Rich Cigars, Inc. (the
"Company") is a Florida Corporation incorporated on July 29, 2013,
and was established to manufacture and distribute high-quality, hand rolled,
premium cigars under the Rich Cigars brand name. The Company has branded
custom cigars to be sold via the internet and through retail locations.
The Company's primary operations are currently in the Ocala, Florida area,
and management intends to conduct our business principally in the U.S. through
our own sales and marketing team.
Certain prior year
amounts have been reclassified for consistency with the current period
presentation. Additionally, certain expense items
have been broken out differently.
Previously, the Company had netted its stock subscription receivables
against common stock. In the current period the Company concluded that it was
more appropriate to present these subscription receivables separately in the
Balance Sheet and in the Statement of Shareholders' Equity. These
reclassifications had no effect on the reported results of operations. This change in classification does not
materially affect previously reported cash flows from operations or from
financing activities in the Statement of Cash Flows, and had no effect on the
previously reported Statement of Operations for any period.
These financial statements have been
prepared on a going concern basis which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business for the
foreseeable future. As of March 31, 2017, the Company has incurred net losses
of $855,732 since inception. This raises substantial doubt about the Company's
ability to continue as a going concern.
Management's plans include raising capital
through the equity markets to fund operations and eventually, the generating of
revenue through its business; however, there can be no assurance that the
Company will be successful in such activities. These financial statements
do not include any adjustments relating to the recovery of the recorded assets
or the classifications of the liabilities that might be necessary should the
Company be unable to continue as a going concern.
The financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
("GAAP") on the accrual basis of accounting.
The preparation of financial statements in
conformity with GAAP requires management to adopt accounting policies and make
estimates and assumptions that affect amounts reported in the financial
statements. The significant accounting policies, estimates and related judgments
underlying the Company's financial statements are summarized below. In
applying these policies, management makes subjective judgments that frequently
require estimates about matters that are inherently uncertain. Actual results
could differ materially from those estimates.
The Company considers all investments with
a maturity date of three months or less when purchased to be cash
equivalents. The Company had cash on hand in the amount of $7,094 and
$4,260 as March 31, 2017 and December 31, 2016, respectively.
Accounts receivable are recorded at invoiced
amount and generally do not bear interest. An allowance for doubtful accounts
is established, as necessary, based on past experience and other factors which,
in management's judgment, deserve current recognition in estimating bad debts.
Such factors include growth and composition of accounts receivable, the
relationship of the allowance for doubtful accounts to accounts receivable and
current economic conditions. Based on a review of these factors, the Company
establishes or adjusts the allowance for specific customers and the accounts
receivable portfolio as a whole. At March 31, 2017 and December 31, 2016, an
allowance for doubtful accounts was not considered necessary as all accounts
receivable were deemed collectible.
The Company records inventory at lower of
cost or net realizable values which consists of ready for sale cigars and other
accessories. Cost is determined using the first-in, first-out method. The
Company had a balance in inventory of $12,467 and $13,338 at March 31, 2017 and
December 31, 2016, respectively.
Property and Equipment
The Company records property and equipment at historical
cost, and depreciates these assets using the straight-line depreciation method
over the estimated useful lives of the respective assets. Estimated useful
lives for major classes of depreciable assets are as follows:
Asset
Class
|
Estimated
Useful Life
|
Buildings
|
Up to 35 years
|
Leasehold
improvements
|
Shorter of
lease term or useful life of the improvement
|
Furniture,
fixtures and office equipment
|
5 years
|
Computer
hardware and software
|
3 years
|
Expenditures for additions and
improvements over $1,500 that substantially extend the useful life of property
and equipment or increase its operating effectiveness are capitalized. Repair and
maintenance costs are expensed as incurred.
Beneficial Conversion Feature
If the conversion features of conventional
convertible debt provide for a rate of conversion that is below market value at
issuance, this feature is characterized as a beneficial conversion feature
("BCF"). A BCF is recorded by the Company as a debt discount pursuant to
Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("ASC") Topic 470-20
Debt with
Conversion and Other Options
. In those circumstances, the convertible debt
is recorded net of the discount related to the BCF, and the Company amortizes
the discount to interest expense over the life of the debt using the effective
interest method.
Embedded Conversion Features
The Company evaluates embedded conversion
features within convertible debt under ASC 815 "Derivatives and Hedging" to
determine whether the embedded conversion feature(s) should be bifurcated from
the host instrument and accounted for as a derivative at fair value with
changes in fair value recorded in earnings. If the conversion feature does not
require derivative treatment under ASC 815, the instrument is evaluated under
ASC 470-20 "Debt with Conversion and Other Options" for consideration of any
beneficial conversion features.
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Rich Cigars, Inc
.
Notes to the Financial Statements
For the Three Months Ended March 31, 2017 and 2016
(Unaudited)
Derivative Financial Instruments
Fair value accounting requires bifurcation
of embedded derivative instruments such as conversion features in convertible
debt or equity instruments, and measurement of their fair value for accounting
purposes. In determining the appropriate fair value, the Company uses the
Black-Scholes option-pricing model. In assessing the convertible debt
instruments, management determines if the convertible debt host instrument is
conventional convertible debt and further if there is a beneficial conversion
feature requiring measurement. If the instrument is not considered conventional
convertible debt, the Company will continue its evaluation process of these
instruments as derivative financial instruments.
Once determined, derivative liabilities
are adjusted to reflect fair value at each reporting period end, with any
increase or decrease in the fair value being recorded in results of operations
as an adjustment to fair value of derivatives. In addition, the fair value of
freestanding derivative instruments such as warrants, are also valued using the
Black-Scholes option-pricing model.
Revenue Recognition
The Company recognizes revenue on
arrangements in accordance with Securities and Exchange Commission Staff
Accounting Bulletin Topic 13,
Revenue Recognition
and ASC
605-15-25,
Revenue Recognition
. The Company's net revenue is
principally from the manufacturing and sales of high-quality, hand-rolled,
premium cigars. In all cases, revenue is recognized when a sales transaction
closes and the product is shipped or picked-up by the customer. For the
periods ended March 31, 2017 and March 31, 2016, the Company recorded revenues related
to the sale of cigars in the amount of $2,497 and $0, respectively. Additionally,
the Company hosts private events and provides the services of a professional
cigar roller. As of March 31, 2017 and March 31, 2016, the Company recorded
revenues for these services in the amount of $0 and $0, respectively.
Cost of Goods Sold
The Company recognizes the direct cost of
purchasing products for sale, including freight charges and packaging, as cost
of goods sold in the accompanying Statement of Operations.
Income Taxes
Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Additionally, the recognition of future tax
benefits, such as net operating loss carryforwards, is required to the extent
that realization of such benefits is more likely than not. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which the assets and liabilities are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income tax expense in the period that
includes the enactment date.
In the event the future tax consequences
of differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities result in deferred tax assets, an evaluation
of the probability of being able to realize the future benefits indicated by
such asset is required. A valuation allowance is provided for the portion of
the deferred tax asset when it is more likely than not that some or all of the
deferred tax asset will not be realized. In assessing the realizability of the
deferred tax assets, management considers the scheduled reversals of deferred
tax liabilities, projected future taxable income, and tax planning strategies.
The Company files income tax returns in
the United States and Florida, which are subject to examination by the tax
authorities in these jurisdictions. Generally, the statute of limitations
related to the Company's federal and state income tax return is three years.
The state impact of any federal changes for prior years remains subject to
examination for a period up to five years after formal notification to the
states.
Management has evaluated tax positions in
accordance with ASC 740,
Income Taxes,
and has not identified
any significant tax positions, other than those disclosed. All of the
Company's tax years since inception remain subject to examination by Federal
and State jurisdictions.
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Rich Cigars, Inc
.
Notes to the Financial Statements
For the Three Months Ended March 31, 2017 and 2016
(Unaudited)
Shipping and Handling Costs
Shipping and handling costs to transport
goods to customers are primarily paid directly by the customer.
Advertising and Promotion
The Company expenses advertising and
promotion costs as incurred. The Company did not incur any advertising and
promotion expenses during the periods ended March 31, 2017 and 2016,
respectively.
Earnings Per
Share
The Company has adopted ASC
260-10-50,
Earnings per Share,
which provides for the
calculation of "basic" and "diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing net
income or loss available to common shareholders by the weighted average common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the earnings of an entity.
Basic and diluted losses per share were the same at the reporting dates as no
common stock equivalents were issued or outstanding during the periods ended
March 31, 2017 and 2016.
NOTE 5 CONVERTIBLE NOTES PAYABLE
On March 24, 2017, the Company entered
into a convertible advance with Crown Bridge Partners LLC. The agreement
provides that the Company may borrow up to $750,000. Borrowings under the line
bear interest at 8% upon maturity and include a 10% issue discount. The
maturity date for each tranche funded shall be 12 months from the effective
date of each tranche. Additionally, the note is convertible at the holder's
discretion into shares of the Company's common stock based on a conversion
formula using the lowest price of the common shares for the 20 trading prior to
which the Notice of Conversion is received. As of March 31, 2017, the Company
has not drawn any credit against this facility.
On March 24, 2017, the Company entered
into a convertible advance with Eagle Equities LLC. The advance, with a face
value of $75,000, bears interest at 8% per annum and is payable on March 24,
2018. The note was issued at a 10% discount. In accordance with ASC 835-30-45,
Interest
, the company records the fees, costs, and original issue
discount as reduction of the carrying amount of the debt and amortizes the
balances over the life of the debt instrument. Additionally, the note is
convertible at the holder's discretion into shares of the Company's common
stock based on a conversion formula using the lowest price of the common shares
for the 20 trading prior to which the Notice of Conversion is received. The conversion formula
created an embedded conversion feature. The Company valued this conversion
feature as of March 31, 2017 at $248,126 using the Black Scholes valuation
model with the following assumptions: dividend yield of zero, 358 day term to
maturity, risk free interest rate of 1.03% and annualized volatility of 69.88%.
The value of the conversion feature was assigned to the derivative liability
and created a conversion debt discount to be amortized over the life of the
convertible debt. At March
31, 2017 and 2016, the convertible note was recorded at $5,120 and $0,
respectively. Accrued interest related to this advance was $115 and $0 at
March 31, 2017 and 2016, respectively, and is included in accrued interest on
the Balance Sheets.
NOTE 6 PROPERTY AND EQUIPMENT
Property and Equipment consists of the
following:
|
March 31, 2017
|
|
December 31, 2016
|
Furniture and
Equipment
|
$ 2,131
|
|
$ 2,131
|
Less
Accumulated Depreciation
|
(1,314)
|
|
(1,207)
|
Property and
Equipment, net
|
$ 817
|
|
$ 924
|
|
For the periods ended March
31, 2017 and 2016, the Company recorded Depreciation Expense of $107 and $107.
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Rich Cigars, Inc
.
Notes to the Financial Statements
For the Three Months Ended March 31, 2017 and 2016
(Unaudited)
NOTE 7 INTANGIBLE ASSETS
Intangible Assets consists of the
following:
|
March 31, 2017
|
|
December 31, 2016
|
Website
Development Costs
|
$ 8,500
|
|
$ 8,500
|
Less
Accumulated Amortization
|
(2,125)
|
|
(1,700)
|
Intangible
Assets, net
|
$ 6,375
|
|
$ 6,800
|
In May 2014, the Company issued 85,000
shares for the development of the Company's website, which is currently
recorded in Website Development Costs. The website for the Company went live
on January 1, 2016, and as a result the Company began amortizing the asset at
that time. The Company will amortize the asset over a period of 5 years. For the periods ended March
31, 2017 and 2016, the Company recorded Amortization expense of $425 and $0,
respectively.
NOTE 8 EQUITY
On January 1, 2017, the Company issued 100,000 shares of
common stock for $10,000. The funds have not been received as of March 31,
2017, and the Company has recorded this issuance as a subscription receivable.
The subscription receivable is recorded as a direct offset in the Company's
Statement of Equity statement as of March 31, 2017.
During the quarter ended March 31, 2017, the Company's CEO
has contributed $48,100 in the business to be used in the Company's regular
activities. Since inception, the Company CEO has contributed $368,491 in the
business to be used in the Company's regular activities. As of March 31, 2017,
the Company has used these proceeds on the Company's operations and purchases.
NOTE 9 COMMITMENTS
AND CONTINGENCIES
During the normal course of business, the
Company may be exposed to litigation. When the Company becomes aware of
potential litigation, it evaluates the merits of the case in accordance with
ASC 450-20-50,
Contingencies.
The Company evaluates its
exposure to the matter, possible legal or settlement strategies and the
likelihood of an unfavorable outcome. If the Company determines that an
unfavorable outcome is probable and can be reasonably estimated, it establishes
the necessary accruals. As of March 31, 2017, the Company is not aware of
any contingent liabilities that should be reflected in the accompanying
financial statements.
NOTE 10 SUBSEQUENT EVENTS
The Company has evaluated
subsequent events that occurred through the date of the filing of the Company's
fiscal year 2017 Form 10-Q. On April 4, 2017, the Company obtained the
First Tranche of the convertible advance with Crown Bridge Partners LLC in the
amount of $75,000.
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