolio of patents the Company owns in both the US and China, covering electronic cigarette, electronic cigar
and personal vaporizer patents. We currently market a brand of electronic cigarette e liquids marketed under the brand “Helium”
in the United States and are undertaking efforts to establish distribution of our electronic cigarette e liquids brand in China.
We are currently also identifying electronic cigarette companies that may be infringing our patents and exploring options to license
and or enforce our patents.
Since our inception, the Company has generated
nominal revenues through the sale of software items related to the job search industry and in 2009 management actively explored
opportunities to manage private capital, specifically the Company had plans to sponsor and manage limited partnerships organized
for the purpose of exploring opportunities to acquire securities in secondary transactions of venture backed businesses and dispensing
capital to seed stage venture capital opportunities. As a result of the Company’s new business direction and in an effort
to establish operations in the venture capital and private equity industry, the Company has reorganized the business and restructured
the Company as a public limited partnership. In 2013, management identified an opportunity to acquire a portfolio of electronic
cigarette and personal vaporizers patents. In connection with this transaction the Company’s business objectives pivoted
and the Company is now focusing its efforts on the electronic cigarette and personal vaporizer industry and is pursuing plans to
commercialize and monetize its portfolio of electronic cigarette and personal vaporizer patents. Prior to the Company’s decision
to design, develop and market electronic cigarette e liquids sold under the Helium brand in March 2016, the Company had designed,
developed and marketed electronic cigarettes sold under the RED brand.
On December 27, 2013, the Company entered
into a patent acquisition agreement (the “Purchase Agreement”), by and among the Company and Guocheng “Greg”
Pan, a natural person, pursuant to which the Company agreed to purchase certain electronic cigarette and personal vaporizer patents
owned and invented by Mr. Pan (the “Purchased Assets”). Under the terms of the Purchase Agreement and in consideration
for the acquisition of the Purchased Assets, the Company issued to Mr. Pan (and certain of his designees) 10,501,700 common units
representing limited partnership units of the Company and a warrant to purchase 2,000,000 common units representing limited partnership
units of the Company. The warrants entitle Mr. Pan (or his designees) to purchase common units of the Company at $0.15 per common
unit with an expiration date ten years from the effective date of the Purchase Agreement.
The patents were originally valued based
on number of shares issued, warrants issued, valuation of the traded stock at the time of issuance and similar patents sold during
the year. Based on these assumptions the Company has valued the assets purchased at approximately $5.5 million at the time of purchase.
During the year ended December 31, 2014 the Company determined due to lack of sales and projected sales and completion in the industry
the value of the patent should be significantly reduced. As a result the Company has written off the entire patent.
In April 2015, the Company issued 25,000
of the Company’s Common Units to Gordon Hung in exchange for services for the Company valued at $12,500.
On May 29, 2015, the Company, entered into
a Share Purchase Agreement with Kevin Frija (“Frija Share Purchase Agreement”) for a private placement (“Private
Placement”) of up to 50,000,000 common units representing limited partnership interest of the Company. The Private Placement
has been expected to occur in multiple tranches. For the first tranche, on June 4, 2015, the Company issued 10,000,000 shares of
its Common Units to Kevin Frija at a purchase price of $0.01 per share, resulting in gross proceeds of $100,000 to the Company.
In subsequent tranches, Kevin Frija has the right to buy an additional 40,000,000 Common Units at a purchase price of $0.01 per
share. The Company has been expecting to receive gross proceeds of $400,000 in the aggregate upon the closing of the subsequent
tranches of the Private Placement, which is expected to be completed by September, 2016. No placement agent has participated in
the Private Placement.
In connection with the Share Purchase Agreement,
the Company has named Kevin Frija chief executive officer and chairman of the board of directors of the Company and as a manager
of the Company’s general partner, Soleil Capital Management LLC (the “General Partner”). Contemporaneous with
Mr. Frija’s appointment as chief executive officer and chairman of the board of Directors, the Company’s current chief
executive officer and chairman of the board of directors, Messrs. Jon Pan and Greg Pan, respectively, have resigned from their
respective positions. Notwithstanding, Mr. Greg Pan continues to serve as a member of the board of directors of the Company and
as a manager of the General Partner and Mr. Jon Pan continues to serve as a consultant to the Company. In consideration and as
severance, for Jon Pan’s resignation as chief executive officer, the Company and the General Partner have entered into that
certain Share Purchase Agreement with Jon Pan wherein the Company agreed to grant Jon Pan the right to purchase 10,000,000 of the
Company’s Common Units, at a price of $0.01 per share.
In August 2015, the Company issued 1,980,000
of the Company’s common unit to the former CEO, Jon Pan in exchange for repayment of funds advanced of $8,000 and future
consulting services totaling $11,800. The Company will amortize the prepaid expenses over the next 15 months starting October 1,
2015.
On September 2, 2015, in accordance with
authority granted to the General Partner under the Company’s Limited Partnership Agreement, the General Partner changed the
Company’s name (“Name Change”) from Soleil Capital L.P. to VPR Brands, LP by filing an amendment to the Company’s
Certificate of Limited Partnership with the Delaware Secretary of State. Accordingly, on September 10, 2015, the Company’s
General Partner also amended the Company’s Limited Partnership Agreement to reflect the Name Change from Soleil Capital L.P.
to VPR Brands, LP. On September 17, 2015, the Financial Industry Regulatory Authority (FINRA) approved the Name Change and the
Company’s new trading symbol VPRB.
The Company, Soleil Capital Management LLC
and Greg Pan entered into a Termination of Share Purchase Agreement on August 18, 2015, which terminated the Share Purchase Agreement,
dated June 1, 2015, among the Company, Soleil Capital Management LLC and Greg Pan.
On December 9, 2015, Kevin Frija sold an
aggregate of 9,000,000 of his shares of Common Units at a sale price of $0.01 per share (for an aggregate of $90,000) to Jacob
Levy (1,000,000 shares), Nissim Levy (1,000,000 shares), Sara Morad (1,000,000 shares), Yaron Edery (1,000,000 shares), Barry Rub
(2,000,000 shares), Hannah Frija (2,000,000 shares), and Ralph Frija (1,000,000 shares).
On March 28, 2016, Mr. Frija exercised a
right to buy 15,000,000 shares of the Common Units at a purchase price of $0.01 per share, resulting in 15,000,000 shares of Common
Units issued to Mr. Frija in exchange for gross proceeds of $150,000 to the Company, pursuant to the terms of the Frija Share Purchase
Agreement
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leaving a balance of 25,000,000 shares of Common Units to purchase at $0.01 per
share under the right to buy under the Frija Share Purchase Agreement.
On
April
29, 2016, the Company issued an aggregate of 720,000 common units, valued at $0.02 per common unit (for an aggregate of $14,400),
to four consultants as total compensation paid-in-advance for services related to product development, creative direction and sales
and marketing to be provided under their respective consulting agreements with the Company.
On May 23, 2016 ($20,000) and May 31, 2016
($20,000) and June 16, 2016 ($10,000), pursuant to the terms of the Frija Share Purchase Agreement, Mr. Frija exercised a
right to buy 5,000,000 Common Units at a purchase price of $0.01 per unit, resulting in 5,000,000 Common Units issued to Mr. Frija
in exchange for total gross proceeds of $50,000 to the Company, leaving a balance of 20,000,000 Common Units to purchase at $0.01
per unit (an aggregate purchase price of $200,000) under the right to buy under the Frija Share Purchase Agreement.
On
July 29, 2016, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Vapor Corp. (“Vapor”)
and the Company’ Chief Executive Officer, Kevin Frija (the former Chief Executive Officer of Vapor), pursuant to which Vapor
sold Vapor’s wholesale operations and inventory related thereto (collectively, “Assets”) to the Company, which
Vapor’s business is operated at 3001 Griffin Road, Dania Beach, Florida 33312
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The
Vapor acquisition and the line of business was accounted for using the purchase method. The cost of the acquisition is measured
at the aggregate of the fair values, at the date of the exchange, of assets given and liabilities incurred or assumed in exchange
for the business line acquired. The acquiree’s identifiable assets and liabilities are recognized at their fair values at
the acquisition date.
The Company entered
into a Securities Purchase Agreement (the “SPA”) with DiamondRock, LLC, an unaffiliated third party (“DiamondRock”),
pursuant to which the Company sold to Diamond Rock a $500,000 convertible promissory note (the “Note”) for a purchase
price of $475,000, reflecting an original issue discount of $25,000. The transactions under the SPA closed on November 29, 2016,
and the Note was issued on that date.
The Note permits the
Company to make additional borrowings under the Note. On November 29, 2016, DiamondRock advanced the first tranche to the Company
in the amount of $71,250, which reflected the first borrowing in the amount of $75,000, less the prorated portion of the original
issue discount.
Amounts advanced under
the Note bear interest at the rate of 8% per year, and the maturity date for each tranche is 12 months from the funding of the
applicable tranche. The Company may prepay any amount outstanding under the Note prior to the actual maturity date for a 35%.
DiamondRock has the
right to convert the outstanding and unpaid principal amount and accrued and unpaid interest of the respective tranche of the Note
into shares of common stock of the Company, subject to the limitation that DiamondRock may not complete a conversion if doing so
would cause DiamondRock to own in excess of 4.99% of the Company’s outstanding shares of common stock, provided that DiamondRock
may waive that limitation and increase the ownership cap to up to 9.99%. The conversion price for any conversion under the Note
is equal to the lesser of (i) $0.50 and (ii) 65% of the volume weighted average trading price of the Company’s common over
the 7 trading days ending on the last complete trading day prior to the date of the conversion. In addition, in the event that
the Company enters into certain transactions with other parties that provide for a conversion price at a larger discount (than
35%) to the trading price of the Company’s common stock, or provides for a longer look-back period, then the conversion price
and look-back period under the Note will be adjusted to be such lower conversion price and longer look-back period, as applicable.
If at any time while
the Note is outstanding, the Company enters into a transaction structured in accordance with, based upon, or related or pursuant
to, in whole or in part, Section 3(a)(10) of the Securities Act of 1933, as amended (covering certain exchange transactions), then
a liquidated damages charge of 25% of the outstanding principal balance of the Note at that time will be assessed and will become
immediately due and payable to DiamondRock, either in the form of cash payment or as an addition to the balance of the Note, as
determined by mutual agreement of the Company and DiamondRock.
The Note also contains
a right of first refusal such that, if at any time while the Note is outstanding, the Company has a bona fide offer of capital
or financing from any 3rd party that the Company intends to act upon, then the Company must first offer such opportunity to DiamondRock
to provide such capital or financing on the same terms. The SPA and the Note contain customary representations, warranties and
covenants for transactions of this type.
On November 28, 2016,
the Company and Kevin Frija, the Company’s Chief Executive Officer, entered into a Termination of Certain Provisions of Share
Purchase Agreement (the “Frija Termination Agreement”), pursuant to which the Company and Mr. Frija terminated, to
the extent not already completed, the rights and obligations of the parties under Section 2 and Section 3 of the Share Purchase
Agreement entered into between them on May 29, 2015.
The Frija Termination
Agreement operated to terminate, to the extent not already completed, all of the options, rights and obligations of the parties
under Section 2 and Section 3 of the Frija SPA, which sections provided for the sale of up to 50,000,000 shares of the Company’s
common units (“Common Units”) by the Company to Mr. Frija at a price of $0.01 per Share.
The sales under the
Frija SPA had been expected to occur in multiple tranches. The following sales have occurred under the Frija SPA, all at a price
of $0.01 per Common Unit:
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June 4, 2015 - 10,000,000 Common Units, for gross proceeds of $100,000 to the Company;
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(ii)
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March 28, 2016 - 15,000,000 Common Units, for gross proceeds of $150,000 to the Company;
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(iii)
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May 23, 2016 - 200,000 Common Units, for gross proceeds to the Company of $20,000;
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May 31, 2016 - 200,000 Common Units, for gross proceeds to the Company of $20,000; and
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June 16, 2016 - 100,000 Common Units, for gross proceeds to the Company of $10,000.
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No additional sales have been completed
under the Frija SPA and thus the Frija Termination Agreement operated to terminate the Company’s and Mr. Frija’s rights
and obligations with respect to the remaining 20,000,000 Common Units available for sale under the Frija SPA.
Contemporaneous with
Mr. Frija’s appointment as Chief Executive Officer and Chairman of the Board of Directors on June 5
th
, 2015, the
Company’s prior Chief Executive Officer, Mr. Jon Pan. resigned from his position as Chief Executive Officer of the Company.
In connection with, and in consideration and as severance for, Mr. Pan’s resignation as Chief Executive Officer, the Company
and Mr. Pan entered into a Share Purchase Agreement on June 1, 2015 wherein the Company agreed to grant Mr. Pan the right to purchase
10,000,000 Common Units, at a price of $0.01 per Common Unit as disclosed in the Company’s Quarterly Report on Form 10-Q
filed on August 19, 2015 (the “Pan SPA”). Mr. Pan currently continues to serve as a consultant to the Company
On November 28, 2016,
the Company and Mr. Pan entered into a Termination Agreement (the “Pan Termination Agreement”), pursuant to which the
Company and Mr. Pan terminated, to the extent not already completed, the rights and obligations of the parties under Section 1
and Section 2 of the Pan SPA.
The Pan Termination
Agreement operated to terminate, to the extent not already completed, all of the options, rights and obligations of the parties
under Section 1 and Section 2 of the Pan SPA, which sections provided for the sale of up to 10,000,000 Common Units by the Company
to Mr. Pan at a price of $0.01 per Common Unit. Through November 28, 2016, no Common Units had been sold to Mr. Pan, and thus the
Pan Termination Agreement operated to terminate the Company’s and Mr. Pan’s rights and obligations with respect to
all 10,000,000 Common Units available for sale under the Pan SPA.
To the extent not terminated
by the Frija Termination Agreement and the Pan Termination Agreement, the Frija SPA and the Pan SPA, respectively, remain in full
force and effect.
No placement agent has
participated in the sales under the Frija SPA or the Pan SPA. No termination fees were incurred by the Company pursuant to either
the Frija Termination Agreement or the Pan Termination Agreement.
On March 13, 2017, the Company
entered into an agreement with MAPH Enterprises, LLC (“MAPH”) pursuant to which MAPH agreed to provide certain business
advisory and consulting services in exchange for payment by the Company of $75,000 and the issuance by the Company of 600,000 restricted
shares of Company common stock. The term of the agreement begins on March 13, 2017 and ends on May 1, 2017. Either party may terminate
the agreement prior to its expiration upon written notice to the other party upon (a) the failure of any party to cure a material
default under the Engagement Letter within five business days after receiving written notice of such default from the terminating
party; (b) the bankruptcy or liquidation of either party; (c) the use by any party of any insolvency laws; (d) the performance
of MAPH’s services under the Engagement Letter; and (e) the appointment of a receiver for all or a substantial portion of
either parties’ assets or business. If terminated, MAPH shall not be required to perform any additional services beyond the
termination date and all fees described in the agreement shall be deemed earned in full.
Competition
Competition in the electronic cigarette industry
is intense. We compete with other sellers of electronic cigarettes, the nature of our competitors is varied as the market is highly
fragmented and the barriers to entry into the business are low. Our direct competitors sell products that are substantially similar
to ours and through the same channels through which we sell our electronic cigarette products. We compete with these direct competitors
for sales
through distributors, wholesalers and retailers, including but not limited to national chain stores, tobacco shops, gas
stations, travel stores, shopping mall kiosks, in addition to direct to public sales through the internet, mail order and telesales.
As a general matter, we have access to and market and sell the similar electronic cigarettes as our competitors and since we sell
our products at substantially similar prices as our competitors.
Part of our business strategy focuses on
the establishment of contractual relationships with distributors. We are aware that e-cigarette competitors in the industry are
also seeking to enter into such contractual relationships. In many cases, competitors for such contracts may have greater management,
human, and financial resources than we do for entering into such contracts and for attracting distributor relationships. Furthermore,
certain of our electronic cigarette competitors may have better control of their supply and distribution, be, better established,
larger and better financed than our Company.
We also compete against “big tobacco”,
U.S. cigarette manufacturers of both conventional tobacco cigarettes and electronic cigarettes like Altria Group, Inc., Lorillard,
Inc. and Reynolds American, Inc. We compete against “big tobacco” who offers not only conventional tobacco cigarettes
and electronic cigarettes but also smokeless tobacco products such as “snus” (a form of moist ground smokeless tobacco
that is usually sold in sachet form that resembles small tea bags), chewing tobacco and snuff. “Big tobacco” has nearly
limitless resources, global distribution networks in place and a customer base that is fiercely loyal to their brands. Furthermore,
we believe that “big tobacco” will devote more attention and resources to developing and offering electronic cigarettes
as the market for electronic cigarettes grows. Because of their well-established sales and distribution channels, marketing expertise
and significant resources, “big tobacco” is better positioned than small competitors like us to capture a larger share
of the electronic cigarette market.
We may also face competition from other patent
holders, including but not limited to, Imperial Tobacco Group Plc, Europe’s second-biggest tobacco company, who in September,
2013 acquired a portfolio of electronic cigarette patents from buy Dragonite International Ltd.’s (formerly Ruyan Group Holdings
Limited) for $75 million, as we attempt to negotiate and contract with other electronic cigarette companies to license our intellectual
property.
Manufacturing
We depend on third party manufacturers
for our electronic cigarettes, vaporizers and accessories. Our customers associate certain characteristics of our products including
the weight, feel, draw, unique flavor, packaging and other attributes of our products to the brands we market, distribute and sell.
Any interruption in supply and/or consistency of our products may adversely impact our ability to deliver our products to our wholesalers,
distributors and customers and otherwise harm our relationships and reputation with customers, and have a materially adverse effect
on our business, results of operations and financial condition.
Although we believe that several alternative
sources for our products are available, any failure to obtain the components, chemical constituents and manufacturing services
necessary for the production of our products would have a material adverse effect on our business, results of operations and financial
condition.
Source and Availability of Raw Materials
We believe that an adequate supply of product
and raw materials will be available to us as needed and from multiple sources and suppliers.
Intellectual Property
We own a portfolio of issued electronic cigarette
and personal vaporizer related patents. Our Patents, listed below are issued by the United State Patent and Trademark Office and
the Patent Office of the People’s Republic of China. Our Patents include:
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Electronic Cigarette, Patent 8,205,622 as issued by the United States Patent and Trademark Office on May 14, 2012,
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Multifunctional Electronic Inhaler, Patent ZL2011-2-0096290.6 as issued by the Patent Office of The People’s Republic
of China on 11/23/2011,
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Electronic Pipe, Patent ZL2008-2-0123801.7 as issued by the Patent Office of The People’s Republic Of China on September
2, 2009,
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Atomizer for Electronic Cigarette, Patent ZL2008-2-0109333.8 as issued by the Patent Office of The People’s Republic of
China on May 20, 2009,
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Electronic Cigarette, Patent ZL2009-2-0106627.x as issued by the Patent Office of The People’s Republic of China on January
3, 2010,
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Disposable Integrated E-Atomizing Inhaler, Patent ZL2008-2-0124683.1 as issued by the Patent Office of The People’s Republic
of China on January 13, 2010,
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Electronic Atomizer, Patent ZL2008-3-0084421.2 as issued by the Patent Office of The People’s Republic of China on May
27, 2009, and
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Electronic Cigar, Patent ZL2008-3-0132968.5 as issued by the Patent Office of The People’s Republic of China on October
10, 2009.
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In addition as per the acquisition of certain assets from Vapor Corp the Company the Company has acquired various trademarks
and domains. The following is the list of trademarks:
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Trademark
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Application
No.
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Application
Date
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Registration
No.
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Registration
Date
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VAPORIN
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B-BUZZ’N
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86856758
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12/22/15
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N/A
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N/A
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CHILLER B
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86856798
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12/22/15
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5012851
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2-Aug-16
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ECIGTRONICS
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85371221
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7/14/11
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4191835
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14-Aug-12
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EZSMOKER
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77681034
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3/2/09
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3800589
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8-Jun-10
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FIFTY-ONE
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77514632
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7/3/08
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3762126
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23-Mar-10
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FUMARE
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85419589
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9/10/11
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4302950
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12-Mar-13
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GOLDMINE
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85495797
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12/15/11
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4186101
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7-Aug-12
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GREENLINE
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85495369
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12/14/11
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4186059
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7-Aug-12
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GREEN PUFFER
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77683491
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3/4/09
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3800608
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8-Jun-10
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HONEY STICK
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86711441
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7/31/15
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4877766
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29-Dec-15
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HOOKAH STIX
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85432021
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9/26/11
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4388693
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20-Aug-13
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KRAVE
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77598996
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10/23/08
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3753097
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23-Feb-10
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MINIMAX
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85714681
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8/28/12
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4385494
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13-Aug-13
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RED LINE
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85495799
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12/15/11
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4186102
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7-Aug-12
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SMOKE STAR
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77846705
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10/12/09
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3795716
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1-Jun-10
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THE BEE KEEPER
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86856822
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12/22/15
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5012853
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2-Aug-16
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THE B-HIGH’V
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86856819
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12/22/15
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5017261
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9-Aug-16
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THE BUMBLER
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86856830
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12/22/15
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5012854
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2-Aug-16
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THE TRIO
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77956805
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3/11/10
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3876177
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16-Nov-10
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VAPE NAKED
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86693699
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7/15/15
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5043802
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20-Sep-16
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VAPOR X
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85200284
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12/17/10
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4005660
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2-Aug-11
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VAPORE
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85419587
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9/10/11
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4306905
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19-Mar-13
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VX
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86043664
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8/21/13
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4542479
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3-Jun-14
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The following are the website domains acquired:
Greenecig.com
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Greenpuffer.com
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Mrecig.com
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Nicstics.com
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Onedollarecig.com
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Onedollarecigs.com
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Smokeexchange.com
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Smokegenius.com
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www.vaporin.com
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www.kraveit.com
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www.vapehoneystick.com
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www.ivaporx.com
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Government Regulation
Pursuant to a December 2010, decision, by
the U.S. Court of Appeals for the District of Columbia Circuit, in Sottera, Inc. v. Food &Drug Administration, 627 F.3d 891
(D.C. Cir. 2010), the United States Food and Drug Administration (the “FDA”) is permitted to regulate electronic cigarettes
as “tobacco products” under the Family Smoking Prevention and Tobacco Control Act of 2009 (the “Tobacco Control
Act”).
Under this Court decision, the FDA is not
permitted to regulate electronic cigarettes as “drugs” or “devices” or a “combination product”
under the Federal Food, Drug and Cosmetic Act unless they are marketed for therapeutic purposes.
Because we do not market our electronic cigarettes
for therapeutic purposes, our electronic cigarettes are subject to being classified as “tobacco products” under the
Tobacco Control Act. The Tobacco Control Act grants the FDA broad authority over the manufacture, sale, marketing and packaging
of tobacco products, although the FDA is prohibited from issuing regulations banning all cigarettes or all smokeless tobacco products,
or requiring the reduction of nicotine yields of a tobacco product to zero.
The Tobacco Control Act also requires establishment,
within the FDA’s new Center for Tobacco Products, of a Tobacco Products Scientific Advisory Committee to provide advice,
information and recommendations with respect to the safety, dependence or health issues related to tobacco products.
The Tobacco Control Act imposes significant
new restrictions on the advertising and promotion of tobacco products. For example, the law requires the FDA to finalize certain
portions of regulations previously adopted by the FDA in 1996 (which were struck down by the Supreme Court in 2000 as beyond the
FDA’s authority). As written, these regulations would significantly limit the ability of manufacturers, distributors and
retailers to advertise and promote tobacco products, by, for example, restricting the use of color, graphics and sound effects
in advertising, limiting the use of outdoor advertising, restricting the sale and distribution of non-tobacco items and services,
gifts, and sponsorship of events and imposing restrictions on the use for cigarette or smokeless tobacco products of trade
or brand
names that are used for non-tobacco products. The law also requires the FDA to issue future regulations regarding the promotion
and marketing of tobacco products sold or distributed over the internet, by mail order or through other non-face-to-face transactions
in order to prevent the sale of tobacco products to minors.
It is likely that the Tobacco Control Act
could result in a decrease in tobacco product sales in the United States, including sales of our electronic cigarettes.
On April 24, 2014 the Food and Drug Administration
released a proposed set of deeming regulations on electronic cigarettes and other nicotine and tobacco based products. The proposed
regulations include the following requirements:
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Manufacturers would need to register each of their manufacturing facilities with the FDA, submit a product list including a list of ingredients, and report any harmful and potentially harmful constituents.
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Retailers would not be allowed to provide free samples of electronic cigarettes to adults.
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The minimum age to purchase electronic cigarettes in addition to other deemed tobacco products would be 18 years old and retailers will be required to verify through photographic identification the legal minimum age of a customer who is younger than 27 years old.
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For newer tobacco products that were not on the market as of February 15, 2007, manufacturers of these products would need to submit what is called a premarket tobacco application (PMTA) to the FDA within 24 months following the effective date of the final deeming regulations. If a PMTA application is filed with the FDA during this 24 month period, then the manufacturer can continue to market its products unless and until the FDA responds to the application.
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The FDA would require under a new health warning on the packaging and advertisements for electronic cigarettes which would read: “WARNING: This product contains nicotine derived from tobacco. Nicotine is an addictive chemical.”
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The proposed deeming regulation does not ban flavors for electronic cigarettes.
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In the proposed deeming regulations, the FDA acknowledges that the agency does not have sufficient scientific data about e-cigarettes to determine what effect they have on the public health. The FDA will continue to analyze the potential benefits and harms of e-cigarettes and is seeking additional scientific data to determine how e-cigarettes should be regulated given the fact that the products may be lower risk than combustible tobacco products. The FDA may consider additional regulations on e-cigarettes in the future.
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The deeming regulations do not include a ban on the Internet sale of e-cigarettes. In addition, the regulations do not restrict or prohibit television advertising of e-cigarettes.
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E-cigarette manufacturers are required to
complete and file a premarket tobacco application to continue to sell their products. This application procedure is a complicated,
expensive and time consuming process. The FDA estimates that it will take a manufacturer approximately 5,000 hours to complete
one premarket tobacco application for a tobacco product (electronic cigarette), which would include conducting scientific studies
on the new product and submitting all of the relevant paperwork.
The FDA is accepting comments on the deeming
regulations for a period of 75 days, which ends on July 9, 2014. These comments will be important since industry recommendations
and data provided to the FDA would all
be taken into consideration by the agency in establishing the final rules and regulations
for electronic cigarette products.
From a timing perspective, the process to
finalize the deeming regulations may take many months and as long as two years.
We cannot predict the impact the regulations
may have on our company specifically or the electronic cigarette industry generally, and the effect on our business, results of
operations and financial condition the regulation will have.
In this regard, total compliance and related
costs are not possible to predict and depend substantially on the future requirements imposed by the FDA under the Tobacco Control
Act. Costs, however, could be substantial and could have a material adverse effect on our business, results of operations and financial
condition. In addition, failure to comply with the Tobacco Control Act and with FDA regulatory requirements could result in significant
financial penalties and could have a material adverse effect on our business, financial condition and results of operations and
ability to market and sell our products. At present, we are not able to predict whether the Tobacco Control Act will impact us
to a greater degree than competitors in the industry, thus affecting our competitive position.
State and local governments currently legislate
and regulate tobacco products, including what is considered a tobacco product, how tobacco taxes are calculated and collected,
to whom and by whom tobacco products can be sold and where tobacco products may or may not be smoked. Certain states and cities
have enacted laws which preclude the use of electronic cigarettes where traditional tobacco burning cigarettes cannot be used and
others have proposed legislation that would categorize electronic cigarettes as tobacco products, equivalent to their tobacco burning
counterparts. If the use of electronic cigarettes is banned anywhere the use of traditional tobacco burning cigarettes is banned,
electronic cigarettes may lose their appeal as an alternative to cigarettes; which may have the effect of reducing the demand for
our products and as a result have a material adverse effect on our business, results of operations and financial condition.
At present, neither the Prevent All Cigarette Trafficking Act (which prohibits the use of the U.S. Postal Service to mail most tobacco products and which amends the Jenkins Act, which would require individuals and businesses that make interstate sales of cigarettes or smokeless tobacco to comply with state tax laws) nor the Federal Cigarette Labeling and Advertising Act (which governs how cigarettes can be advertised and marketed) apply to electronic cigarettes. The application of either or both of these federal laws to electronic cigarettes would have a material adverse effect on our business, results of operations and financial condition.
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 (“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:
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the levying of substantial and increasing tax and duty charges;
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restrictions or bans on advertising, marketing and sponsorship;
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the display of larger health warnings, graphic health warnings and other labeling requirements;
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restrictions on packaging design, including the use of colors and generic packaging;
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restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;
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requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels;
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requirements regarding testing, disclosure and use of tobacco product ingredients;
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increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;
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elimination of duty free allowances for travelers; and
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encouraging litigation against tobacco companies.
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On January 28, 2016, President Obama signed
the Child Nicotine Poisoning Prevention Act of 2015, legislation that “requires the packaging of liquid nicotine containers
for use in electronic cigarettes to be subject to existing child poisoning prevention packaging standards.”
“Liquid nicotine container” is
described in the bill to: (1) include a package from which nicotine in a solution or other form is accessible through normal and
foreseeable use by a consumer and that is used to hold soluble nicotine in any concentration; and (2) exclude a sealed, pre-filled,
and disposable container of nicotine in a solution or other form in which such container is inserted directly into an electronic
cigarette, electronic nicotine delivery system, or other similar product, if the nicotine in the container is inaccessible through
customary or reasonably foreseeable handling or use, including reasonably foreseeable ingestion or other contact by children.
The definition covers bottles of refillable
nicotine-containing e-liquid sold directly to consumers for use in “open-system” electronic vaping devices, but not packaging
for zero-nicotine e-liquid, according to a report by The National Law Review.
Special packaging requirements also would
not apply to “closed-system” e-cigarettes (cigalikes) where the e-liquid is not intended to come into contact with or
be handled by the consumer, said the report.
The new bill, which would take effect 180
days after it was signed into law, does not limit or preempt the U.S. Food & Drug Administration’s (FDA) authority to regulate
e-cigarettes, and the FDA would still be empowered to impose its own packaging requirements, the report said.
If 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.
Employees
As of March 29, 2017, we have nineteen (19)
employees. None of our employees is represented by a collective bargaining agreement and we believe that our relationship with
our employees is good.
Various portions of this report contain
forward-looking statements that involve risks and uncertainties. Actual results, performance or achievements could differ materially
from those anticipated in these forward-looking statements as a result of certain risk factors, including those set forth below
and elsewhere in this report. These risk factors are not presented in the order of importance or probability of occurrence. For
purposes of these risk factors, the term “electronic cigarettes” is deemed to include “vaporizers.”
Risks Related to Our Business
We have incurred losses in the past and cannot assure
you that we will be successful and or achieve profitable operations.
As of December 31, 2016, we had an accumulated
deficit of $(6,013,832) which we have incurred since our inception. To date we have explored various business opportunities, without
success and can give no assurances that we will be successful in our current operations in the electronic cigarette industry.
Our business is difficult to evaluate because we are a
new enterprise with relatively no operating history
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We have no relevant operating history in
the electronic cigarette industry upon which an investor can make an evaluation of the likelihood of our success. Owners of our
securities must consider the uncertainties, expenses and difficulties frequently encountered by companies such as ours that are
in the early stages of development. Our operations may never generate significant revenues and we may never achieve profitable
operations or positive investment returns. An investor should consider the likelihood of our future success to be highly speculative
in light of our limited operating history, as well as the problems, limited resources, expenses, risks and complications frequently
encountered by similarly situated companies in the early stages of development.
Our management team lacks experience in managing a public
company and the obligations incident to being a public company will place significant demands on our management.
Our officers lack experience in running a
public company. Our success is substantially dependent on the performance of our executive officers. In particular, our success
depends substantially on the continued efforts of our executive officers and our Board of Directors.
As a public reporting company, we are required
to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, including periodic reports, disclosures
and more complex accounting rules. As directed by Section 404 of Sarbanes-Oxley, the SEC adopted rules requiring public companies
to include a report of management on a company’s internal control over financial reporting in their Annual Report on Form
10-K. In addition, the independent registered public accounting firm auditing our financial statements must attest to and report
on the effectiveness of our internal control over financial reporting. Based on current rules, we are required to report under
Section 404(a) of Sarbanes-Oxley regarding the effectiveness of our internal control over financial reporting. If we are unable
to conclude that we have effective internal control over our financial reporting as required by Section 404(a), investors could
lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock.
Further, our auditors are required, under Section 404(b) of Sarbanes-Oxley, to report on the effectiveness of our internal control
over financial reporting.
Currently, we do not have key person life
insurance on Mr. Frija, our sole executive officer and a board member, or Greg Pan, a board member, and may be unable to obtain
such insurance in the near future due to high cost or other reasons. The loss of the services of Mr. Frija, Mr. Pan or any of our
key employees could have a material adverse effect on our business, if we are unable to find suitable replacements.
We cannot predict our future capital needs and we may
not be able to secure additional financing.
We have limited cash on hand of $83,785 as
of December 31, 2016. Any cash on hand is currently not generating any revenue from operations. We expect to raise capital required
to operate our business through public or private equity offerings, debt financings and or corporate collaborations.
There can be no assurance that any such funding
will be available to us at terms acceptable to the Company. Further, we currently have no credit facility or similar financing
currently available and any debt financing, if available, may involve restrictive covenants, which may limit our operating flexibility
with respect to certain business matters. If additional funds are raised through the issuance of equity securities, the percentage
ownership of our existing stockholders will be reduced and our stockholders will experience additional dilution in net tangible
book value per common unit. If adequate funds are not available on acceptable terms, we may be unable to successfully market our
products, take advantage of future opportunities, repay debt obligations as they become due or respond to competitive pressures,
any and all of which would have an adverse effect on our business.
Our operating history makes it difficult to accurately
predict our future success.
We acquired our portfolio of electronic
cigarette patents on December 27, 2013. Prior to that we operated as a venture capital firm and prior to that we operated in the
job search space. Because we have a very limited operating history in the electronic cigarette industry, it is difficult to accurately
predict our future sales and appropriately budget our expenses. Additionally, our operations will be subject to risks inherent
in the establishment of a developing new business, including, among other things, efficiently deploying our capital, developing
our products, developing and implementing our marketing campaigns and strategies and developing brand awareness and acceptance
of our products. Our ability to generate future sales will be dependent on a number of factors, many of which are beyond our control,
including the pricing of competing products, overall demand for our products, changes in consumer preferences, market competition
and government regulation. If we do not generate sales as anticipated, we could incur significant losses and may not be able to
cover our operating expenses in a timely manner if at all.
A United States Federal Court decision permits the United
States Food and Drug Administration to regulate electronic cigarettes as “tobacco products” under the Family Smoking
Prevention and Tobacco Control Act of 2009 and the United States Food and Drug Administration has indicated that it intends to
do so.
Based on the December 2010 U.S. Court of
Appeals for the D.C. Circuit’s decision in
Sottera, Inc. v. Food & Drug Administration
, 627 F.3d 891 (D.C. Cir.
2010), the United States Food and Drug Administration (the “FDA”) is permitted to regulate electronic cigarettes as
“tobacco products” under the Family Smoking Prevention and Tobacco Control Act of 2009 (the “Tobacco Control
Act”).
Under this Court decision, the FDA is not
permitted to regulate electronic cigarettes as “drugs” or “devices” or a “combination product”
under the Federal Food, Drug and Cosmetic Act unless they are marketed for therapeutic purposes.
Because we do not market our electronic
cigarettes for therapeutic purposes, our electronic cigarettes are subject to being classified as “tobacco products”
under the Tobacco Control Act. The Tobacco Control Act grants the FDA broad authority over the manufacture, sale, marketing and
packaging of tobacco products, although the FDA is prohibited from issuing regulations banning all cigarettes or all smokeless
tobacco products, or requiring the reduction of nicotine yields of a tobacco product to zero. Among other measures, the Tobacco
Control Act (under various deadlines):
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increases the number of health warnings required on cigarette and smokeless tobacco products, increases the size of warnings on packaging and in advertising, requires the FDA to develop graphic warnings for cigarette packages, and grants the FDA authority to require new warnings;
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requires practically all tobacco product advertising to eliminate color and imagery and instead consist solely of black text on white background;
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imposes new restrictions on the sale and distribution of tobacco products, including significant new restrictions on tobacco product advertising and promotion as well as the use of brand and trade names;
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bans the use of “light,” “mild,” “low” or similar descriptors on tobacco products;
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gives the FDA the authority to impose tobacco product standards that are appropriate for the protection of the public health (by, for example, requiring reduction or elimination of the use of particular constituents or components, requiring product testing, or addressing other aspects of tobacco product construction, constituents, properties or labeling);
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requires manufacturers to obtain FDA review and authorization for the marketing of certain new or modified tobacco products;
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requires pre-market approval by the FDA for tobacco products represented (through labels, labeling, advertising, or other means) as presenting a lower risk of harm or tobacco-related disease;
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requires manufacturers to report ingredients and harmful constituents and requires the FDA to disclose certain constituent information to the public;
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mandates that manufacturers test and report on ingredients and constituents identified by the FDA as requiring such testing to protect the public health, and allows the FDA to require the disclosure of testing results to the public;
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requires manufacturers to submit to the FDA certain information regarding the health, toxicological, behavioral or physiologic effects of tobacco products;
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prohibits use of tobacco containing a pesticide chemical residue at a level greater than allowed under federal law;
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requires the FDA to establish “good manufacturing practices” to be followed at tobacco manufacturing facilities;
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requires tobacco product manufacturers (and certain other entities) to register with the FDA; and
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grants the FDA the regulatory authority to impose broad additional restrictions.
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The Tobacco Control Act also requires establishment,
within the FDA’s new Center for Tobacco Products, of a Tobacco Products Scientific Advisory Committee to provide advice,
information and recommendations with respect to the safety, dependence or health issues related to tobacco products.
As indicated above, the Tobacco Control
Act imposes significant new restrictions on the advertising and promotion of tobacco products. For example, the law requires the
FDA to finalize certain portions of regulations previously adopted by the FDA in 1996 (which were struck down by the Supreme Court
in 2000 as beyond the FDA’s authority). As written, these regulations would significantly limit the ability of manufacturers,
distributors and retailers to advertise and promote tobacco products, by, for example, restricting the use of color, graphics and
sound effects in advertising, limiting the use of outdoor advertising, restricting the sale and distribution of non-tobacco items
and services, gifts, and sponsorship of events and imposing restrictions on the use for cigarette or smokeless tobacco products
of trade or brand names that are used for non-tobacco products. The law also requires the FDA to issue future regulations regarding
the promotion and marketing of tobacco products sold or distributed over the internet, by mail order or through other non-face-to-face
transactions in order to prevent the sale of tobacco products to minors.
It is likely that the Tobacco Control Act
could result in a decrease in tobacco product sales in the United States, including sales of our electronic cigarettes.
On April 24, 2014 the Food and Drug Administration
released a proposed set of deeming regulations on electronic cigarettes and other nicotine and tobacco based products.
For a description of risks related to other
government regulations, please see “
Risks Related to Government Regulation
” in this Section.
The recent development of electronic cigarettes has not
allowed the medical profession to study the long-term health effects of electronic cigarette use.
Because electronic cigarettes were recently
developed, the medical profession has not had a sufficient period of time to study the long-term health effects of electronic cigarette
use. Currently, therefore, there is no way of knowing whether or not electronic cigarettes are safe for their intended use. If
the medical profession were to determine conclusively that electronic cigarette usage poses long-term health risks, electronic
cigarette usage could decline, which could have a material adverse effect on our business, results of operations and financial
condition.
Our business, results of operations and financial condition
could be adversely affected if we are taxed like other tobacco products or if we are required to collect and remit sales tax on
certain of our internet sales.
Presently the sale of electronic cigarettes
is not subject to federal, state and local excise taxes like the sale of conventional cigarettes or other tobacco products, all
of which have faced significant increases in the amount of taxes collected on their sales. Should federal, state and local governments
and or other taxing authorities impose excise taxes similar to those levied against conventional cigarettes and tobacco products
on our products, it may have a material adverse effect on the demand for our products, as consumers may be unwilling to pay the
increased costs for our products.
We may be unable to establish the systems
and processes needed to track and submit the excise and sales taxes we collect through Internet sales, which would limit our ability
to market our products through our websites which would have a material adverse effect on our business, results of operations and
financial condition. States such as New York, Hawaii, Rhode Island and North Carolina have begun collecting sales taxes on Internet
sales where companies have used independent contractors in those states to solicit sales from residents of that state. The requirement
to collect, track and remit sales taxes based on independent affiliate sales may require us to increase our prices, which may affect
demand for our products or conversely reduce our net profit margin, either of which would have a material adverse effect on our
business, results of operations and financial condition.
The market for electronic cigarettes is a niche market,
subject to a great deal of uncertainty and is still evolving.
Electronic cigarettes, having recently
been introduced to market, are at an early stage of development, represent a niche market and are evolving rapidly and are characterized
by an increasing number of market entrants. Our future sales and any future profits are substantially dependent upon the widespread
acceptance and use of electronic cigarettes. Rapid growth in the use of, and interest in, electronic cigarettes is recent, and
may not continue on a lasting basis. The demand and market acceptance for these products is subject to a high level of uncertainty.
Therefore, we are subject to all of the business risks associated with a new enterprise in a niche market, including risks of unforeseen
capital requirements, failure of widespread market acceptance of electronic cigarettes, in general or, specifically our products,
failure to establish business relationships and competitive disadvantages as against larger and more established competitors.
We face intense competition and our failure to compete
effectively could have a material adverse effect on our business, results of operations and financial condition.
Competition in the electronic cigarette
and related e liquids industry is intense. We compete with other sellers of electronic cigarettes, most notably Lorillard, Inc.,
Altria Group, Inc. and Reynolds American Inc., big tobacco companies, through their electronic cigarettes business segments; the
nature of our competitors is varied as the market is highly fragmented and the barriers to entry into the business are low.
We compete primarily on the basis of product
quality, brand recognition, brand loyalty, service, marketing, advertising and price. We are subject to highly competitive conditions
in all aspects of our business. The competitive environment and our competitive position can be significantly influenced by weak
economic conditions, erosion of consumer confidence, competitors’ introduction of low-priced products or innovative products,
cigarette excise taxes, higher absolute prices and larger gaps between price categories, and product regulation that diminishes
the ability to differentiate tobacco products.
Our principal competitors are “big
tobacco”, U.S. cigarette manufacturers of both conventional tobacco cigarettes and electronic cigarettes like Altria Group,
Inc., Lorillard, Inc. and Reynolds American Inc. We compete against “big tobacco” who offers not only conventional
tobacco cigarettes and electronic cigarettes but also smokeless tobacco products such as “snus” (a form of moist ground
smokeless tobacco that is usually sold in sachet form that resembles small tea bags), chewing tobacco and snuff. Furthermore, we
believe that “big tobacco” will devote more attention and resources to developing and offering electronic cigarettes
as the market for electronic cigarettes grows. Because of their well-established sales and distribution channels, marketing expertise
and significant resources, “big tobacco” is better positioned than small competitors like us to capture a larger share
of the electronic cigarette market. We also compete against numerous other smaller manufacturers or importers of cigarettes. There
can be no assurance that we will be able to compete successfully against any of our competitors, some of whom have far greater
resources, capital, experience, market penetration, sales and distribution channels than us. If our major competitors were, for
example, to significantly increase the level of price discounts offered to consumers, we could respond by offering price discounts,
which could have a materially adverse effect on our business, results of operations and financial condition.
Sales of conventional tobacco cigarettes have been declining,
which could have a material adverse effect on our business.
The overall U.S. market for conventional
tobacco cigarettes has generally been declining in terms of volume of sales, as a result of restrictions on advertising and promotions,
funding of smoking prevention campaigns, increases in regulation and excise taxes, a decline in the social acceptability of smoking,
and other factors, and such sales are expected to continue to decline. In 2014, a national drug store chain, namely CVS Health,
ceased selling tobacco products. If other national drug store chains also decide to cease selling tobacco products, cigarette sales
could decline further. While the sales of electronic cigarettes have been increasing over the last several years, the electronic
cigarette market is only developing and is a fraction of the size of the conventional tobacco cigarette market. A continual decline
in cigarette sales may adversely affect the growth of the electronic cigarette market, which could have a material adverse effect
on our business, results of operations and financial condition.
Our Patents and our ability to enforce them.
We have a portfolio of issued US and Chinese
Patents, however we cannot provide any assurances that our patents will not be challenged and if challenged, will be upheld and
deemed valid. Furthermore our efforts to enforce our patent may be costly and there can be no assurances that should we seek to
prosecute and enforce our patents, that we will be victorious and even if we are victorious, we cannot provide assurances that
our efforts would result in damages, licensing fees or removing the infringing products from the market. Moreover, if we are not
able to retain counsel on a contingency basis, we may be unable to pursue prosecution of the infringers of our Patents.
We may not be able to adequately protect our intellectual
property rights in China or elsewhere, which could harm our business and competitive position.
We believe that patents, trademarks, trade
secrets and other intellectual property we use and are developing are important to sustaining and growing our business. We utilize
third party manufacturers to manufacture our products in China, where the validity, enforceability and scope of protection available
under intellectual property laws are uncertain and still evolving. Implementation and enforcement of Chinese intellectual property-related
laws have historically been deficient, ineffective and hampered by corruption and local protectionism. Accordingly, we may not
be able to adequately protect our intellectual property in China, which could have a material adverse effect on our business, results
of operations and financial condition. Furthermore, policing unauthorized use of our intellectual property in China and elsewhere
is difficult and expensive, and we may need to resort to litigation to enforce or defend our intellectual property or to determine
the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination
in any such litigation, if any, could result in substantial costs and diversion of resources and management attention, which could
harm our business and competitive position.
Electronic cigarettes face intense media attention and
public pressure.
Electronic cigarettes are new to the marketplace
and since their introduction certain members of the media, politicians, government regulators and advocate groups, including independent
medical physicians have called for an outright ban of all electronic cigarettes, pending regulatory review and a demonstration
of safety. A partial or outright ban would have a material adverse effect on our business, results of operations and financial
condition.
We rely on our CEO and may experience difficulty in attracting
and hiring qualified new personnel in some areas of our business.
The loss of our CEO or any of our key employees
could adversely affect our business. As a member of the tobacco industry, we may experience difficulty in identifying and hiring
qualified executives and other personnel in some areas of our business. This difficulty is primarily attributable to the health
and social issues associated with the tobacco industry. The loss of services of any key employees or our inability to attract,
hire and retain personnel with requisite skills could restrict our ability to develop new products, enhance existing products in
a timely manner, sell products or manage our business effectively. These factors could have a material adverse effect on our business,
results of operations and financial condition.
We may experience product liability claims in our business,
which could adversely affect our business.
The tobacco industry in general has historically
been subject to frequent product liability claims. As a result, we may experience product liability claims from the marketing and
sale of electronic cigarettes. Any product liability claim brought against us, with or without merit, could result in:
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liabilities that substantially exceed our product liability insurance, which we would then be required to pay from other sources, if available;
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an increase of our product liability insurance rates or the inability to maintain insurance coverage in the future on acceptable terms, or at all;
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damage to our reputation and the reputation of our products, resulting in lower sales;
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regulatory investigations that could require costly recalls or product modifications;
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litigation costs; and
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the diversion of management’s attention from managing our business.
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Any one or more of the foregoing could have a material adverse
effect on our business, results of operations and financial condition.
If we experience product recalls, we may incur significant
and unexpected costs and our business reputation could be adversely affected.
We may be exposed to product recalls and
adverse public relations if our products are alleged to cause illness or injury, or if we are alleged to have violated governmental
regulations. A product recall could result in substantial and unexpected expenditures that could exceed our product recall insurance
coverage limits and harm to our reputation, which could have a material adverse effect on our business, results of operations and
financial condition. In addition, a product recall may require significant management time and attention and may adversely impact
on the value of our brands. Product recalls may lead to greater scrutiny by federal or state regulatory agencies and increased
litigation, which could have a material adverse effect on our business, results of operations and financial condition.
Product exchanges, returns and warranty claims may adversely
affect our business.
If we are unable to maintain an acceptable
degree of quality control of our products we will incur costs associated with the exchange and return of our products as well as
servicing our customers for warranty claims. Any of the foregoing on a significant scale may have a material adverse effect on
our business, results of operations and financial condition.
Adverse economic conditions may adversely affect the demand
for our products.
Electronic cigarettes are new to market
and may be regarded by users as a novelty item and expendable as such demand for our products may be extra sensitive to economic
conditions. When economic conditions are prosperous, discretionary spending typically increases; conversely, when economic conditions
are unfavorable, discretionary spending often declines. Any significant decline in economic conditions that affects consumer spending
could have a material adverse effect on our business, results of operations and financial condition.
We rely, significantly, on the efforts of third party
agents to generate sales of our products.
We rely, significantly, on the efforts
of independent distributors to purchase and distribute our products to wholesalers and retailers. No single distributor currently
accounts for a material percentage of our sales and we believe that should any of these relationships terminate we would be able
to find suitable replacements and do so on a timely basis. However, any loss of distributors or our ability to timely replace any
given distributor could have a material adverse effect on our business, financial condition and results of operations.
We rely, in part, on the efforts of independent
salespersons who sell our products to distributors and major retailers and Internet sales affiliates to generate sales of products.
No single independent salesperson or Internet affiliate currently accounts for a material percentage of our sales and we believe
that should any of these relationships terminate we would be able to find suitable replacements and do so on a timely basis. However,
any loss of independent sales persons or Internet sales affiliates or our ability to timely replace any one of them could have
a material adverse effect on our business, financial condition and results of operations.
We may not be able to establish sustainable relationships
with large retailers or national chains.
We believe the best way to develop brand
and product recognition and increase sales volume is to establish relationships with large retailers and national chains. We currently
do not have any established relationships with large retailers and or national chains and we cannot provide any assurances that
we will be successful in our efforts to establish such relationships and or if we would be able to pay the costs associated with
establishing such national accounts. Our inability to develop and sustain relationships with large retailers and national chains
will impede our ability to develop brand and product recognition and increase sales volume and, ultimately, require us to pursue
and rely on local and more fragmented sales channels, which will have a material adverse effect on our business, results of operations
and financial condition.
We may not be able to adapt to trends in our industry.
We may not be able to adapt as the electronic
cigarette industry and customer demand evolves, whether attributable to regulatory constraints or requirements, a lack of financial
resources or our failure to respond in a timely and/or effective manner to new technologies, customer preferences, changing market
conditions or new developments in our industry. Any of the failures to adapt for the reasons cited herein or otherwise could make
our products obsolete and would have a material adverse effect on our business, financial condition and results of operations.
We depend on third party manufacturers for our products.
We depend on third party manufacturers
for our electronic cigarettes, vaporizers and accessories. Our customers associate certain characteristics of our products including
the weight, feel, draw, unique flavor, packaging and other attributes of our products to the brands we market, distribute and sell.
Any interruption in supply and/or consistency of our products may adversely impact our ability to deliver our products to our wholesalers,
distributors and customers and otherwise harm our relationships and reputation with customers, and have a materially adverse effect
on our business, results of operations and financial condition.
Although we believe that several alternative
sources for the components, chemical constituents and manufacturing services necessary for the production of our products are available,
any failure to obtain any of the foregoing would have a material adverse effect on our business, results of operations and financial
condition.
We rely on Chinese manufacturers to produce our products.
Our manufacturers are based in China. Certain
Chinese factories and the products they export have been the source of safety concerns and recalls, which is generally attributed
to lax regulatory, quality control and safety standards. Should Chinese factories continue to draw public criticism for exporting
unsafe products, whether those products relate to our products or not we may be adversely affected by the stigma associated with
Chinese production, which could have a material adverse effect on our business, results of operations and financial condition.
We may be unable to promote and maintain our brands.
We believe that establishing and maintaining
our brand is a critical aspect of attracting and expanding a large customer base. Promotion and enhancement of our brands will
depend largely on our success in continuing to provide high quality products. If our customers and end users do not perceive our
products to be of high quality, or if we introduce new products or enter into new business ventures that are not favorably received
by our customers and end users, we will risk diluting our brand identities and decreasing their attractiveness to existing and
potential customers.
Moreover, in order to attract and retain
customers and to promote and maintain our brand equity in response to competitive pressures, we may have to increase substantially
our financial commitment to creating and maintaining a distinct brand loyalty among our customers. If we incur significant expenses
in an attempt to promote and maintain our brands, our business, results of operations and financial condition could be adversely
affected.
We expect that new products and/or brands we develop will
expose us to risks that may be difficult to identify until such products and/or brands are commercially available.
We are currently developing, and in the
future will continue to develop, new products and brands, the risks of which will be difficult to ascertain until these products
and/or brands are commercially available. For example, we are developing new formulations, packaging and distribution channels.
Any negative events or results that may arise as we develop new products or brands may adversely affect our business, financial
condition and results of operations.
If we are unable to manage our anticipated future growth,
our business and results of operations could suffer materially.
Our operating results depend to a large
extent on our ability to successfully manage our anticipated growth. To manage our anticipated growth, we believe we must effectively,
among other things:
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hire, train, and manage additional
employees;
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expand our marketing and distribution
capabilities;
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increase our product development
activities;
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add additional qualified finance
and accounting personnel; and
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implement and improve our administrative,
financial and operational systems, procedures and controls.
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If we are unable to manage our growth effectively,
we may not be able to take advantage of market opportunities or develop new products, and we may fail to satisfy product requirements,
maintain product quality, execute our business plan or respond to competitive pressures, any of which could have a material adverse
effect on our business, results of operations and financial condition.
We may face competition from foreign importers who do
not comply with government regulation.
We may face competition from foreign sellers
of electronic cigarettes that may illegally ship their products into the United States for direct delivery to customers. These
market participants will not have the added cost and expense of complying with U.S. regulations and taxes and as a result will
be able to offer their product at a more competitive price than us and potentially capture market share. Moreover, should we be
unable to sell certain of our products during any regulatory approval process we have no assurances that we will be able to recapture
those customers that we lost to our foreign domiciled competitors during any “blackout” periods, during which we are
not permitted to sell our products. This competitive disadvantage may have a material adverse effect on our business, results of
operations and our financial condition.
Our results of operations could be adversely affected
by currency exchange rates and currency devaluations.
Our functional currency is the U.S. dollar;
substantially all of our purchases and sales are currently generated in U.S. dollars. However, our manufacturers and suppliers
are located in China. Fluctuations in exchange rates between our respective currencies could result in higher production and supply
costs to us which would have a material adverse effect on our results of operations if we are not willing or able to pass those
costs on to our customers.
Going concern report of independent certified public accountants.
Our limited history of operations and our
absence of revenues to date raise substantial doubt about our ability to continue as a going concern. In this regard, see the Report
of Independent Certified Public Accountants accompanying our audited financial statements appearing elsewhere herein which cites
substantial doubt about our ability to continue as a going concern. There can be no assurance that we will achieve profitability
or generate positive cash flow in the future. As a result of these and other factors, there can be no assurance that the proposed
activities will be successful or that the Company will be able to achieve or maintain profitable operations. If we fail to achieve
profitability, its growth strategies could be materially and adversely affected.
We depend on our General Partner and its managers Messrs.
Kevin Frija and Greg Pan.
Our performance is directly correlated to
the performance of our General Partner. Due in part to our size, the loss of the services of Messrs. Frija and Pan would have a
material adverse effect on us, including on a short term basis, and until a replacement could be found, the continuity of our operations.
We do not carry any “key man” insurance
that would provide us with proceeds in the event of the death or disability of any of our principals.
Rights of limited partners are significantly different
than rights of shareholders of a corporation.
We are organized as a limited partnership.
Members of limited partnerships, also known as limited partners, have different rights than shareholders of a corporation. Due
to our structure as a limited partnership, your rights as a stakeholder are governed by our operating agreement. For example, limited
partners do not elect persons to our board of directors. Our General Partner has limited call rights to our securities; please
read carefully the Agreement of Limited Partnership of VPR Brands which governs the relationship between us and our unit-holders.
Our General Partner, Soleil Capital Management LLC, is
solely responsible for our operations.
The current managers of our General Partner
are Kevin Frija, who is our current executive officer, Chairman, and a director, and Greg Pan, who is a director. Through the General
Partner, Messrs. Frija and Pan manage all of our operations and activities. Our General Partner’s limited liability company
agreement establishes a board of directors that will be responsible for the oversight of our business and operations. Our General
Partner’s board of directors will be elected in accordance with its limited liability company agreement, where Mr. Frija (or, following
his withdrawal, death or disability, any successor founder designated by him), will have the power to appoint and remove the directors
of our General Partner. Following the withdrawal, death or disability of Kevin Frija (and any successor founder), the power to
appoint and remove the directors of our General Partner will revert to the members of our General Partner who hold a majority in
interest in our General Partner. Our common unit-holders do not elect our General Partner or its board of directors and, unlike
the holders of common stock in a corporation, will have only limited voting rights on matters affecting our business and therefore
limited ability to influence decisions regarding our business. Furthermore, if our common unit holders are dissatisfied with the
performance of our General Partner, they will have little ability to remove our General Partner.
Our ability to retain our management is critical
to our success and our ability to grow depends on our ability to attract additional key personnel.
Our success depends on our ability to attract
and retain managers, executive officers and qualified personnel. We anticipate that it will be necessary for us to attract and
retain key personnel in order to develop our business and pursue our growth strategy. The market for qualified managers is extremely
competitive and as such our inability to attract and retain key personnel would adversely affect in the short term, our continuity
of operations and in the long term our profitability.
The control of our General Partner may be transferred
to a third party without common unitholder consent.
Our General Partner may transfer its General
Partner interest to a third party in a merger or consolidation without the consent of our common unitholders. Furthermore, at any
time, the members of our General Partner may sell or transfer all or part of their limited liability company interests in our General
Partner without the approval of the common unitholders, subject to certain restrictions as described elsewhere in this annual report.
A new general partner and/or owner could have different business objectives and/or philosophies then our current business objectives
and/or philosophies, employ individuals who are less experienced in our current business, be unsuccessful in identifying new opportunities
in our current area of business or have a track record that is not as successful as VPR Brand’s track record. If any of the foregoing
were to occur, we could experience difficulty in operating our business, and the value of our business, our results of operations
and our financial condition could materially suffer.
If we were treated as a corporation for U.S. federal income
tax or state tax purposes, then our distributions to our common unitholders would be substantially reduced and the value of our
common units would be adversely affected.
If we were treated as a corporation for U.S.
federal income tax purposes, we would pay U.S. federal income tax on our taxable income at the corporate tax rate. Distributions
to our common unitholders would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or
credits would flow through to you. Because a tax would be imposed upon us as a corporation, our distributions to our common unitholders
would be substantially reduced, likely causing a substantial reduction in the value of our common units.
Current law may change, causing us to be
treated as a corporation for U.S. federal or state income tax purposes or otherwise subjecting us to entity level taxation. See
“-The U.S. Congress recently considered legislation that, if enacted, would have (a) for taxable years beginning ten years
after the date of enactment, precluded us from qualifying as a partnership or required us to hold carried interest through taxable
subsidiary corporations and (b)
taxed individual holders of common units with respect to certain income and gains at increased
rates. If any similar legislation were to be enacted and apply to us, we could incur a material increase in our tax liability and
a substantial portion of our income could be taxed at a higher rate to the individual holders of our common units.” For example,
because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity level taxation
through the imposition of state income, franchise or other forms of taxation. If any state were to impose a tax upon us as an entity,
our distributions to our common unitholders would be reduced.
Our common unitholders may be subject to U.S. federal
income tax on their share of our taxable income, regardless of whether they receive any cash distributions from us.
Each unitholder will be required to take
into account its allocable share of items of income, gain, loss and deduction of the Partnership. Distributions to a unitholder
will generally be taxable to the unitholder for U.S. federal income tax purposes only to the extent the amount distributed exceeds
the unitholder’s tax basis in the unit. That treatment contrasts with the treatment of a shareholder in a corporation. For example,
a shareholder in a corporation who receives a distribution of earnings from the corporation will generally report the distribution
as dividend income for U.S. federal income tax purposes. In contrast, a holder of our units who receives a distribution of earnings
from us will not report the distribution as dividend income (and will treat the distribution as taxable only to the extent the
amount distributed exceeds the unitholder’s tax basis in the units), but will instead report the holder’s allocable share of items
of our income for U.S. federal income tax purposes. As a result, our common unitholders may be subject to U.S. federal, state,
local and possibly, in some cases, foreign income taxation on their allocable share of our items of income, gain, loss, deduction
and credit (including our allocable share of those items of any entity in which we invest that is treated as a partnership or is
otherwise subject to tax on a flow through basis) for each of our taxable years ending with or within your taxable year, regardless
of whether or not a common unitholder receives cash distributions from us.
Our common unitholders may not receive cash
distributions equal to their allocable share of our net taxable income or even the tax liability that results from that income.
In addition, certain of our holdings, including holdings, if any, in a Controlled Foreign Corporation, or “CFC,” and
a Passive Foreign Investment Company, or “PFIC,” may produce taxable income prior to the receipt of cash relating to
such income, and common unitholders that are U.S. taxpayers will be required to take such income into account in determining their
taxable income. In the event of an inadvertent termination of our partnership status for which the IRS has granted us limited relief,
each holder of our common units may be obligated to make such adjustments as the IRS may require to maintain our status as a partnership.
Such adjustments may require persons holding our common units to recognize additional amounts in income during the years in which
they hold such units.
Risks Associated with Our Common Units
There is no established public market for our common units
and if a market for our common units does not develop, our investors will be unable to sell their shares.
Our common limited partnership units are
currently listed on the Pink Sheets of the OTC Markets Group, Inc. under the stock ticker symbol “VPRB.PK,” however there
is no established public market for our membership Units and such a market may not develop or be sustained.
Further, the Pink Sheets of the OTC Markets
Group, Inc. is not a listing service or exchange, but is instead a dealer quotation service for subscribing members. If our common
units are not quoted on the Pink Sheets of the OTC Markets Group, Inc. or if a public market for our common units does not develop,
then investors may not be able to resell the common units that they currently hold and or have purchased and may lose all of their
investment.
Because we do not intend to make any dividends or distributions
on our securities, investors seeking income should not purchase our securities.
We currently do not anticipate making any
distributions on our securities at any time in the near future. We may never pay cash distributions on our securities. Any credit
agreements which we may enter into with institutional lenders may restrict our ability to make distributions. Whether we make distributions
in the future will be at the discretion of our General Partner and will be dependent upon our financial condition, results of operations,
capital requirements and any other factors that our General Partner decides is relevant. (See “Dividend Policy.”)
Since there is no established market for our securities,
if a market ever develops for our securities, the price of our securities is likely to be highly volatile. If no market develops
holders of our securities may have difficulty selling their securities and may not be able to sell their securities at all.
There is no public market for our securities
and we cannot assure you that a market will develop or that any holders of our securities will be able to liquidate his investment
without considerable delay, if at all. A trading market may not develop in the future, and if one does develop, it may not be sustained.
If an active trading market does develop, the market price of our securities is likely to be highly volatile. The market price
of our securities may also fluctuate significantly in response to the following factors, most of which are beyond our control:
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variations in our quarterly operating results;
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changes in securities analysts estimates of our financial performance;
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changes in general economic conditions and in the electronic cigarette industry;
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changes in market valuations of similar companies;
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announcements by us or our competitors of relevant news items and or business developments; and,
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the loss of key management.
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The equity markets have, on occasion, experienced
significant price and volume fluctuations that have affected the market prices for many companies’ securities and that have often
been unrelated to the operating performance of these companies. Any such fluctuations may adversely affect the market price of
our common units, regardless of our actual operating performance. As a result, security holders may be unable to sell their securities,
or may be forced to sell them at a loss.
Because we can issue additional common units, purchasers
of our units may incur immediate dilution and may experience further dilution.
Our General Partner, controls our board of
directors has the authority to cause our company to issue additional membership units without the consent of any of our unit holders.
Consequently, our unit holders may experience more dilution in their ownership of our company in the future.
Our securities fall under penny stock rules. Trading of
our units may be restricted by the Securities and Exchange Commission’s penny stock regulations which may limit a unitholder’s
ability to buy and sell our units.
Our securities fall under penny stock rules.
The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity
security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject
to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements
on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited
investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document
in a form prepared by the Securities and Exchange Commission which provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for
the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing
the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given
to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to
a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for our units
that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade
our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common
units.
Financial Industry Regulatory Authority (FINRA) sales
practice requirements may also limit a unitholder’s ability to buy and sell our units.
In addition to the “penny stock”
rules promulgated by the Securities and Exchange Commission, FINRA rules require that in recommending an investment to a customer,
a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending
speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information
about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these
rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least
some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common units,
which may limit your ability to buy and sell our units and have an adverse effect on the market for our units.
Volatility in our common stock price may subject us to
securities litigation.
The market for our common stock is characterized
by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more
volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action
litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the
target of similar litigation. Securities litigation could result in substantial costs and liabilities to us and could divert our
management’s attention and resources from managing our operations and business.
If we fail to maintain an effective system of internal
control over financial reporting, we may not be able to accurately report our financial results. As a result, we could become subject
to sanctions or investigations by regulatory authorities and/or stockholder litigation, which could harm our business and have
an adverse effect on our stock price.
As a public reporting company, we are required
to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, including periodic reports, disclosures
and more complex accounting rules. As directed by Section 404 of Sarbanes-Oxley, the SEC adopted rules requiring public companies
to include a report of management on a company’s internal control over financial reporting in their Annual Report on Form
10-K. Based on current rules, we are required to report under Section 404(a) of Sarbanes-Oxley regarding the effectiveness of our
internal control over financial reporting. If we determine that we have material weaknesses, it may be necessary to make restatements
of our consolidated financial statements and investors will not be able to rely on the completeness and accuracy of the financial
information contained in our filings with the SEC and this could potentially subject us to sanctions or investigations by the SEC
or other regulatory authorities or stockholder litigation.
Future sales of our common units may depress our stock
price.
As of April 17, 2017, we had 50,099,233
shares of our common units representing limited partnership interests outstanding. Approximately 1,900,100 of the 50,969,233
outstanding common units are eligible for resale without restriction in the public market. These represent shares owned by
individuals with less than 5% ownership of the outstanding common units. If any significant number of the 1,900,100 units are
sold, such units could have a depressive effect on the market price of our stock. The remaining units are eligible, and some
of the units underlying the warrants and options upon issuance will be eligible, to be offered from time to time in the
public market pursuant to Rule 144 of the Securities Act, and any such sale of these units may have a depressive effect as
well. We are unable to predict the effect, if any, that the sale of units, or the availability of shares for future sale,
will have on the market price of the units prevailing from time to time. Sales of substantial amounts of units in the public
market, or the perception that such sales could occur, could depress prevailing market prices for the units. Such sales may
also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price,
which we deem appropriate.