SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 000-54545
VPR Brands, LP
(Exact name of registrant as specified in its charter)
Delaware |
45-1740641 |
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. Employer Identification
No.) |
3001 Griffin Road
Fort Lauderdale, FL 33312
(Address of principal executive offices) (zip code)
(954) 715-7001
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each
class |
Trading Symbol(s) |
Name of each exchange on which
registered |
N/A |
N/A |
N/A |
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
☒
Yes ☐
No
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
☒ Yes
☐ No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer”, “accelerated filer”,
“non-accelerated filer”, “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐ |
Accelerated
filer
☐ |
Non-accelerated filer
☒ |
Smaller reporting company
☒ |
|
Emerging growth company
☐ |
If
an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
No ☒
Indicate the number of shares outstanding of each of the
registrant’s classes of common units as of the latest practicable
date.
Class |
Outstanding at November 19, 2020: |
|
Common Units, No par
value |
87,656,632 Units |
|
TABLE OF CONTENTS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION
This report includes forward-looking statements that relate to
future events or our future financial performance and involve known
and unknown risks, uncertainties and other factors that may cause
our actual results, levels of activity, performance or achievements
to differ materially from any future results, levels of activity,
performance or achievements expressed or implied by these
forward-looking statements. Words such as, but not limited to,
“believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,”
“targets,” “likely,” “aim,” “will,” “would,” “could,” and similar
expressions or phrases identify forward-looking statements. We have
based these forward-looking statements largely on our current
expectations and future events and financial trends that we believe
may affect our financial condition, results of operation, business
strategy and financial needs.
You should read thoroughly this report and the documents that we
refer to herein with the understanding that our actual future
results may be materially different from and/or worse than what we
expect. We qualify all of our forward-looking statements by these
cautionary statements including those made in this report, in Part
I. Item 1A. Risk Factors appearing in our Annual Report on Form
10-K for the year ended December 31, 2019 and our other filings
with the Securities and Exchange Commission.
Other sections of this report include additional factors which
could adversely impact our business and financial performance. New
risk factors emerge from time to time and it is not possible for
our management to predict all risk factors, nor can we assess the
impact of all factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking
statements. Except for our ongoing obligations to disclose material
information under the Federal securities laws, we undertake no
obligation to release publicly any revisions to any forward-looking
statements, to report events or to report the occurrence of
unanticipated events. These forward-looking statements speak only
as of the date of this report, and you should not rely on these
statements without also considering the risks and uncertainties
associated with these statements and our business.
OTHER PERTINENT INFORMATION
Unless specifically set forth to the contrary, when used in this
report the terms “VPR Brands” the “Company,” “we,” “our,” “us,” and
similar terms refer to VPR Brands, LP, a Delaware corporation.
The information which appears on our website
www.vprbrands.com is not part of this report.
PART I –
FINANCIAL INFORMATION
VPR BRANDS, LP
CONDENSED BALANCE SHEETS
(Unaudited)
|
|
September 30, |
|
December 31, |
|
|
2020 |
|
2019 |
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
11,601 |
|
|
$ |
22,797 |
|
Accounts receivable, net |
|
|
31,868 |
|
|
|
107,381 |
|
Inventory, net |
|
|
520,332 |
|
|
|
723,884 |
|
Vendor deposits |
|
|
50,016 |
|
|
|
38,578 |
|
Deposits |
|
|
16,780 |
|
|
|
16,780 |
|
Total current assets |
|
|
630,597 |
|
|
|
909,420 |
|
|
|
|
|
|
|
|
|
|
Right to Use Asset |
|
|
309,249 |
|
|
|
362,743 |
|
Total
assets |
|
$ |
939,846 |
|
|
$ |
1,272,163 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
PARTNERS' DEFICIT |
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
411,081 |
|
|
$ |
211,727 |
|
Customer
deposits |
|
|
5,000 |
|
|
|
5,000 |
|
Right to use obligation, current portion |
|
|
55,311 |
|
|
|
46,282 |
|
Notes
payable |
|
|
469,101 |
|
|
|
749,156 |
|
Note payable-related parties |
|
|
570,086 |
|
|
|
577,008 |
|
Convertible
notes payable |
|
|
1,025,000 |
|
|
|
1,025,000 |
|
Total current liabilities and total liabilities |
|
|
2,535,579 |
|
|
|
2,614,173 |
|
|
|
|
|
|
|
|
|
|
Note payable, less current portion |
|
|
363,562 |
|
|
|
- |
|
Right to Use
Obligation, net of current portion |
|
|
293,491 |
|
|
|
336,180 |
|
Total liabilitites |
|
|
3,192,632 |
|
|
|
2,950,353 |
|
|
|
|
|
|
|
|
|
|
Partners'
Deficit: |
|
|
|
|
|
|
|
|
Common units - 100,000,000 units
authorized; 87,656,632 units |
|
|
|
|
|
|
|
|
issued and outstanding |
|
|
8,100,204 |
|
|
|
8,100,204 |
|
Accumulated
deficit |
|
|
(10,352,990 |
) |
|
|
(9,778,394 |
) |
Total partners' deficit |
|
|
(2,252,786 |
) |
|
|
(1,678,190 |
) |
Total
liabilities and partners' deficit |
|
$ |
939,846 |
|
|
$ |
1,272,163 |
|
The accompanying notes are an integral part of these unaudited
condensed interim financial statements.
VPR BRANDS, LP
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
993,509 |
|
|
$ |
1,435,063 |
|
|
$ |
2,797,512 |
|
|
$ |
4,334,358 |
|
Cost of Sales |
|
|
562,057 |
|
|
|
824,429 |
|
|
|
1,699,876 |
|
|
|
2,628,479 |
|
Gross profit |
|
|
431,452 |
|
|
|
610,634 |
|
|
|
1,097,636 |
|
|
|
1,705,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and
Administrative |
|
|
393,196 |
|
|
|
675,648 |
|
|
|
1,242,671 |
|
|
|
1,834,985 |
|
Total operating expenses |
|
|
393,196 |
|
|
|
675,648 |
|
|
|
1,242,671 |
|
|
|
1,834,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Operating Income (Loss) |
|
|
38,256 |
|
|
|
(65,014 |
) |
|
|
(145,035 |
) |
|
|
(129,106 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(76,404 |
) |
|
|
(41,519 |
) |
|
|
(215,441 |
) |
|
|
(195,214 |
) |
Interest
expense- related parties |
|
|
(64,504 |
) |
|
|
(45,988 |
) |
|
|
(214,120 |
) |
|
|
(155,738 |
) |
Total
other expense, net |
|
|
(140,908 |
) |
|
|
(87,507 |
) |
|
|
(429,561 |
) |
|
|
(350,952 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
$ |
(102,652 |
) |
|
$ |
(152,521 |
) |
|
$ |
(574,596 |
) |
|
$ |
(480,058 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Per Common Unit - Basic and
Diluted |
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Common Units
Outstanding - Basic and Diluted |
|
|
87,656,632 |
|
|
|
87,105,633 |
|
|
|
87,656,632 |
|
|
|
86,740,319 |
|
The accompanying notes are an integral part of these unaudited
condensed interim financial statements.
VPR BRANDS, LP
CONDENSED STATEMENTS OF CHANGES IN PARTNERS’ DEFICIT
(Unaudited)
|
|
Common
Units |
|
|
|
Total |
|
|
Number |
|
Amount |
|
Accumulated
Deficit |
|
Partners'
Deficit |
Nine Months Ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 |
|
|
85,975,911 |
|
|
$ |
8,015,891 |
|
|
$ |
(8,599,384 |
) |
|
$ |
(583,493 |
) |
Conversion of convertible debt into common units |
|
|
578,723 |
|
|
|
34,723 |
|
|
|
- |
|
|
|
34,723 |
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
(138,684 |
) |
|
|
(138,684 |
) |
Balance at March 31, 2019 |
|
|
86,554,634 |
|
|
|
8,050,614 |
|
|
|
(8,738,068 |
) |
|
|
(687,454 |
) |
Net loss |
|
|
- |
|
|
|
- |
|
|
|
(188,853 |
) |
|
|
(188,853 |
) |
Balance at June 30,
2019 |
|
|
86,554,634 |
|
|
|
8,050,614 |
|
|
|
(8,926,921 |
) |
|
|
(876,307 |
) |
Common units
issued to employees |
|
|
1,101,998 |
|
|
|
49,590 |
|
|
|
- |
|
|
|
49,590 |
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
(152,521 |
) |
|
|
(152,521 |
) |
Balance at September 30, 2019 |
|
|
87,656,632 |
|
|
$ |
8,100,204 |
|
|
$ |
(9,079,442 |
) |
|
$ |
(979,238 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December
31, 2019 |
|
|
87,656,632 |
|
|
$ |
8,100,204 |
|
|
$ |
(9,778,394 |
) |
|
$ |
(1,678,190 |
) |
Net loss |
|
|
- |
|
|
|
- |
|
|
|
(421,590 |
) |
|
|
(421,590 |
) |
Balance at March 31, 2020 |
|
|
87,656,632 |
|
|
|
8,100,204 |
|
|
|
(10,199,984 |
) |
|
|
(2,099,780 |
) |
Net loss |
|
|
- |
|
|
|
- |
|
|
|
(50,354 |
) |
|
|
(50,354 |
) |
Balance at June 30,
2020 |
|
|
87,656,632 |
|
|
|
8,100,204 |
|
|
|
(10,250,338 |
) |
|
|
(2,150,134 |
) |
Net loss |
|
|
- |
|
|
|
- |
|
|
|
(102,652 |
) |
|
|
(102,652 |
) |
Balance at September
30, 2020 |
|
|
87,656,632 |
|
|
$ |
8,100,204 |
|
|
$ |
(10,352,990 |
) |
|
$ |
(2,252,786 |
) |
The accompanying notes are an integral part of these unaudited
condensed interim financial statements.
VPR BRANDS, LP
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months
Ended |
|
|
September
30, |
|
|
2020 |
|
2019 |
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(574,596 |
) |
|
$ |
(480,058 |
) |
Adjustments to reconcile net loss to cash used in operating
activities: |
|
|
|
|
|
|
|
|
Amortization and Depreciation |
|
|
- |
|
|
|
16,397 |
|
Stock-based compensation |
|
|
- |
|
|
|
84,313 |
|
Changes in operating assets and
liabilities: |
|
|
|
|
|
|
|
|
Inventory |
|
|
203,552 |
|
|
|
(255,908 |
) |
Vendor deposits |
|
|
(11,438 |
) |
|
|
(205,987 |
) |
Prepaid expenses |
|
|
- |
|
|
|
(22,000 |
) |
Accounts receivable |
|
|
75,513 |
|
|
|
(26,182 |
) |
Customer deposits |
|
|
- |
|
|
|
3,549 |
|
Right to use asset and
obligation |
|
|
19,834 |
|
|
|
(8,443 |
) |
Accounts payable and accrued expenses |
|
|
199,354 |
|
|
|
(191,263 |
) |
Net cash used in
operating activities |
|
|
(87,781 |
) |
|
|
(1,085,582 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities: |
|
|
|
|
|
|
|
|
Proceeds from convertible notes payable |
|
|
- |
|
|
|
1,000,000 |
|
Proceeds from notes payable |
|
|
363,562 |
|
|
|
782,000 |
|
Payments of notes payable |
|
|
(280,055 |
) |
|
|
(727,869 |
) |
Proceeds from notes payable, related
parties |
|
|
655,002 |
|
|
|
- |
|
Payments of notes payable, related parties |
|
|
(661,924 |
) |
|
|
- |
|
Net cash provided by financing
activities |
|
|
76,585 |
|
|
|
1,054,131 |
|
|
|
|
|
|
|
|
|
|
Decrease in Cash |
|
|
(11,196 |
) |
|
|
(31,451 |
) |
Cash -
Beginning of the Period |
|
|
22,797 |
|
|
|
58,323 |
|
Cash - End of the Period |
|
$ |
11,601 |
|
|
$ |
26,872 |
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow
Information: |
|
|
|
|
|
|
|
|
Interest paid in cash |
|
$ |
373,043 |
|
|
$ |
300,990 |
|
Income taxes paid
in cash |
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Schedule of Non-Cash Financing and
Investing Activities: |
|
|
|
|
|
|
|
|
Operating lease right-of-use assets obtained in exchange for
operating lease liability |
|
$ |
- |
|
|
$ |
87,114 |
|
The accompanying notes are an integral part of these unaudited
condensed interim financial statements.
VPR BRANDS, LP
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(Unaudited)
NOTE
1. ORGANIZATION
VPR Brands, LP (the “Company”, “we”, “our”) was incorporated in New
York on July 19, 2004, as Jobsinsite.com, Inc. On August 5, 2004,
we changed 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 changed 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 U.S. and China,
covering electronic cigarette, electronic cigar and personal
vaporizer patents. We currently market a brand of electronic
cigarette e-liquids under the brand “Helium” in the United States
and are undertaking efforts to establish distribution of our
electronic cigarette e-liquids brand in China. The Company also
designs, develops, markets and distributes products (the HoneyStick
brand of vaporizers and the Goldline CBD products) oriented toward
the cannabis markets. This allows us to capitalize on the rapidly
growing expansion within the cannabis markets. The Company is also
identifying electronic cigarette companies that may be infringing
our patents and exploring options to license and or enforce our
patents.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In the opinion of Management, the accompanying unaudited condensed
financial statements are prepared in accordance with instructions
for Form 10-Q, include all adjustments (consisting only of normal
recurring accruals) which we considered as necessary for a fair
presentation of the results for the periods presented. Certain
information and footnote disclosures normally included in the
financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
(“GAAP”) have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the
Company’s Annual Report on Form 10-K for the year ended December
31, 2019. The results of operations for the three and nine months
ended September 30, 2020 are not necessarily indicative of the
results to be expected for future periods or the full year.
Use of Estimates
The preparation of financial statements in conformity with GAAP
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.
Accounts Receivable
The Company analyzes the collectability of accounts receivable from
continuing operations each accounting period and adjusts its
allowance for doubtful accounts accordingly. A considerable
amount of judgment is required in assessing the realization of
accounts receivables, including the creditworthiness of each
customer, current and historical collection history and the related
aging of past due balances. The Company evaluates specific
accounts when it becomes aware of information indicating that a
customer may not be able to meet its financial obligations due to
deterioration of its financial condition, lower credit ratings,
bankruptcy or other factors affecting the ability to render
payment. As of September 30, 2020 and December 31, 2019, the
Company had recorded allowance for bad debt of $112,017.
Inventory
Inventory consisting of finished products is stated at the lower of
cost or net realizable value. At each balance sheet date, the
Company evaluates its ending inventories for excess quantities and
obsolescence. This evaluation primarily includes an analysis of
forecasted demand in relation to the inventory on hand, among
consideration of other factors. The physical condition (e.g., age
and quality) of the inventories is also considered in establishing
its valuation. Based upon the evaluation, provisions are made to
reduce excess or obsolete inventories to their estimated net
realizable values. Once established, write-downs are considered
permanent adjustments to the cost basis of the respective
inventories. These adjustments are estimates, which could vary
significantly, either favorably or unfavorably, from the amounts
that the Company may ultimately realize upon the disposition of
inventories if future economic conditions, customer inventory
levels, product discontinuances, sales return levels or competitive
conditions differ from the Company’s estimates and expectations. As
of September 30, 2020 and December 31, 2019, the Company had
recorded a provision for obsolescence of $72,614 and $71,736,
respectively.
Leases
In February 2016, the Financial Accounting Standards Board (the
“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02
(Topic 842). Topic 842 amended several aspects of lease accounting,
including requiring lessees to recognize leases with a term greater
than one year as a right-of-use asset and corresponding liability,
measured at the present value of the lease payments. In July 2018,
the FASB issued supplemental adoption guidance and clarification to
Topic 842 within ASU 2018-10 “Codification Improvements to Topic
842, Leases” and ASU 2018-11 “Leases (Topic 842): Targeted
Improvements.” The new guidance aims to increase transparency and
comparability among organizations by requiring lessees to recognize
lease assets and lease liabilities on the balance sheet and
requiring disclosure of key information about leasing arrangements.
A modified retrospective application is required with an option to
not restate comparative periods in the period of adoption.
The Company, effective January 1, 2019 has adopted the provisions
of the new standard. The Company decided to use the practical
expedients available upon adoption of Topic 842 to aid the
transition from current accounting to provisions of Topic 842. The
package of expedients will effectively allow the Company to run off
existing leases, as initially classified as operating and classify
new leases after implementation under the new standard as the
business evolves.
The Company has an operating lease principally for warehouse and
office space. Management evaluates each lease independently to
determine the purpose, necessity to its future operations in
addition to other appropriate facts and circumstances.
The Company adopted Topic 842 using a modified retrospective
approach for its existing lease at January 1, 2019. The adoption of
Topic 842 impacted the Company’s balance sheet by the recognition
of the operating lease right-of-use assets and the liability for
operating leases. The lease liability is based on the present value
of the remaining lease payments, discounted using a market based
incremental borrowing rate as the effective date of January 1,
2019 using current estimates as to lease term including estimated
renewals for each operating lease. As of January 1, 2019, the
Company recorded an adjustment of approximately $387,000 to
operating lease right-to-use asset and the right to use lease
liability.
Revenue Recognition
The Company recognizes revenues when its customer obtains control
of promised goods or services, in an amount that reflects the
consideration which it expects to receive in exchange for those
goods. The Company recognizes revenues following the five step
model prescribed under ASU No. 2014-09: (i) identify contract(s)
with a customer; (ii) identify the performance obligations in the
contract; (iii) determine the transaction price; (iv) allocate the
transaction price to the performance obligations in the contract;
and (v) recognize revenues when (or as) we satisfy the performance
obligation.
Revenues from product sales are recognized when the customer
obtains control of the Company's product, which occurs at a point
in time, typically upon delivery to the customer. The Company
expenses incremental costs of obtaining a contract as and when
incurred if the expected amortization period of the asset that it
would have recognized is one year or less or the amount is
immaterial. 100% of the Company’s revenues for the nine months
ended September 30, 2020 and 2019, were recognized when the
customer obtained control of the Company’s product, which occurred
at a point in time, typically upon delivery to the customer.
Unit-Based Compensation
Unit-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 Accounting Standards Codification (“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 units as compensation in future periods for employee
services.
The Company may issue restricted units 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 units as compensation in future periods for
services associated with the registration of the common units.
Convertible Instruments
The Company evaluates and accounts for conversion options embedded
in convertible instruments in accordance with ASC 815, Derivatives
and Hedging Activities.
Applicable GAAP require companies to bifurcate conversion options
from their host instruments and account for them as free-standing
derivative financial instruments according to certain criteria. The
criteria include circumstances in which (a) the economic
characteristics and risks of the embedded derivative instrument are
not clearly and closely related to the economic characteristics and
risks of the host contract, (b) the hybrid instrument that embodies
both the embedded derivative instrument and the host contract is
not re-measured at fair value under other GAAP with changes in fair
value reported in earnings as they occur and (c) a separate
instrument with the same terms as the embedded derivative
instrument would be considered a derivative instrument.
The Company accounts for convertible instruments (when it has been
determined that the embedded conversion options should not be
bifurcated from their host instruments) as follows: The Company
records, when necessary,
discounts to convertible notes for the intrinsic value of
conversion options embedded in debt instruments based upon the
differences between the fair value of the underlying common stock
at the commitment date of the note transaction and the effective
conversion price embedded in the note. Debt discounts under these
arrangements are amortized over the term of the related debt to
their stated date of redemption.
The Company accounts for the conversion of convertible debt when a
conversion option has been bifurcated using the general
extinguishment standards. The debt and equity linked derivatives
are removed at their carrying amounts and the units issued are
measured at their then-current fair value, with any difference
recorded as a gain or loss on extinguishment of the two separate
accounting liabilities.
Fair Value
The carrying values of the Company’s notes payables, convertible
notes, and accounts payable and accrued expenses approximates their
fair values because of the short-term nature of these
instruments.
Basic and Diluted Net Loss Per Unit
The Company computes net loss per unit in accordance with FASB ASC
260, “Earnings per Share”. ASC 260 requires presentation of both
basic and diluted earnings per share (“EPS”) on the face of the
statement of operations. Basic EPS is computed by dividing net loss
available to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted EPS gives
effect to all dilutive potential common shares outstanding during
the period including stock options, using the treasury stock
method, and convertible notes, using the if-converted method.
Diluted EPS excludes all dilutive potential common shares if their
effect is anti-dilutive. 10,676,133 shares underlying convertible
notes were excluded from the calculation of diluted loss per share
for the nine months ended September 30, 2020 and 2019 because their
effect was antidilutive.
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.
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 condensed 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 incurred a net loss of
$574,596 for the nine months ended September 30, 2020 and has an
accumulated deficit of $10,352,990 and a working capital deficit of
$1,904,982 at September 30, 2020. 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
sufficient 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.
In March 2020, the World Health Organization declared the novel
coronavirus (COVID-19) a global pandemic and recommended
containment and mitigation measures worldwide. The spread of
COVID-19 has affected segments of the global economy and may affect
our operations, including the potential interruption of our supply
chain. We are monitoring this situation closely, and although
operations have not been materially affected by the COVID-19
outbreak to date, the ultimate duration and severity of the
outbreak and its impact on the economic environment and our
business is uncertain.
The spread of COVID-19, or another infectious disease, could also
negatively affect the operations at our third-party manufacturers,
which could result in delays or disruptions in the supply of our
products. In addition, we may take temporary precautionary measures
intended to help minimize the risk of the virus to our employees,
including temporarily requiring all employees to work remotely,
suspending all non-essential travel worldwide for our employees,
and discouraging employee attendance at industry events and
in-person work-related meetings, which could negatively affect our
business.
The extent to which COVID-19 impacts our operations will depend on
future developments, which are highly uncertain and cannot be
predicted with confidence, including the duration of the outbreak,
new information which may emerge concerning the severity of
COVID-19 and the actions to contain the coronavirus or treat its
impact, among others. In particular, the continued spread of the
coronavirus globally could adversely impact our operations,
including among others, our manufacturing and supply chain, sales
and marketing and could have an adverse impact on our business and
our financial results. The COVID-19 outbreak is a widespread health
crisis that has adversely affected the economies and financial
markets of many countries, resulting in an economic downturn that
could affect demand for our products and likely impact our
operating results.
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: NOTES PAYABLE
Notes Payable- Unrelated Parties
On September 6, 2018, the Company issued the Amended and Restated
Secured Promissory Note in the principal amount of $582,260 (the
“A&R Note”). The principal amount of the A&R Note
represents (i) $500,000 which Healthier Choices Management Corp.
(HCMC) loaned to the Company on September 6, 2018, and (ii)
$82,260, which represents the aggregate amount owed by the Company
under the Original Notes as of September 6, 2018. The A&R Note,
which has a maturity date of September 6, 2021, had the effect of
amending and restating the Note and bears interest at the rate of
7% per annum. Pursuant to the terms of the A&R Note, the
Company agreed to pay HCMC 155 weekly payments of $4,141,
commencing on September 14, 2018 and ending on September 14, 2021,
and a balloon payment for all remaining accrued interest and
principal in the 156th week. The Company at its option has the
right, by giving 15 business days’ advance notice to HCMC, to
prepay a portion or all amounts outstanding under the A&R Note
without penalty or premium. The balance of the note as of September
30, 2020 was $314,247.
On July 22, 2019, the Company issued a promissory note in the
principal amount of $250,000 (the “Lendistry Note”) to Lendistry,
LLC. The principal amount due under the Lendistry Note bears
interest at the rate of 24% per annum, and permits Lendistry, LLC
to deduct weekly ACH payments from the Company’s bank account in
the
amount of $1,240 plus up to 11% of Credit Card Sales until the
principal amount due and accrued interest is repaid. Any unpaid
principal amount and any accrued interest is due on July 25, 2025.
The Lendistry Note is unsecured. The balance of the note as of
September 30, 2020 was $36,363.
On September 13, 2019, the Company issued a promissory note in the
principal amount of $95,000 (“BlueVine Note”) to BlueVine Capital,
Inc. The principal amount due under the BlueVine Note bears
interest at the rate of 27% per annum, and required weekly payments
of $4,062 until the principal amount due and accrued interest is
repaid. Any unpaid principal amount and any accrued interest was
due on July 13, 2025. The BlueVine Note is unsecured and was paid
in full during the nine months ended September 30, 2020. The
balance of the note as of September 30, 2020 was $0.
On September 17, 2019, the Company issued a promissory note in the
principal amount of $100,000 (the “Kabbage Note”) to Kabbage, Inc.
The principal amount due under the Kabbage Note bears interest at
an annual rate of 37%, and requires monthly payments of principal
and interest of $10,083 through maturity in September 2020. The
Kabbage Note is unsecured. The balance of the note as of September
30, 2020 was $60,971.
On September 24, 2019, the Company entered into a working capital
account agreement with Paypal Working Capital (“Paypal Note”),
pursuant to which the Company borrowed $37,000, requiring repayment
in amounts equal to 30% of sales collections processed through
Paypal, but no less than $4,143, every 90 days, until the total
amount of payments equals $41,435. The balance of the loan as of
September 30, 2020 is $41,435.
On December 23, 2019, the Company issued a promissory note in the
principal amount of $23,300 (the “Kabbage Note #2”) to Kabbage,
Inc. The principal amount due under the Kabbage Note bears interest
at an annual rate of 37%, and requires monthly payments of
principal and interest of $2,349 through maturity in December 2020.
The Kabbage Note #2 is unsecured. The balance of the note as of
September 30, 2020 was $16,085.
Payroll Protection Program Loan
The Company’s long-term debt is comprised of promissory notes
pursuant to the Paycheck Protection Program and Economic Injury
Disaster Loan (see below), under Coronavirus Aid, Relief and
Economic Security Act (“CARES ACT”) enacted on March 27, 2020 and
revised under the provisions of the PayCheck Protection Flexibility
Act of 2020 on June 5, 2020 and administered by the United States
Small Business Administration (“SBA”).
In April 2020, the Company received a loan in the amount of
$203,662 under the Payroll Protection Program (“PPP Loan”). The
loan accrues interest at a rate of 1% and has an original maturity
date of two years which can be extended to five years 2 by mutual
agreement of the Company and SBA. The PPP loan contains customary
events of default relating to, among other things, payment defaults
and breaches of representations and warranties.
Under the terms of the loan, a portion or all of the loan is
forgivable to the extent the loan proceeds are used to fund
qualifying payroll, rent and utilities during a designated
twenty-four week period. Payments are deferred until the SBA
determines the amount to be forgiven. The Company intends to
utilize the proceeds of the PPP loan in a manner which will enable
qualification as a forgivable loan. However, no assurance can be
provided that all or any portion of the PPP loan will be forgiven.
The balance on this PPP loan was $203,662 as of September 30, 2020
and has been classified as a long-term liability in notes payable,
less current portion on the accompanying balance sheets.
Economic Injury Disaster Loan
On July 9, 2020 and June 24, 2020, the Company received an Economic
Injury Disaster Loan (“EIDL”) in the aggregate amount of $159,900,
payable in monthly installments of principal and interest totaling
$731 over 30 years beginning in June 2021. The note accrues
interest at an annual rate of 3.75%. The loan is secured by all
tangible
and intangible property. The balance on this EIDL was $159,900 as
of September 30, 2020 and has been classified as a long-term
liability in notes payable, less current portion on the
accompanying balance sheets.
The
following is a summary of notes payable activity for the nine
months ended September 30, 2020:
Balance at December 31, 2019
Proceeds from notes payable
|
$ 749,156
363,562
|
Repayments of notes
payable |
(280,055) |
Balance at September 30,
2020 |
$832,663 |
Current portion |
$469,101 |
Notes payable, less current
portion |
$363,562 |
NOTE 5: NOTES PAYABLE – RELATED PARTIES
On February 1, 2019, the Company issued a promissory note in the
principal amount of $100,001 (the “February 2019 Frija Note”) to
Kevin Frija. Mr. Frija is the Company’s Chief Executive Officer,
President, principal financial officer, principal accounting
officer and Chairman of the Board, and a significant stockholder of
the Company. The principal amount due under the February 2019 Frija
Note bears interest at the rate of 24% per annum, permits Mr. Frija
to deduct one ACH payment from the Company’s bank account in the
amount of $500 per business day until the principal amount due and
accrued interest is repaid. Any unpaid principal amount and
any accrued interest was due on February 1, 2020. The February 2019
Frija Note was paid in full during the nine months ended September
30, 2020. The February 2019 Frija Note is unsecured and had a
balance as of September 30, 2020 of $0.
On June 14, 2019, the Company issued a promissory note in the
principal amount of $100,001 (the “June 2019 Frija/Hoff Note”) to
Kevin Frija and Dan Hoff. Mr. Frija is the Company’s Chief
Executive Officer, President, principal financial officer,
principal accounting officer and Chairman of the Board, and a
significant stockholder of the Company. Mr. Hoff is the Company’s
Chief Operating Officer. The principal amount due under the June
2019 Frija/Hoff Note bears interest at the rate of 24% per annum,
permits Messrs. Frija and Hoff to deduct one ACH payment from the
Company’s bank account in the amount of $500 per business day until
the principal amount due and accrued interest is repaid. Any unpaid
principal amount and any accrued interest was due on June 14, 2020.
The June 2019 Frija/Hoff Note is unsecured. The June 2019
Frija/Hoff Note was paid in full during the nine months ended
September 30, 2020. The June 2019 Frija/Hoff Note is unsecured and
had a balance as of September 30, 2020 of $0.
On July 5, 2019, the Company issued a Note in the principal amount
of $100,001 (“July 2019 Frija Note”) to Kevin Frija, the Company’s
Chief Executive Officer, President, principal financial officer,
principal accounting officer and Chairman of the Board, and a
significant stockholder of the Company. The principal amount due
under the July 2019 Frija Note bears interest at the rate of 24%
per annum, and permits Mr. Frija to deduct one ACH payment from the
Company’s bank account in the amount of $500 per business day until
the principal amount due and accrued interest is repaid. Any unpaid
principal amount and any accrued interest is due in July 2020. The
July 2019 Frija Note is unsecured and had a balance as of September
30, 2020 of $7,557.
On October 7, 2019, the Company issued a Note in the principal
amount of $100,001 (“October 2019 Frija Note”) to Kevin Frija, the
Company’s Chief Executive Officer, President, principal financial
officer, principal accounting officer and Chairman of the Board,
and a significant unitholder of the Company. The principal amount
due under the October 2019 Frija Note bears interest at the rate of
24% per annum, and permits Mr. Frija to deduct one ACH payment from
the Company’s bank account in the amount of $500 per business day
until the principal amount due and accrued interest is repaid. Any
unpaid principal amount and any accrued interest is due in October
2020. The October 2019 Frija Note is unsecured and had balance as
of September 30, 2020 of $2,476.
On November 8, 2019 and November 15, 2019, the Company issued two
separate notes with an aggregate principal amount of $200,002
(“November 2019 Frija Notes”) to Kevin Frija, the Company’s Chief
Executive Officer, President, principal financial officer,
principal accounting officer and Chairman of the Board, and a
significant unitholder of the Company. The principal amount due
under the November 2019 Frija Note bears interest at the rate of
24% per annum, and permits Mr. Frija to deduct one ACH payment from
the Company’s bank account in the amount of $500 per business day
until the principal amount due and accrued interest is repaid. Any
unpaid principal amount and any accrued interest is due in November
2020. The November 2019 Frija Notes are unsecured and had an
aggregate balance as of September 30, 2020 of $20,490.
On December 9, 2019 and December 16, 2019, the Company issued
two separate notes with an aggregate principal amount of $200,002
(“December 2019 Frija Notes”) to Kevin Frija, the Company’s Chief
Executive Officer, President, principal financial officer,
principal accounting officer and Chairman of the Board, and a
significant unitholder of the Company. The principal amount due
under the December 2019 Frija Notes bears interest at the rate of
24% per annum, and permits Mr. Frija to deduct one ACH payment from
the Company’s bank account in the amount of $500 per business day
until the principal amount due and accrued interest is repaid. Any
unpaid principal amount and any accrued interest is due in December
2020. The December 2019 Frija Notes is unsecured. The balance of
the December 2019 Frija Notes as of September 30, 2020 was
$56,059.
On January 10, 2020, the Company issued a promissory note in the
principal amount of $100,001 (“January 2020 Frija Note”) to Kevin
Frija, who is the Company’s Chief Executive Officer, President,
principal financial officer, principal accounting officer and
Chairman of the Board, and a significant unitholder of the Company.
The principal amount due under the Note bears interest at the rate
of 24% per annum, and the Note permits Mr. Frija to deduct one ACH
payment from the Company’s bank account in the amount of $500 per
business day until the principal amount due and accrued interest is
repaid. Any unpaid principal amount and any accrued interest is due
on January 10, 2021. The Note is unsecured. The Note is unsecured.
The balance of the note as of September 30, 2020 was $43,106.
On February 18, 2020, the Company issued a promissory note in the
principal amount of $100,001 (“February 2020 Frija Note”) to Kevin
Frija, who is the Company’s Chief Executive Officer, President,
principal financial officer, principal accounting officer and
Chairman of the Board, and a significant unitholder of the Company.
The principal amount due under the February 2020 Frija Note bears
interest at the rate of 24% per annum, and the February 2020 Frija
Note permits Mr. Frija to deduct one ACH payment from the Company’s
bank account in the amount of $500 per business day until the
principal amount due and accrued interest is repaid. Any unpaid
principal amount and any accrued interest is due on February 18,
2021. The February 2020 Frija Note is unsecured and had balance as
of September 30, 2020 was $49,755.
On March 17, 2020, the Company received $90,000 pursuant to a
promissory note in the principal amount of $100,001 (“March 2020
Frija Note”) to Kevin Frija, who is the Company’s Chief Executive
Officer, President, principal financial officer, principal
accounting officer and Chairman of the Board, and a significant
unitholder of the Company. The remaining amount of principal of
$10,001 was received in April 2020. The principal amount due under
the March 2020 Frija Note bears interest at the rate of 24% per
annum, and the March 2020 Frija Note permits Mr. Frija to deduct
one ACH payment from the Company’s bank account in the amount of
$500 per business day until the principal amount due and accrued
interest is repaid. Any unpaid principal amount and any accrued
interest is due on April 6, 2021. The March 2020 Frija Note is
unsecured and had a balance as of September 30, 2020 was
$59,873.
On June 18, 2020 and June 22, 2020, the Company issued two separate
promissory notes with an aggregate principal amount of $130,000
(the “June 2020 Notes”) to Mr. Frija, who is the Company’s Chief
Executive Officer, President, principal financial officer,
principal accounting officer and Chairman of the Board, and a
significant unitholder of the Company. The principal amount due
under the June 2020 Notes bears interest at the rate of 24% per
annum,
and the June 2020 Notes permits Mr. Frija to deduct one ACH payment
from the Company’s bank account in the amount of $500 per business
day until the principal amount due and accrued interest is repaid.
Any unpaid principal amount and any accrued interest is due on June
22, 2021. During August 2020, there was an additional $70,000
issuance to the June 2020 Notes. The June 2020 Notes are unsecured
and had a balance as of September 30, 2020 of $175,769.
On September 17, 2020 and September 25, 2020, the Company issued
two separate promissory notes with an aggregate principal amount of
$155,000 (the “September 2020 Notes”) to Mr. Frija, who is the
Company’s Chief Executive Officer, President, principal financial
officer, principal accounting officer and Chairman of the Board,
and a significant unitholder of the Company. The principal amount
due under the September 2020 Notes bears interest at the rate of
24% per annum, and the September 2020 Notes permits Mr. Frija to
deduct one ACH payment from the Company’s bank account in the
amount of $500 per business day until the principal amount due and
accrued interest is repaid. Any unpaid principal amount and any
accrued interest is due on September 22, 2021. The September 2020
Frija Note is unsecured and had balance as of September 30, 2020
was $155,000.
The
following is a summary of notes payable – related parties activity
for the nine months ended September 30, 2020:
Balance at
December 31, 2019 |
$577,008 |
New borrowings |
655,002 |
Repayments of
principal |
(661,924) |
Balance at September 30,
2020 |
$570,086 |
NOTE 6: CONVERTIBLE NOTES PAYABLE
Acquisition Note
In connection with 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
holder sold the Acquisition Note to DiamondRock, LLC.
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 units 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 of September 30, 2020, and December 31,
2019, the balance outstanding was $25,000.
Brikor Note
On February 15, 2019, the Company issued a senior convertible
promissory note in the principal amount of $200,000 to Brikor LLC.
The principal amount due under the Brikor Note bears interest at
the rate of 18% per annum. The principal amount and accrued but
unpaid interest (to the extent not converted in accordance with the
terms of the Brikor Note) is due and payable on the third
anniversary of the issue date. The Brikor Note and the amounts
payable thereunder are unsecured obligations of the Company and
shall be senior in right of payment and otherwise to all
indebtedness, as provided in the Brikor Note.
At any time after the first anniversary of the issue date, the
holder may require the Company, upon at least 30 business days’
written notice, to redeem all or any portion of the Brikor Note.
The portion of the Brikor Note subject to redemption will be
redeemed by the Company in cash.
The Brikor Note is convertible into common units of the Company.
Pursuant to the terms of the Brikor Note, Brikor has the right, at
its option, to convert any portion of the outstanding and unpaid
Conversion Amount (as hereinafter defined) into common units in
accordance with the provisions of the Brikor Note at the Conversion
Rate (as hereinafter defined). The number of common units issuable
upon conversion of any Conversion Amount will be determined by
dividing (x) such Conversion Amount by (y) $0.10 (subject to
adjustment as set forth in the Brikor Note) (such result, the
“Conversion Rate”). “Conversion Amount” means the sum of (A) the
portion of the principal balance of the Brikor Note to be converted
with respect to which the determination is being made, (B) accrued
and unpaid interest with respect to such principal balance, if any,
and (C) the Default Balance (other than any amount thereof within
the purview of foregoing clauses (A) or (B)), if any. The balance
of the note as of September 30, 2020 and December 31, 2019 was
$200,000. Interest expense for nine months ended September 30, 2020
totaled $27,000, of which $4,266 is included in accounts payable
and accrued expenses as of September 30, 2020.
Daiagi and Daiagi Note
On February 15, 2019, the Company issued a senior convertible
promissory note in the principal amount of $200,000 (the “Daiagi
and Daiagi Note”) to Mike Daiagi and Mathew Daiagi jointly (the
“Daiagis”). The principal amount due under the Daiagi and Daiagi
Note bears interest at the rate of 18% per annum. The principal
amount and accrued but unpaid interest (to the extent not converted
in accordance with the terms of the Daiagi and Daiagi Note) is due
and payable on the third anniversary of the issue date. The Daiagi
and Daiagi Note and the amounts payable thereunder are unsecured
obligations of the Company and shall be senior in right of payment
and otherwise to all indebtedness, as provided in the Daiagi and
Daiagi Note.
At any time after the first anniversary of the issue date, the
holder may require the Company, upon at least 30 business days’
written notice, to redeem all or any portion of the Daiagi and
Daiagi Note. The portion of the Daiagi and Daiagi Note subject to
redemption will be redeemed by the Company in cash.
The Daiagi and Daiagi Note is convertible into common units of the
Company. Pursuant to the terms of the Daiagi and Daiagi Note, the
Daiagis have the right, at their option, to convert any portion of
the outstanding and unpaid Conversion Amount into common units in
accordance with the provisions of the Daiagi and Daiagi Note at the
Conversion Rate. The number of common units issuable upon
conversion of any Conversion Amount will be determined by dividing
(x) such Conversion Amount by (y) $0.10 (subject to adjustment as
set forth in the Daiagi and Daiagi Note). The balance of the note
as of September 30, 2020 and December 31, 2019 was $200,000.
Interest expense for nine months ended September 30, 2020 totaled
approximately $27,000, of which $4,600 is included in accounts
payable and accrued as of September 30, 2020.
Amber Investments Note
On February 15, 2019, the Company issued a senior convertible
promissory note in the principal amount of $200,000 (the “Amber
Investments Note”) to Amber Investments LLC (“Amber Investments”).
The principal amount due under the Amber Investments Note bears
interest at the rate of 18% per annum. The principal amount and
accrued but unpaid interest (to the extent not converted in
accordance with the terms of the Amber Investments Note) is due and
payable on the third anniversary of the issue date. The Amber
Investments Note and the amounts payable thereunder are unsecured
obligations of the Company and shall be senior in right of payment
and otherwise to all indebtedness, as provided in the Amber
Investments Note.
At any time after the first anniversary of the issue date, the
holder may require the Company, upon at least 30 business days’
written notice, to redeem all or any portion of the Amber
Investments Note. The portion of the Amber Investments Note subject
to redemption will be redeemed by the Company in cash.
The Amber Investments Note is convertible into common units of the
Company. Pursuant to the terms of the Amber Investments Note, Amber
Investments has the right, at its option, to convert any portion of
the outstanding and unpaid Conversion Amount into common units in
accordance with the provisions of the Amber Investments Note at the
Conversion Rate. The number of common units issuable upon
conversion of any Conversion Amount will be determined by dividing
(x) such Conversion Amount by (y) $0.10 (subject to adjustment as
set forth in the Amber Investments Note). The balance of the
note as of September 30, 2020 and December 31, 2019 was $200,000.
Interest expense for nine months ended September 30, 2020 totaled
approximately $27,000, of which $4,266 is included in accounts
payable and accrued as of September 30, 2020.
K & S Pride Note
On February 19, 2019, the Company issued a senior convertible
promissory note in the principal amount of $200,000 (the “K & S
Pride Note”) to K & S Pride Inc. (“K & S Pride”). The
principal amount due under the K & S Pride Note bears interest
at the rate of 18% per annum. The principal amount and accrued but
unpaid interest (to the extent not converted in accordance with the
terms of the K & S Pride Note) is due and payable on the third
anniversary of the issue date. The K & S Pride Note and the
amounts payable thereunder are unsecured obligations of the Company
and shall be senior in right of payment and otherwise to all
indebtedness, as provided in the K & S Pride Note.
At any time after the first anniversary of the issue date, the
holder may require the Company, upon at least 30 business days’
written notice, to redeem all or any portion of the K & S Pride
Note. The portion of the K & S Pride Note subject to redemption
will be redeemed by the Company in cash.
The K & S Pride Note is convertible into common units of the
Company. Pursuant to the terms of the K & S Pride Note, K &
S Pride has the right, at its option, to convert any portion of the
outstanding and unpaid Conversion Amount into common units in
accordance with the provisions of the K & S Pride Note at the
Conversion Rate. The number of common units issuable upon
conversion of any Conversion Amount will be determined by dividing
(x) such Conversion Amount by (y) $0.10 (subject to adjustment as
set forth in the K & S Pride Note). The balance of the note as
of September 30, 2020 and December 31, 2019 was $200,000. Interest
expense for nine months ended September 30, 2020 totaled
approximately $27,000, of which $3,900 is included in accounts
payable and accrued as of September 30, 2020.
Surplus Depot Note
On February 20, 2019, the Company issued a senior convertible
promissory note in the principal amount of $200,000 (the “Surplus
Depot Note”) to Surplus Depot Inc. (“Surplus Depot”). The principal
amount due under the K & S Pride Note bears interest at the
rate of 18% per annum. The principal amount and accrued but unpaid
interest (to the extent not converted in accordance with the terms
of the Surplus Depot Note) is due and payable on the third
anniversary of the issue date. The Surplus Depot Note and the
amounts payable thereunder are unsecured obligations
of the Company and shall be senior in right of payment and
otherwise to all indebtedness, as provided in the Surplus Depot
Note.
At any time after the first anniversary of the issue date, the
holder may require the Company, upon at least 30 business days’
written notice, to redeem all or any portion of the Surplus Depot
Note. The portion of the Surplus Depot Note subject to redemption
will be redeemed by the Company in cash.
The Surplus Depot Note is convertible into common units of the
Company. Pursuant to the terms of the Surplus Depot Note, Surplus
Depot has the right, at its option, to convert any portion of the
outstanding and unpaid Conversion Amount into common units in
accordance with the provisions of the Surplus Depot Note at the
Conversion Rate. The number of common units issuable upon
conversion of any Conversion Amount will be determined by dividing
(x) such Conversion Amount by (y) $0.10 (subject to adjustment as
set forth in the Surplus Depot Note). The balance of the note as of
September 30, 2020 and December 31, 2019 was $200,000. Interest
expense for nine months ended September 30, 2020 totaled
approximately $27,000, of which $3,900 is included in accounts
payable and accrued as of September 30, 2020.
NOTE 7: PARTNERS’ DEFICIT
Amendment to Partnership Agreement
On January 23, 2020, the Company executed the Second Amendment (the
“Second Amendment”) to Limited Partnership Agreement (the
“Agreement”) in order to create a new class of Company securities
titled Class A preferred units.
Pursuant to Section 5.6 of the Agreement, Soleil Capital Management
LLC, the Company’s general partner (the “General Partner”) may,
without the approval of the Company’s limited partners, issue
additional Company securities for any Company purpose at any time
and from time to time for such consideration and on such terms and
conditions as the General Partner shall determine in its sole
discretion, all without the approval of any limited partners, and
that each additional Company interest authorized to be issued by
the Company may be issued in one or more classes, or one of more
series of any such classes, with such designations, preferences,
rights, powers and duties as shall be fixed by the General Partner
in its sole discretion. Pursuant to Section 13.1 of the Agreement,
the General Partner may, without the approval of any partner, any
unitholder or any other person, amend any provision of the
Agreement to reflect any amendment expressly permitted in the
Agreement to be made by the General Partner acting along, therefore
including the creation of a new class of Company securities.
The designation, powers, preferences and rights of the Class A
preferred units and the qualifications, limitations and
restrictions thereof are contained in the Second Amendment, and are
summarized as follows:
Number and Stated Value. The number of authorized Class
A preferred units is 1,000,000. Each Class A preferred unit will
have a stated value of $2.00 (the “Stated Value”).
Rights. Except as set forth in the Second Amendment,
each Class A preferred unit has all of the rights, preferences and
obligations of the Company’s common units as set forth in the
Agreement and shall be treated as a common unit for all other
purposes of the Agreement.
Dividends.
Rate. Each Class A preferred unit is entitled to receive an
annual dividend at a rate of 8% per annum on the Stated Value.,
which shall accrue on a monthly basis at the rate of 0.6666% per
month, non-compounding, and shall be payable in cash within 30 days
of each calendar year for which the dividend is payable.
Liquidation. In the event of a liquidation, dissolution or
winding up of the Company, a merger or consolidation of the Company
wherein the Company is not the surviving entity, or a sale of all
or substantially all of the assets of the Company, each Class A
unit will be entitled to receive, prior an in preference to any
distribution of any of the assets or surplus funds of the Company
to the holders of common units or any other Company securities
ranking junior to the Class A preferred units, or to the General
Partner, an amount per Class A preferred unit equal to any accrued
but unpaid dividends. If, upon such an event and after the payment
of preferential amounts required to be paid to holders of any
Company securities having a ranking upon liquidation senior to the
Class A preferred units, the assets of the Company available for
distribution to the partners of the Company are insufficient to
provide for both the payment of the full Class A liquidation
preference and the preferential amounts (if any) required to be
paid to holders of any other Company securities having a ranking
upon liquidation pari passu with the Class A
preferred units, such assets as are so available shall be
distributed among the Class A preferred units and the holders of
any other series of Company securities having a ranking upon
liquidation pari passu with the Class A preferred
units in proportion to the relative aggregate preferential amount
each such holder is otherwise entitled to receive.
Conversion Rights.
Conversion. Upon notice, a holder of Class A preferred units
has the right, at its option, to convert all or a portion of the
Class A preferred units held into fully paid and nonassessable
Company common units.
Conversion Price. Each Class A preferred unit is convertible
into a number of common units equal to (x) the Stated Value plus
any accrued and unpaid dividends, divided by (y) the Conversion
Price (as hereinafter defined). The “Conversion Price” means 85%
multiplied by the VWAP (as defined in the Second Amendment),
representing a discount rate of 15%.
Conversion Limitation. In no event shall a holder of Class A
preferred units be entitled to convert any of the Class A preferred
units in excess of that number of Class A preferred units upon
conversion of which the sum of (1) the number of common units
beneficially owned by such holder and its affiliates (other than
common units which may be deemed beneficially owned through the
ownership of the unconverted Class A preferred units or the
unexercised or unconverted portion of any other security of the
Company subject to a limitation on conversion or exercise analogous
to the limitations contained herein), and (2) the number of common
units issuable upon the conversion of all Class A preferred units
held by such holder would result in beneficial ownership by the
holder and its affiliates of more than 4.99% of the outstanding
common units.
Equity Purchase Agreement
On February 19, 2020 (the “Execution Date”), the Company entered
into an Equity Purchase Agreement (the “Equity Purchase Agreement”)
with DiamondRock, LLC (the “Investor”) pursuant to which, upon the
terms and subject to the conditions thereof, the Investor committed
to purchase shares of the Company’s common units (the “Put Shares”)
at an aggregate purchase price of up to $5,000,000 (the “Maximum
Commitment Amount”) over the course of the commitment period.
Pursuant to the terms of the Equity Purchase Agreement, the
commitment period will commence upon the initial effective date of
a Form S-1 Registration Statement planned to be filed to register
the Put Shares in accordance with the Registration Rights Agreement
as further described below and will end on the earlier of (i) the
date on which the Investor has purchased Put Shares from the
Company pursuant to the Equity Purchase Agreement equal to the
Maximum Commitment Amount, (ii) the date on which there is no
longer an effective registration statement for the
Put Shares, (iii) 24 months after the initial effectiveness of the
Registration Statement planned to be filed to register the Put
Shares in accordance with the Registration Rights Agreement as
further described below, or (iv) written notice of termination by
the Company to the Investor (which will not occur at any time that
the Investor holds any of the Put Shares).
From time to time over the
term of the Equity Purchase Agreement, commencing on the date on
which a registration statement registering the Put Shares (the
“Registration Statement”) becomes effective, the Company may, in
its sole discretion, provide the Investor with a put notice (each a
“Put Notice”) to purchase a specified number of the Put Shares
(each a “Put Amount Requested”) subject to the limitations
discussed below and contained in the Equity Purchase
Agreement. Within two (2) trading days of the date that
the Put Notice is deemed delivered (“Put Date”) pursuant to terms
of the Equity Purchase Agreement, the Company shall deliver, or
cause to be delivered, to the Investor, the estimated amount of Put
Shares equal to the investment amount (“Investment Amount”)
indicated in the Put Notice divided by the “Initial Pricing” per
share, as such term is defined in the Equity Purchase Agreement
(the “Estimated Put Shares”) as DWAC Shares. Within two (2) trading
days following the Put Date, the Investor shall pay the Investment
Amount to the Company by wire transfer of immediately available
funds.
At the end of the five (5)
trading days following the clearing date associated with the
applicable Put Notice (“Valuation Period”), the purchase price (the
“Purchase Price”) shall be computed as 85% of the average daily
volume weighted average price of the Company’s common units during
the Valuation Period and the number of Put Shares shall be
determined for a particular put as the Investment Amount divided by
the Purchase Price. If the number of Estimated Put
Shares (Investment Amount divided by Initial Pricing) initially
delivered to the Investor is greater than the number of Put Shares
(Investment Amount divided by Purchase Price) purchased by the
Investor pursuant to such Put, then, within two (2) trading days
following the end of the Valuation Period, the Investor shall
deliver to the Company any excess Estimated Put Shares associated
with such put. If the number of Estimated Put Shares (Investment
Amount divided by Initial Pricing) delivered to the Investor is
less than the Put Shares purchased by the Investor pursuant to a
put, then within two (2) trading days following the end of the
Valuation Period the Company shall deliver to the Investor by wire
transfer of immediately available funds equal to the difference
between the Estimated Put Shares and the Put Shares issuable
pursuant to such put.
The Put Amount Requested pursuant to any single Put Notice must
have an aggregate value of at least $25,000, and cannot exceed the
lesser of (i) $250,000, or (ii) 150% of the average daily trading
value of the common units in the five trading days immediately
preceding the Put Notice.
In order to deliver a Put Notice, certain conditions set forth in
the Equity Purchase Agreement must be met, as provided therein. In
addition, the Company is prohibited from delivering a Put Notice
if: (i) the sale of Put Shares pursuant to such Put Notice would
cause the Company to issue and sell to the Investor, or the
Investor to acquire or purchase, a number of shares of
the Company’s common units that, when aggregated with all shares of
common units purchased by the Investor pursuant to all prior Put
Notices issued under the Equity Purchase Agreement, would exceed
the Maximum Commitment Amount; or (ii) the issuance of the Put
Shares would cause the Company to issue and sell to Investor, or
the Investor to acquire or purchase, an aggregate number of shares
of common units that would result in the Investor beneficially
owning more than 4.99% of the issued and outstanding shares of the
Company’s common units (the “Beneficial Ownership Limitation”).
If the value of the Put Shares based on the Purchase Price
determined for a particular put would cause the Company to exceed
the Maximum Commitment Amount, then within two (2) trading days
following the end of the Valuation Period the Investor shall return
to the Company the surplus amount of Put Shares associated with
such put. If the number of the Put Shares (Investment Amount
divided by Purchase Price) determined for a particular put exceeds
the Beneficial Ownership Limitation, then within two (2) trading
days following the end of the Valuation Period the Investor shall
return to the Company the surplus amount of Put Shares associated
with such put. Concurrently, the Company shall return within two
(2) trading days following the end of the respective Valuation
Period to the
Investor, by wire transfer of immediately available funds, the
portion of the Investment Amount related to the portion of Put
Shares exceeding the Beneficial Ownership Limitation.
Further pursuant to the Equity Purchase Agreement, the Company
agreed that if the Securities and Exchange Commission (the “SEC”)
declares the Registration Statement for the Put Shares effective,
then during the 12 month period immediately following the date the
SEC declares the Registration Statement for the Put Shares
effective, upon any issuance by the Company or any of its
subsidiaries of common units or common units equivalents for cash
consideration, indebtedness or a combination of units thereof (a
“Subsequent Financing”), the Investor shall have the right to
participate in up to an amount of the Subsequent Financing (that is
not an “Exempt Issuance” as such term is defined in the Equity
Purchase Agreement), equal to 50% of the Subsequent Financing (the
“Participation Maximum”) on the same terms, conditions and price
provided for in such Subsequent Financing; provided, however, where
(i) the person or persons through or with whom such Subsequent
Financing is proposed to be effected will not agree to such
participation by the Investor and (ii) the Investor will not agree
to finance the total amount of such Subsequent Financing in lieu of
the person or persons through or with whom such Subsequent
Financing is proposed to be effected, the Investor shall have no
right to participate in such Subsequent Financing.
Further pursuant to the Equity Purchase Agreement, the Company
agreed to reserve a sufficient number of shares of its common units
for the Investor pursuant to the Equity Purchase Agreement and all
other contracts between the Company and the Investor.
The Equity Purchase Agreement contains customary representations,
warranties, covenants and conditions for a transaction of this type
for the benefit of the parties.
Registration Rights Agreement
On the Execution Date, the
Company also entered into a registration rights agreement (the
“Registration Rights Agreement”) with the Investor pursuant to
which the Company is obligated to file the Registration Statement
to register the resale of the Put Shares. Pursuant to the
Registration Rights Agreement, the Company must (i) file the
Registration Statement within 45 calendar days from the Execution
Date, (ii) use reasonable best efforts to cause the Registration
Statement to be declared effective under the Securities Act of
1933, as amended (the “Securities Act”), within 90 calendar days
after the filing thereof, and (iii) use its reasonable best efforts
to keep such Registration Statement continuously effective under
the Securities Act until all of the Put Shares have been sold
thereunder or pursuant to Rule 144.
Pursuant to the Registration Rights Agreement, the Company agreed
to pay all reasonable expenses, other than sales or brokerage
commissions, incurred in connection with registrations, filings or
qualifications pursuant to the Registration Rights Agreement,
including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, and fees and
disbursements of counsel for the Company.
NOTE 8: COMMITMENTS AND CONTINGENCIES
Lease Agreement
In October 2019, the Company entered into a 5-year lease of
approximately 9,819 square feet of warehouse store and office space
with an entity of which the Company’s chief executive officer is an
owner. The lease requires base monthly rent of $11,100. The Company
has annual options to extend for one-year, during which period rent
will increase 3% annually. Future minimum payment on the lease are
as follows:
Years Ending December 31, |
|
2020
(Remainder) |
$ 33,300 |
2021 |
133,200 |
2022 |
133,200 |
2023 |
133,200 |
2024 |
122,100 |
Total |
$555,000 |
At inception of the lease, the Company recorded a right to use
asset and obligation of $378,426, equal to the present value of
remaining payments of minimum required lease payments.
The
Company amortized $53,494 of the right to use asset during the nine
months ended September 30, 2020.
Rent
expense for the nine months ended September 30, 2020 and 2019 was
$126,831 and $85,565, 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. There are 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 9: SUBSEQUENT EVENTS
On November 2, 2020, the Company issued a promissory note in the
principal amount of $100,001 (the “November 2020 Note”) to Kevin
Frija and Dan Hoff. Mr. Frija is the Company’s Chief Executive
Officer, President, principal financial officer, principal
accounting officer and Chairman of the Board, and a significant
stockholder of the Company. Mr. Hoff is the Company’s Chief
Operating Officer. The principal amount due under the November 2020
Note bears interest at the rate of 24% per annum, and the November
2020 Note permits Messrs. Frija and Hoff to deduct one ACH payment
from the Company’s bank account in the amount of $500 per business
day until the principal amount due and accrued interest is repaid.
Any unpaid principal amount and any accrued interest is due on
November 2, 2021. The November 2020 Note is unsecured.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following Management's Discussion and Analysis
together with our financial statements and notes to those financial
statements included elsewhere in this report. This discussion
contains forward-looking statements that are based on our
management's current expectations, estimates and projections about
our business and operations. Our actual results may differ from
those currently anticipated and expressed in such forward-looking
statements.
Overview
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:
|
• |
Design, market and distribute a line of e liquids
under the “HELIUM” brand; |
|
• |
Design, market and distribute a line vaporizers
for essential oils, concentrates, and dry herbs under the
“HONEYSTICK” brand; |
|
|
|
|
• |
Design, market and distribute a line of
cannabidiol (“CBD”) products under the “GOLD LINE”
brand; |
|
|
|
|
• |
Design, market and distribute electronic
cigarettes and popular vaporizers; |
|
• |
Prosecute and enforce our patent
rights; |
|
• |
License our intellectual property;
and |
|
• |
Develop private label manufacturing
programs. |
Results of Operations for the Three Months Ended September
30, 2020 Compared to the Three Months Ended September 30,
2019
Revenues
Our revenues for the three months
ended September 30, 2020 and 2019 were $993,509 and $1,435,063,
respectively. The decrease in revenues is related to the ban on
flavored e-cigarettes implemented by the U.S. Food and Drug
Administration and disturbances to our revenue channels from
COVID-19.
Cost of Sales
Cost of sales for the three months ended September 30, 2020 and
2019 was $562,057 and $824,429, respectively. The decrease is a
result of the decreased sales during the current year. Gross margin
remained at 43% due to pricing pressures from the decreased demand
related to the industry crisis.
Operating Expenses
Operating expenses for the three months ended September 30, 2020
were $393,196 as compared to $675,648 for the three months ended
September 30, 2019. The decrease in expenses is primarily due cost
cutting measures to offset decreased demand.
Other Expense
Interest expense increased to $140,908 for the three months ended
September 30, 2020 as compared to $87,507 for the three months
ended September 30, 2019 due to increased borrowings.
Net Loss
Net loss for the three months ended September 30, 2020 was $102,652
compared to a net loss of $152,521 for the three months ended
September 30, 2019.
Results of Operations for the Nine Months Ended September 30,
2020 Compared to the Nine Months Ended September 30,
2019
Revenues
Our revenues for the nine months ended September 30, 2020 and 2019
were $2,797,512 and $4,334,358, respectively. The decrease in
revenues is related to the ban on flavored e-cigarettes implemented
by the U.S. Food and Drug Administration and disturbances to our
revenue channels from COVID-19.
Cost of Sales
Cost of sales for the nine months ended September 30, 2020 and 2019
was $1,699,876 and $2,628,479, respectively. The decrease is a
result of the decreased sales during the current year. Gross margin
remained at 39% due to pricing pressures from the decreased demand
related to the industry crisis.
Operating Expenses
Operating expenses for the nine months ended September 30, 2020
were $1,242,671 as compared to $1,834,985 for the nine months ended
September 30, 2019. The decrease in expenses is primarily due cost
cutting measures to offset decreased demand.
Other Expense
Interest expense increased to $429,561 for the nine months ended
September 30, 2020 as compared to $350,952 for the nine months
ended September 30, 2019 due to increased borrowings.
Net Loss
Net loss for the nine months ended September 30, 2020 was $574,596
compared to a net loss of $480,058 for the nine months ended
September 30, 2019.
Liquidity and Capital Resources
The Company used cash in operating activities of $87,781 for nine
months ended September 30, 2020 as compared to
$1,085,582 used in nine months ended September 30, 2019. Cash used
in operations in 2020 was the result of the Company’s net loss of
approximately $575,000, offset by decreases in inventory and
accounts receivable levels as well as increase accounts payable.
Cash used in operations in 2019 was the result of the Company’s net
loss of approximately $480,000, and increases in inventory and
accounts receivable levels as well as a decrease accounts
payable.
During the nine months ended September 30, 2020, the Company
received $655,002 from the issuance of notes payable to related
parties, repaid $661,924 of principal on notes payable to related
parties, repaid $280,055 of principal on notes payable, and
received $363,562 of notes payable proceeds under the Payment
Protection Program (“PPP”) and Economic Injury Disaster Loan
(“EIDL”) program. Both the PPP and EIDL are financial programs
under the Coronavirus Aid, Relief and Economic Security Act (“CARES
Act”) signed into law by the U.S. President on March 27, 2020 to
provide economic relief to small businesses adversely impacted by
COVID-19.
During the nine months ended September 30, 2019, the Company
received $1,000,000 of proceeds from the issuance of notes payable,
received $782,000 of proceeds from related parties, and repaid
$727,869 of principal on notes payable.
Assets
At September 30, 2020 and December 31, 2019, we had total assets of
$939,846 and $1,272,163, respectively. Assets primarily consist of
the cash accounts held by the Company, inventory, vendor deposits,
accounts receivable and a right-to-use asset. In 2020 the Company’s
inventory was decreased by approximately $204,000 as a result
of
fewer purchases for new products, accounts receivable decreased by
approximately $76,000 from decreased sales, vendor deposits
increased by $11,438, and decrease in the right-to-use asset of
$53,494.
Liabilities
At September 30, 2020 and December 31, 2019, we had total
liabilities of $3,192,632 and $2,950,353, respectively. The
increase was primarily due to the issuance of notes payable and
notes payable to related parties in 2020 of $1,018,564 and an
increase in accounts payable, offset by the decrease in the right
to use obligation of $33,660, offset by the repayment of existing
notes payable of $941,979.
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
additional capital will be available to us, or that, if available,
it will be on terms satisfactory to us. Any additional financing
may involve dilution to our shareholders. In the alternative,
additional funds may be provided from cash flow in excess of that
needed to finance our day-to-day operations, although we may never
generate this excess cash flow. If we do not raise additional
capital or generate additional funds, implementation of our plans
for expansion will be delayed. If necessary we may withdraw from
certain growth strategies to conserve cash for continued
operations.
Going Concern
The Company has incurred losses since inception, including $574,596
and $480,058 during the nine months ended September 30, 2020 and
2019, respectively, resulting in an accumulated deficit of
$10,352,990 and negative working capital of $1,904,982 as of
September 30, 2020. As of September 30, 2020, the Company had
approximately $11,600 in cash and cash equivalents, which will not
be sufficient to fund the operations and strategic objectives of
the Company over the next twelve months from the date of issuance
of these financial statements. These factors raise substantial
doubt regarding the Company’s ability to continue as a going
concern.
On July 9, 2020 and June 24, 2020, the Company received an Economic
Injury Disaster Loan in the aggregate amount of $159,900, payable
in monthly installments of principal and interest totaling $731
over 30 years beginning in June 2021. The note accrues interest at
an annual rate of 3.75%. The loan is secured by all tangible and
intangible property of the Company.
In December 2019, COVID-19 emerged globally and has been declared a
pandemic. The extent to which COVID-19 will impact our customers,
business, results and financial condition will depend on current
and future developments, which are highly uncertain and cannot be
predicted at this time. In April 2020, the Company received a loan
in the amount of $203,662 under the Payroll Protection Program
administered by the Small Business Administration. The loan accrues
interest at an annual rate of 1%, payments are deferred, and any
amounts not forgiven pursuant to the Payroll Protection Program,
are payable over two years and can be extended to five years with
mutual agreement between the Company and the SBA.
The Company will be required to obtain additional financing and
capital and expects to satisfy its cash needs primarily from the
additional issuance of equity securities or indebtedness in order
to sustain operations until it can achieve profitability and
positive cash flows, if ever. There can be no assurances, however,
that adequate additional funding will be available on favorable
terms, or at all. If such funds are not available in the future,
the Company may be required to delay, significantly modify or
terminate its operations, all of which could have a material
adverse effect on the Company.
COVID-19
In March 2020, the World Health Organization declared the novel
coronavirus (COVID-19) a global pandemic and recommended
containment and mitigation measures worldwide. The spread of
COVID-19 has affected segments of the global economy and may affect
our operations, including the potential interruption of our supply
chain. We are monitoring this situation closely, and although
operations have not been materially affected by the COVID-19
outbreak to date, the ultimate duration and severity of the
outbreak and its impact on the economic environment and our
business is uncertain.
The spread of COVID-19, or another infectious disease, could also
negatively affect the operations at our third-party manufacturers,
which could result in delays or disruptions in the supply of our
products. In addition, we may take temporary precautionary measures
intended to help minimize the risk of the virus to our employees,
including temporarily requiring all employees to work remotely,
suspending all non-essential travel worldwide for our employees,
and discouraging employee attendance at industry events and
in-person work-related meetings, which could negatively affect our
business.
The extent to which COVID-19 impacts our operations will depend on
future developments, which are highly uncertain and cannot be
predicted with confidence, including the duration of the outbreak,
new information which may emerge concerning the severity of
COVID-19 and the actions to contain the coronavirus or treat its
impact, among others. In particular, the continued spread of the
coronavirus globally could adversely impact our operations,
including among others, our manufacturing and supply chain, sales
and marketing and could have an adverse impact on our business and
our financial results. The COVID-19 outbreak is a widespread health
crisis that has adversely affected the economies and financial
markets of many countries, resulting in an economic downturn that
could affect demand for our products and likely impact our
operating results.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on
the Company's financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital
expenditures, or capital resources that is material to
investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
As a smaller reporting company, we are not required to include
disclosure under this item.
ITEM 4.
CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer, has
reviewed and evaluated the effectiveness of the Company’s
disclosure controls and procedures as of September 30, 2020. Based
on such review and evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that, as of September 30,
2020, the disclosure controls and procedures were not effective to
ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange
Act of 1934, as amended, (a) is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and
forms and (b) is accumulated and communicated to the Company’s
management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions
regarding required disclosure, because of a continued material
weakness in our internal control over financial reporting, as
described below.
The Company did not maintain an effective financial reporting
process to prepare financial statements in accordance with
generally accepted accounting principles in the United States.
Specifically, our process lacked timely and
complete financial statement reviews and procedures to ensure all
required disclosures were made in our financial statements. Also,
the Company lacked documented procedures including documentation
related to testing of internal controls and entity-level controls,
disclosure review, and other analytics. Furthermore, the Company
lacked sufficient personnel to properly segregate duties.
A material weakness (within the meaning of PCAOB Auditing Standard
No. 5) is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of our annual
or interim financial statements will not be prevented or detected
on a timely basis. A significant deficiency is a deficiency, or a
combination of deficiencies, in internal control over financial
reporting that is less severe than a material weakness; yet
important enough to merit attention by those responsible for
oversight of the Company’s financial reporting.
Remedial Efforts Related to the Material Weakness in Internal
Control
In an effort to address the material weakness, we have implemented,
or are in the process of implementing, the following remedial
steps:
|
· |
We
intend to establish an audit committee of the board of directors as
soon as practicable. We envision that the audit committee will be
primarily responsible for reviewing the services performed by our
independent auditors, evaluating our accounting policies and our
system of internal controls. |
|
· |
We
intend to establish an internal audit function and engage a public
accounting firm to perform internal audit services under an
outsourcing arrangement. We intend for the internal audit service
provider to review the policies, procedures and systems to address
the material weakness. |
|
· |
In
addition to supervising all financial aspects of the Company, our
Chief Financial Officer is also supervising our Information
Technology (“IT”) functions to better facilitate the coordination
and development of improved systems to support our financial
reporting process. |
|
· |
In
furtherance of timely and complete financial statement reviews and
procedures to ensure all required disclosures are made in our
financial statements and promoting the segregation of duties, we
have (i) hired experienced accounting personnel and expect to hire
additional experienced accounting personnel, (ii) hired staff to
handle the increased workload associated with the reporting
structure in place and continue to recruit additional staff in key
areas including financial reporting and tax accounting as well as
we have engaged temporary staff and (iii) hired consultants to
assist in achieving accurate and timely reporting, including hiring
additional consultants to assist in the development and enhancement
of IT infrastructure systems to support accounting. |
|
· |
We
have provided and will continue to provide training to our finance
and accounting personnel for timely and accurate preparation and
management review of documentation to support our financial
reporting and period-end close procedures including documentation
related to testing of internal controls and entity-level controls,
disclosure review, and other analytics. |
|
· |
We
have been conducting and continue to conduct the assessment and
review of our accounting general ledger system to further identify
changes that can be made to improve our overall control environment
with respect to journal entries. We are continuing to implement
more formal procedures related to the review and approval of
journal entries. |
|
· |
We
have been formalizing the periodic account reconciliation process
for all significant balance sheet accounts. We are continuing to
implement more formal review of these reconciliations by our
accounting management and we will increase the number of
supervisory personnel to ensure that reviews are
performed. |
We believe these additional internal controls will be effective in
remediating the material weakness described above; however, we may
determine to modify the remediation plan described above by adding
remedial steps to or modifying or no longer pursuing (if determined
to be unnecessary in remediating the material weakness) the
remedial steps set forth above. Until the remediation steps set
forth above are fully implemented, the material weakness described
above will continue to exist. Notwithstanding, through the use of
external consultants and the review process, management believes
that the financial statements and other information presented
herewith are materially correct.
The Company’s disclosure controls and procedures are designed to
provide reasonable assurance of achieving their objectives.
However, the Company’s management, including its CEO and CFO, does
not expect that its disclosure controls and procedures will prevent
all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefit of controls must be
considered relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company
have been detected.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial
reporting that occurred during the quarter ended September 30, 2020
that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART
II
ITEM 1. LEGAL PROCEEDINGS
We are not aware of any pending or threatened legal proceedings
against us that could have a material adverse effect on our
business, operating results or financial conditions.
ITEM 1A. RISK FACTORS
Risk factors describing the major risks to our business can be
found under Item 1A, “Risk Factors”, in our Annual Report on Form
10-K for the year ended December 31, 2019. There has been no
material change in our risk factors from those previously discussed
in the Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable to our operations.
ITEM 5. OTHER INFORMATION
None.
ITEM 6.
EXHIBITS
101.INS XBRL Instance Document *
101.SCH XBRL Taxonomy Extension Schema Document *
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB XBRL Taxonomy Extension Label Linkbase Document *
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
*
*
Filed herewith
**
Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
VPR BRANDS,
LP |
|
|
|
By: |
/s/ Kevin
Frija |
|
Chief Executive
Officer |
|
(principal executive
officer, principal financial officer and principal accounting
officer) |
|
|
Dated: November 19, 2020 |
|
VPR Brands (PK) (USOTC:VPRB)
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