VPRB 10-Q
VPR Brands, LP. (VPRB)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
Commission file number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (zip code)
(Registrant’s telephone number, including area code)
3001 Griffin Road, Fort Lauderdale, FL 33312
Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
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
Indicate the number of units outstanding of each of the registrant’s classes of common units as of the latest practicable date.
| Class | Outstanding at August 14, 2023: | |
| Common Units, No par value |
TABLE OF CONTENTS
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report includes forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs.
You should read thoroughly this report and the documents that we refer to herein with the understanding that our actual future results may be materially different from and/or worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements including those made in this report, in Part I. Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2022 and our other filings with the Securities and Exchange Commission.
Other sections of this report include additional factors which could adversely impact our business and financial performance. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.
OTHER PERTINENT INFORMATION
Unless specifically set forth to the contrary, when used in this report the terms “VPR Brands” the “Company,” “we,” “our,” “us,” and similar terms refer to VPR Brands, LP, a Delaware limited partnership.
The information which appears on our website (www.vprbrands.com) is not part of this report.
ii
PART I – FINANCIAL INFORMATION
VPR BRANDS, LP
CONDENSED BALANCE SHEETS
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Royalty receivable | - | |||||||
| Inventory, net | ||||||||
| Vendor deposits | ||||||||
| Deposits | ||||||||
| Total current assets | ||||||||
| Right of Use Asset | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND PARTNERS’ DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accounts payable - related party | ||||||||
| Customer deposits | ||||||||
| Contract liability | ||||||||
| Right of use obligation, current portion | ||||||||
| Notes payable | ||||||||
| Note payable-related parties | ||||||||
| Convertible notes payable | ||||||||
| Total current liabilities and total liabilities | ||||||||
| Notes Payable, less current portion | ||||||||
| Right to Use Obligation, net of current portion | ||||||||
| Total liabilities | ||||||||
| Partners’ Deficit: | ||||||||
| Common units - | ||||||||
| Common units to be issued; | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total partners’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and partners’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed interim financial statements.
1
VPR BRANDS, LP
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | ||||||||||||||||
| Product sales | $ | $ | $ | $ | ||||||||||||
| Royalty revenue | - | |||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of Sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating Expenses: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Net Operating Income (Loss) | ( | ) | ( | ) | ||||||||||||
| Other Income (Expense): | ||||||||||||||||
| Settlement income, net | ||||||||||||||||
| Other income | ||||||||||||||||
| Loan forgiveness | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense- related parties | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense), net | ||||||||||||||||
| Net Income (Loss) | $ | $ | $ | $ | ( | ) | ||||||||||
| Net Income (Loss) Per Common Unit - Basic | $ | $ | $ | $ | ( | ) | ||||||||||
| Net Income (Loss) Per Common Unit - Diluted | $ | $ | $ | $ | ( | ) | ||||||||||
| Weighted-Average Common Units Outstanding - Basic | ||||||||||||||||
| Weighted-Average Common Units Outstanding - Diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed interim financial statements.
2
VPR BRANDS, LP
CONDENSED STATEMENTS OF CHANGES IN PARTNERS’ DEFICIT
(Unaudited)
| Total | ||||||||||||||||||||||||
| Common Units | Common Units to be Issued | Accumulated | Partners’ | |||||||||||||||||||||
| Number | Amount | Number | Amount | Deficit | Deficit | |||||||||||||||||||
| Six Months Ended June 30,2022 | ||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||
| Balance at March 30, 2022 | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | - | - | - | - | ||||||||||||||||||||
| Balance at June 30,2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||
| Six Months Ended June 30,2023 | ||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||
| Balance at March 31,2023 | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | - | - | - | - | ||||||||||||||||||||
| Balance at June 30,2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed interim financial statements.
3
VPR BRANDS, LP
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | ||||||||
| Amortization of right of use asset | ||||||||
| Interest on lease liability | ||||||||
| Gain on modification of lease | ( | ) | ||||||
| Loan forgiveness | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Royalty receivable | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||
| Vendor deposits | ( | ) | ||||||
| Accounts receivable | ( | ) | ||||||
| Customer deposits | ( | ) | ||||||
| Prepaid | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Contract liability | ||||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash Flows from Financing Activities: | ||||||||
| Payments of notes payable | ( | ) | ( | ) | ||||
| Payments of convertible notes payable | ( | ) | ( | ) | ||||
| Payments of notes payable, related parties | ( | ) | ( | ) | ||||
| Payments on lease liability | ( | ) | ( | ) | ||||
| Payments of lease security deposits | ( | ) | ||||||
| Proceeds from notes payable, related parties | ||||||||
| Proceeds from notes payable | ||||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Change in Cash | ||||||||
| Cash - Beginning of the Year | ||||||||
| Cash - End of the Year | $ | $ | ||||||
| Supplemental Cash Flow Information: | ||||||||
| Interest paid in cash | $ | $ | ||||||
| Income taxes paid in cash | $ | $ | ||||||
| Schedule of Non-Cash Investing and Financing Activities: | ||||||||
| Adjustment of right of use obligation and asset for increase in rent | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed interim financial statements.
4
VPR BRANDS, LP
NOTES TO CONDENSED FINANCIAL STATEMENTS
For the three AND SIX months ended JUNE 30, 2023 and 2022
(Unaudited)
NOTE 1. ORGANIZATION
VPR Brands, LP (the “Company”, “we”, “our”) was incorporated in New York on July 19, 2004, as Jobsinsite.com, Inc. On August 5, 2004, we changed our name to Jobsinsite, Inc. On June 18, 2009, we merged with a Delaware corporation and became Jobsinsite, Inc. On July 1, 2009, we filed articles of conversion with the secretary of state of Delaware and became Soleil Capital L.P., a Delaware limited partnership. On September 2, 2015, we changed our name to VPR Brands, LP. We are managed by Soleil Capital Management LLC, a Delaware limited liability company.
The Company is engaged in various monetization strategies of a U.S. patent that the Company owns covering electronic cigarette, electronic cigar and personal vaporizer patents, as well as a patent for an inverted pocket lighter. The Company also has several trademarks (ELF, PHANTOM, HRB, VPOD, VAPOR X, and RIPPER) for which it is also engaged in licensing and various monetization strategies. The Company also designs, develops, markets and distributes products (the HoneyStick brand of vaporizers and the Goldline CBD products) oriented toward the cannabis markets. This allows us to capitalize on the rapidly growing expansion within the cannabis markets. The Company is also identifying electronic cigarette companies that may be infringing our patents and trademarks and exploring options to license and/or enforce our patents. The Company is now also selling DISSIM brand pocket lighters for which it holds a U.S. patent and patents pending. The Company also has patents pending in the cigar accessory space and sells these proprietary accessories.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed financial statements are prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which we considered as necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission. The results of operations for the six months ended June 30, 2023 are not necessarily indicative of the results to be expected for future periods or the full year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash includes all cash deposits and highly liquid financial instruments with an original maturity of three months or less. The Company did not maintain any cash equivalents as of June 30, 2023 and December 31, 2022, respectively.
Accounts Receivable and Royalty Receivable
The Company analyzes the collectability of accounts receivable and royalty receivable from continuing operations each accounting period and adjusts its allowance for doubtful accounts accordingly. A considerable amount of judgment is required in assessing the realization of accounts receivables, including the creditworthiness of each customer, current and historical collection history and the related aging of past due balances. The Company evaluates specific accounts when it becomes aware of information indicating that a customer may not be able to meet its financial obligations due to deterioration of its financial condition, lower credit ratings, bankruptcy or other factors affecting the ability to render payment. As of June 30, 2023 and December 31, 2022, the Company determined that no allowance for bad debt was necessary.
5
Inventory
Inventory consisting of finished products is stated at the lower of cost or net realizable value. At each balance sheet date, the Company evaluates its ending inventories for excess quantities and obsolescence. This evaluation primarily includes an analysis of forecasted demand in relation to the inventory on hand, among consideration of other factors. The physical condition (e.g., age and quality) of the inventories is also considered in establishing its valuation. Based upon the evaluation, provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis of the respective inventories. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from the amounts that the Company may ultimately realize upon the disposition of inventories if future economic conditions, customer inventory levels, product discontinuances, sales return levels or competitive conditions differ from the Company’s estimates and expectations. As of June 30, 2023 and December 31, 2022, the Company determined that no allowance for provision for obsolescence was necessary.
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 (Topic 842). Topic 842 amended several aspects of lease accounting, including requiring lessees to recognize leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present value of the lease payments. In July 2018, the FASB issued supplemental adoption guidance and clarification to Topic 842 within ASU 2018-10 “Codification Improvements to Topic 842, Leases” and ASU 2018-11 “Leases (Topic 842): Targeted Improvements.” The new guidance aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. A modified retrospective application is required with an option to not restate comparative periods in the period of adoption.
Effective January 1, 2019, the Company adopted the provisions of the new standard. The Company decided to use the practical expedients available upon adoption of Topic 842 to aid the transition from current accounting to provisions of Topic 842. The package of expedients will effectively allow the Company to run off existing leases, as initially classified as operating and classify new leases after implementation under the new standard as the business evolves.
The Company has an operating lease principally for warehouse and office space. Management evaluates each lease independently to determine the purpose, necessity to its future operations in addition to other appropriate facts and circumstances.
Revenue Recognition
The Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Revenues from product sales are recognized when
the customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the customer.
The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that
it would have recognized is one year or less or the amount is immaterial.
6
Royalty revenues consist of license and sublicense agreements to use the Company’s intellectual property in exchange for a sales-based royalty. Royalty revenue is recognized over time as the performance obligations are satisfied by licensees and sublicensees through sales of licensed products.
The
Company records contract liabilities when cash payments are received or due in advance of satisfaction of performance obligations by licensees
and sublicensees. During the six months ended June 30, 2023, the Company received cash payments totaling $
The
sublicense agreement executed in March 2023 provides for monthly royalties to the Company totaling
| Contract | ||||
| Liabilities | ||||
| Balance at December 31, 2022 | $ | |||
| Cash received from prepayment of royalty revenue | ||||
| Recognition of royalty revenue | ( | ) | ||
| Balance at June 30, 2023 | $ | |||
| Accounts | Royalty | Contract | ||||||||||
| Receivable | Receivable | Liabilities | ||||||||||
| December 31, 2022 | $ | $ | - | $ | - | |||||||
| June 30, 2023 | $ | $ | $ | |||||||||
As of June 30, 2023, contract liabilities related to cash received from licensees as a prepayment of royalty revenues to be earned through September 2023, at which time the contract liabilities will be recognized as revenues.
Unit-Based Compensation
Unit-based payments to employees, including grants of employee stock options are recognized as compensation expense in the financial statements based on their fair values, in accordance with FASB Accounting Standards Codification (“ASC”) Topic 718. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). The Company had no common stock options or common stock equivalents granted or outstanding for all periods presented. The Company may issue units as compensation in future periods for employee services.
The Company may issue restricted units to consultants for various services. Costs for these transactions will be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is to be measured at the earlier of: (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached, or (ii) the date at which the counterparty’s performance is complete. The Company may issue units as compensation in future periods for services associated with the registration of the common units.
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815, Derivatives and Hedging Activities.
Applicable GAAP require companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
7
The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.
The Company accounts for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment standards. The debt and equity linked derivatives are removed at their carrying amounts and the units issued are measured at their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting liabilities.
Fair Value
The carrying values of the Company’s notes payables, convertible notes, and accounts payable and accrued expenses approximate their fair values because of the short-term nature of these instruments.
Basic and Diluted Net Income (Loss) Per Unit
The Company computes net loss per unit in accordance with FASB ASC
260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted earnings per unit (“EPS”) on
the face of the statement of operations. Basic EPS is computed by dividing net income (loss) available to common unitholders by the weighted
average number of common units outstanding during the period. Diluted EPS gives effect to all dilutive potential common units outstanding
during the period including options, using the treasury stock method, and convertible notes, using the if-converted method. Diluted EPS
excludes all dilutive potential common units if their effect is anti-dilutive. Approximately
| Weighted | ||||||||
| Average | Net | |||||||
| For the Three Months Ended June 30, 2023: | Units | Income | ||||||
| Basic | $ | |||||||
| Convertible Debt | ||||||||
| Diluted | $ | |||||||
| Net Income Per Common Unit - Diluted | $ | |||||||
| Weighted | ||||||||
| Average | ||||||||
| For the Six Months Ended June 30, 2023: | Units | Net Income | ||||||
| Basic | $ | |||||||
| Convertible Debt | ||||||||
| Diluted | $ | |||||||
| Net Income Per Common Unit - Diluted | $ | |||||||
| Weighted | ||||||||
| Average | ||||||||
| For the Three Months Ended June 30, 2022: | Units | Net Income | ||||||
| Basic | $ | |||||||
| Convertible Debt | ||||||||
| Diluted | $ | |||||||
| Net Income Per Common Unit - Diluted | $ | |||||||
8
| Weighted | ||||||||
| Average | ||||||||
| For the Six Months Ended June 30, 2022: | Units | Net Income | ||||||
| Basic | $ | ( | ) | |||||
| Convertible Debt | ||||||||
| Diluted | $ | ( | ) | |||||
| Net Income Per Common Unit - Diluted | $ | ( | ) | |||||
Income Taxes
The Company is considered a partnership for income tax purposes. Accordingly, the partners report the Company’s taxable income or loss on their individual tax returns.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that may have an impact on the Company’s accounting and reporting. The Company believes that such recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not be material to its financial position, results of operations, and cash flow when implemented.
NOTE 3: GOING CONCERN
The accompanying unaudited condensed financial
statements have been prepared on a going concern basis, which contemplates the Company will continue to realize its assets and discharge
its liabilities in the normal course of business. The Company reported net income of $
The Company plans to pursue equity funding to expand its brand. Through equity funding and the current operations, the Company expects to meet its current capital needs. There can be no assurance that the Company will be able to raise sufficient working capital. If the Company is unable to raise the necessary working capital through equity funding, it will be forced to continue relying on cash from operations in order to satisfy its current working capital needs.
NOTE 4: NOTES PAYABLE
On
September 6, 2018, the Company issued the Amended and Restated Secured Promissory Note in the principal amount of $
On
September 24, 2019, the Company entered into a working capital account agreement with Paypal Working Capital (“Paypal Note”),
pursuant to which the Company borrowed $
In October 2022, the Company entered into a purchase
and sale agreement with BRMS, LLC (“BRMS Note 2”), pursuant to which the Company received proceeds of $
9
Economic Injury Disaster Loan
On July 9, 2020 and June 24, 2020, the Company
received an Economic Injury Disaster Loan (“EIDL”) in the aggregate amount of $
Daiagi Note
On
May 18, 2022, the Company issued a promissory note in the principal amount of $
| Balance at December 31, 2022 | $ | |||
| Repayments of notes payable | ( | ) | ||
| Balance at June 30, 2023 | $ | |||
| Current portion | ||||
| Notes payable, less current portion | $ |
NOTE 5: NOTES AND ACCOUNTS PAYABLE – RELATED PARTIES
On February 25, 2021, the Company received $
From May and June 2021, the Company received $
From June through September 2021, the Company
received a $
In September and November 2021, the Company received
a $
10
In November 2021, the Company received a $
On December 8, 2021, the Company issued a promissory
note in the principal amount of $
In December 2021, the Company received $
In January 2022, the Company received $
In January 2022, the Company received $
In March 2022, the Company received $
11
In April 2022, the Company received $
In April 2022, the Company received $
In September 2022, the Company received $
| Balance at December 31, 2022 | $ | |||
| Repayments of principal | ( | ) | ||
| Balance at June 30, 2023 | $ |
Accounts Payable - Related Party
As of June 30, 2023, accounts payable - related
party of $
12
NOTE 6: CONVERTIBLE NOTES PAYABLE
Brikor Note
On February 15, 2019, the Company issued a senior
convertible promissory note in the principal amount of $
At any time after the first anniversary of the issue date, the holder may require the Company, upon at least 30 business days’ written notice, to redeem all or any portion of the Brikor Note. The portion of the Brikor Note subject to redemption will be redeemed by the Company in cash.
The
Brikor Note is convertible into common units of the Company. Pursuant to the terms of the Brikor Note, Brikor has the right, at its option,
to convert any portion of the outstanding and unpaid Conversion Amount (as hereinafter defined) into common units in accordance with the
provisions of the Brikor Note at the Conversion Rate (as hereinafter defined). The number of common units issuable upon conversion of
any Conversion Amount will be determined by dividing (x) such Conversion Amount by (y) $
Daiagi and Daiagi Note
On February 15, 2019, the Company issued a senior
convertible promissory note in the principal amount of $
At any time after the first anniversary of the issue date, the holder may require the Company, upon at least 30 business days’ written notice, to redeem all or any portion of the Daiagi and Daiagi Note. The portion of the Daiagi and Daiagi Note subject to redemption will be redeemed by the Company in cash.
The
Daiagi and Daiagi Note is convertible into common units of the Company. Pursuant to the terms of the Daiagi and Daiagi Note, the Daiagis
have the right, at their option, to convert any portion of the outstanding and unpaid Conversion Amount into common units in accordance
with the provisions of the Daiagi and Daiagi Note at the Conversion Rate. The number of common units issuable upon conversion of any Conversion
Amount will be determined by dividing (x) such Conversion Amount by (y) $
Amber Investments Note
On February 15, 2019, the Company issued a senior
convertible promissory note in the principal amount of $
At any time after the first anniversary of the issue date, the holder may require the Company, upon at least 30 business days’ written notice, to redeem all or any portion of the Amber Investments Note. The portion of the Amber Investments Note subject to redemption will be redeemed by the Company in cash.
The
Amber Investments Note is convertible into common units of the Company.
13
K& S Pride Note
On February 19, 2019, the Company issued a senior
convertible promissory note in the principal amount of $
At any time after the first anniversary of the issue date, the holder may require the Company, upon at least 30 business days’ written notice, to redeem all or any portion of the K & S Pride Note. The portion of the K & S Pride Note subject to redemption will be redeemed by the Company in cash.
The
K & S Pride Note is convertible into common units of the Company. Pursuant to the terms of the K & S Pride Note, K & S Pride
has the right, at its option, to convert any portion of the outstanding and unpaid Conversion Amount into common units in accordance with
the provisions of the K & S Pride Note at the Conversion Rate. The number of common units issuable upon conversion of any Conversion
Amount will be determined by dividing (x) such Conversion Amount by (y) $0.10 (subject to adjustment as set forth in the K & S Pride
Note). In March 2022, the Company began making monthly payments of principal and interest of $
Surplus Depot Note
On February 20, 2019, the Company issued a senior
convertible promissory note in the principal amount of $
At any time after the first anniversary of the issue date, the holder may require the Company, upon at least 30 business days’ written notice, to redeem all or any portion of the Surplus Depot Note. The portion of the Surplus Depot Note subject to redemption will be redeemed by the Company in cash.
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NOTE 7: PARTNERS’ DEFICIT
The
Company is authorized to issue
Amendment to Partnership Agreement
On January 23, 2020, the Company executed the Second Amendment (the “Second Amendment”) to Limited Partnership Agreement (the “Agreement”) in order to create a new class of Company securities titled Class A preferred units.
Pursuant to Section 5.6 of the Agreement, Soleil Capital Management LLC, the Company’s general partner (the “General Partner”) may, without the approval of the Company’s limited partners, issue additional Company securities for any Company purpose at any time and from time to time for such consideration and on such terms and conditions as the General Partner shall determine in its sole discretion, all without the approval of any limited partners, and that each additional Company interest authorized to be issued by the Company may be issued in one or more classes, or one of more series of any such classes, with such designations, preferences, rights, powers and duties as shall be fixed by the General Partner in its sole discretion. Pursuant to Section 13.1 of the Agreement, the General Partner may, without the approval of any partner, any unitholder or any other person, amend any provision of the Agreement to reflect any amendment expressly permitted in the Agreement to be made by the General Partner acting along, therefore including the creation of a new class of Company securities.
The designation, powers, preferences and rights of the Class A preferred units and the qualifications, limitations and restrictions thereof are contained in the Second Amendment, and are summarized as follows:
Number and Stated Value. The number
of authorized Class A preferred units is
Rights. Except as set forth in the Second Amendment, each Class A preferred unit has all of the rights, preferences and obligations of the Company’s common units as set forth in the Agreement and shall be treated as a common unit for all other purposes of the Agreement.
Dividends.
Rate. Each
Class A preferred unit is entitled to receive an annual dividend at a rate of
Liquidation. In the event of a liquidation, dissolution or winding up of the Company, a merger or consolidation of the Company wherein the Company is not the surviving entity, or a sale of all or substantially all of the assets of the Company, each Class A unit will be entitled to receive, prior an in preference to any distribution of any of the assets or surplus funds of the Company to the holders of common units or any other Company securities ranking junior to the Class A preferred units, or to the General Partner, an amount per Class A preferred unit equal to any accrued but unpaid dividends. If, upon such an event and after the payment of preferential amounts required to be paid to holders of any Company securities having a ranking upon liquidation senior to the Class A preferred units, the assets of the Company available for distribution to the partners of the Company are insufficient to provide for both the payment of the full Class A liquidation preference and the preferential amounts (if any) required to be paid to holders of any other Company securities having a ranking upon liquidation pari passu with the Class A preferred units, such assets as are so available shall be distributed among the Class A preferred units and the holders of any other series of Company securities having a ranking upon liquidation pari passu with the Class A preferred units in proportion to the relative aggregate preferential amount each such holder is otherwise entitled to receive.
Conversion Rights.
Conversion. Upon notice, a holder of Class A preferred units has the right, at its option, to convert all or a portion of the Class A preferred units held into fully paid and nonassessable Company common units.
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Conversion Price.
Each Class A preferred unit is convertible into a number of common units equal to (x) the Stated Value plus any accrued and unpaid dividends,
divided by (y) the Conversion Price (as hereinafter defined). The “Conversion Price” means
Conversion Limitation.
In no event shall a holder of Class A preferred units be entitled to convert any of the Class A preferred units in excess of that number
of Class A preferred units upon conversion of which the sum of (1) the number of common units beneficially owned by such holder and its
affiliates (other than common units which may be deemed beneficially owned through the ownership of the unconverted Class A preferred
units or the unexercised or unconverted portion of any other security of the Company subject to a limitation on conversion or exercise
analogous to the limitations contained herein), and (2) the number of common units issuable upon the conversion of all Class A preferred
units held by such holder would result in beneficial ownership by the holder and its affiliates of more than
Equity Purchase Agreement
On February 19, 2020 (the “Execution Date”),
the Company entered into an Equity Purchase Agreement (the “Equity Purchase Agreement”) with DiamondRock, LLC (the “Investor”)
pursuant to which, upon the terms and subject to the conditions thereof, the Investor committed to purchase shares of the Company’s
common units (the “Put Shares”) at an aggregate purchase price of up to $
Pursuant to the terms of the Equity Purchase Agreement, the commitment period will commence upon the initial effective date of a Form S-1 Registration Statement planned to be filed to register the Put Shares in accordance with the Registration Rights Agreement as further described below and will end on the earlier of (i) the date on which the Investor has purchased Put Shares from the Company pursuant to the Equity Purchase Agreement equal to the Maximum Commitment Amount, (ii) the date on which there is no longer an effective registration statement for the Put Shares, (iii) 24 months after the initial effectiveness of the Registration Statement planned to be filed to register the Put Shares in accordance with the Registration Rights Agreement as further described below, or (iv) written notice of termination by the Company to the Investor (which will not occur at any time that the Investor holds any of the Put Shares).
From time to time over the term of the Equity Purchase Agreement, commencing on the date on which a registration statement registering the Put Shares (the “Registration Statement”) becomes effective, the Company may, in its sole discretion, provide the Investor with a put notice (each a “Put Notice”) to purchase a specified number of the Put Shares (each a “Put Amount Requested”) subject to the limitations discussed below and contained in the Equity Purchase Agreement. Within two (2) trading days of the date that the Put Notice is deemed delivered (“Put Date”) pursuant to terms of the Equity Purchase Agreement, the Company shall deliver, or cause to be delivered, to the Investor, the estimated amount of Put Shares equal to the investment amount (“Investment Amount”) indicated in the Put Notice divided by the “Initial Pricing” per share, as such term is defined in the Equity Purchase Agreement (the “Estimated Put Shares”) as DWAC Shares. Within two (2) trading days following the Put Date, the Investor shall pay the Investment Amount to the Company by wire transfer of immediately available funds.
At
the end of the five (5) trading days following the clearing date associated with the applicable Put Notice (“Valuation Period”),
the purchase price (the “Purchase Price”) shall be computed as
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The Put Amount Requested pursuant to any single
Put Notice must have an aggregate value of at least $
In order to deliver a Put Notice, certain conditions
set forth in the Equity Purchase Agreement must be met, as provided therein. In addition, the Company is prohibited from delivering a
Put Notice if: (i) the sale of Put Shares pursuant to such Put Notice would cause the Company to issue and sell to the Investor, or the
Investor to acquire or purchase, a number of shares of the Company’s common units that, when aggregated with all shares
of common units purchased by the Investor pursuant to all prior Put Notices issued under the Equity Purchase Agreement, would exceed the
Maximum Commitment Amount; or (ii) the issuance of the Put Shares would cause the Company to issue and sell to Investor, or the Investor
to acquire or purchase, an aggregate number of shares of common units that would result in the Investor beneficially owning more than
If the value of the Put Shares based on the Purchase Price determined for a particular put would cause the Company to exceed the Maximum Commitment Amount, then within two (2) trading days following the end of the Valuation Period the Investor shall return to the Company the surplus amount of Put Shares associated with such put. If the number of the Put Shares (Investment Amount divided by Purchase Price) determined for a particular put exceeds the Beneficial Ownership Limitation, then within two (2) trading days following the end of the Valuation Period the Investor shall return to the Company the surplus amount of Put Shares associated with such put. Concurrently, the Company shall return within two (2) trading days following the end of the respective Valuation Period to the Investor, by wire transfer of immediately available funds, the portion of the Investment Amount related to the portion of Put Shares exceeding the Beneficial Ownership Limitation.
Further pursuant to the Equity Purchase Agreement,
the Company agreed that if the Securities and Exchange Commission (the “SEC”) declares the Registration Statement for the
Put Shares effective, then during the 12 month period immediately following the date the SEC declares the Registration Statement for the
Put Shares effective, upon any issuance by the Company or any of its subsidiaries of common units or common units equivalents for cash
consideration, indebtedness or a combination of units thereof (a “Subsequent Financing”), the Investor shall have the right
to participate in up to an amount of the Subsequent Financing (that is not an “Exempt Issuance” as such term is defined in
the Equity Purchase Agreement), equal to
Further pursuant to the Equity Purchase Agreement, the Company agreed to reserve a sufficient number of shares of its common units for the Investor pursuant to the Equity Purchase Agreement and all other contracts between the Company and the Investor.
The Equity Purchase Agreement contains customary representations, warranties, covenants and conditions for a transaction of this type for the benefit of the parties.
Registration Rights Agreement
On the Execution Date, the Company also entered into a registration rights agreement (the “Registration Rights Agreement”) with the Investor pursuant to which the Company is obligated to file the Registration Statement to register the resale of the Put Shares. Pursuant to the Registration Rights Agreement, the Company must (i) file the Registration Statement within 45 calendar days from the Execution Date, (ii) use reasonable best efforts to cause the Registration Statement to be declared effective under the Securities Act of 1933, as amended (the “Securities Act”), within 90 calendar days after the filing thereof, and (iii) use its reasonable best efforts to keep such Registration Statement continuously effective under the Securities Act until all of the Put Shares have been sold thereunder or pursuant to Rule 144.
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Pursuant to the Registration Rights Agreement, the Company agreed to pay all reasonable expenses, other than sales or brokerage commissions, incurred in connection with registrations, filings or qualifications pursuant to the Registration Rights Agreement, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees, and fees and disbursements of counsel for the Company.
NOTE 8: COMMITMENTS AND CONTINGENCIES
Lease Agreements
Warehouse and Office Space – Related Party
In October 2019, the Company entered into a
At inception of the lease, the Company recorded
a right to use asset and obligation of $
On June 22, 2022, a lease termination notice was signed terminating the lease, effective June 30, 2022, and requiring the Company to surrender the premises by July 31, 2022. The lease was derecognized in July 2022.
Warehouse and Office Space
On May 19, 2022, the Company entered into a
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Warehouse and office lease right-of-use assets | $ | $ | ||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Right-of-use assets, net | $ | $ | ||||||
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Lease liabilities related to warehouse and office lease right-of-use assets | $ | $ | ||||||
| Less: current portion of lease liabilities | ( | ) | ( | ) | ||||
| Lease liabilities, net of current portion | $ | $ | ||||||
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| Year Ended December 31, | Amount | |||
| 2023 (Remainder) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total minimum non-cancelable operating lease payments | ||||
| Less: discount to fair value | ( | ) | ||
| Total lease liability as of June 30, 2023 | $ | |||
The Company amortized $
Rent expense for the six months ended June 30, 2023 and 2022 totaled
$
Legal Matters
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. There are no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of our operations and there are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest.
On
April 20, 2023, the Company entered into a Litigation Resolution Agreement (the “Agreement”) with Safa Goods, LLC regarding
trademark and patent infringements of Company branded products . Pursuant to the terms of the Agreement, the Company is to
receive cash payments $
Customer Concentration
During the three and six months ended June 30, 2023,
NOTE 9: SUBSEQUENT EVENTS
No events occurred subsequent to the date of the Company’s financial statements that would require adjustments to, or disclosure in, the aforementioned financial statements. The Company evaluated subsequent events through August 14, 2023, the date the financial statements were available for issuance.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of operations of VPR Brands, LP (“VPRB” or the “Company”) should be read in conjunction with our unaudited condensed financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us,” “we,” “our,” and similar terms refer to the Company. This Quarterly Report on Form 10-Q includes forward-looking statements, as that term is defined in the federal securities laws, based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Words such as “anticipate,” “estimate,” “plan,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Reference is made to the “Risk Factors” section of the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) on April 13, 2023.
Overview
We are a company engaged in the electronic cigarette and personal vaporizer industry. We own a portfolio of electronic cigarette and personal vaporizer patents which are the basis for our efforts to:
| ● | Design, market, license, and distribute a line of vaporizers under the “ELF” brand; |
| ● | Design, market and distribute a line of e-liquids under the “HELIUM” brand; |
| ● | Design, market and distribute a line of vaporizers for essential oils, concentrates, and dry herbs under the “HONEYSTICK” brand; |
| ● | Design, market and distribute a line of cannabidiol (“CBD”) products under the “GOLD LINE” brand; |
| ● | Design, market and distribute electronic cigarettes and popular vaporizers under the KRAVE brand; |
| ● | Prosecute and enforce our patent and trademark rights; |
| ● | License our intellectual property; and |
| ● | Develop private label manufacturing programs. |
Results of Operations for the Three Months Ended June 30, 2023 Compared to the Three Months Ended June 30, 2022
Revenues
Our revenues for the three months ended June 30, 2023 and 2022 were $1,909,529 and $920,705, respectively. The increase was a result of royalty revenue from the licensing of intellectual property.
Cost of Sales
Cost of sales for the three months ended June 30, 2023 and 2022 was $814,437 and $553,122, respectively. Gross margins decreased to 32% in 2023 compared to 40% in 2022, due to higher volume of lower margin sales in 2023.
Operating Expenses
Operating expenses for the three months ended June 30, 2023 were $452,903 as compared to $460,470 for the three months ended June 30, 2022.
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Other Income
Net other income for the three months ended June 30, 2023 was $286,133 compared to $166,620 for the three months ended June 30, 2022.
Net Income
Net income for the three months ended June 30, 2023 was $928,322 compared to $73,733 for the three months ended June 30, 2022.
Results of Operations for the Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022
Revenues
Our revenues for the six months ended June 30, 2023 and 2022 were $4,990,550 and $1,975,937, respectively. The increase was a result of a large distribution sales order compared to 2022 and royalty revenue from the licensing of intellectual property.
Cost of Sales
Cost of sales for the six months ended June 30, 2023 and 2022 was $3,371,785 and $1,182,242, respectively. The decrease was a result of 2022 including higher online direct to customer sales compared to 2023.
Operating Expenses
Operating expenses for the six months ended June 30, 2023 were $857,564 as compared to $975,913 for the six months ended June 30, 2022.
Other Income
Net other income for the six months ended June 30, 2023 was $192,435 as compared to net other income of $108,710 for the six months ended June 30, 2022. The change is due primarily to an increase in settlement income and a decrease in interest expense.
Net Income (Loss )
Net income for the six months ended June 30, 2023 was $953,636 compared to a net loss of $73,508 for the six months ended June 30, 2022.
Liquidity and Capital Resources
Cash provided by operations was $1,289,700 for the six months ended June 30, 2023 as compared to net cash used in operations of $273,041 in the six months ended June 30, 2022. Cash provided by operations in 2023 related to the Company’s net income of approximately $954,000 and increases in contract liabilities and partially offset by uses of cash relating increases in inventory, royalty receivable and a decrease in vendor deposit assets. Cash used in operations in 2022 related to the Company’s net loss of approximately $73,500, decreases in accounts payable, increases in accounts receivable and customer deposits, offset by decrease in vendor deposits and inventory.
During the six months ended June 30, 2023, the Company repaid $161,583 of notes principal, repaid $146,120 of principal on convertible notes payable, repaid $264,595 of principal on notes payable to related parties and repaid $20,318 of lease liability principal.
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During the six months ended June 30, 2022, the Company received $492,000 from the issuance of notes payable to related parties, $250,000 from the issuance of a promissory note, repaid $111,081 of principal on notes payable to related parties, repaid $164,684 of principal on notes payable, and repaid $78,367 of convertible debt. During the six months ended June 30, 2021, the Company received $310,000 from the issuance of notes payable to related parties, repaid $294,483 of principal on notes payable to related parties, repaid $78,855 of principal on notes payable, and received $190,057 of notes payable proceeds under the Paycheck Protection Program (“PPP”) and Economic Injury Disaster Loan (“EIDL”) program. Both the PPP and EIDL are financial programs under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) signed into law on March 27, 2020 to provide economic relief to small businesses adversely impacted by COVID-19.
Assets
At June 30, 2023 and December 31, 2022, we had total assets of $2,112,699 and $1,632,528, respectively. Assets primarily consist of the cash accounts held by the Company, inventory, vendor deposits, accounts receivable, royalty receivable and a right-to-use asset. In 2023, the Company’s cash increased by $697,084, accounts receivable, net, increased by $86,144, royalty receivable increased by $137,725, inventories, net, increased by $84,881, deposits increased by $5,420 and vendor deposits decreased by $518,763.
Liabilities
At June 30, 2023 and December 31, 2022, we had total liabilities of $3,477,555 and $3,951,020, respectively. Liabilities primarily consist of notes payable, convertible notes payable, notes payable – related parties, contract liabilities, customer deposits and accounts payable and accrued expenses. In 2023, notes payable decreased by $161,583, convertible notes payable decreased by $146,120, notes payable – related parties decreased by $264,595, contract liabilities increased by $883,334, customer deposits decreased by $537,827 and accounts payable and accrued expenses decreased by $236,306.
Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the Company will continue to realize its assets and discharge its liabilities in the normal course or business. The Company reported net income of $953,636 during the six months ended June 30, 2023, and prior to the three months ended March 31, 2023, the Company has incurred losses since inception, including $73,508 during the six months ended June 30, 2022, resulting in an accumulated deficit of $9,465,060 and negative working capital of $942,953 as of June 30, 2023. The Company is in default in certain of its outstanding debt. As of June 30, 2023, the Company had approximately $719,505 in cash and cash equivalents, which will not be sufficient to fund the operations and strategic objectives of the Company over the next twelve months from the date of issuance of these financial statements. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.
The Company will be required to obtain additional financing and capital and expects to satisfy its cash needs primarily from the additional issuance of equity securities or indebtedness in order to sustain operations until it can achieve profitability and positive cash flows, if ever. There can be no assurances, however, that adequate additional funding will be available on favorable terms, or at all. If such funds are not available in the future, the Company may be required to delay, significantly modify or terminate its operations, all of which could have a material adverse effect on the Company.
Availability of Additional Funds
Our capital requirements going forward will consist of financing our operations until we are able to reach a level of revenues and gross margins adequate to equal or exceed our ongoing operating expenses. We do not have any credit agreement or source of liquidity immediately available to us.
Since inception, our operations have primarily been funded through proceeds from equity and debt financing. At June 30, 2023, we had $719,505 of cash on hand. Although we believe that we have access to capital resources, there are no commitments in place for new financing as of the filing date of this Quarterly Report on Form 10-Q and there can be no assurance that we will be able to obtain funds on commercially acceptable terms, if at all. We expect to have ongoing needs for working capital in order to (a) fund operations; plus (b) fund strategic acquisitions. To that end, we may be required to raise additional funds through equity or debt financing. However, there can be no assurance that we will be successful in securing additional capital. If we are unsuccessful, we may need to (a) initiate cost reductions; (b) forego business development opportunities; (c) seek extensions of time to fund its liabilities, or (d) seek protection from creditors.
In addition, if we are unable to generate adequate cash from operations, and if we are unable to find sources of funding, it may be necessary for us to sell all or a portion of our assets, enter into a business combination, or reduce or eliminate operations. These possibilities, to the extent available, may be on terms that result in significant dilution to our unitholders or that result in our unitholders losing all of their investment in our Company.
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If we are able to raise additional capital, we do not know what the terms of any such capital raising would be. In addition, any future sale of our equity securities would dilute the ownership and control of your units and could be at prices substantially below prices at which our units currently trade. Our inability to raise capital could require us to significantly curtail or terminate our operations. We may seek to increase our cash reserves through the sale of additional equity or debt securities. The sale of convertible debt securities or additional equity securities could result in additional and potentially substantial dilution to our unitholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity. In addition, our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties.
Our unaudited condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplate our continuation as a going concern and the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.
Equity Purchase Agreement and Registration Statement
On February 19, 2020 (“Execution Date”), the Company entered into an Equity Purchase Agreement (the “Equity Purchase Agreement”) with DiamondRock, LLC (“Selling Unitholder”) pursuant to which, upon the terms and subject to the conditions thereof, the Selling Unitholder is committed to purchase shares of the Company’s common units (the “Put Shares”) at an aggregate price of up to $5,000,000 (the “Maximum Commitment Amount”) over the course of the commitment period. Pursuant to the terms of the Equity Purchase Agreement, the commitment period will commence upon the initial effective date of this registration statement and will end on the earlier of (i) the date on which the Selling Unitholder has purchased Common Units from us pursuant to the Equity Purchase Agreement (“Put Shares”) equal to the Maximum Commitment Amount, (ii) the date on which there is no longer an effective registration statement for the Put Shares, (iii) 24 months after the initial effectiveness of this registration statement, or (iv) written notice of termination by us to the Selling Unitholder (which will not occur at any time that the Selling Unitholder holds any of the Put Shares).
From time to time over the term of the Equity Purchase Agreement, commencing on the date on which a registration statement registering the Put Shares (the “Registration Statement”) becomes effective, the Company may, in its sole discretion, provide the Selling Unitholder with a put notice (each a “Put Notice”) to purchase a specified number of the Put Shares (each a “Put Amount Requested”) subject to the limitations discussed below and contained in the Equity Purchase Agreement. Within one trading day of the date that the Put Notice is deemed delivered (“Put Date”) pursuant to terms of the Equity Purchase Agreement, the Company shall deliver, or cause to be delivered, to the Selling Unitholder estimated Put Shares equal to the investment amount (“Investment Amount”) indicated in the Put Notice divided by the Initial Pricing per share (the “Estimated Put Shares”) as DWAC Shares. Within one trading day following the Put Date, Selling Unitholder shall pay the Investment Amount to the Company by wire transfer of immediately available funds to an escrow account to be established with the escrow agent for the benefit of the Company.
At the end of the five trading days following the clearing date associated with the applicable Put Notice (“Valuation Period”), the purchase price (“Purchase Price”) shall be computed as 85% of the average daily volume weighted average price of the common units during the Valuation Period and the number of Put Shares shall be determined for a particular Put as the Investment Amount divided by the Purchase Price. If the number of Estimated Put Shares (Investment Amount divided by Initial Pricing) initially delivered to Selling Unitholder is greater than the number of Put Shares (Investment Amount divided by Purchase Price) purchased by the Selling Unitholder pursuant to such Put, then, within two trading days following the end of the Valuation Period, the Selling Unitholder shall deliver to the Company any excess Estimated Put Shares associated with such Put. If the number of Estimated Put Shares (Investment Amount divided by Initial Pricing) delivered to the Selling Unitholder is less than the Put Shares purchased by the Selling Unitholder pursuant to a Put, then within two trading days following the end of the Valuation Period the Company shall deliver to the Selling Unitholder the difference between the Estimated Put Shares and the Put Shares issuable pursuant to such Put.
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The Put Amount Requested pursuant to any single Put Notice must have an aggregate value of at least $25,000, and cannot exceed the lesser of (i) $250,000, and (ii) 150% of the average daily trading value of the common units in the five trading days immediately preceding the Put Notice.
In order to deliver a Put Notice, certain conditions set forth in the Equity Purchase Agreement must be met, as provided therein. In addition, the Company is prohibited from delivering a Put Notice if: (i) the sale of Put Shares pursuant to such Put Notice would cause the Company to issue and sell to Selling Unitholder, or Selling Unitholder to acquire or purchase, a number of shares of the Company’s common units that, when aggregated with all shares of common units purchased by Selling Unitholder pursuant to all prior Put Notices issued under the Equity Purchase Agreement, would exceed the Maximum Commitment Amount; or (ii) the issuance of the Commitment Shares pursuant to a request for the Commitment Shares would cause the Company to issue and sell to Selling Unitholder, or Selling Unitholder to acquire or purchase, an aggregate number of shares of common units that would result in Selling Unitholder beneficially owning more than 4.99% of the issued and outstanding shares of the Company’s common units.
On the Execution Date, the Company also entered into a registration rights agreement (the “Registration Rights Agreement”) with Selling Unitholder pursuant to which the Company is obligated to file the Registration Statement to register the resale of the Put Shares. Pursuant to the Registration Rights Agreement, the Company must (i) file the Registration Statement within 30 calendar days from the Execution Date, (ii) use reasonable best efforts to cause the Registration Statement to be declared effective under the Securities Act within 90 calendar days after the filing thereof, and (iii) use its reasonable best efforts to keep such Registration Statement continuously effective under the Securities Act until all of the Put Shares have been sold thereunder or pursuant to Rule 144.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. Our significant accounting policies are described in notes accompanying the financial statements. The preparation of the financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. Estimates are based on information available as of the date of the financial statements, and accordingly, actual results in future periods could differ from these estimates. Significant judgments and estimates used in the preparation of the financial statements apply critical accounting policies described in the notes to our financial statements.
We consider our recognition of revenues, accounting for the consolidation of operations, accounting for stock-based compensation, accounting for intangible assets and related impairment analyses, the allowance for doubtful accounts and accounting for equity transactions, to be most critical in understanding the judgments that are involved in the preparation of our consolidated financial statements.
Together with our critical accounting policies set out below, our significant accounting policies are summarized in Note 2 of our unaudited condensed financial statements as of and for the six months ended June 30, 2023.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
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Accounts Receivable and Royalty Receivable
The Company analyses the collectability of accounts receivable from continuing operations each accounting period and adjusts its allowance for doubtful accounts accordingly. A considerable amount of judgment is required in assessing the realization of accounts receivable, including the creditworthiness of each customer, current and historical collection history and the related aging of past due balances. The Company evaluates specific accounts when it becomes aware of information indicating that a customer may not be able to meet its financial obligations due to deterioration of its financial condition, lower credit ratings, bankruptcy or other factors affecting the ability to render payment. As of June 30, 2023, the Company had no allowance for bad debt.
Inventory
Inventory consisting of finished products is stated at the lower of cost or net realizable value. At each balance sheet date, the Company evaluates its ending inventories for excess quantities and obsolescence. This evaluation primarily includes an analysis of forecasted demand in relation to the inventory on hand, among consideration of other factors. The physical condition (e.g., age and quality) of the inventories is also considered in establishing its valuation. Based upon the evaluation, provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis of the respective inventories. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from the amounts that the Company may ultimately realize upon the disposition of inventories if future economic conditions, customer inventory levels, product discontinuances, sales return levels or competitive conditions differ from the Company’s estimates and expectations. As of June 30, 2023, the Company had no provision for obsolescence.
Leases
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02 (Topic 842). Topic 842 amended several aspects of lease accounting, including requiring lessees to recognize leases with a term greater than one year as a right-of-use asset and corresponding liability, measured at the present value of the lease payments. In July 2018, the FASB issued supplemental adoption guidance and clarification to Topic 842 within ASU 2018-10 “Codification Improvements to Topic 842, Leases” and ASU 2018-11 “Leases (Topic 842): Targeted Improvements.” The new guidance aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. A modified retrospective application is required with an option to not restate comparative periods in the period of adoption.
The Company, effective January 1, 2019 has adopted the provisions of the new standard. The Company decided to use the practical expedients available upon adoption of Topic 842 to aid the transition from current accounting to provisions of Topic 842. The package of expedients will effectively allow the Company to run off existing leases, as initially classified as operating and classify new leases after implementation under the new standard as the business evolves.
The Company has an operating lease principally for warehouse and office space. Management evaluates each lease independently to determine the purpose, necessity to its future operations in addition to other appropriate facts and circumstances.
The Company adopted Topic 842 using a modified retrospective approach for its existing lease at January 1, 2019. The adoption of Topic 842 impacted the Company’s balance sheet by the recognition of the operating lease right-of-use assets and the liability for operating leases. The lease liability is based on the present value of the remaining lease payments, discounted using a market based incremental borrowing rate as the effective date of January 1, 2019 using current estimates as to lease term including estimated renewals for each operating lease. As of January 1, 2019, the Company recorded an adjustment of approximately $386,614 to operating lease right-to-use asset and the right to use lease liability.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry specific guidance. This new standard requires a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The FASB subsequently issued the following amendments to ASU No. 2014-09 that have the same effective date and transition date: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The Company adopted these amendments with ASU 2014-09 (collectively, the new revenue standards).
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The new revenue standards became effective for the Company on January 1, 2018, and were adopted using the modified retrospective method. The adoption of the new revenue standards as of January 1, 2018 did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify any accounting changes that impacted the amount of reported revenues with respect to its product revenues, no adjustment to retained earnings was required upon adoption.
The Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the customer. Royalty revenues consist of license and sublicense agreements to use the Company’s intellectual property in exchange for a sales-based royalty. Royalty revenue is recognized over time as the performance obligations are satisfied by licensees and sublicensees through sales of licensed products. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.
Unit-Based Compensation
Unit-based payments to employees, including grants of employee options are recognized as compensation expense in the financial statements based on their fair values, in accordance with FASB Accounting Standards Codification (“ASC”) Topic 718. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). The Company had no options or unit equivalents granted or outstanding for all periods presented. The Company may issue units as compensation in future periods for employee services.
The Company may issue restricted units to consultants for various services. Cost for these transactions will be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is to be measured at the earlier of: (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached, or (ii) the date at which the counterparty’s performance is complete. The Company may issue units as compensation in future periods for services associated with the registration of the units.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company, we are not required to include disclosure under this item.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2023. Based on such review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2023, the disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, because of a continued material weakness in our internal control over financial reporting, as described below.
The Company did not maintain an effective financial reporting process to prepare financial statements in accordance with generally accepted accounting principles in the United States. Specifically, our process lacked timely and complete financial statement reviews and procedures to ensure all required disclosures were made in our financial statements. Also, the Company lacked documented procedures including documentation related to testing of internal controls and entity-level controls, disclosure review, and other analytics. Furthermore, the Company lacked sufficient personnel to properly segregate duties.
A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness; yet important enough to merit attention by those responsible for oversight of the Company’s financial reporting.
Remedial Efforts Related to the Material Weakness in Internal Control
In an effort to address the material weakness, we have implemented, or are in the process of implementing, the following remedial steps:
| ● | We intend to establish an audit committee of the board of directors as soon as practicable. We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditors, evaluating our accounting policies and our system of internal controls. |
| ● | We intend to establish an internal audit function and engage a public accounting firm to perform internal audit services under an outsourcing arrangement. We intend for the internal audit service provider to review the policies, procedures and systems to address the material weakness. |
| ● | In addition to supervising all financial aspects of the Company, our Chief Financial Officer is also supervising our Information Technology (“IT”) functions to better facilitate the coordination and development of improved systems to support our financial reporting process. |
| ● | In furtherance of timely and complete financial statement reviews and procedures to ensure all required disclosures are made in our financial statements and promoting the segregation of duties, we have (i) hired experienced accounting personnel and expect to hire additional experienced accounting personnel, (ii) hired staff to handle the increased workload associated with the reporting structure in place and continue to recruit additional staff in key areas including financial reporting and tax accounting as well as we have engaged temporary staff and (iii) hired consultants to assist in achieving accurate and timely reporting, including hiring additional consultants to assist in the development and enhancement of IT infrastructure systems to support accounting. |
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| ● | We have provided and will continue to provide training to our finance and accounting personnel for timely and accurate preparation and management review of documentation to support our financial reporting and period-end close procedures including documentation related to testing of internal controls and entity-level controls, disclosure review, and other analytics. |
| ● | We have been conducting and continue to conduct the assessment and review of our accounting general ledger system to further identify changes that can be made to improve our overall control environment with respect to journal entries. We are continuing to implement more formal procedures related to the review and approval of journal entries. |
| ● | We have been formalizing the periodic account reconciliation process for all significant balance sheet accounts. We are continuing to implement more formal review of these reconciliations by our accounting management and we will increase the number of supervisory personnel to ensure that reviews are performed. |
We believe these additional internal controls will be effective in remediating the material weakness described above; however, we may determine to modify the remediation plan described above by adding remedial steps to or modifying or no longer pursuing (if determined to be unnecessary in remediating the material weakness) the remedial steps set forth above. Until the remediation steps set forth above are fully implemented, the material weakness described above will continue to exist. Notwithstanding, through the use of external consultants and the review process, management believes that the financial statements and other information presented herewith are materially correct.
The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. However, the Company’s management, including its CEO and CFO, does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
ITEM 1. LEGAL PROCEEDINGS
There are no current, pending or threatened legal proceedings against the Company.
ITEM 1A. RISK FACTORS
Risk factors describing the major risks to our business can be found under Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the year ended December 31, 2022. There has been no material change in our risk factors from those previously discussed in the Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable to our operations.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
|
Exhibit Number |
Description | |
| 31.1* | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act | |
| 31.2* | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act | |
| 32.1** | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | Inline XBRL Instance Document * | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document * | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document * | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document * | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document * | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) * |
| * | Filed herewith |
| ** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| VPR BRANDS, LP | ||
| Dated: August 14, 2023 | By: | /s/ Kevin Frija |
| Chief Executive Officer | ||
| (principal executive officer, | ||
| principal financial officer and | ||
| principal accounting officer) | ||
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