Quarterly Report (10-q)

Date : 08/13/2019 @ 9:08PM
Source : Edgar (US Regulatory)
Stock : Vpr Brands, Lp (PC) (VPRB)
Quote : 0.06  0.0 (0.00%) @ 12:58PM

Quarterly Report (10-q)

  SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

 

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 000-54435

   

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)

 

                     N/A                     

(Former name, former address and former fiscal year, if changed since last report)

 

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 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,” “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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

Yes No

 

The number of the registrant’s common units representing limited partner interests outstanding as of August 13, 2019 was 86,554,634.

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page No.
PART I - FINANCIAL INFORMATION  
   
Item 1. Financial Statements. 4 - 7
   
Condensed Balance Sheets as of June 30, 2019 and December 31, 2018 (unaudited) 4
   
Condensed Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)

 

5

   
Condensed Statement of Changes in Partners’ Deficit for the S ix Months Ended June 30, 2019 and 2018 (unaudited)

 

6

   
Condensed Statements of Cash Flows for the S ix Months Ended June 30, 2019 and 2018 (unaudited)

 

7

   
Notes to Unaudited Condensed Financial Statements 8-17
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 17 -19
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 19
   
Item 4. Controls and Procedures. 19
   
PART II - OTHER INFORMATION  
   
Item 1. Legal Proceedings. 21
   
Item 1A. Risk Factors. 21
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 21
   
Item 3. Defaults Upon Senior Securities. 21
   
Item 4. Mine Safety Disclosures. 21
   
Item 5. Other Information. 21
   
Item 6. Exhibits. 21

 

 

 

 

 

 

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, 2018 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.

 

 

 

PART I – FINANCIAL INFORMATION

 

VPR BRANDS, LP

CONDENSED BALANCE SHEETS

(Unaudited)

    June 30,   December 31,
    2019   2018
         
ASSETS
         
Current Assets:                
Cash   $ -     $ 58,323  
Accounts receivable, net     300,110       217,902  
Inventory, net     563,577       413,289  
Right to use asset     39,598       -  
Vendor deposits     118,387       42,791  
Prepaid expenses     22,000          
Deposits     16,780       16,780  
Total current assets     1,060,452       749,085  
                 
Property and Equipment, net     3,458       8,500  
Intangible Assets, net     3,734       9,624  
Total assets   $ 1,067,644     $ 767,209  
                 

 

LIABILITIES AND PARTNERS' DEFICIT
         
Current Liabilities:        
Accounts payable and accrued expenses   $ 146,032     $ 298,519  
Customer deposits     5,000       1,451  
Right to use liability     31,312       -  
Notes payable     450,219       640,688  
Note payable-related parties     286,388       385,044  
Convertible notes payable     1,025,000       25,000  
Total current liabilities and total liabilities     1,943,951       1,350,702  
                 
Partners' Deficit:                
Common units - 86,554,634 and 85,975,911 units issued and                
 outstanding, respectively     8,050,614       8,015,891  
Accumulated deficit     (8,926,921 )     (8,599,384 )
Total partners' deficit     (876,307 )     (583,493 )
Total liabilities and partners' deficit   $ 1,067,644     $ 767,209  

 

 The accompanying notes are an integral part of these unaudited condensed interim financial statements.

4  

 

VPR BRANDS, LP

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2019   2018   2019   2018
                 
Revenues   $ 1,581,246     $ 1,214,786     $ 2,899,295     $ 2,215,948  
Cost of Sales     1,025,023       607,378       1,804,050       1,141,835  
Gross profit     556,223       607,408       1,095,245       1,074,113  
                                 
Operating Expenses:                                
Selling, General and Administrative     594,732       486,618       1,159,337       940,499  
Total operating expenses     594,732       486,618       1,159,337       940,499  
                                 
Net Operating (Loss) Income     (38,509 )     120,790       (64,092 )     133,614  
                                 
Other Income (Expense):                                
Interest expense     (150,344 )     (115,380 )     (263,445 )     (180,611 )
Loss on extinguishment of debt     -       (84,279 )     -       (329,113 )
Change in fair value of derivative liability     -       47,342       -       195,163  
Total other expense, net     (150,344 )     (152,317 )     (263,445 )     (314,561 )
                                 
Net Loss   $ (188,853 )   $ (31,527 )   $ (327,537 )   $ (180,947 )
                                 
Loss Per Common Unit - Basic and Diluted   $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.00 )
                                 
Weighted-Average Common Units Outstanding - Basic and Diluted     86,554,634       78,301,635       86,554,634       74,604,571  

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed interim financial statements. 

 

5  

 

 

 

VPR BRANDS, LP

CONDENSED STATEMENTS OF CHANGES IN PARTNERS’ DEFICIT

(Unaudited)

 

    Common Units   Accumulated   Total
    Number   Amount   Deficit   Partners' Deficit
Six Months Ended June 30, 2018                
Balance at December 31, 2017     68,604,686     $ 6,794,002     $ (7,625,644 )   $ (831,642 )
Conversion of convertible debt into common units     6,724,526       536,873       -       536,873  
Net loss     -       -       (149,420 )     (149,420 )
Balance at March 31, 2018     75,329,212       7,330,875       (7,775,064 )     (444,189 )
Conversion of convertible debt into common units     5,725,507       314,239       -       314,239  
Net loss     -       -       (31,527 )     (31,527 )
Balance at June 30, 2018     81,054,719     $ 7,645,114     $ (7,806,591 )   $ (161,477 )
                                 
Six Months Ended June 30, 2019                                
Balance at December 31, 2018     85,975,911     $ 8,015,891     $ (8,599,384 )   $ (583,493 )
Stock-based compensation     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 )

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed interim financial statements.

6  

 

 

VPR BRANDS, LP

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  Six Months Ended
  June 30,
  2019   2018
       
Cash Flows from Operating Activities:              
Net loss $ (327,537 )   $ (180,947 )
Adjustments to reconcile net loss to cash used in operating activities:              
Amortization and Depreciation   10,932       10,965  
Stock-based compensation   34,723       36,000  
Non-cash interest   -       180,611  
Loss on extinguishment of debt   -       329,113  
Gain on derivative liability   -       (195,163 )
Changes in operating assets and liabilities:              
Inventory   (150,288 )     (62,249 )
Vendor deposits   (75,596 )     (127,173 )
Prepaid expenses   (22,000 )     -  
Accounts receivable   (82,208 )     (98,144 )
Customer deposits   3,549       20,302  
Right to use asset and obligation   (8,286 )     -  
Accounts payable and accrued expenses   (152,487 )     (92,453 )
Net cash used in operating activities   (769,198 )     (179,138 )
               
Cash Flows from Financing Activities:              
Proceeds from convertible notes payable   1,000,000       -  
Proceeds from notes payable   200,000       600,005  
Payments of notes payable   (489,125 )     (470,165 )
Net cash provided by financing activities   710,875       129,840  
               
Decrease in Cash   (58,323 )     (49,298 )
Cash - Beginning of the Period   58,323       56,640  
Cash - End of the Period $ (0 )   $ 7,342  
               
Supplemental Cash Flow Information:              
Interest paid in cash $ 263,449     $ 180,611  
Income taxes paid in cash $ -     $ -  
               
Schedule of Non-Cash Financing and Investing Activities:              
Conversion of convertible debt into common units $ -     $ 450,000  
Common Units issued in connection with debt conversion $ -     $ 12,450,033  
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.

7  

 

VPR BRANDS, LP

NOTES TO CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2019

(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. We are currently 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 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, 2018. The results of operations for the three and six months ended June 30, 2019 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 generally accepted accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 

Cash  

 

Cash includes all cash deposits and highly liquid financial instruments with an original maturity of three months or less. 

 

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 June 30, 2019 and December 31, 2018, the Company had recorded allowance for bad debt of $49,056.

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

8  

 

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 June 30, 2019 and December 31, 2018, the Company had recorded a provision for obsolescence of $70,582.

 

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 $87,000 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.

 

Stock-Based Compensation  

 

Share-based payments to employees, including grants of employee stock options are recognized as compensation expense in the financial statements based on their fair values, in accordance with FASB 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

9  

 

common stock equivalents granted or outstanding for all periods presented. The Company may issue shares as compensation in future periods for employee services. 

 

The Company may issue restricted 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 shares as compensation in future periods for services associated with the registration of the common shares. 

 

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 share 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. 10,728,833 shares underlying convertible notes were excluded from the calculation of diluted loss per share for the six months ended June 30, 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 FASB 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.

 

On June 20, 2018, the FASB issued ASU 2018-07 which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. Previously, share-based payment arrangements to nonemployees were accounted for under ASC 718, while nonemployee share-based payments issued for goods and services were accounted for under ASC 505-50. Before the amendment, the major difference for the Company (but not limited to) was the determination of measurement date which generally is the date on which the measurement of equity classified share-based payments becomes fixed. Equity classified share-based payments for employees was fixed at the time of grant. Equity-classified nonemployee share-based payment awards are no longer measured at the earlier of the date which a commitment for performance by the counterparty is reached or the date at which the counterparty’s performance is complete. They are now measured at the grant date of the award which is the same as share-based payments for employees. The Company adopted the requirements of the new rule as of January 1, 2019, the effective date of the new guidance.

 

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 $327,537 for the six months ended June 30, 2019 and has an accumulated deficit of $8,926,921 and a working

10  

 

capital deficit of $883,499 at June 30, 2019. 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.

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

 

On April 5, 2018, the Company issued a Promissory Note in the principal amount of $100,001 (the “Surplus Note”) to Surplus Depot Inc., an unaffiliated third party (“Surplus”). The principal amount due under the Surplus Note bears interest at the rate of 24% per annum, and permits Surplus 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 5, 2019. The Surplus Note is unsecured. The note was paid in full during the six months ended June 30, 2019.

 

On May 30, 2018, the Company issued a promissory note in the principal amount of $100,001 (the “May 2018 Sunshine Note”) to Sunshine Travel, Inc., an unaffiliated third party (“Sunshine Travel”). The principal amount due under the May 2018 Sunshine Note bears interest at the rate of 24% per annum, and permits Sunshine Travel 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 May 30, 2019. The May 2018 Sunshine Note was paid in full during the six months ended June 30, 2019.

 

On August 16, 2018, the Company issued a promissory note in the principal amount of $100,001 (the “August 2018 Sunshine Note”) to Sunshine Travel. The principal amount due under the Sunshine Travel Note bears interest at the rate of 24% per annum, permits Sunshine Travel 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 August 16, 2019. The August 2018 Sunshine Note is unsecured. The balance of the note as of June 30, 2019 was $14,999.

 

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 June 30, 2019 was $435,720.

 

The following is a summary of notes payable activity for the six months ended June 30, 2019:

 

Balance at December 31, 2018 $640,688
Repayments of principal (190,469)
Balance at June 30, 2019 $450,219

 

 

 

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NOTE 5: NOTES PAYABLE – RELATED PARTIES

 

On March 30, 2018, the Company issued an unsecured promissory note (the “Greg Pan Note”) in the principal amount of $100,001 to Mr. Greg Pan. Mr. Greg Pan is a director of the General Partner and owns a significant percentage of the Company’s outstanding common units. Any unpaid principal amount and any accrued interest is due on March 30, 2019. The principal amount due under the Greg Pan Note bears interest at the rate of 24% per annum. Pursuant to the terms of the Greg Pan Note, Mr. Greg Pan may 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. This note was fully repaid as of June 30, 2019.

 

On May 4, 2018, the Company issued a promissory note in the principal amount of $100,001 (the “May 2018 Frija Note”) to Kevin Frija, the Company’s Chief Executive Officer, President, principal financial and accounting officer and Chairman of the Board, and a significant stockholder of the Company. The principal amount due under the May 2018 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 on May 4, 2019. The May 2018 Frija Note is unsecured. This note was fully repaid as of June 30, 2019.  

 

On June 15, 2018, the Company issued a promissory note in the principal amount of $100,001 (the “June 2018 Frija-Hoff Note”) to Daniel Hoff and Kevin Frija jointly. The principal amount due under the June 2018 Frija-Hoff Note bears interest at the rate of 24% per annum, and permits Messrs. Hoff and 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 15, 2019. The June 2018 Frija-Hoff Note is unsecured. This note was fully repaid as of June 30, 2019.

 

On July 23, 2018, the Company issued the July 2018 Frija Note in the principal amount of $100,001 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 2018 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 on July 23, 2019. The July 2018 Frija Note is unsecured. The balance of the note as of June 30, 2019 was $7,356.

 

On August 24, 2018, the Company issued a promissory note in the principal amount of $100,001 (the “August 2018 Hoff/Frija Note”) to Daniel Hoff and Kevin Frija jointly. Mr. Hoff is the Company’s Chief Operating Officer. 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 August 2018 Hoff/Frija Note bears interest at the rate of 24% per annum, permits Messrs. Hoff and 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 August 24, 2019. The August 2018 Hoff/Frija Note is unsecured. The balance of the note as of June 30, 2019 was $16,835.

   

On December 12, 2018, the Company issued a promissory note in the principal amount of $100,001 (the “December 2018 Frija-Hoff Note”) to Daniel Hoff and Kevin Frija jointly. The principal amount due under the December 2018 Frija-Hoff Note bears interest at the rate of 24% per annum, and permits Messrs. Hoff and 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 December 12, 2019. The balance of the note as of June 30, 2019 was $51,265.

 

On December 3, 2018, the Company issued the December 2018 Frija Note in the principal amount of $100,001 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 December 2018 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 on December 3, 2019. The December 2018 Frija Note is unsecured. The balance of the note as of June 30, 2019 was $49,267.

 

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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 is due on February 1, 2020. The February 2019 Frija Note is unsecured.    The balance of the note as of June 30, 2019 was $64,722.

 

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 is due on June 14, 2020. The June 2019 Frija/Hoff Note is unsecured. The balance of the note as of June 30, 2019 was $96,943.

 

 

The following is a summary of notes payable – related parties activity for the six months ended June 30, 2019:

 

 

Balance at December 31, 2018 $385,044
New borrowings 100,000
Repayments of principal (198,656)
Balance at June 30, 2019 $286,388

 

 

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 June 30, 2019 and December 31, 2018, the balance outstanding was $25,000, of which $625 is included in accrued interest as of June 30, 2019.

 

 

 

 

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Brikor Note

 

On February 15, 2019, the Company issued a senior convertible promissory note in the principal amount of $200,000 (the “Brikor Note”) to Brikor LLC (“Brikor”). 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 June 30, 2019 and December 31, 2018 was $200,000. Interest expense for six months ended June 30, 2019 totaled $13,315, of which $1,315 is included in accrued interest as of June 30, 2019.

 

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 June 30, 2019 and December 31, 2018 was $200,000. Interest expense for six months ended June 30, 2019 totaled approximately $13,315, of which $15 is included in accrued interest as of June 30, 2019.

  

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.

 

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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 June 30, 2019 and December 31, 2018 was $200,000. Interest expense for six months ended June 30, 2019 totaled approximately $13,315, of which $1,315 is included in accrued interest as of June 30, 2019.

 

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 June 30, 2019 and December 31, 2018 was $200,000. Interest expense for six months ended June 30, 2019 totaled approximately $12,000, of which $715 is included in accrued interest as of June 30, 2019.

 

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 June 30, 2019 and December 31, 2018 was $200,000. Interest expense for six months ended June 30, 2019 totaled approximately $12,822, of which $222 is included in accrued interest as of June 30, 2019.

 

 

 

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The following is a summary of convertible notes payable activity for the six months ended June 30, 2019:

 

Balance at December 31, 2018 $     25,000
New borrowings 1,000,000
Balance at June 30, 2019 $1,025,000

 

 

 

NOTE 7: PARTNERS’ DEFICIT

 

During the six months ended June 30, 2019, the Company granted 578,724 common units to board members and consultants. The Company recorded the fair value of the units of $34,723, based on the closing price of the units on the grant date, as compensation expense for the six months ended June 30, 2019.

 

NOTE 8: COMMITMENTS AND CONTINGENCIES

 

Lease Agreement

 

As a result of the July 2016 acquisition, the Company negotiated a three-year lease for its office and warehouse facility. The lease requires monthly payments as follows:

 

December 15, 2018 to June 14, 2019  $10,190
June 15, 2019 to November 15, 2019  $10,690

 

The Company recorded a right to use obligation equal to the present value of remaining payments of minimum required lease payments which totaled $31,312 as of June 30, 2019, all of which is payable within one year.

 

The Company amortized $47,516 of the right to use asset during the six months ended June 30, 2019.

Rent expense for the six months ended June 30, 2018 was $52,806.

 

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: CONCENTRATION OF CREDIT RISK

 

Five customers accounted for approximately 13%, 14%, 15%, 18%, and 23%, respectively, as of total customer receivables as of June 30, 2019.

 

NOTE 10: SUBSEQUENT EVENTS

 

On July 5, 2019, the Company issued a promissory note in the principal amount of $100,001 (the “July 2019 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 stockholder of the Company. The principal amount due under the July 2019 Frija Note bears interest at the rate of 24% per annum, and the July 2019 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 July 5, 2020. The July 2019 Frija Note is unsecured.

 

On July 29, 2019, the Company entered into a Loan Agreement (the “Loan Agreement”) dated July 15, 2019 with Lendistry, LLC (“Lendistry”). Pursuant to the terms of the Loan Agreement, Lendistry agreed to loan the Company $250,000. In exchange, the Company agreed to pay Lendistry $250,000, in addition to interest payable on the unpaid principal, such that the aggregate amount due to Lendistry is $312,500 (the “Final Loan Amount”). The Final Loan Amount must be repaid by July 25, 2020.  Pursuant to the terms of the Loan Agreement, the Company agreed to remit the Final Loan Amount to Lendistry as follows: (1) through the debit of a deposit account established by the Company in the amount of $1,240 weekly, and (2) by authorizing and directing a processor acceptable to Lendistry to pay Lendistry each day an amount of cash equal to 11% of all receivables arising from credit card payments by the Company’s customers.

  

 

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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 managed by Soleil Capital Management LLC, a Delaware limited liability company.

 

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 June 30, 2019 Compared to the Three Months Ended June 30, 2018

 

Revenues

 

Our revenue for the three months ended June 30, 2019 and 2018 was $1,581,246 and $1,214,786, respectively. The increase is a result of increased marketing and advertising efforts.

 

Cost of Sales

 

Cost of sales for the three months ended June 30, 2019 and 2018 was $1,025,023 and $607,738, respectively. The increase is a result of the increased sales during the current year. Gross margin decreased from 50% to 35% due to a higher mix of private label and distributor orders sales.

 

Operating Expenses

Operating expenses for the three months ended June 30, 2019 were $594,732 as compared to $486,618 for the three months ended June 30, 2018. The increase in expenses is primarily due to increased marketing and advertising efforts.

 

Other Income (Expense)

Net other expenses decreased to $150,344 for the three months ended June 30, 2019 as compared to $152,317 for the three months ended June 30, 2018. Interest expense increased from $115,380 in 2018 to $150,344 in 2019 due to increased debt, offset by derivative expense of $47,342 in 2018 and a loss on extinguishment of debt of $84,279 incurred in 2018.

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Net Loss

Net loss for the three months ended June 30, 2019 was $188,853 compared to a net loss of $31,527 for the three months ended June 30, 2018.

Results of Operations for the Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018

 

Revenues

 

Our revenue for the six months ended June 30, 2019 and 2018 was $2,899,295 and $2,215,948, respectively. The increase was is a result of increased marketing and advertising efforts.

 

Cost of Sales

 

Cost of sales for the six months ended June 30, 2019 and 2018 was $1,804,050 and $1,141,835, respectively. The increase is a result of the increased sales during the current year. Gross margin decreased from 48% to 38% due to a higher mix of private label and distributor orders sales.

 

Operating Expenses

Operating expenses for the six months ended June 30, 2019 were $1,159,337 as compared to $940,499 for the six months ended June 30, 2018. The increase in expenses is primarily due to increased marketing and advertising efforts.

 

Other Income (Expense)

Net other expenses increased to $263,445 for the six months ended June 30, 2019 as compared to $314,561 for the six months ended June 30, 2018. Interest expense increased from $180,611 in 2018 to $263,445 in 2019 due to increased debt, offset by derivative income of $195,163 in 2018 and a loss on extinguishment of debt of $329,113 incurred in 2018.

Net Loss

Net loss for the six months ended June 30, 2019 was $327,537 compared to a net loss of $180,947 for the six months ended June 30, 2018.

Liquidity and Capital Resources

The Company used cash in operating activities of $769,198 for the six months ended June 30, 2019   as compared to $179,138 used in six months ended June 30, 2018. The increased use of cash is primarily the result of an increase in net loss of $146,590, an increase in accounts receivable of $82,208, an increase in inventory of $150,288, an increase in vendor deposits of $75,596, and a decrease in accounts payable of $152,487, offset by non-cash expense for stock compensation of $34,723 and depreciation of $10,932.

During the six months ended June 30, 2019, the Company received $1,000,000 of proceeds from the issuance of convertible debt, received $200,000 from the issuance of notes payable, and repaid $489,125 of principal on notes payable. During the six months ended June 30, 2018, the Company received $600,005 of proceeds from the issuance of notes payable, and repaid $470,165 of principal on notes payable.

 

Assets

 

At June 30, 2019 and December 31, 2018, we had total assets of $1,067,644 and $767,209, respectively. Assets primarily consist of the cash accounts held by the Company, inventory, vendor deposits, accounts receivable and a right-to-use asset. In 2019 the Company’s inventory was increased by approximately $150,000 as a result of additional purchases for new products, accounts receivable increased by approximately $82,000 from increased sales, vendor deposits increased by $75,596, and we recorded a right-to-use asset of $39,598 as a result of implementing new lease accounting guidance effective January 1, 2019.

 

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Liabilities

 

At June 30, 2019 and December 31, 2018, we had total liabilities of $1,943,951 and $1,350,702, respectively. The increase was primarily due to the issuance of convertible debt and notes payable in 2019, offset by the repayment of existing notes payable and decrease in accounts payable, offset by the right to use obligation of $31,312.

 

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.

 

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 June 30, 2019. Based on such review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2019, 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:

 

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· 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 June 30, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

   

20  

 

PART II

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, the Company may be involved in legal proceedings in the normal course of its business. As of June 30, 2019, there are no material pending legal proceedings (or material proceedings known to be contemplated), other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.

 

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, 2018. 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

 

Exhibit

Number

Description
31.1*   Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
     
31.2*   Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
     
32.1*   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
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

 

21  

 

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.

 

 Dated: August 13, 2019 VPR BRANDS, LP
   
  By: /s/ Kevin Frija
 

Kevin Frija

Chief Executive Officer and Chief Financial Officer

  (principal executive officer, principal financial officer and principal accounting officer)
   
   

 

22  

 

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