CANNA Corp - Quarter Report: 2017 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

_________________

FORM 10-Q

_________________

(Mark One)

For the quarterly period ended June 30, 2017

For the transition period from __________ to ___________

Commission file number: 333-199452

RICH CIGARS, INC.

(Exact name of registrant as specified in its charter)

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.

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).

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.

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).

Indicate the number of share outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

As of August 17, 2017, there were 2,712,980 shares of the registrant’s common stock issued and outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

See accompanying notes to the condensed unaudited financial statements.

See accompanying notes to the condensed unaudited financial statements.

See accompanying notes to the condensed unaudited financial statements.

See accompanying notes to the condensed unaudited financial statements.

Rich Cigars, Inc.

Notes to the Financial Statements

For the Six Months Ended June 30, 2017 and 2016

(Unaudited)

NOTE 1 NATURE OF ORGANIZATION

Rich Cigars, Inc. (the "Company") is a Florida Corporation incorporated on July 29, 2013, and was established to manufacture and distribute high-quality, hand rolled, premium cigars under the Rich Cigars brand name. The Company has branded custom cigars to be sold via the internet and through retail locations. The Company's primary operations are currently in the Tampa, Florida area, and management intends to conduct our business principally in the U.S. through our own sales and marketing team.

NOTE 2 RECLASSIFICATION OF PRIOR YEAR PRESENTATION

Certain prior year amounts have been reclassified for consistency with the current period presentation. Additionally, certain expense items have been broken out differently.  Previously, the Company had netted its stock subscription receivables against common stock. In the current period the Company concluded that it was more appropriate to present these subscription receivables separately in the Balance Sheet and in the Statement of Shareholders’ Equity. These reclassifications had no effect on the reported results of operations. This change in classification does not materially affect previously reported cash flows from operations or from financing activities in the Statement of Cash Flows, and had no effect on the previously reported Statement of Operations for any period.

NOTE 3 GOING CONCERN

These financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future.  As of June 30, 2017, the Company has incurred net losses of $902,061 since inception. This raises substantial doubt about the Company’s ability to continue as a going concern.

Management's plans include raising capital through the equity markets to fund operations and eventually, the generating of revenue through its business; however, there can be no assurance that the Company will be successful in such activities.  These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classifications of the liabilities that might be necessary should the Company be unable to continue as a going concern.

NOTE 4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") on the accrual basis of accounting.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the financial statements.  The significant accounting policies, estimates and related judgments underlying the Company's financial statements are summarized below.  In applying these policies, management makes subjective judgments that frequently require estimates about matters that are inherently uncertain. Actual results could differ materially from those estimates.

Cash and Cash Equivalents

The Company considers all investments with a maturity date of three months or less when purchased to be cash equivalents.  The Company had cash on hand in the amount of $0 and $4,260 as June 30, 2017 and December 31, 2016, respectively.

Rich Cigars, Inc.

Notes to the Financial Statements

For the Six Months Ended June 30, 2017 and 2016

(Unaudited)

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at invoiced amount and generally do not bear interest. An allowance for doubtful accounts is established, as necessary, based on past experience and other factors which, in management's judgment, deserve current recognition in estimating bad debts. Such factors include growth and composition of accounts receivable, the relationship of the allowance for doubtful accounts to accounts receivable and current economic conditions. Based on a review of these factors, the Company establishes or adjusts the allowance for specific customers and the accounts receivable portfolio as a whole. At June 30, 2017 and December 31, 2016, an allowance for doubtful accounts was not considered necessary as all accounts receivable were deemed collectible.

Inventory

The Company records inventory at lower of cost or net ralizable values which consists of ready for sale cigars and other accessories. Cost is determined using the first-in, first-out method. The Company had a balance in inventory of $159 and $13,338 at June 30, 2017 and December 31, 2016, respectively.

Property and Equipment

The Company records property and equipment at historical cost, and depreciates these assets using the straight-line depreciation method over the estimated useful lives of the respective assets. Estimated useful lives for major classes of depreciable assets are as follows:

Expenditures for additions and improvements over $1,500 that substantially extend the useful life of property and equipment or increase its operating effectiveness are capitalized. Repair and maintenance costs are expensed as incurred.

Beneficial Conversion Feature

If the conversion features of conventional convertible debt provide for a rate of conversion that is below market value at issuance, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 470-20 Debt with Conversion and Other Options. In those circumstances, the convertible debt is recorded net of the discount related to the BCF, and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method.

Embedded Conversion Features

The Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion features.

Rich Cigars, Inc.

Notes to the Financial Statements

For the Six Months Ended June 30, 2017 and 2016

(Unaudited)

Derivative Financial Instruments

Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.

Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.

Revenue Recognition

The Company recognizes revenue on arrangements in accordance with Securities and Exchange Commission Staff Accounting Bulletin Topic 13, Revenue Recognition and ASC 605-15-25, Revenue Recognition.  The Company’s net revenue is principally from the manufacturing and sales of high-quality, hand-rolled, premium cigars. In all cases, revenue is recognized when a sales transaction closes and the product is shipped or picked-up by the customer. For the periods ended June 30, 2017 and June 30, 2016, the Company recorded revenues related to the sale of cigars in the amount of $4,606 and $2,971, respectively. Additionally, the Company hosts private events and provides the services of a professional cigar roller. As of June 30, 2017 and June 30, 2016, the Company recorded revenues for these services in the amount of $0 and $0, respectively.

Cost of Goods Sold

The Company recognizes the direct cost of purchasing products for sale, including freight charges and packaging, as cost of goods sold in the accompanying Statement of Operations.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Additionally, the recognition of future tax benefits, such as net operating loss carryforwards, is required to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company's assets and liabilities result in deferred tax assets, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some or all of the deferred tax asset will not be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.

The Company files income tax returns in the United States and Florida, which are subject to examination by the tax authorities in these jurisdictions. Generally, the statute of limitations related to the Company's federal and state income tax return is three years. The state impact of any federal changes for prior years remains subject to examination for a period up to five years after formal notification to the states.

Management has evaluated tax positions in accordance with ASC 740, Income Taxes, and has not identified any significant tax positions, other than those disclosed. All of the Company’s tax years since inception remain subject to examination by Federal and State jurisdictions.

Rich Cigars, Inc.

Notes to the Financial Statements

For the Six Months Ended June 30, 2017 and 2016

(Unaudited)

Shipping and Handling Costs

Shipping and handling costs to transport goods to customers are primarily paid directly by the customer.

Advertising and Promotion

The Company expenses advertising and promotion costs as incurred. The Company did not incur any advertising and promotion expenses during the periods ended June 30, 2017 and 2016, respectively.

Earnings per Share

The Company has adopted ASC 260-10-50, Earnings per Share, which provides for the calculation of "basic" and "diluted" earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. Basic and diluted losses per share were the same at the reporting dates as no common stock equivalents were issued or outstanding during the periods ended June 30, 2017 and 2016.

NOTE 5 CONVERTIBLE NOTES PAYABLE

On March 24, 2017, the Company entered into a convertible advance with Crown Bridge Partners LLC. The agreement provides that the Company may borrow up to $750,000. Borrowings under the line bear interest at 8% upon maturity and include a 10% issue discount. The maturity date for each tranche funded shall be 12 months from the effective date of each tranche. Additionally, the note is convertible at the holder’s discretion into shares of the Company’s common stock based on a conversion formula using the lowest price of the common shares for the 20 trading prior to which the Notice of Conversion is received. As of June 30, 2017, the Company has drawn a $75,000 credit line against this facility.

On March 24, 2017, the Company entered into a convertible advance with Eagle Equities LLC. The advance, with a face value of $75,000, bears interest at 8% per annum and is payable on March 24, 2018. The note was issued at a 10% discount. The net proceeds received after issuance costs and fees was $63,750. In accordance with ASC 835-30-45, Interest, the Company records the fees, costs, and original issue discount as reduction of the carrying amount of the debt and amortizes the balances over the life of the debt instrument. Additionally, the note is convertible at the holder’s discretion into shares of the Company’s common stock based on a conversion formula using the lowest price of the common shares for the 20 trading prior to which the Notice of Conversion is received. The conversion formula created an embedded derivative conversion feature. The Company valued this conversion feature as of June 30, 2017 at $65,935 using the Black Scholes valuation model with the following assumptions: dividend yield of zero, 267 day term to maturity, risk free interest rate of 1.24% and annualized volatility of 64.59%. The value of the conversion feature was assigned to the derivative liability and created a debt discount to be amortized over the life of the convertible debt. At June 30, 2017 and 2016, the convertible note was recorded at $1,706 and $0, respectively.  Accrued interest related to this advance was $1,611 and $0 at June 30, 2017 and 2016, respectively, and is included in accrued interest on the Balance Sheets.

On March 27, 2017, the Company entered into a convertible advance with Crown Bridge Partners, LLC. The advance, with a face value of $75,000, bears interest at 8% per annum and is payable on March 27, 2018. The note was issued at a 10% discount. The net proceeds received after issuance costs and fees was $63,750. In accordance with ASC 835-30-45, Interest, the Company records the fees, costs, and original issue discount as reduction of the carrying amount of the debt and amortizes the balances over the life of the debt instrument. Additionally, the note is convertible at the holder’s discretion into shares of the Company’s common stock based on a conversion formula using the lowest price of the common shares for the 20 trading prior to which the Notice of Conversion is received. The conversion formula created an embedded derivative conversion feature. The Company valued this conversion feature as of June 30, 2017 at $65,935 using the Black Scholes valuation model with the following assumptions: dividend yield of zero, 270 day term to maturity, risk free interest rate of 1.24% and annualized volatility of 64.59%. The value of the conversion feature was assigned to the derivative liability and created a debt discount to be amortized over the life of the convertible debt. At June 30, 2017 and 2016, the convertible note was recorded at $1,858 and $0, respectively.  Accrued interest related to this advance was $1,561 and $0 at June 30, 2017 and 2016, respectively, and is included in accrued interest on the Balance Sheets.

Rich Cigars, Inc.

Notes to the Financial Statements

For the Six Months Ended June 30, 2017 and 2016

(Unaudited)

NOTE 5 CONVERTIBLE NOTES PAYABLE (continued)

On May 15, 2017, the Company entered into a convertible advance with Power Up Lending Group, LTD. The advance, with a face value of $38,000, bears interest at 12% per annum and is payable on May 15, 2018. The note was issued at a 7% discount. The net proceeds received after issuance costs and fees was $35,000. In accordance with ASC 835-30-45, Interest, the Company records the fees, costs, and original issue discount as reduction of the carrying amount of the debt and amortizes the balances over the life of the debt instrument. Additionally, the note is convertible at the holder’s discretion into shares of the Company’s common stock based on a conversion formula using the lowest price of the common shares for the 15 trading prior to which the Notice of Conversion is received. The conversion formula created an embedded derivative conversion feature. The Company valued this conversion feature as of June 30, 2017 at $67,335 using the Black Scholes valuation model with the following assumptions: dividend yield of zero, 319 day term to maturity, risk free interest rate of 1.24% and annualized volatility of 64.25%. The value of the conversion feature was assigned to the derivative liability and created a debt discount to be amortized over the life of the convertible debt. At June 30, 2017 and 2016, the convertible note was recorded at $387 and $0, respectively.  Accrued interest related to this advance was $387 and $0 at June 30, 2017 and 2016, respectively, and is included in accrued interest on the Balance Sheets.

On May 15, 2017, the Company entered into a convertible advance with Kodiak Capital Group, LLC. The advance, with a face value of $37,500, bears interest at 8% per annum and is payable on May 15, 2018. The note was issued at a 10% discount. The net proceeds received after issuance costs and fees was $30,000. In accordance with ASC 835-30-45, Interest, the Company records the fees, costs, and original issue discount as reduction of the carrying amount of the debt and amortizes the balances over the life of the debt instrument. Additionally, the note is convertible at the holder’s discretion into shares of the Company’s common stock based on a conversion formula using the lowest price of the common shares for the 20 trading prior to which the Notice of Conversion is received. The conversion formula created an embedded derivative conversion feature. The Company valued this conversion feature as of June 30, 2017 at $66,906 using the Black Scholes valuation model with the following assumptions: dividend yield of zero, 319 day term to maturity, risk free interest rate of 1.24% and annualized volatility of 64.25%. The value of the conversion feature was assigned to the derivative liability and created a debt discount to be amortized over the life of the convertible debt. At June 30, 2017 and 2016, the convertible note was recorded at $378 and $0, respectively.  Accrued interest related to this advance was $378 and $0 at June 30, 2017 and 2016, respectively, and is included in accrued interest on the Balance Sheets.

NOTE 6 PROPERTY AND EQUIPMENT

Property and Equipment consists of the following:

For the periods ended June 30, 2017 and 2016, the Company recorded Depreciation Expense of $107 and $107.

Rich Cigars, Inc.

Notes to the Financial Statements

For the Six Months Ended June 30, 2017 and 2016

(Unaudited)

NOTE 7 INTANGIBLE ASSETS

Intangible Assets consists of the following:

In May 2014, the Company issued 85,000 shares for the development of the Company’s website, which is currently recorded in Website Development Costs. The website for the Company went live on January 1, 2016, and as a result the Company began amortizing the asset at that time. The Company will amortize the asset over a period of 5 years. For the periods ended June 30, 2017 and 2016, the Company recorded Amortization expense of $425 and $0, respectively.

NOTE 8 EQUITY

On January 1, 2017, the Company issued 100,000 shares of common stock for a $10,000. The shares were issued to pay for consulting services performed for the Company.

During the quarter ended March 31, 2017, the Company’s shareholders have contributed $48,100 in the business to be used in the Company’s regular activities. Since inception, the Company’s shareholders have contributed $368,491 in the business to be used in the Company’s regular activities. As of June 30, 2017, the Company has used these proceeds on the Company’s operations and purchases.

NOTE 9 COMMITMENTS AND CONTINGENCIES

During the normal course of business, the Company may be exposed to litigation.  When the Company becomes aware of potential litigation, it evaluates the merits of the case in accordance with ASC 450-20-50, Contingencies.  The Company evaluates its exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome.  If the Company determines that an unfavorable outcome is probable and can be reasonably estimated, it establishes the necessary accruals.  As of June 30, 2017, the Company is not aware of any contingent liabilities that should be reflected in the accompanying financial statements.

NOTE 10 SUBSEQUENT EVENTS

The Company has evaluated subsequent events that occurred through the date of the filing of the Company’s fiscal year 2017 Form 10-Q. No significant events occurred subsequent to the balance sheet date and prior to the filing date of this report that would have a material impact on the Financial Statements.

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 June 30, 2017, we had an accumulated deficit totaling $(902,061). 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 June 30, 2017, we had $2,109 in revenues and $731 in cost of goods sold compared to $2,971 and $921, respectively, for the same period one year earlier. For the three months ended June 30, 2017, our total operating expenses were $155,441 as compared to $37,359 for the three months ended June 30, 2016. Some of the categories with larger differences in expenses are discussed here. For the three months ended June 30, 2017, we incurred expenses of $19,051 for professional fees compared to $3,211 for the same period in 2016. The increase in professional fees is largely due to our efforts related to the fact that we are now a reporting public company. For the three months ended June 30, 2017, we incurred expenses of $48,183 for officers’ compensation compared to $16,180 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, as well as to the other officers for operating the Company. For the three months ended June 30, 2017, we incurred travel expenses in the amount of $26,473 compared to $5,010 for the corresponding period in 2016. The increase in travel is due to Company sponsoring events to increase brand awareness and market product. For the three months ended June 30, 2017, we incurred $3,390 for legal fees, compared to $0 for the same period in 2016. This increase is due to ongoing legal services due to the our status as a reporting public company. For the three months ended June 30, 2017 we incurred meals and entertainment expenses of $5,751 compared to $597 for the corresponding period in 2016. The increase in this category is due to increased travel related to the Company sponsoring events to increase brand awareness and market product. For the three months ended June 30, 2017, we incurred general and administrative expenses of $20,347 compared to $1,086 for the corresponding period in 2016. The increase in this category is due to increased operations over the previous period last year The total operating expenses increased by $118,082 for the three months ended June 30, 2017 over the same period last year.

Six Months

For the six months ended June 30, 2017, we had $4,606 in revenues and $2,382 in cost of goods sold compared to $2,971 and $921, respectively, for the same period one year earlier. For the six months ended June 30, 2017, our total operating expenses were $269,824 as compared to $65,535 for the six months ended June 30, 2016. Some of the categories with larger differences in expenses are

discussed here. For the six months ended June 30, 2017, we incurred expenses of $47,963 for professional fees compared to $9,457 for the same period in 2016. The increase in professional fees is largely due to our efforts related to the fact that we are now a reporting public company. For the six months ended June 30, 2017, we incurred expenses of $73,648 for officers’ compensation compared to $28,708 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, as well as to the other officers for operating the Company. For the six months ended June 30, 2017, we incurred travel expenses in the amount of $45,836 compared to $12,100 for the corresponding period in 2016. The increase in travel is due to Company sponsoring events to increase brand awareness and market product. For the six months ended June 30, 2017, we incurred $23,670 for legal fees, compared to $0 for the same period in 2016. This increase is due to ongoing legal services due to the our status as a reporting public company. For the six months ended June 30, 2017 we incurred meals and entertainment expenses of $10,544 compared to $642 for the corresponding period in 2016. The increase in this category is due to increased travel related to the Company sponsoring events to increase brand awareness and market product. For the six months ended June 30, 2017 we incurred general and administrative expenses of $25,248 compared to $2,206 for the corresponding period in 2016. The increase in this category is due to increased operations over the previous period last year. The total operating expenses increased by $204,289 for the six months ended June 30, 2017 over the same period last year.

Our auditor has expressed substantial doubt as to whether we will be able to continue to operate as a “going concern” due to the fact that the Company has an accumulated deficit of $(902,063) as of June 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.

Liquidity and Capital Resources

As at June 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 six months ended June 30, 2017, the Company used cash in the amount of ($244,860) in operating activities, which is an increase of $181,724 over the same period in 2016. The increase in the operating expenses of $204,288 for the six months ended June 30, 2017 over the corresponding period in 2016, is the main factor in the increased cash used. The increased operating expenses are due to the Company’s effort to produce, sell, and market its product, and its effort to publicly list the Company.

Financing Activities

During the quarter ended June 30, 2017, the Company received $192,500 from proceeds from convertible debt. See Part II, Item 5 “Other Events” for a full description of the convertible debt agreements entered into during the period. The Company also received shareholder contributions in the amount of $48,100 in the six months ended June 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.

Investing Activities

The Company had no investing activities for the three months ended June 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 June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Not Applicable to Smaller Reporting Companies.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On May 15, 2017, the Company entered into a convertible promissory note totaling $38,000.00 and a Securities Purchase Agreement with Power Up Lending Group Ltd. (“Power Up Lending”). The Company may convert an indeterminate number of shares pursuant to the conversion of the Note.

The issuance of the Note was made in reliance on the exemption provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company's reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the Note was an accredited investor.

On May 15, 2017, the Company entered into convertible promissory notes for $375,000 total, a Securities Purchase Agreement, and an Equity Purchase Agreement for up to $1,000,000 of the Company’s Common Stock, to convert and/or issue shares of Common Stock to Kodiak Capital Group, LLC in an indeterminate number of shares.

The issuance of the Notes was made in reliance on the exemption provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company's reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the Note was an accredited investor.

The shares of Common Stock that may be purchased by Kodiak Capital Group, LLC under the Equity Purchase Agreement through Put Notices put forward by the Company, and will be registered under a registration statement filed with the SEC, but as of the date of this filing, the registration statement has not yet been filed. No shares have been issued under the Equity Purchase Agreement as of the date of this filing.

Item 5, below, contains a detailed description of the transactions discussed above, and is incorporated herein by reference.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable.

ITEM 4. MINE SAFETY DISCLOSURE

Not Applicable.

ITEM 5. OTHER INFORMATION

Crown Bridge Convertible Promissory Note

On March 24, 2017, the Company entered into a convertible promissory note totaling $750,000.00 (filed as Exhibit 10.5 to the quarterly report for the period ended March 31, 2017 on Form 10-Q) (“Note 3”) and a Securities Purchase Agreement (filed as Exhibit 10.6 to the quarterly report for the period ended March 31, 2017 on Form 10-Q) (altogether, the “Crown Bridge Transaction Documents”) with Crown Bridge Partners LLC (“Crown Bridge”). The agreement provides that the Company may borrow up to $750,000. Borrowings under the line bear interest at 8% upon maturity, and the maturity date for each tranche funded shall be 12 months from the effective date of each tranche. Note 3 carries a prorated original issue discount of $75,000.00 (the “OID”), to cover the Crown Bridge’s accounting fees, due diligence fees, monitoring, and/or other transactional costs incurred in connection with the purchase and sale of Note 3, which is included in the principal balance of Note 3. Thus, the purchase price of Note 3 is $675,000.00. As of June 30, 2017, the Company had drawn $75,000 on this Note. All other details of Note 3 can be found in the quarterly report for the period ended March 31, 2017 on Form 10-Q.

Power Up Lending Group, LTD Convertible Promissory Note and Securities Purchase Agreement

On May 15, 2017, the Company entered into a convertible promissory note totaling $38,000.00 (filed as Exhibit 10.1) (“Note 4”) and a Securities Purchase Agreement (filed as Exhibit 10.2) (altogether, the “Power Up Lending Documents”) with Power Up Lending Group Ltd. (“Power Up Lending”). The agreement provides that the Company may borrow up to $38,000. Borrowings under the line bear interest at 12% upon maturity, and the maturity date shall be February 20, 2018.

The Company may, exercisable on not more than three (3) Trading Days prior written notice to Power Up Lending, prepay the outstanding Note (principal and accrued interest), in full, in accordance with the following:

Conversion Right. Power Up Lending shall have the right at any time to convert all or any part of the outstanding and unpaid principal amount into fully paid and non-assessable shares of Common Stock, determined as provided below; provided, however, that in no event shall Power Up Lending be entitled to convert any portion of Note 4 in excess of that portion of Note 4 upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by Power Up Lending and its affiliates would result in beneficial ownership of more than 4.99% of the outstanding shares of Common Stock. The "Variable Conversion Price" is 61% multiplied by the Market Price (as defined in Note 4) (representing a discount rate of 39%). “Market Price” means the lowest Trading Price (as defined below) for the Common Stock during the fifteen (15) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means, for any security as of any date, the closing bid price on the OTCQB, OTCQX, Pink Sheets electronic quotation system or applicable trading market (the “OTC”) as reported by a reliable reporting service (“Reporting Service”) designated by the Holder. The Company will reserve from its authorized and unissued Common Stock a sufficient number of shares, initially 1,494,484, free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of Note 4.

Kodiak Capital Group, LLC Convertible Promissory Notes, Securities Purchase Agreement, Equity Purchase Agreement, and Associated Documents

On May 15, 2017, the Company entered into a convertible promissory note (“Note 5”), a back end convertible redeemable note (“Note 6”), and a collateralized secured promissory note tied to Note 5 with Kodiak Capital Group, LLC (“Kodiak”) (Exhibits 10.3, 10.4, and 10.5, respectively), along with a Securities Purchase Agreement for the convertible notes (Exhibit 10.6), an Equity Purchase Agreement for the purchase of up to $1,000,000 of the Company’s Common Stock (Exhibit 10.7), and a Registration Rights Agreement for the shares purchased pursuant to the Equity Purchase Agreement (Exhibit 10.8).

Note 5 is the convertible promissory note for $375,000, with an original issue discount of $37,500, of which the Company will receive $33,750 in the first tranche. The Note 6 advance (the “First Tranche”), with a face value of $37,500, bears interest at 8% per annum. The maturity date is the date twelve months from the effective date of each payment. Additionally, Notes 5,6, and 7 are convertible at the holder’s discretion into shares of the Company’s common stock based on a conversion formula, subject to certain restrictions. The "Conversion Price" is 55% of the lowest trading price of the Common Stock during the twenty (20) prior Trading Days including the day upon which a Notice of Conversion is received by the Company. If the Company fails to maintain the share reserve at the 10x the number of shares that is actually issuable upon full conversion of the Note during the period that the conversion rights exist, it will be considered an event of default. In no event, shall Kodiak be allowed to effect a conversion if such conversion, along with all other shares of Company Common Stock beneficially owned by Kodiak and its affiliates would exceed 4.99% of the outstanding shares of the Common Stock of the Company.

Note 6 may be prepaid, and the Company may prepay any amount outstanding under Note 6, during the initial 90 day period after the issuance of Note 6, by making a payment to the Holder of an amount in cash equal to 135% multiplied the amount that the Borrower is prepaying, subject to the Holder’s prior written acceptance in Holder’s sole discretion. Further, the Borrower may prepay any amount outstanding under Note 6, from the 91st day through the 180th day after the issuance of Note 6, by making a payment to the Holder of an amount in cash equal to 150% multiplied the amount that the Borrower is prepaying, subject to the Holder’s prior written acceptance in Holder’s sole discretion. The Borrower may not prepay any amount outstanding under Note 6 after the 180th day after the issuance of Note. 6

Note 6 shall initially be paid for by the issuance of an offsetting $37,500 promissory note, secured by assets (Exhibits 10.4 and 10.5), issued to the Company by Kodiak, provided that prior to conversion of the Note 6, Kodiak must have paid off the secured note in cash such that Note 6 may not be converted until it has been paid for in cash by Kodiak. The collateralized secured promissory note shall initially be secured by the pledge of the $375,000.00

8% convertible promissory note issued to the Company by Kodiak on May 15, 2017 (Note 5). The Company may exchange this collateral for other collateral with an appraised value of at least $37,500.00, by providing 3 days’ prior written notice to Kodiak.

Pursuant to the Securities Purchase Agreement (“SPA”) (Exhibit 10.6) entered into by and between the Company and Kodiak, the Company has agreed to issue and sell to Kodiak an indeterminate number of shares of the Company’s common stock, and the Company has agreed to provide piggyback registration rights.

The issuance of the Notes and entry into Purchase Agreements were made in reliance on the exemption provided by Section 4(2) of the Securities Act for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company's reliance upon Section 4(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) the recipient of the Note was an accredited investor.  

The Equity Purchase Agreement (“EPA”) (Exhibit 10.7) provides that the Company may, in its discretion, sell up to $1,000,000 of shares of Company common stock to Kodiak. The sale of shares of Company common stock is subject to the conditions set forth in the EPA, which include, but are not limited to, the Company filing a Registration Statement on Form S-1 to register the shares to be sold to Kodiak and the Registration Statement becoming effective. The purchase price to be paid for the shares will be 75% of the market price for such shares as determined pursuant to the terms set forth in the EPA. The Registration Rights Agreement (“RRA”)(Exhibit 10.8) provides that the Company will file a Registration Statement to register up to the maximum number of shares to be sold to Kodiak pursuant to the EPA, and that the Company shall use commercially reasonable efforts to file the Registration Statement before August 23, 2017.

The EPA, RRA and Note also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal under the Notes in the event of such defaults. The foregoing is only a brief description of the material terms of the EPA, RRA and Notes, and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such descriptions are qualified in their entirety by reference to the agreements and their exhibits which are filed as exhibits hereto.

ITEM 6. EXHIBITS

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.

SIGNATURES

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: August 21, 2017

By: /s/ Richard Davis

Richard Davis

(Chief Executive Officer, Principal Executive

Officer, Acting Chief Financial Officer

and Principal Accounting Officer)