VPRB VPR Brands LP (QB)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2024

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission file number 000-54545

VPR Brands, LP

(Exact name of registrant as specified in its charter)

1141 Sawgrass Corporate Parkway, Sunrise, FL

33323

(Address of principal executive offices) (zip code)

(954) 715-7001

(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:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒  Yes ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒  Yes ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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.

TABLE OF CONTENTS

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, 2023 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.

PART I – FINANCIAL INFORMATION

VPR BRANDS, LP

CONDENSED BALANCE SHEETS

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

VPR BRANDS, LP

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

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

VPR BRANDS, LP

CONDENSED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL SURPLUS/(DEFICIT)

(Unaudited)

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

VPR BRANDS, LP

CONDENSED STATEMENTS OF CASH FLOWS  

(Unaudited)

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

VPR BRANDS, LP

NOTES TO CONDENSED FINANCIAL STATEMENTS

For the three AND SIX months  ended June 30, 2024 AND 2023

(Unaudited)

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 19, 2024.

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:

Results of Operations for the Three Months Ended June 30, 2024 Compared to the Three Months Ended June 30, 2023

Revenues

Our revenues from product sales for the three months ended June 30, 2024 and 2023 were $ 1,611,190 and $ 1,196,805, respectively. Royalty revenues for the three months ended June 30, 2024 and 2023 were $157,943 and $ 712,724, respectively. The decrease in total revenue for the three months ended June 30, 2024, compared to June 30, 2023, was primarily due to the initial fee from the royalty agreement entered into in March 2023, which was still being amortized during the three months ended June 30, 2023. This decrease was partially offset by an increase in product sales from expanded operations during the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

Cost of Sales

Cost of sales for the three months ended June 30, 2024 and 2023 was $ 1,317,644 and $ 814,437, respectively. Gross margins decreased to 26% for the three months ended June 30, 2024 compared to 32% for the three months ended June 30, 2023, due to increased portion of product sales mix attributable to lower margin products.

Operating Expenses

Operating expenses for the three months ended June 30, 2024 were $ 680,765 as compared to $ 452,903 for the three months ended June 30, 2023. The increase in operating expenses for the three months ended June 30, 2024 compared to the same period in 2023, was primarily attributed to higher marketing, payroll, and professional fees as the company continues to expand.

Other Income

Net other income for the three months ended June 30, 2024 was $ 465,117 compared to net other expense of $ 286,133 for the three months ended June 30, 2023. The increase in other income for the three months ended June 30, 2024 compared to the same period in 2023, was primarily due to decrease in interest expenses as loans are being paid off.

Net Income

As a result of the factors mentioned above, net income decreased by $752,270, from $928,322 for the six months ended June 30, 2023, to $176,052, for the six months ended June 30, 2024.

Results of Operations for the six Months Ended June 30, 2024 Compared to the six Months Ended June 30, 2023

Revenues

Our revenues from product sales for the six months ended June 30, 2024 and 2023 were $ 2,794,891 and $ 4,236,159, respectively. Royalty revenues for the six months ended June 30, 2024 and 2023 were $ 493,001 and $ 754,391, respectively. The decrease in total revenue for the six months ended June 30, 2024, compared to the same period in 2023, was primarily due to the initial fee from the royalty agreement entered into in March 2023, which was still being amortized during the six months ended June 30, 2023, as well as a large distribution sales order in the first quarter of 2023.

Cost of Sales

Cost of sales for the six months ended June 30, 2024 and 2023 was $ 2,359,567 and $ 3,371,785, respectively. Gross margins decreased to 28% for the six months ended June 30, 2024 compared to 32% for the six months ended June 30, 2023, due to increased portion of product sales mix attributable to lower margin products.

Operating Expenses

Operating expenses for the six months ended June 30, 2024 were $ 1,327,631 as compared to $ 857,564 for the six months ended June 30, 2023. The increase in operating expenses for the three months ended June 30, 2024 compared to the same period in 2023, was primarily attributed to higher marketing, payroll, and professional fees as the company continues to increase its operations.

Other Income

Net other income for the six months ended June 30, 2024 was $ 907,124 compared to net other expense of $ 192,435 for the six months ended June 30, 2023. The increase in other income for the six months ended June 30, 2024 compared to the same period in 2023, was primarily due to higher settlement payments received and a decrease in interest expenses as loans are being paid off.

Net Income

As a result of the factors mentioned above, net income decreased by $574,525, from $953,636 for the six months ended June 30, 2023, to $379,111 for the six months ended June 30, 2024.

Liquidity and Capital Resources

The following table sets forth a summary of our net cash flows for the periods indicated:

Cash used in operations was $ 94,696 for six months ended June 30, 2024 as compared to cash flow provided by operations of $ 1,239,700 in six months ended June 30, 2023.

During the six months ended June 30, 2024, the Company repaid $189,973 of principal on convertible notes payable, repaid $165,810 of principal on notes payable to related parties and repaid $ 21,334 of lease liability principal.

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.

Assets

At June 30, 2024 and December 31, 2023, we had total assets of $3,218,641 and $3,191,246, 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. During the six months ended June 30, 2024. the Company’s accounts receivable increased by $311,264, royalty receivable decreased by $28,909, inventory increased by $132,779, net of obsolesce and vendor deposits increased by $134,236.

Liabilities

At June 30, 2024 and December 31, 2023, we had total liabilities of $2,225,220 and $2,576,936, respectively.  These liabilities primarily consist of notes payable, convertible notes payable, tax liabilities, refund liabilities, customer deposits, and accounts payable and accrued expenses. Between June 30, 2024, and December 31, 2023, customer deposits, accounts payable, and accrued expenses (both to unrelated and related parties) decreased by a total of $107,729. Convertible notes and notes payable to unrelated and related parties also decreased by a total of $355,783. Additionally, the right-of-use obligation decreased by $13,026, and the refund liability decreased by $3,885, while the tax liability increased by $128,707.

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, 2024, we had $ 1,295,447 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.

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.

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 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 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, 2024.

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, 2023 as filed with the Securities and Exchange Commission. The results of operations for the six months ended June 30, 2024 are not necessarily indicative of the results to be expected for future periods or the full year.

Use of Estimates

GAAP requires the Company to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses, cash flows and the related footnote disclosures during the period. On an on-going basis, the Company reviews and evaluates its estimates and assumptions. Actual results could differ from these estimates. 

Financial Condition

As reflected in the financial statements, the Company generated negative cash flows used in operations of $94,696 for the six months ended June 30, 2024 and had positive working capital of $ 1,087,280 and had cash of $1,295,447 as of June 30, 2024. These factors serve to mitigate the conditions that historically raised substantial doubt about the Company’s ability to continue as a going concern. The Company believes that the Company has sufficient cash and positive cash flows to meet its obligations for a minimum of twelve months from the date of issuance of these financial statements.

Cash 

Cash is carried at cost and represents cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments. The Company had no cash equivalents on June 30, 2024 and December 31, 2023. The Company’s cash is held at major commercial banks, which may at times exceed the Federal Deposit Insurance Corporation (“FDIC”) limit. To date, the Company has not experienced any losses on its invested cash. On June 30, 2024 and December 31, 2023, the Company had approximately $ 560,442 and  $ 947,184, respectively, of cash in excess of FDIC limits of $250,000. Any loss incurred or a lack of access to such funds above the FDIC limit could have a significant adverse impact on the Company’s financial condition, results of operations and cash flows.

Accounts Receivable and Royalty Receivable

The Company recognizes an allowance for expected credit losses in accordance with the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses.” This ASU sets forth a current expected credit loss model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. An allowance for credit losses is established as losses are estimated to have occurred through a provision for bad debts charged to earnings. This evaluation is inherently subjective and requires estimates that are susceptible to significant revisions as more information becomes available.

As of June 30, 2024 and December 31, 2023, the Company had an allowance for expected credit loss of $ 21,854 and $ 10,925, respectively.

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, 2024 and December 31, 2023, the provision for potential   inventory obsolescence was $ 30,086 and $ 0, respectively.

Leases

The Company applied the FASB’s Accounting Standards Codification (“ASC”) Topic 842, Leases (Topic 842) to arrangements with lease terms of 12 months or more. Operating lease right of use assets (“ROU”) represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company use an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the statements of operations. 

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 revenue when the risk gets transferred to the customer which occurs at a point in time, typically upon shipment of promised 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 risk got transferred to the customer which occurred at a point in time, typically upon shipment of promised goods 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.

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 year ended December 31, 2023, the Company received cash payments totaling $3,000,000 for the prepayment of royalties pursuant to a license agreement executed on January 2, 2023. The license agreement provides for monthly royalties to the Company totaling 5% of gross sales of licensed products by licensee and provides the licensee exclusive use of certain trademark and patent assets for an initial term of six months commencing March 2023 and expiring in September 2023. The Company recognized the prepaid royalties over the initial term of exclusivity. The license agreement required a monthly minimum royalty payments of $500,000 to maintain exclusivity on a month-to-month basis beyond September 2023. The minimum royalty payments were not met, so the agreement continued on a non-exclusive basis, with monthly royalties to the Company totaling 5% of gross sales of licensed products by the licensee and still and provides the licensee with non-exclusive use of certain trademark and patent assets.

The sublicense agreement executed in March 2023 provided for monthly royalties to the Company totaling 5% of gross sales of licensed products by sublicensee and provides the sublicensee exclusive use of certain trademark and patent assets in exchange for minimum monthly royalty payments totaling $250,000 beginning June 2023.    

During the year ended December 31, 2023, the sublicensee, licensee, and Company agreed that the Company would not require the minimum monthly royalty payments. Instead, sublicensee would continue to pay 5% of gross sales as royalty, and the licensee would match this royalty payment if their calculated royalty would have been less than what the sublicensee paid. The Company recognizes sublicense royalty revenue on the basis of royalty statements for the period.

Voluntary Recall 

In February 2024, the Company initiated a voluntary recall of approximately 62,200 lighters due to a missing child safety feature. Under ASC 606, these products are not eligible for revenue recognition, as revenue cannot be recognized for amounts that are not expected to be entitled. Consequently, the Company recorded this as a refund liability. For the year ended December 31, 2023, the total impact of the recall, amounting to $198,068, has been recognized against revenues and receivables for potential credits associated with the recalled products.

During the six months ended June 30, 2024, $418 was refunded to retail consumers in cash, and $79,670 in credits was issued to wholesale and distributor customers. Only $3,467 of the credits were utilized during the six months ended June 30, 2024, the remaining unutilized credits are still included in the refund liability. The Company anticipates issuing refunds related to the recall throughout the year and will continue to evaluate potential losses.

As of June 30, 2024, and December 31, 2023, the refund liability was $182,600 and $ 186,485, respectively.

The following table   provides information about accounts receivable, royalty receivable from contracts with customers and the refund liability as of June 30, 2024 and December 31, 2023:

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 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 accounts for convertible instruments in accordance with ASU 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This update significantly simplifies the accounting for convertible instruments by eliminating the requirement to bifurcate embedded conversion options from their host instruments, unless the conversion feature independently meets the definition of a derivative under ASC 815, Derivatives and Hedging Activities. Under ASC 815, a conversion feature is treated as a derivative only if its economic characteristics and risks are not clearly and closely related to those of the host contract, and other specific conditions are met.

When it is determined that the embedded conversion options do not require bifurcation, the entire convertible instrument is accounted for as a single liability at amortized cost. Discounts or premiums on convertible instruments are recognized based on the difference between the proceeds received and the principal amount, and are amortized over the life of the instrument using the effective interest method.

In the rare instances where a conversion option is bifurcated and accounted for as a derivative, the Company would apply 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 Per Unit

The Company computes net income per unit in accordance with FASB ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the statement of operations. Basic EPS is computed by dividing net income/(loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method, and convertible notes, using the if-converted method. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive. Approximately 6,648,898 units underlying convertible notes were excluded from the calculation of diluted loss per unit for the six months ended June 30, 2023 because their effect was antidilutive. 6,648,898 units underlying convertible debt were dilutive for the three months ended June 30, 2023 and were included in the calculation of diluted income per unit for the three months ended June 30, 2023.

Approximately 2,912,170 units underlying convertible notes were excluded from the calculation of diluted loss per unit for the three and six months ended June 30, 2024 because their effect was antidilutive.

The following summarizes the calculation of basic and diluted income per unit for the three and six months ended June 30, 2024 and June 30, 2023:

Provision for Income Taxes 

The Company has recorded income taxes in accordance with ASC 740, “Income Taxes.” This standard necessitates the recognition of deferred tax liabilities and assets for the expected future tax consequences of differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases.

The Company follows the provisions of FASB ASC 740-10, “Uncertainty in Income Taxes”. Certain recognition thresholds must be met before a tax position is recognized in the financial statements. An entity may only recognize or continue to recognize tax positions that meet a “more-likely-than-not” threshold. The Company does not believe it has any uncertain tax positions as of June 30, 2024 and December 31, 2023 that would require either recognition or disclosure in the accompanying unaudited financial statements.

During the three and six months ended June 30, 2023, the Company had minimal net income and a history of losses, and did not anticipate having a tax liability, so no provision for income tax was recorded.

The items accounting for the difference between income taxes at the effective Federal statutory rate and the provision for income taxes for the three and six months ended June 30, 2024 were as follows:

The provision for income taxes, effective tax rate, statutory federal income tax rate, and rate reconciliation for the three and six months ended June 30, 2024, and 2023 were as follows:

The Company’s effective tax rate for the three and six months ended June 30, 2024 was higher than the statutory federal income tax rate, primarily due to state income taxes. Additionally, the effective tax rate for the three and six months ended June 30, 2024 was higher compared to the period in 2023 because the Company had losses to offset income, which were fully utilized during 2023.

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.

In December 2023, the FASB issued ASU 2023-09, Income Taxes—Improvements to Income Tax Disclosures. This guidance enhances the transparency and decision usefulness of income tax disclosures. More specifically, the amendments relate to the income tax rate reconciliation and income taxes paid disclosures and require 1) consistent categories and greater disaggregation of information in the rate reconciliation and 2) income taxes paid disaggregated by jurisdiction. This guidance is effective for fiscal years beginning after December 15, 2024.

In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 47020) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 81540): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which is intended to simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The guidance allows for either full retrospective adoption or modified retrospective adoption. The guidance became effective for the Company as of January 1, 2024. The adoption of this standard did not have a material impact on our financial statements, as our existing convertible instruments issued prior to January 1, 2024, did not have bifurcated conversion features and were past due by the effective date. Future issuances of convertible instruments will comply with the new standard, which may simplify both measurement and disclosure of these instruments.

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, 2024. Based on such review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2024, 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 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, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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, 2023. 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

(a) None.

(b) There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors since the Company last provided disclosure in response to the requirements of Item 407(c)(3) of Regulation S-K. 

(c) During the quarter ended June 30, 2024, no director or officer of the Company adopted or terminated a contract, instruction or written plan for the purchase or sale of securities of the Company intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) and/or a non-Rule 10b5-1 trading arrangement. 

ITEM 6. EXHIBITS

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.