Notes to the Financial Statements
For the Six Months Ended June 30, 2017 and
2016
(Unaudited)
NOTE 1 NATURE OF ORGANIZATION
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 Tampa, Florida area, and management
intends to conduct our business principally in the U.S. through our own sales and marketing team.
NOTE 2
RECLASSIFICATION
OF PRIOR YEAR PRESENTATION
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.
NOTE 3 GOING CONCERN
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 June 30, 2017, the Company has incurred net losses of
$902,061 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.
NOTE 4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
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.
Use
of Estimates
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.
Cash
and Cash Equivalents
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 $0 and $4,260 as June 30, 2017 and December 31, 2016, respectively.
Rich Cigars, Inc
.
Notes to the Financial Statements
For the Six Months Ended June 30, 2017 and
2016
(Unaudited)
Accounts
Receivable and Allowance for Doubtful Accounts
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 June 30, 2017 and December 31, 2016,
an allowance for doubtful accounts was not considered necessary as all accounts receivable were deemed collectible
.
Inventory
The Company records inventory at
lower of cost or net ralizable 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 $159 and $13,338 at June 30, 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.
Rich Cigars, Inc
.
Notes to the Financial Statements
For the Six Months Ended June 30, 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 June 30, 2017 and June 30, 2016, the Company recorded revenues
related to the sale of cigars in the amount of $4,606 and $2,971, respectively. Additionally, the Company hosts private events
and provides the services of a professional cigar roller. As of June 30, 2017 and June 30, 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.
Rich Cigars, Inc
.
Notes to the Financial Statements
For the Six Months Ended June 30, 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 June 30, 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 June 30, 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 June 30, 2017, the Company
has drawn a $75,000 credit line 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. The net
proceeds received after issuance costs and fees was $63,750. 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 derivative conversion feature. The Company valued this conversion feature as of June 30, 2017 at
$65,935 using the Black Scholes valuation model with the following assumptions: dividend yield of zero, 267 day term to
maturity, risk free interest rate of 1.24% and annualized volatility of 64.59%. The value of the conversion feature was
assigned to the derivative liability and created a debt discount to be amortized over the life of the convertible debt.
At
June 30, 2017 and 2016, the convertible note was recorded at $1,706 and $0, respectively. Accrued interest related
to this advance was $1,611 and $0 at June 30, 2017 and 2016, respectively, and is included in accrued interest on the Balance
Sheets.
On March 27,
2017, the Company entered into a convertible advance with Crown Bridge Partners, LLC. The advance, with a face value of $75,000,
bears interest at 8% per annum and is payable on March 27, 2018. The note was issued at a 10% discount. The net
proceeds received after issuance costs and fees was $63,750. 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 derivative conversion feature. The Company valued this conversion feature as of June 30, 2017 at $65,935 using
the Black Scholes valuation model with the following assumptions: dividend yield of zero, 270 day term to maturity, risk free interest
rate of 1.24% and annualized volatility of 64.59%. The value of the conversion feature was assigned to the derivative liability
and created a debt discount to be amortized over the life of the convertible debt.
At June 30, 2017 and 2016, the convertible
note was recorded at $1,858 and $0, respectively. Accrued interest related to this advance was $1,561 and $0 at June 30,
2017 and 2016, respectively, and is included in accrued interest on the Balance Sheets.
Rich Cigars, Inc
.
Notes to the Financial Statements
For the Six Months Ended June 30, 2017 and
2016
(Unaudited)
NOTE 5 CONVERTIBLE NOTES PAYABLE
(continued)
On May 15,
2017, the Company entered into a convertible advance with Power Up Lending Group, LTD. The advance, with a face value of $38,000,
bears interest at 12% per annum and is payable on May 15, 2018. The note was issued at a 7% discount. The net
proceeds received after issuance costs and fees was $35,000. 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
15 trading prior to which the Notice of Conversion is received.
The conversion formula created
an embedded derivative conversion feature. The Company valued this conversion feature as of June 30, 2017 at $67,335 using the
Black Scholes valuation model with the following assumptions: dividend yield of zero, 319 day term to maturity, risk free interest
rate of 1.24% and annualized volatility of 64.25%. The value of the conversion feature was assigned to the derivative liability
and created a debt discount to be amortized over the life of the convertible debt.
At June 30, 2017 and 2016, the convertible
note was recorded at $387 and $0, respectively. Accrued interest related to this advance was $387 and $0 at June 30, 2017
and 2016, respectively, and is included in accrued interest on the Balance Sheets.
On May 15,
2017, the Company entered into a convertible advance with Kodiak Capital Group, LLC. The advance, with a face value of $37,500,
bears interest at 8% per annum and is payable on May 15, 2018. The note was issued at a 10% discount. The net
proceeds received after issuance costs and fees was $30,000. 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 derivative conversion feature. The Company valued this conversion feature as of June 30, 2017 at $66,906 using the
Black Scholes valuation model with the following assumptions: dividend yield of zero, 319 day term to maturity, risk free interest
rate of 1.24% and annualized volatility of 64.25%. The value of the conversion feature was assigned to the derivative liability
and created a debt discount to be amortized over the life of the convertible debt.
At June 30, 2017 and 2016, the convertible
note was recorded at $378 and $0, respectively. Accrued interest related to this advance was $378 and $0 at June 30, 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:
|
|
June 30, 2017
|
|
December 31, 2016
|
Furniture and Equipment
|
|
$
|
2,131
|
|
|
$
|
2,131
|
|
Less Accumulated Depreciation
|
|
|
(1,421
|
)
|
|
|
(1,207
|
)
|
Property and Equipment, net
|
|
$
|
710
|
|
|
$
|
924
|
|
|
|
|
|
|
|
|
|
|
For
the periods ended June 30, 2017 and 2016, the Company recorded Depreciation Expense of $107 and $107.
Rich Cigars, Inc
.
Notes to the Financial Statements
For the Six Months Ended June 30, 2017 and
2016
(Unaudited)
NOTE 7 INTANGIBLE ASSETS
Intangible
Assets consists of the following:
|
|
June 30, 2017
|
|
December 31, 2016
|
Website Development Costs
|
|
$
|
8,500
|
|
|
$
|
8,500
|
|
Less Accumulated Amortization
|
|
|
(2,550
|
)
|
|
|
(1,700
|
)
|
Intangible Assets, net
|
|
$
|
5,950
|
|
|
$
|
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 June 30, 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 a $10,000. The shares were issued to pay for consulting services performed
for the Company.
During the quarter
ended March 31, 2017, the Company’s shareholders have contributed $48,100 in the business to be used in the Company’s
regular activities. Since inception, the Company’s shareholders have contributed $368,491 in the business to be used in the
Company’s regular activities. As of June 30, 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 June 30, 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.
No significant events occurred subsequent to the balance sheet date and prior to the filing date of this report that would have
a material impact on the Financial Statements.