NOTES TO THE UNAUDITED FINANCIAL
STATEMENTS
MARCH 31, 2018
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 marketed under the brand “Helium”
in the United States and are undertaking efforts to establish distribution of our electronic cigarette e-liquids brand in China.
We are currently also identifying electronic cigarette companies that may be infringing our patents and exploring options to license
and or enforce our patents.
On July 29, 2016, the Company entered
into and closed an Asset Purchase Agreement (the “Purchase Agreement”) with Vapor Corp. (“Vapor”) and the
Company’ Chief Executive Officer, Kevin Frija (the former Chief Executive Officer of Vapor), pursuant to which Vapor sold
Vapor’s wholesale operations and inventory related thereto (collectively, “Assets”) to the Company.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ
from those estimates.
Cash
Cash includes all cash deposits and highly liquid financial
instruments with an original maturity of three months or less.
Stock-Based Compensation
Share-based payments to employees, including grants of
employee stock options are recognized as compensation expense in the financial statements based on their fair values, in accordance
with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718.
That expense is recognized over the period during which an employee is required to provide services in exchange for the award,
known as the requisite service period (usually the vesting period). The Company had no common stock options or common stock equivalents
granted or outstanding for all periods presented. The Company may issue 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.
Revenue Recognition
In May 2014 the FASB issued Accounting Standards Update (ASU)
No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements,
including most industry specific guidance. This new standard requires a company to recognize revenues when it transfers goods
or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services.
The FASB subsequently issued the following amendments to ASU No. 2014-09 that have the same effective date and transition date:
ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue
from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts
with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and
Improvements to Topic 606, Revenue from Contracts with Customers. The Company adopted these amendments with ASU 2014-09 (collectively,
the new revenue standards).
The new revenue
standards became effective for the Company on January 1, 2018, and were adopted using the modified retrospective method. The
adoption of the new revenue standards as of January 1, 2018 did not change the Company's revenue recognition as the majority
of its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify
any accounting changes that impacted the amount of reported revenues with respect to its product revenues, no adjustment to
retained earnings was required upon adoption.
Under the new revenue standards, 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.
Basic and Diluted Net Loss Per Unit
Net loss per share was computed by dividing the net loss
by the weighted average number of common shares outstanding during the period. The weighted average number of shares was calculated
by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding. Diluted net loss
per share for the Company is the same as basic net loss per share, as the inclusion of common stock equivalents would be anti-dilutive.
Income Taxes
The Company is considered a partnership for income tax
purposes. Accordingly, the partners report the Company’s taxable income or loss on their individual tax returns.
Rent
The Company recognizes rent expense on a straight-line basis
over the lease term. Deferred rent is included in accounts payable and accrued expenses on the accompanying balance sheets.
Accounting for Derivative Instruments
The Company issues debentures where the number of shares into
which a debenture can be converted is not fixed. For example, when a debenture converts at a discount to market based on the stock
price on the date of conversion. In such instances, the embedded conversion option of the convertible debentures is bifurcated
from the host contract and recorded at their fair value. In accounting for derivatives, the Company records a liability representing
the estimated present value of the conversion feature considering the historic volatility of the Company’s stock, and a discount
representing the imputed interest associated with the beneficial conversion feature. The discount is then amortized over the life
of the debenture and the derivative liability is adjusted periodically according to stock price fluctuations. At the time of conversion,
any remaining derivative liability is charged to additional paid-in capital. For purposes of determining derivative liability,
the Company uses Black-Scholes modeling for computing historic volatility.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are
issued by the 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.
NOTE 3: GOING CONCERN
The accompanying financial statements have been prepared
on a going concern basis, which contemplates the Company will continue to realize its assets and discharge its liabilities in the
normal course of business. The Company has a net loss of $149,420 for the quarter ended March 31, 2018 and has an accumulated deficit
of $7,775,064 at March 31, 2018. The continuation of the Company as a going concern is dependent upon, among other things, the
continued financial support from its common unit holders, the ability of the Company to obtain necessary equity or debt financing,
and the attainment of profitable operations. These factors, among others, raise
substantial doubt regarding the Company’s
ability to continue as a going concern. There is no assurance that the Company will be able to generate revenues in the future.
These financial statements do not give any effect to any adjustments that would be necessary should the Company be unable to continue
as a going concern.
The Company plans to pursue equity funding to expand
its brand. Through equity funding and the current operations, including the acquisition of the Vapor line of business, the Company
expects to meet its current capital needs. There can be no assurance that the Company will be able raise sufficient working capital.
If the Company is unable to raise the necessary working capital through the equity funding it will be forced to continue
relying on cash from operations in order to satisfy its current working capital needs.
NOTE 4: FAIR VALUE MEASUREMENTS
The Company adopted the provisions
of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value as used in numerous accounting
pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain
financial instruments, payables to related parties, and accounts payable and accrued expenses are carried at historical cost basis,
which approximates their fair values because of the short-term nature of these instruments.
ASC 820 defines fair value as the
exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes
a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 — quoted prices in
active markets for identical assets or liabilities
Level 2 — quoted prices for
similar assets and liabilities in active markets or inputs that are observable
Level 3 — inputs that are
unobservable (for example cash flow modeling inputs based on assumptions)
The Company used Level 3 inputs
for its valuation methodology for the derivative liability in determining the fair value using a Black-Scholes option-pricing model
with the following assumption inputs:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Annual dividend yield
|
|
|
-
|
|
|
|
-
|
|
Expected life (years)
|
|
|
.50
|
|
|
|
.75 to .50
|
|
Risk-free interest rate
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
Expected volatility
|
|
|
35-237%
|
|
|
|
187-236
|
%
|
The change in Level 3 financial instrument is as follows:
|
|
|
|
|
|
Balance, December 31, 2016
|
|
$
|
104,572
|
|
Issued During the Year Ended December 31, 2017
|
|
|
287,829
|
|
Extinguished during the year
|
|
|
(102,317
|
)
|
Change in fair value recognized in operations
|
|
|
102,529
|
|
Balance, December 31, 2017
|
|
|
392,623
|
|
Issued During the Quarter Ended March 31, 2018
|
|
|
-0-
|
|
Extinguished during the year
|
|
|
(36,571
|
)
|
Change in fair value recognized in operations
|
|
|
(147,821
|
)
|
Balance, March 31, 2018
|
|
$
|
208,231
|
|
|
|
Fair Value Measurements at
|
|
|
|
December 31, 2017
|
|
|
|
Using Fair Value Hierarchy
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative liabilities – (Conversion Feature)
|
|
|
|
|
|
|
|
|
|
|
392,623
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
392,623
|
|
|
|
Fair Value Measurements at
|
|
|
|
March 31, 2018
|
|
|
|
Using Fair Value Hierarchy
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative liabilities – (Conversion Feature)
|
|
|
|
|
|
|
|
|
|
|
208,231
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
208,231
|
|
For the quarter ended March 31,
2018, the Company recognized a gain of $147,821 on the change in fair value of its derivative liabilities. At March 31, 2018, the
Company did not identify any other assets or liabilities that are required to be presented on the balance sheet at fair value in
accordance with ASC 825-10.
NOTE
5: PROPERTY AND EQUIPMENT-NET
|
|
Estimated Useful Lives
|
|
|
|
|
|
|
(Years)
|
|
March 31, 2018
|
|
December 31, 2017
|
Furniture and Fixtures
|
|
|
5
|
|
|
$
|
32,476
|
|
|
$
|
30,296
|
|
Warehouse Equipment
|
|
|
5
|
|
|
|
130
|
|
|
|
130
|
|
|
|
|
|
|
|
$
|
32,606
|
|
|
$
|
30,426
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
(15,693
|
)
|
|
|
(12,667
|
)
|
|
|
|
|
|
|
$
|
16,913
|
|
|
$
|
17,759
|
|
Depreciation expense amounted
to $3,026 and $3015 for the quarters ended March 31, 2018 and March 31, 2017, respectively.
NOTE
6: INTANGIBLE ASSETS-NET
|
|
Estimated Useful Lives
|
|
|
|
|
|
|
(Years)
|
|
March 31, 2018
|
|
December 31, 2017
|
Customer Lists
|
|
6
|
|
|
$
|
26,222
|
|
|
$
|
26,222
|
|
Trademarks
|
|
3
|
|
|
|
32,000
|
|
|
|
32,000
|
|
|
|
|
|
|
$
|
58,222
|
|
|
$
|
58,222
|
|
Less: accumulated amortization
|
|
|
|
|
|
(32,718
|
)
|
|
|
(28,468
|
)
|
|
|
|
|
|
$
|
25,504
|
|
|
$
|
29,754
|
|
Amortization expense amounted to $4,250 and $16,250 for
the quarters ended March 31, 2018 and March 31, 2017, respectively.
NOTE 7: PARTNER DEFICIT/COMMON UNITS
On March 31, 2017, pursuant to the terms of certain
share purchase agreements, the Company received an aggregate of $75,000 from three investors in exchange for the sale by the Company
of an aggregate of 208,332 common units (representing a sale price of $0.36 per common unit). As of March 31, 2018, the Company
has not issued these common units.
DiamondRock has the right to convert the outstanding
and unpaid principal amount and accrued and unpaid interest of the respective tranche of the Secured Promissory Note into common
units 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 common units, 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 Secured Promissory 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 units 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 units, or provides for a longer look-back period, then the conversion price
and look-back period under the Secured Promissory Note will be adjusted to be such lower conversion price and longer look-back
period, as applicable
during the quarter ended March 31, 2018, the following
conversions were effected:
Date
|
|
Amount Converted
|
|
Common Units Issued
|
1/2/18
|
|
$
|
75,000
|
|
|
|
1,176,471
|
|
1/5/18
|
|
$
|
50,000
|
|
|
|
1,002,697
|
|
2/1/18
|
|
$
|
40,000
|
|
|
|
902,835
|
|
2/19/18
|
|
$
|
50,000
|
|
|
|
1,417,004
|
|
3/12/18
|
|
$
|
75,000
|
|
|
|
2,225,519
|
|
NOTE 8: NOTES PAYABLE
In connection with the Vapor Acquisition, Vapor loaned
the Company $500,000. The Company issued to Vapor a secured, 36-month promissory note in the principal amount of $500,000 (the
“Secured Promissory Note”) 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, the Secured Promissory Note was sold by Vapor to DiamondRock, LLC, an unaffiliated
third party (“DiamondRock”).
DiamondRock has the right to convert the
outstanding and unpaid principal amount and accrued and unpaid interest of the respective tranche of the Secured Promissory Note
into common units 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 common units, 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 Secured Promissory
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
units 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 units, or provides for a longer look-back period, then the conversion
price and look-back period under the Secured Promissory Note will be adjusted to be such lower conversion price and longer look-back
period, as applicable.
As per the convertible note with Diamond Rock in November
2016, The Company borrowed from Diamond Rock has borrowed $405,000 of which $75,000 was borrowed in 2016 and 2017, against the
loan and as of March 31, 2018 the balance outstanding was $-0- including accrued interest on the balance due at quarter end.
The Company entered into a Securities Purchase
Agreement (the “DiamondRock SPA”) with DiamondRock, pursuant to which the Company may borrow up to $500,000 under a
convertible promissory note (the “DiamondRock Note”) for an aggregate purchase price of $475,000, reflecting an original
issue discount of $25,000. The transactions under the DiamondRock SPA closed on November 29, 2016, and the DiamondRock Note was
issued on that date.
The consideration for the Vapor Acquisition consisted
of a secured, one-year promissory note from the Company to Vapor in the principal amount of $370,000 . The Acquisition Note bears
interest at the rate of 4.5% and is payable $10,000 per month, commencing on October 28, 2016, with a balloon payment of the remainder
of principal and interest due on July 29, 2017. As of March 31, 2018, the outstanding balance, including accrued interest, on the
Acquisition Note is $77,470.
The DiamondRock Note permits the Company
to make additional borrowings under the DiamondRock Note. As of March 31, 2018, DiamondRock has advanced a total of four tranches
to the Company, in the aggregate amount of $300,000.
Amounts advanced under the DiamondRock
Note bear interest at the rate of 8% per year, and the maturity date for each tranche is 12 months from the funding of the applicable
tranche. The Company may prepay any amount outstanding under the DiamondRock Note prior to the maturity date for a 35% premium
(thus paying 135% of the amount owed for that particular maturity).
If at any time while the DiamondRock Note
is outstanding, the Company enters into a transaction structured in accordance with, based upon, or related or pursuant to, in
whole or in part, Section 3(a)(10) of the Securities Act of 1933, as amended (covering certain exchange transactions), then a liquidated
damages charge of 25% of the outstanding principal balance of the DiamondRock Note at that time will be assessed and will become
immediately due and payable to DiamondRock, either in the form of cash payment or as an addition to the balance of the DiamondRock
Note, as determined by mutual agreement of the Company and DiamondRock.
The DiamondRock Note also contains a right
of first refusal such that, if at any time while the DiamondRock Note is outstanding, the Company has a bona fide offer of capital
or financing from any third party that the Company intends to act upon, then the Company must first offer such opportunity to DiamondRock
to provide such capital or financing on the same terms. The DiamondRock SPA and the DiamondRock Note contain customary representations,
warranties and covenants for transactions of this type.
The following table summarizes the
Company’s convertible notes as of March 31, 2018 and December 31, 2017:
|
|
March 31,
2018
|
|
December 31,
2017
|
Gross proceeds from notes
|
|
$
|
628,048
|
|
|
$
|
812,711
|
|
Less: Debt discount
|
|
|
(57,830
|
)
|
|
|
(145,856
|
)
|
|
|
|
|
|
|
|
|
|
Carrying value of notes
|
|
$
|
570,218
|
|
|
$
|
666,855
|
|
In addition, the Company has one note outstanding
related to the Vapor Acquisition.
The consideration for the Vapor Acquisition consisted
of a secured, one-year promissory note from the Company to Vapor in the principal amount of $370,000 (the “Acquisition Note”).
The Acquisition Note bears interest at the rate of 4.5% and is payable $10,000 per month, commencing on October 28, 2016, with
a balloon payment of the remainder of principal and interest due on July 29, 2017. As of March 31, 2018, the outstanding balance,
including accrued interest, on the Acquisition Note is $77,470.
On November 30, 2017, the Company
entered into a Purchase Agreement (the “Orange Door Purchase Agreement”), dated November 16, 2017, with Orange Door
Capital, LLC (“Orange Door”). Pursuant to the terms of the Orange Door Purchase Agreement, the Company agreed to sell
to Orange Door all of the Company’s right, title and interest in and to $312,000 of the Company’s future receivables
arising from electronic payments by the Company’s customers, in exchange for the payment by Orange Door to the Company of
$240,000. Kevin Frija, the Company’s Chief Executive Officer and Chief Financial Officer and the majority stockholder of
the Company, personally guaranteed the performance of all covenants and the truth and accuracy of all representations and warranties
made by the Company in the Purchase Agreement. The balance as of March 31, 2018 was $238,393.
On January 18, 2018, the Company issued an unsecured
promissory note (the “Brikor Note”) in the principal amount of $100,001 to Brikor, LLC, an unaffiliated third party.
Any unpaid principal amount and any accrued interest is due on January 18, 2019. The principal amount due under the Brikor Note
bears interest at the rate of 24% per annum. Pursuant to the terms of the Brikor Note, Brikor 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.
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.
NOTE 9: COMMITMENTS AND CONTINGENCIES
Lease Agreement
The Company has a three-year lease for its office and
warehouse facility. The lease requires monthly payments as follows:
December 15, 2017 to June 15, 2018
|
|
$
|
9,090
|
|
June 15, 2018-December 14, 2018
|
|
$
|
9,590
|
|
December 15, 2018 to June 14, 2019
|
|
$
|
10,190
|
|
June 15, 2019 to November 15, 2019
|
|
$
|
10,690
|
|
Remaining lease payments in the following years are:
|
|
Year Ended December 31,
|
|
2018
|
|
|
|
85,910
|
|
|
|
2019
|
|
|
|
104,400
|
|
Total minimum lease payments
|
|
|
$
|
190,310
|
|
Rent expense for the quarters ended March 31, 2018 and
2017 was $28,051 and $26,080, respectively.
Legal Matters
From time to time, we may be involved in litigation relating
to claims arising out of our operations in the normal course of business. As of March 31, 2018, there were no pending or threatened
lawsuits that could reasonably be expected to have a material effect on the results of our operations and there are no proceedings
in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has
a material interest adverse to our interest.
NOTE 10: SUBSEQUENT EVENTS
On April 5, 2018, the Company issued a Promissory Note
in the principal amount of $100,001 to Surplus Depot Inc. Surplus Depot, Inc. is a third party unaffiliated with the Company.
The principal amount due under the Promissory Note bears interest at the rate of 24% per annum, permits the Lender 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 Promissory Note is unsecured.
On May 4, 2018, the Company issued a Promissory Note
in the principal amount of $100,001 to Kevin Frija. Mr. Frija is Chief Executive Officer of the Company. The principal amount due
under the Promissory Note bears interest at the rate of 24% per annum, permits the Lender 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 Promissory Note is unsecured.