NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2017
NOTE 1. ORGANIZATION
VPR Brands, LP (the “Company”, “we”,
“our”) was 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.
Business Description
VPR Brands, LP (the “Company”, “we”,
“our”) was 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., and 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 VPR Brands LP, 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.
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 have been available for sale in Vape shops in the United States since April 1, 2016.
On July 29, 2016, the Company entered into
and closed 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.
See note 4, Asset Purchase and Secured
Borrowing for further details, concerning total considerations.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash
Cash includes all cash deposits and highly liquid financial
instruments with an original maturity of three months or less.
Stock-Based Compensation
Share-based payments to employees, including grants of employee
stock options are recognized as compensation expense in the financial statements based on their fair values, in accordance with
FASB ASC Topic 718. That expense is recognized over the period during which an employee is required to provide services in exchange
for the award, known as the requisite service period (usually the vesting period). The Company had no common stock options or common
stock equivalents granted or outstanding for all periods presented. The Company may issue shares as compensation in future periods
for employee services.
The Company may issue restricted stock to consultants for various
services. Cost for these transactions will be measured at the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable. The value of the common stock is to be measured at the earlier
of: (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached, or (ii)
the date at which the counterparty’s performance is complete. The Company may issue shares as compensation in future periods for
services associated with the registration of the common shares.
Revenue recognition
The Company follows the guidance of the Securities and Exchange
Commission’s Staff Accounting Bulletin 104 for revenue recognition. Revenue is recognized when persuasive evidence of an arrangement
exists; the delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably
assured.
Basic and Diluted Net Loss Per Share
Net loss per share was computed by dividing the net loss by
the weighted average number of common shares outstanding during the period. The weighted average number of shares was calculated
by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding. Diluted net loss
per share for the Company is the same as basic net loss per share, as the inclusion of common stock equivalents would be anti-dilutive.
Income taxes
The Company is considered a partnership for income tax purposes.
Accordingly, the partners report the Partnership’s taxable income or loss on their individual tax returns.
Rent
The Company recognizes rent expense on a straight-line basis
over the lease term. Deferred rent is included in accounts payable and accrued expenses on the accompanying balance sheets.
Accounting for Derivative Instruments
The Company issues debentures where the number of shares into which a debenture can
be converted is not fixed. For example, when a debenture converts at a discount to market based on the stock price on the
date of conversion. In such instances, the embedded conversion option of the convertible debentures is bifurcated from the
host contract and recorded at their fair value. In accounting for derivatives, the Company records a liability representing
the estimated present value of the conversion feature considering the historic volatility of the Company’s stock, and
a discount representing the imputed interest associated with the beneficial conversion feature. The discount is then amortized
over the life of the debenture and the derivative liability is adjusted periodically according to stock price
fluctuations. At the time of conversion, any remaining derivative liability is charged to additional paid-in capital. For
purposes of determining derivative liability, the Company uses Black-Scholes modeling for computing historic volatility.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued
by the Financial Accounting Standards Board or other standard setting bodies that may have an impact on the Company’s accounting
and reporting. The Company believes that such recently issued accounting pronouncements and other authoritative guidance for which
the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not
be material to its financial position, results of operations, and cash flow when implemented.
NOTE 3: GOING CONCERN
The accompanying financial statements have been prepared on
a going concern basis, which contemplates the Company will continue to realize its assets and discharge its liabilities in the
normal course of business. The Company has a net loss of $635,265 for the six months ended June 30, 2017 and has an accumulated
deficit of $6,649,097 at June 30, 2017. The continuation of the Company as a going concern is dependent upon, among other things,
the continued financial support from its common unit holders, the ability of the Company to obtain necessary equity or debt financing,
and the attainment of profitable operations. These factors, among others, raise substantial doubt regarding the Company’s
ability to continue as a going concern. There is no assurance that the Company will be able to generate revenues in the future.
These financial statements do not give any effect to any adjustments that would be necessary should the Company be unable to continue
as a going concern.
The Company plans to pursue equity funding to expand its brand.
Through equity funding and the current operations including the acquisition of the Vapor line of business, the Company expects
to meet its current capital needs. There can be no assurance that the Company will be able raise sufficient working capital. If
the Company is unable to raise the necessary working capital through the equity funding it will be forced to continue relying on
cash from operations in order to satisfy its current working capital needs.
NOTE 4: FAIR VALUE MEASUREMENTS
The Company adopted the provisions of
ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value as used in numerous accounting pronouncements,
establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain
financial instruments, payables to related parties, and accounts payable and accrued expenses are carried at historical cost basis,
which approximates their fair values because of the short-term nature of these instruments.
ASC 820 defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes
a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 — quoted prices in active
markets for identical assets or liabilities
Level 2 — quoted prices for similar
assets and liabilities in active markets or inputs that are observable
Level 3 — inputs that are unobservable
(for example cash flow modeling inputs based on assumptions)
The Company used Level 3 inputs for
its valuation methodology for the conversion option liability in determining the fair value using a Black-Scholes option-pricing
model with the following assumption inputs:
|
|
December 31, 2016
|
|
|
June 30, 2017
|
|
Annual dividend yield
|
|
|
-
|
|
|
|
-
|
|
Expected life (years)
|
|
|
1.267
|
|
|
|
.667
|
|
Risk-free interest rate
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
Expected volatility
|
|
|
35-65%
|
|
|
|
103-114
|
%
|
|
|
Fair Value Measurements at
|
|
|
|
December 31, 2016
|
|
|
|
Using Fair Value Hierarchy
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative liabilities – (Warrant)
|
|
|
|
|
|
|
|
|
|
|
--
|
|
Embedded derivative liabilities – (Debenture)
|
|
|
|
|
|
|
|
|
|
|
361,119
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
361,119
|
|
|
|
Fair Value Measurements at
|
|
|
|
June 30, 2017
|
|
|
|
Using Fair Value Hierarchy
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative liabilities – (Warrant)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Embedded derivative liabilities – (Debenture)
|
|
|
|
|
|
|
|
|
|
|
104,572
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
104,572
|
|
For the six months ended June 30, 2017,
the Company recognized a gain of $122,988 on the change in fair value of its derivative liabilities. At June 30, 2017, the Company
did not identify any other assets or liabilities that are required to be presented on the balance sheet at fair value in accordance
with ASC 825-10.
NOTE 5: BUSINESS ACQUISITION AND SECURED BORROWING
On July 29, 2016, the Company entered into
and closed on an Asset Purchase Agreement (the “Purchase Agreement”) with Vapor Corp. (“Vapor”) and the
Company’s 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.
The consideration consisted of:
●
|
|
A secured, one-year promissory note from the Company to Vapor in the principal amount of $370,000 (the “Acquisition Note”) bearing an interest rate of 4.5%, payable $10,000 per month, commencing on October 28, 2016, with a balloon payment of the remainder of principal and interest on July 29, 2017. Current balance including accrued interest is $170,637.
|
Notwithstanding the above, pursuant to the Purchase Agreement,
Vapor continues to own its accounts receivable from its wholesale operations as of July 29, 2016. However, Vapor agreed to use
its commercially reasonable efforts, consistent with standard industry practice, to collect such accounts receivable, and any and
all amounts so collected (i) up to $150,000 (net of any refunds) in the aggregate shall be credited against payment of the Acquisition
Note and (ii) in excess of $150,000 (up to $95,800) will be transferred to Mr. Frija as consideration for the transfer to Vapor
by Mr. Frija of 1,405,910,203 shares of Vapor’s common stock that he had acquired on the open market (“Retired Shares”).
The Purchase Agreement contained customary
representations, warranties, and covenants of the Company and Vapor. Vapor also agreed to a restrictive covenant prohibiting it
from competing with the Company for a period of three years in the wholesale distribution of electronic cigarette products that
comprise the Assets.
The Vapor acquisition and the line of business
was accounted for using the acquisition 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.
Preliminary Allocation of the Purchase
Price to the Assets acquired and liabilities assumed at fair value is as follows:
Assets Acquired
|
|
|
Trademarks
|
|
$
|
83,000
|
|
Domain
|
|
$
|
26,000
|
|
Property Plant and Equipment
|
|
$
|
12,700
|
|
Vendor Deposits
|
|
$
|
56,857
|
|
Employees
|
|
$
|
96,912
|
|
Customer Lists
|
|
$
|
124,700
|
|
Inventory
|
|
$
|
178,716
|
|
Accounts Receivable
|
|
$
|
150,000
|
|
Total Assets
|
|
$
|
728,885
|
|
Liabilities
|
|
|
|
|
Notes Payable
|
|
$
|
(370,000
|
)
|
Customer Deposits
|
|
$
|
(63,726
|
)
|
Customer Returns (Pre-7/29)
|
|
$
|
(295,936
|
)
|
|
|
$
|
(729,662
|
)
|
The Company is in the process of hiring
a valuation firm to allocate the purchase price to the net assets acquired for the business unit acquired. The company anticipates
this to be done prior to the filing of its Quarterly Report on Form 10-Q for the third quarter ended September 30, 2017.
The following presents the unaudited pro-forma combined results
of operations of the Company with Vapor Corp. as if the Acquisition occurred on January 1, 2016. The results for 2016 were provided by Vapor Corp. as per the June 30, 2017 Form 10Q.
|
|
Six Month Ended
|
|
Three Months Ended
|
|
|
June 30, 2017
|
|
June 30, 2016
|
|
June 30, 2017
|
|
June 30, 2016
|
REVENUES
|
|
$
|
1,823,341
|
|
|
$
|
2,844,338
|
|
|
$
|
1,036,806
|
|
|
$
|
1,330,769
|
|
COST OF SALES
|
|
|
(1,136,930
|
)
|
|
|
(2,629,083
|
)
|
|
|
(625,409
|
)
|
|
|
(1,317,164
|
)
|
GROSS PROFIT
|
|
|
686,411
|
|
|
|
215,255
|
|
|
|
411,397
|
|
|
|
13,605
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative
|
|
|
1,088,196
|
|
|
|
1,414,327
|
|
|
|
489,640
|
|
|
|
729,165
|
|
TOTAL EXPENSES
|
|
|
1,088,196
|
|
|
|
1,414,327
|
|
|
|
489,640
|
|
|
|
729,165
|
|
NET OPERATING LOSS
|
|
|
(401,785
|
)
|
|
|
(1,199,072
|
)
|
|
|
(78,243
|
)
|
|
|
(715,560
|
)
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(182,477
|
)
|
|
|
—
|
|
|
|
(41,441
|
)
|
|
|
—
|
|
Loss on extinguishment of debt
|
|
|
(173,991
|
)
|
|
|
—
|
|
|
|
(185,953
|
)
|
|
|
—
|
|
Change in fair value of derivative liability
|
|
|
122,988
|
|
|
|
—
|
|
|
|
(37,334
|
)
|
|
|
—
|
|
NET LOSS
|
|
$
|
(635,265
|
)
|
|
$
|
(1,199,072
|
)
|
|
$
|
(342,971
|
)
|
|
$
|
(715,560
|
)
|
LOSS PER COMMON UNIT
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.032
|
)
|
Weighted-Average Common Units Outstanding — Basic and Diluted
|
|
|
49,924,937
|
|
|
|
36,792,125
|
|
|
|
50,259,797
|
|
|
|
40,297,251
|
|
The unaudited pro-forma results of operations
are presented for information purposes only and are based on estimated financial operations. The unaudited pro-forma results of
operations are not intended to present actual results that would have been attained.
NOTE
6: PROPERTY AND EQUIPMENT-NET
|
|
Estimated Useful Lives
|
|
|
|
|
|
|
(Years)
|
|
JUNE 30, 2017
|
|
December 31, 2016
|
Furniture and Fixtures
|
|
|
5
|
|
|
$
|
30,296
|
|
|
$
|
30,296
|
|
Warehouse Equipment
|
|
|
5
|
|
|
|
130
|
|
|
|
130
|
|
|
|
|
|
|
|
$
|
30,426
|
|
|
$
|
30,426
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
(8,554
|
)
|
|
|
(2,525
|
)
|
|
|
|
|
|
|
$
|
21,872
|
|
|
$
|
27,901
|
|
Depreciation expense amounted to
$6,030 and $2,525 for the quarter ended June 30, 2017 and the year ended December 31, 2016, respectively.
NOTE 7: PARTNER DEFICIT/COMMON UNITS
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 Common Units to Kevin Frija at a purchase price
of $0.01 per unit, 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 unit. 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. No placement agent
has participated in the Private Placement.
In connection with the Share Purchase Agreement, the Company
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, VPR Brands LP (the “General Partner”). Contemporaneous with Mr. Frija’s appointment as chief
executive officer and chairman of the board of Directors, the Company’s prior chief executive officer and chairman of the
board of directors, Messrs. Jon Pan and Greg Pan, respectively, 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 his 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 unit.
On March 28, 2016, pursuant to the terms of the Frija Share
Purchase Agreement, Mr. Frija exercised a right to buy 15,000,000 Common Units at a purchase price of $0.01 per unit, resulting
in 15,000,000 Common Units issued to Mr. Frija in exchange for gross proceeds of $150,000 to the Company, leaving a balance of
25,000,000 Common Units to purchase at $0.01 per unit 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 August 18, 2016, the Company issued 660,000 of the Company’s
Common Units to employees and consultants of the Company. The common units were issued for services totaling $13,200.
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:
|
(i)
|
June 4, 2015 - 10,000,000 Common Units, for gross proceeds of $100,000 to the
Company;
|
|
|
|
|
(ii)
|
March 28, 2016 - 15,000,000 Common Units, for gross proceeds of $150,000 to the Company;
|
|
|
|
|
(iii)
|
May 23, 2016 – 2,000,000 Common Units, for gross proceeds to the Company of $20,000;
|
|
|
|
|
(iv)
|
May 31, 2016 – 2,000,000 Common Units, for gross proceeds to the Company of $20,000;
and
|
|
|
|
|
(v)
|
June 16, 2016 – 1,000,000 Common Units, for gross proceeds to the Company of $10,000.
|
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 31, 2017, pursuant to the terms of Share Purchase Agreements,
the Company received $25,000 each from 3 investors for a total of $75,000 at a share price of $.36/share. Upon issuance the Company
will issue a total of 208,332 shares. As of this filing the shares related to the agreements have not been issued.
NOTE 8: NOTES PAYABLE
In connection to the business acquisition there was a $500,000
loan from Vapor to the Company, a secured, 36-month promissory note from the Company to Vapor in the principal amount of $500,000
(the “Secured Promissory Note”; together with the Acquisition Note, are referred to herein as the “Notes”)
bearing an interest rate of prime plus 2% (which rate resets annually on July 29th), which payments thereunder are $14,000 per
month, with such payments deferred and commencing on January
26, 2017, with subsequent installments payable on the same day of each month thereafter and in the 37th month (on July 29, 2019),
a balloon payment for all remaining accrued interest and principal. In March 2017 this note was sold by Vapor Corp. to DiamondRock,
LLC.
The new note is convertible at the following terms:
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.
As per the convertible note with Diamond Rock in November 2016,
Diamond Rock has converted $25,000 into 87,108 shares in March 2017, $25,000 into 86,102 shares in April 2017 and $25,000 into
97,364 shares on May 5, 2017.
As of June 30, 2017 the balance outstanding was $448,747 including
accrued interest on the balance due at quarter end. To date $25,000 portion of the loan was converted to stock
The Company entered into a Securities Purchase
Agreement (the “SPA”) with DiamondRock, LLC, an unaffiliated third party (“DiamondRock”), pursuant to which
the Company may borrow up to 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. As of June 30, 2017, DiamondRock advanced four (4) tranches to the Company in the total amount of $300,000.
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% premium (thus paying 135%
of the amount owed for that particular maturity).
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.
The following table summarizes the Company’s
convertible notes as of June 30, 2017 and December 31, 2016:
|
|
June 30,
2017
|
|
December
31, 2016
|
Gross proceeds from notes
|
|
$
|
728,431
|
|
|
$
|
575,333
|
|
Less: Debt discount
|
|
|
(119,771
|
)
|
|
|
(68,750
|
)
|
Less: Beneficial conversion feature
|
|
|
-0-
|
|
|
|
-0-
|
|
Add: Amortization of discount
|
|
|
-0-
|
|
|
|
-0-
|
|
Less: Beneficial conversion feature
|
|
|
(-0-
|
)
|
|
|
-0-
|
|
Carrying Value of notes
|
|
$
|
608,660
|
|
|
$
|
506,583
|
|
In addition the Company has one note outstanding
related to the acquisition of assets from Vapor Corp.
As part of the acquisition the Company secured a one-year promissory
note from the Company to Vapor in the principal amount of $370,000 (the “Acquisition Note”) bearing an interest rate
of 4.5%, which payments thereunder are $10,000 per month, with such payments deferred and commencing on October 28, 2016, with
a balloon payment of the remainder of principal and interest on July 29, 2017. Current balance including accrued interest is $170,637.
NOTE 9: COMMITMENTS AND CONTINGENCIES
Lease Agreement
As a result of the July 2016 acquisition, the Company negotiated
a three-year lease for its office and warehouse facility. The lease requires monthly payments as follows:
November 15, 2016-June 14, 2017
|
|
$
|
8,390
|
|
June 15, 2017-December 14, 2017
|
|
$
|
8,690
|
|
December 15, 2017 to June 15, 2018
|
|
$
|
9,090
|
|
June 15, 2018-December 14, 2018
|
|
$
|
9,590
|
|
December 15, 2018 to June 14, 2019
|
|
$
|
10,190
|
|
June 15, 2019 to November 15, 2019
|
|
$
|
10,690
|
|
Remaining Lease payments in the following years are:
|
Year Ended December 31,
|
|
|
2017
|
|
|
|
$52,540
|
|
|
2018
|
|
|
|
113,180
|
|
|
2019
|
|
|
|
104,400
|
|
Total minimum lease payments
|
|
|
|
$
|
270,120
|
|
As a result of the rent varying each year the rent expense is
recorded on a straight line basis. As a result the Company has a liability for deferred rent for future rent expense where it is
recorded on the balance sheet.
Rent expense for the quarter June 30, 2017 and 2016 was $56,278
and $-0-, respectively.
Legal Matters
From time to time, we may be involved in litigation relating
to claims arising out of our operations in the normal course of business. As of June 30, 2017, there were no pending or threatened
lawsuits that could reasonably be expected to have a material effect on the results of our operations and there are no proceedings
in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has
a material interest adverse to our interest.
NOTE 10: SUBSEQUENT EVENTS
As of August 21, 2017, the following events were transacted
by the Company subsequent to the quarter ended date of June 30, 2017.
Subsequent to June 30, 2017 there were Conversions of convertible
notes aggregating 1,324,177 shares by Diamond Rock as per the convertible note payable discussed in Note 8. There were a total
of 11 conversions from July 10, 2017 to August 10, 2017.