Attached files
| file | filename |
|---|---|
| EX-32 - CANNA Corp | ex32_1.htm |
| EX-31 - CANNA Corp | ex31_1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_________________
FORM 10-Q
_________________
(Mark One)
| [X] | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017
| [_] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from __________ to ___________
Commission file number: 333-199452
RICH CIGARS, INC.
(Exact name of registrant as specified in its charter)
| Florida | 46-3289369 | |
| (State of Incorporation) | (IRS Employer ID Number) |
3001 North Rocky Point East, Suite 200, Tampa, FL 33607
(Address of principal executive offices)
(813) 281-4653
(Registrant's Telephone number)
(Former Address and phone of principal executive offices)
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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.
| Yes | [x] | No | [ ] |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 for Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
| Yes | [x] | No | [ ] |
Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |||
| Non-accelerated filer | [ ] | Smaller reporting company | [X] | |||
| (Do not check if a smaller reporting company) | ||||||
| Emerging growth company | [X] | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes | [_] | No | [x] |
Indicate the number of share outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
As of November 18, 2017, there were 3,396,057 shares of the registrant’s common stock issued and outstanding.
| PART 1 – FINANCIAL INFORMATION | Page | |
| Item 1. | Financial Statements (Unaudited) | 3 |
| Condensed Balance Sheets –December 31, 2016 and September 30, 2017 | 4 | |
| Condensed Statements of Operations - Three and Nine months ended September 30, 2017 and 2016 | 5 | |
| Condensed Statements of Shareholder’s Deficit – September 30, 2017 | 6 | |
| Condensed Statements of Cash Flows – Nine months ended September 30, 2017 and 2016 | 7 | |
| Notes to the Financial Statements | 8 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk – Not Applicable | 17 |
| Item 4. | Controls and Procedures | 17 |
| PART II- OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 18 |
| Item 1A. | Risk Factors - Not Applicable | 18 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 18 |
| Item 3. | Defaults Upon Senior Securities – Not Applicable | 18 |
| Item 4. | Mine Safety Disclosure – Not Applicable | 18 |
| Item 5. | Other Information | 18 |
| Item 6. | Exhibits | 19 |
| Signatures | 20 |
| 2 |
PART I – FINANCIAL INFORMATION
| 3 |
See accompanying notes to the condensed unaudited financial statements.
| 4 |
See accompanying notes to the condensed unaudited financial statements.
| 5 |
See accompanying notes to the condensed unaudited financial statements.
| 6 |
| ||||||||
Condensed Statements of Cash Flows (Unaudited) | ||||||||
| Nine months ended | ||||||||
| September 30, 2017 | September 30, 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Loss | $ | (785,770 | ) | $ | (127,709 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| Depreciation and Amortization | 1,595 | 1,595 | ||||||
| Stock issued for services | 20,000 | 11,250 | ||||||
| Beneficial conversion feature and derivative interest | 512,403 | — | ||||||
| Change in derivative liability | (68,486 | ) | — | |||||
| Amortization of discount on convertible notes payable | 18,410 | — | ||||||
| Change in assets and liabilities: | ||||||||
| Accounts receivable | — | (806 | ) | |||||
| Prepaid expenses | (7,861 | ) | (312 | ) | ||||
| Inventory | 13,338 | (3,590 | ) | |||||
| Accounts payable and accrued expenses | 45,821 | 7,181 | ||||||
| Net cash used in operating activities | (250,550 | ) | (112,391 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Shareholder Contributions | 53,790 | 97,580 | ||||||
| Proceeds from convertible debt | 192,500 | — | ||||||
| Proceeds from share issuance | — | 14,508 | ||||||
| Net cash provided by financing activities | 246,290 | 112,088 | ||||||
| NET CHANGE IN CASH | (4,260 | ) | (303 | ) | ||||
| CASH, beginning of period | 4,260 | 7,056 | ||||||
| CASH, end of period | $ | — | $ | 6,753 | ||||
| SUPPLEMENTAL DISCLOSURES: | ||||||||
| Cash paid for interest | $ | — | $ | — | ||||
| Cash paid for income taxes | $ | — | $ | — | ||||
See accompanying notes to the condensed unaudited financial statements.
| 7 |
Notes to the Financial Statements
For the Nine Months Ended September 30, 2017 and 2016
(Unaudited)
NOTE 1 NATURE OF ORGANIZATION
Rich Cigars, Inc. (the "Company") is a Florida Corporation incorporated on July 29, 2013, and was established to manufacture and distribute high-quality, hand rolled, premium cigars under the Rich Cigars brand name. The Company has branded custom cigars to be sold via the internet and through retail locations. The Company's primary operations are currently in the Ocala, Florida area, and management intends to conduct our business principally in the U.S. through our own sales and marketing team.
NOTE 2 RECLASSIFICATION OF PRIOR YEAR PRESENTATION
Certain prior year amounts have been reclassified for consistency with the current period presentation. Additionally, certain expense items have been broken out differently. Previously, the Company had netted its stock subscription receivables against common stock. In the current period the Company concluded that it was more appropriate to present these subscription receivables separately in the Balance Sheet and in the Statement of Shareholders’ Equity. These reclassifications had no effect on the reported results of operations. This change in classification does not materially affect previously reported cash flows from operations or from financing activities in the Statement of Cash Flows, and had no effect on the previously reported Statement of Operations for any period.
NOTE 3 GOING CONCERN
These financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. As of September 30, 2017, the Company has incurred net losses of $1,338,356 since inception. This raises substantial doubt about the Company’s ability to continue as a going concern.
Management's plans include raising capital through the equity markets to fund operations and eventually, the generating of revenue through its business; however, there can be no assurance that the Company will be successful in such activities. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classifications of the liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") on the accrual basis of accounting.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the financial statements. The significant accounting policies, estimates and related judgments underlying the Company's financial statements are summarized below. In applying these policies, management makes subjective judgments that frequently require estimates about matters that are inherently uncertain. Actual results could differ materially from those estimates.
Cash and Cash Equivalents
The Company considers all investments with a maturity date of three months or less when purchased to be cash equivalents. The Company had cash on hand in the amount of $0 and $4,260 as September 30, 2017 and December 31, 2016, respectively.
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Rich Cigars, Inc.
Notes to the Financial Statements
For the Nine Months Ended September 30, 2017 and 2016
(Unaudited)
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at invoiced amount and generally do not bear interest. An allowance for doubtful accounts is established, as necessary, based on past experience and other factors which, in management's judgment, deserve current recognition in estimating bad debts. Such factors include growth and composition of accounts receivable, the relationship of the allowance for doubtful accounts to accounts receivable and current economic conditions. Based on a review of these factors, the Company establishes or adjusts the allowance for specific customers and the accounts receivable portfolio as a whole. At September 30, 2017 and December 31, 2016, an allowance for doubtful accounts was not considered necessary as all accounts receivable were deemed collectible.
Inventory
The Company records inventory at lower of cost or net realizable values which consists of ready for sale cigars and other accessories. Cost is determined using the first-in, first-out method. The Company had a balance in inventory of $0 and $13,338 at September 30, 2017 and December 31, 2016, respectively.
Prepaid Expenses
The Company records inventory in transit in prepaid expenses. The prepaid balance will be reclassed to Inventory upon receipt of the inventory. The Company had a balance in prepaid expenses of $24,625 and $16,764 at September 30, 2017 and December 31, 2016, respectively.
Property and Equipment
The Company records property and equipment at historical cost, and depreciates these assets using the straight-line depreciation method over the estimated useful lives of the respective assets. Estimated useful lives for major classes of depreciable assets are as follows:
| Asset Class | Estimated Useful Life |
| Buildings | Up to 35 years |
| Leasehold improvements | Shorter of lease term or useful life of the improvement |
| Furniture, fixtures and office equipment | 5 years |
| Computer hardware and software | 3 years |
Expenditures for additions and improvements over $1,500 that substantially extend the useful life of property and equipment or increase its operating effectiveness are capitalized. Repair and maintenance costs are expensed as incurred.
Beneficial Conversion Feature
If the conversion features of conventional convertible debt provide for a rate of conversion that is below market value at issuance, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 470-20 Debt with Conversion and Other Options. In those circumstances, the convertible debt is recorded net of the discount related to the BCF, and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method.
Embedded Conversion Features
The Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion features.
| 9 |
Rich Cigars, Inc.
Notes to the Financial Statements
For the Nine Months Ended September 30, 2017 and 2016
(Unaudited)
Derivative Financial Instruments
Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.
Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.
Revenue Recognition
The Company recognizes revenue on arrangements in accordance with Securities and Exchange Commission Staff Accounting Bulletin Topic 13, Revenue Recognition and ASC 605-15-25, Revenue Recognition. The Company’s net revenue is principally from the manufacturing and sales of high-quality, hand-rolled, premium cigars. In all cases, revenue is recognized when a sales transaction closes and the product is shipped or picked-up by the customer. For the nine months ended September 30, 2017 and 2016, the Company recorded revenues related to the sale of cigars in the amount of $4,606 and $4,184, respectively. Additionally, the Company hosts private events and provides the services of a professional cigar roller. As of September 30, 2017 and 2016, the Company recorded revenues for these services in the amount of $0 and $0, respectively.
Cost of Goods Sold
The Company recognizes the direct cost of purchasing products for sale, including freight charges and packaging, as cost of goods sold in the accompanying Statement of Operations.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Additionally, the recognition of future tax benefits, such as net operating loss carryforwards, is required to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.
In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company's assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.
The Company files income tax returns in the United States and Florida, which are subject to examination by the tax authorities in these jurisdictions. Generally, the statute of limitations related to the Company's federal and state income tax return is three years. The state impact of any federal changes for prior years remains subject to examination for a period up to five years after formal notification to the states.
Management has evaluated tax positions in accordance with ASC 740, Income Taxes, and has not identified any significant tax positions, other than those disclosed. All of the Company’s tax years since inception remain subject to examination by Federal and State jurisdictions.
| 10 |
Rich Cigars, Inc.
Notes to the Financial Statements
For the Nine Months Ended September 30, 2017 and 2016
(Unaudited)
Shipping and Handling Costs
Shipping and handling costs to transport goods to customers are primarily paid directly by the customer.
Advertising and Promotion
The Company expenses advertising and promotion costs as incurred. The Company incurred advertising and promotion expenses of $32,095 and $0 during the nine months ended September 30, 2017 and 2016, respectively.
Earnings Per Share
The Company has adopted ASC 260-10-50, Earnings per Share, which provides for the calculation of "basic" and "diluted" earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. Basic and diluted losses per share were the same at the reporting dates as no common stock equivalents were issued or outstanding during the nine months ended September 30, 2017 and 2016.
NOTE 5 CONVERTIBLE NOTES PAYABLE
On March 24, 2017, the Company entered into a convertible advance with Crown Bridge Partners LLC. The agreement provides that the Company may borrow up to $750,000. Borrowings under the line bear interest at 8% upon maturity and include a 10% issue discount. The maturity date for each tranche funded shall be 12 months from the effective date of each tranche. Additionally, the note is convertible at the holder’s discretion into shares of the Company’s common stock based on a conversion formula using the lowest price of the common shares for the 20 trading prior to which the Notice of Conversion is received. As of September 30, 2017, the Company has drawn a $75,000 credit line against this facility.
On March 24, 2017, the Company entered into a convertible advance with Eagle Equities LLC. The advance, with a face value of $75,000, bears interest at 8% per annum and is payable on March 24, 2018. The note was issued at a 10% discount. The net proceeds received after issuance costs and fees was $63,750. In accordance with ASC 835-30-45, Interest, the Company records the fees, costs, and original issue discount as reduction of the carrying amount of the debt and amortizes the balances over the life of the debt instrument. Additionally, the note is convertible at the holder’s discretion into shares of the Company’s common stock based on a conversion formula using the lowest price of the common shares for the 20 trading prior to which the Notice of Conversion is received. The conversion formula created an embedded derivative conversion feature. The Company valued this conversion feature as of September 30, 2017 at $158,928 using the Black Scholes valuation model with the following assumptions: dividend yield of zero, 175-day term to maturity, risk free interest rate of 1.31% and annualized volatility of 63.25%. The value of the conversion feature was assigned to the derivative liability and created a debt discount to be amortized over the life of the convertible debt. At September 30, 2017 and 2016, the convertible note was recorded at $7,393 and $0, respectively. Accrued interest related to this advance was $3,123 and $0 at September 30, 2017 and 2016, respectively, and is included in accrued interest on the Balance Sheets.
On March 27, 2017, the Company entered into a convertible advance with Crown Bridge Partners, LLC. The advance, with a face value of $75,000, bears interest at 8% per annum and is payable on March 27, 2018. The note was issued at a 10% discount. The net proceeds received after issuance costs and fees was $63,750. In accordance with ASC 835-30-45, Interest, the Company records the fees, costs, and original issue discount as reduction of the carrying amount of the debt and amortizes the balances over the life of the debt instrument. Additionally, the note is convertible at the holder’s discretion into shares of the Company’s common stock based on a conversion formula using the lowest price of the common shares for the 20 trading prior to which the Notice of Conversion is received. The conversion formula created an embedded derivative conversion feature. The Company valued this conversion feature as of September 30, 2017 at $158,946 using the Black Scholes valuation model with the following assumptions: dividend yield of zero, 178-day term to maturity, risk free interest rate of 1.31% and annualized volatility of 63.25%. The value of the conversion feature was assigned to the derivative liability and created a debt discount to be amortized over the life of the convertible debt. At September 30, 2017 and 2016, the convertible note was recorded at $6,993 and $0, respectively. Accrued interest related to this advance was $3,074 and $0 at September 30, 2017 and 2016, respectively, and is included in accrued interest on the Balance Sheets.
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Rich Cigars, Inc.
Notes to the Financial Statements
For the Nine Months Ended September 30, 2017 and 2016
(Unaudited)
NOTE 5 CONVERTIBLE NOTES PAYABLE (continued)
On May 15, 2017, the Company entered into a convertible advance with Power Up Lending Group, LTD. The advance, with a face value of $38,000, bears interest at 12% per annum and is payable on May 15, 2018. The note was issued at a 7% discount. The net proceeds received after issuance costs and fees was $35,000. In accordance with ASC 835-30-45, Interest, the Company records the fees, costs, and original issue discount as reduction of the carrying amount of the debt and amortizes the balances over the life of the debt instrument. Additionally, the note is convertible at the holder’s discretion into shares of the Company’s common stock based on a conversion formula using the lowest price of the common shares for the 15 trading prior to which the Notice of Conversion is received. The conversion formula created an embedded derivative conversion feature. The Company valued this conversion feature as of September 30, 2017 at $159,321 using the Black Scholes valuation model with the following assumptions: dividend yield of zero, 242-day term to maturity, risk free interest rate of 1.31% and annualized volatility of 63.25%. The value of the conversion feature was assigned to the derivative liability and created a debt discount to be amortized over the life of the convertible debt. At September 30, 2017 and 2016, the convertible note was recorded at $2,152 and $0, respectively. Accrued interest related to this advance was $1,537 and $0 at September 30, 2017 and 2016, respectively, and is included in accrued interest on the Balance Sheets.
On May 15, 2017, the Company entered into a convertible advance with Kodiak Capital Group, LLC. The advance, with a face value of $37,500, bears interest at 8% per annum and is payable on May 15, 2018. The note was issued at a 10% discount. The net proceeds received after issuance costs and fees was $30,000. In accordance with ASC 835-30-45, Interest, the Company records the fees, costs, and original issue discount as reduction of the carrying amount of the debt and amortizes the balances over the life of the debt instrument. Additionally, the note is convertible at the holder’s discretion into shares of the Company’s common stock based on a conversion formula using the lowest price of the common shares for the 20 trading prior to which the Notice of Conversion is received. The conversion formula created an embedded derivative conversion feature. The Company valued this conversion feature as of September 30, 2017 at $159,221 using the Black Scholes valuation model with the following assumptions: dividend yield of zero, 227-day term to maturity, risk free interest rate of 1.31% and annualized volatility of 63.25%. The value of the conversion feature was assigned to the derivative liability and created a debt discount to be amortized over the life of the convertible debt. At September 30, 2017 and 2016, the convertible note was recorded at $1,872 and $0, respectively. Accrued interest related to this advance was $1,134 and $0 at September 30, 2017 and 2016, respectively, and is included in accrued interest on the Balance Sheets.
NOTE 6 PROPERTY AND EQUIPMENT
Property and Equipment consists of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| Furniture and Equipment | $ | 2,131 | $ | 2,131 | ||||
| Less Accumulated Depreciation | (1,527 | ) | (1,207 | ) | ||||
| Property and Equipment, net | $ | 604 | $ | 924 | ||||
For the three months ended September 30, 2017 and 2016, the Company recorded Depreciation Expense of $106 and $106.
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Rich Cigars, Inc.
Notes to the Financial Statements
For the Nine Months Ended September 30, 2017 and 2016
(Unaudited)
NOTE 7 INTANGIBLE ASSETS
Intangible Assets consists of the following:
| September 30, 2017 | December 31, 2016 | |||||||
| Website Development Costs | $ | 8,500 | $ | 8,500 | ||||
| Less Accumulated Amortization | (2,975 | ) | (1,700 | ) | ||||
| Intangible Assets, net | $ | 5,525 | $ | 6,800 | ||||
In May 2014, the Company issued 85,000 shares for the development of the Company’s website, which is currently recorded in Website Development Costs. The website for the Company went live on January 1, 2016, and as a result the Company began amortizing the asset at that time. The Company will amortize the asset over a period of 5 years. For the three months ended September 30, 2017 and 2016, the Company recorded Amortization expense of $425 and $425, respectively.
NOTE 8 EQUITY
On January 1, 2017, the Company issued 100,000 shares of common stock for $10,000. The shares were issued to pay for consulting services performed for the Company. On July 23, 2017, the Company issued 100,000 shares of common stock for $10,000. The shares were issued to pay for consulting services performed for the Company.
During the quarter ended March 31, 2017, the Company’s shareholders have contributed $48,100 in the business to be used in the Company’s regular activities. During the quarter ended September 30, 2017, the Company’s shareholders have contributed $5,690 in the business to be used in the Company’s regular activities. Since inception, the Company’s shareholders have contributed $374,181 in the business to be used in the Company’s regular activities. As of September 30, 2017, the Company has used these proceeds on the Company’s operations and purchases.
NOTE 9 COMMITMENTS AND CONTINGENCIES
During the normal course of business, the Company may be exposed to litigation. When the Company becomes aware of potential litigation, it evaluates the merits of the case in accordance with ASC 450-20-50, Contingencies. The Company evaluates its exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. If the Company determines that an unfavorable outcome is probable and can be reasonably estimated, it establishes the necessary accruals. As of September 30, 2017, the Company is not aware of any contingent liabilities that should be reflected in the accompanying financial statements.
The Company believes that it may be placed in default on one or more of its obligations to creditors, though the Company has not received notice of default as of the date of this filing. The triggering event would be the failure to file a registration statement on Form S-1 for the shares of common stock issued pursuant to the Equity Purchase Agreement and Registration Rights Agreement with Kodiak Capital Group, LLC, filed as Exhibits to the Form 10-Q filed on August 21, 2017. The default could potentially accelerate the balance owed and trigger default interest rates. The Company intends to seek amendment or modification of the agreements in order to avoid default.
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NOTE 10 SUBSEQUENT EVENTS
The Company has evaluated subsequent events that occurred through the date of the filing of the Company’s fiscal year 2017 Form 10-Q.
On October 3, 2017, Eagle Equities, LLC exercised the option to convert the convertible debt into 137,478 shares of the Company’s common stock. On October 11, 2017, Crown Bridge Partners, LLC exercised the option to convert the convertible debt into 140,310 shares of the Company’s common stock. On October 17, 2017, Eagle Equities, LLC exercised the option to convert the convertible debt into 149,270 shares of the Company’s common stock. On November 6, 2017, Eagle Equities, LLC exercised the option to convert the convertible debt into 156,019 shares of the Company’s common stock.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements and Associated Risks.
This form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as "may", "will", "expect", "believe", "anticipate", "estimate, or "continue" or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include but are not limited to economic conditions generally and in the industries in which we may participate; competition within our chosen industry, including competition from much larger competitors; technological advances and failure to successfully develop business relationships.
Going Concern
Based on our financial history since inception, our auditor has expressed substantial doubt as to our ability to continue as a going concern. As reflected in the accompanying financial statements, as of September 30, 2017, we had an accumulated deficit totaling $1,338,356. This raises substantial doubts about our ability to continue as a going concern.
Plan of Operation
The Company was incorporated under the laws of the State of Florida on July 29, 2013. The Company was established to manufacture and distribute high-quality, hand rolled, premium cigars under the Rich Cigars brand name. The Company has branded custom cigars to be sold via the internet and through retail locations. The Company's primary operations are currently in the Tampa, Florida area, and management intends to conduct our business principally in the U.S. through our own sales and marketing team.
Results of Operations
Three Months
For the three months ended September 30, 2017, we had $0 in revenues and $0 in cost of goods sold compared to $1,213 and $507 respectively for the same period one year earlier. For the three months ended September 30, 2017, our total operating expenses were $46,977 as compared to $64,930 for the three months ended September 30, 2016. Some of the categories with larger differences in expenses are discussed here. For the three months ended September 30, 2017, we incurred expenses of $14,615 for professional fees compared to $35,067 for the same period in 2016. For the three months ended September 30, 2017, we incurred expenses of $1,873 for officers’ compensation compared to $15,191 for the same period in 2016. For the three months ended September 30, 2017, we incurred travel expenses in the amount of $38 compared to $9,137 for the corresponding period in 2016. For the three months ended September 30, 2017, we incurred $575 for other general and administrative expenses, which was down from $2,951 for the same period in 2016. For the three months ended September 30, 2017, we incurred meals and entertainment expenses of $0 compared to $2,053 for the corresponding period in 2016. The decreases in these categories were due to an effort to reduce spending while the Company evaluated viable options for raising capital.
Nine Months
For the nine months ended September 30, 2017, we had $4,606 in revenues and $2,382 in cost of goods sold compared to $4,184 and $1,428 respectively for the same period one year earlier. For the nine months ended September 30, 2017, our total operating expenses were $316,799 as compared to $130,465 for the nine months ended September 30, 2016. Some of the categories with larger differences in expenses are discussed here. For the nine months ended September 30, 2017, we incurred expenses of $75,520 for officers’ compensation compared to $43,899 for the same period in 2016. The increase is due to additional compensation to the Company’s CEO for attending events and marketing the business. For the nine months ended September 30, 2017 we incurred professional fees in the amount of $62,578 compared to $40,339 for the corresponding period in 2016. The increase in this category is due to additional fees incurred after the company’s public offering. For the nine months ended September 30, 2017, we incurred $45,874 for travel expenses compared to $21,237 for the same period in 2016 which is due to an increase in travel for events and conferences during the first two
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fiscal quarters. For the nine months ended September 30, 2017, we incurred meals and entertainment expenses of $10,544 compared to $2,695 for the corresponding period in 2016 which is due to increased spending on meals during travel and sponsorship events during the first two fiscal quarters.
Based on our financial history since inception, in their report on the financial statements for the period ended December 31, 2016, our independent registered public accounting firm has expressed substantial doubt as to our ability to continue as a “going concern.” There is no assurance that any revenue will be realized in the future.
The Company has an accumulated deficit of $1,338,356 as of September 30, 2017, compared to an accumulated deficit of $552,586 at December 31, 2016, and has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining the adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
There can be no assurance that we will have adequate capital resources to fund planned operations or that any additional funds will be available to us when needed or at all, or, if available, will be available on favorable terms or in amounts required by us. If we are unable to obtain adequate capital resources to fund operations, we may be required to delay, scale back or eliminate some or all of our operations, which may have a material adverse effect on our business, results of operations and ability to operate as a going concern.
Liquidity and Capital Resources
As at September 30, 2017, our cash balance was $0 as compared to $4,260 at December 31, 2016. Our plan for satisfying our cash requirements for the next twelve months is through the sale of shares of our common stock, third party financing, and/or traditional bank financing. We do not anticipate generating sufficient amounts of revenues to meet our working capital requirements. Consequently, we intend to make appropriate plans to insure sources of additional capital in the future to fund growth and expansion through additional equity or debt financing or credit facilities.
The Company must raise additional funds in order to fund our continued operations. We may not be successful in our efforts to raise additional funds or achieve profitable operations. Even if we are able to raise additional funds through the sale of our securities or through the issuance of debt securities, or loans from our directors or financial institutions our cash needs could be greater than anticipated in which case we could be forced to raise additional capital. At the present time, we have no commitments for any additional financing, and there can be no assurance that, if needed, additional capital will be available to us on commercially acceptable terms or at all. These conditions raise substantial doubt as to our ability to continue as a going concern, which may make it more difficult for us to raise additional capital when needed. If we cannot get the needed capital, we may not be able to become profitable and may have to curtail or cease our operations.
Operating Activities
During the nine months ended September 30, 2017, the Company used cash in the amount of $250,550 in operating activities, which is an increase of $138,159 over the same period in 2016. The increase in the net loss of $658,061 is the main factor in the increased cash used; however, there were positive adjustments made in the depreciation and amortization, and shares issued for services categories, and there was a positive change in the accounts payable and accrued expenses categories, which help to offset the increased spending. The increased operating expenses are due to the Company’s effort to produce and sell its product, and operate as a public company.
Financing Activities
During the quarter ended September 30, 2017, the Company received $0 from subscription agreements or private placement offerings. The Company received shareholder contributions in the amount of $53,790 in the nine months ended September 30, 2017. The Company also raised $192,500 from proceeds of convertible debt for the nine months ended September 30, 2017.
We intend to seek additional funding through public or private financings to fund our operations through fiscal 2017 and beyond. However, if we are unable to raise additional capital when required or on acceptable terms, or achieve cash flow positive operations, we may have to significantly delay product development and scale back operations both of which may affect our ability to continue as a going concern.
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Investing Activities
The Company had no investing activities for the three months ended September 30, 2017.
Off Balance Sheet Arrangements
None
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is accumulated and communicated to management including our principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.
Management has carried out an evaluation of the effectiveness of the design and operation of our company’s disclosure controls and procedures. Due to the lack of personnel and outside directors, management acknowledges that there are deficiencies in these controls and procedures.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f)) during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION
None.
Not Applicable to Smaller Reporting Companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On July 23, 2017, the Company issued 100,000 shares of restricted common stock for $10,000 pursuant to Section 4(a)(2) of the Securities Act of 1933; the shares were issued to pay for consulting services performed for the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. MINE SAFETY DISCLOSURE
Not Applicable.
The Company believes that it may be placed in default on one or more of its obligations to creditors, though the Company has not received notice of default as of the date of this filing. The triggering event would be the failure to file a registration statement on Form S-1 for the shares of common stock issued pursuant to the Equity Purchase Agreement and Registration Rights Agreement with Kodiak Capital Group, LLC, filed as Exhibits to the Form 10-Q filed on August 21, 2017. The default could potentially accelerate the balance owed and trigger default interest rates. The Company intends to seek amendment or modification of the agreements in order to avoid default.
The Company has not adopted, nor has it ever had in place, any procedures by which security holders may recommend nominees to the Company’s board of directors.
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Exhibits. The following is a complete list of exhibits filed as part of this Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K.
| 31.1 | Certification of Chief Executive Officer and Acting Chief Financial Officer Pursuant to Rule 13a–14(a) or 15d-14(a) of the Securities Exchange Act of 1934 | |
| 32.1 | Certification of Chief Executive Officer and Acting Chief Financial Officer under Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document (1) | |
| 101.SCH | XBRL Taxonomy Extension Schema Document (1) | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (1) | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (1) | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document (1) | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (1) |
| (1) | Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
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Pursuant to the requirements of Section 12 of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RICH CIGARS, INC.
(Registrant)
Dated: November 20, 2017
By: /s/ Richard Davis
Richard Davis
(Chief Executive Officer, Principal Executive
Officer, Acting Chief Financial Officer
and Principal Accounting Officer)
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