Veroni Brands Corp. - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2020

For the transition period from _____ to ______

000-55735

(Commission file number)

VERONI BRANDS CORP.

(Exact name of registrant as specified in its charter)

2275 Half Day Rd. Suite 346, Bannockburn, IL 60015

(Address of principal executive offices) (Zip Code)

(888)794-2999

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None

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 [X] 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 [X] No [  ]

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

If an emerging growth company, indicate by the check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 27,085,028 shares as of November 20, 2020

VERONI BRANDS CORP.

FORM 10-Q

FOR THE QUARTER ENDED

September 30, 2020

INDEX

Veroni Brands Corp.

BALANCE SHEETS

September 30, 2020 and December 31, 2019

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

* Derived from audited financial statements for the year ended December 31, 2019

Veroni Brands Corp.

STATEMENTS OF OPERATIONS

Unaudited

** Less than $.01

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

Veroni Brands Corp.

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the nine months ended September 30, 2019 and September 30, 2020

Unaudited

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

Veroni Brands Corp.

STATEMENTS OF CASH FLOW

For the nine months ended September 30, 2020 and 2019

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

VERONI BRANDS CORP.

Notes to Unaudited Financial Statements

Note 1 - Nature of Operations and Financial Condition

Veroni Brands Corp. (the “Company”) was incorporated on December 7, 2016 under the laws of the state of Delaware to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisition.

The Company has been formed to acquire, operate, develop, grow and import premium European products into the U.S. market. Veroni Brands was created to search out desirable premium products across Europe and make them accessible to discerning consumers in the U.S. Veroni Brands strives to import the extraordinary and delight its consumers with experiences that had previously only been attainable in Europe. In January 2018, the Company became an exclusive importer and distributor of “Iron Energy” by Mike Tyson. The beverage became available to consumers in select Chicago area markets in May 2018. During 2019, the Company built the distribution of the Iron Energy product nationwide but demand never grew to acceptable levels and the product was discontinued in April 2020. Beginning in February 2019, the Company expanded its import and distribution network with the distribution of chocolate products and significantly grew its sales and distribution volumes. The Company entered into long term supply agreements with major U.S national retailers to import chocolate products under its “Sweet Desire” brand as well as “Private Label Brands” that are currently being sold in over 20,000 retail locations across the U.S. The Company takes pride in the variety of consumer products it imports and is proud to share them with its consumers nationwide. The Company’s recent expansion of the import and distribution of snacks, chocolate and chocolate related products that are currently being sold to U.S. national retailers presents the Company with a substantial growth opportunity to introduce to its retail partners to many other consumer products and to increase its network of retailers.

Basis of presentation: unaudited interim financial information

The accompanying interim condensed financial statements are unaudited. In the opinion of management, the accompanying unaudited condensed financial statements contain all of the normal recurring adjustments necessary to present fairly the financial position and results of operations as of and for the periods presented. The interim results are not necessarily indicative of the results to be expected for the full year or any future period.

Certain information and footnote disclosures normally included in the condensed financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The Company believes that the disclosures are adequate to make the interim information presented not misleading. These condensed financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Report on Form 10-K filed on April 14, 2020 for the years ended December 31, 2019, and 2018.

Going Concern

The Company has generated revenue this year of approximately $4.8 million and has income of $117,650 for the nine months ending September 30, 2020 and has an accumulated deficit of $789,350 since its inception. As of September 30, 2020, the Company had a cash balance available of approximately $147,346 and working capital of $315,552 which is not sufficient to meet its operating requirements for the next twelve months. Therefore, the Company’s ability to continue as a going concern is dependent on its ability to grow its revenue and generate sufficient cash flows from operations to meet its obligations and/or obtaining additional financing from its shareholders or other sources, as may be required.

The Company is continuing to evaluate various financing options in order to continue the funding of the expansion of its operations, the products being offered and its customer base.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern; however, the above condition raises substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

VERONI BRANDS CORP.

Notes to Unaudited Financial Statements

Note 2 – Summary of Significant Accounting Policies

Reclassifications

Certain reclassifications have been made in the 2019 financial statements to conform to the 2020 presentation. These reclassifications have no effect on net loss for 2019.

Advertising

The Company’s policy is to expense advertising costs as incurred. Advertising expense for the nine months ending September 30, 2020 and 2019 is $28,685 and $45,551, respectively.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make 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, and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the carrying amount of inventory and associated reserves, and allowances and reserves in regards to receivables and revenue. Actual results could differ from those estimates.

Revenue Recognition

The Company’s significant accounting policy for revenue was updated as a result of the adoption of ASU Topic 606. The Company has adopted the new standard on January 1, 2019 and has used the modified retrospective method. The majority of the Company’s business is ship and bill. Based on management’s analysis, the Company did not identify a cumulative effect adjustment to retained earnings at December 31, 2018. The Company recognizes revenue in accordance with the five-step model as prescribed by ASU 606 in which the Company evaluates the transfer of promised goods or services and recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects to be entitled to receive in exchange for those goods or services.

To determine revenue recognition for the arrangements that the Company determines are within the scope of ASU 606, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. See Note 12 for revenue disaggregated by product line.

The majority of the Company’s revenue is recognized when it satisfies a single performance obligation by transferring control of its products to a customer. Control is generally transferred when the Company’s products are either picked up or delivered based on the terms contained within the underlying contracts or agreements.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and on deposit at banking institutions as well as all highly liquid short-term investments with original maturities of 90 days or less.

Shipping Costs

Costs associated with shipping product to customers aggregating approximately $188,484 and $130,373 for the nine months ended September 30, 2020 and 2019, respectively, is included in warehouse and selling expenses.

VERONI BRANDS CORP.

Notes to Unaudited Financial Statements

Note 2 – Summary of Significant Accounting Policies (Continued)

Concentration of Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. The Company places its cash with high quality banking institutions. The Company did not have cash balances in excess of the Federal Deposit Insurance Corporation limit as of September 30, 2020 and December 31, 2019, respectively.

Accounts Receivable and Concentration of Credit Risk

Accounts receivable are recorded at the invoiced amounts less an allowance for doubtful accounts. The allowance for doubtful accounts is based on the Company’s estimate of the amount of probable credit losses in its accounts receivable. The Company determines the allowance for doubtful accounts based upon an aging of accounts receivable, historical experience and management judgment. Accounts receivable balances are periodically reviewed for collectability, and balances are charged off against the allowance when the Company determines that the potential for recovery is remote. An allowance for doubtful accounts of approximately $0 and $2,125 is reserved as of September 30, 2020 and December 31, 2019, respectively.

We are exposed to credit risk in the normal course of business, primarily related to accounts receivable. To limit credit risk, management periodically reviews and evaluates the financial condition of its customers and maintains an allowance for doubtful accounts. As of September 30, 2020, the Company had three customers that comprised approximately 81% or $1,068,143 of its combined accounts receivables and contract receivables with recourse. As of September 30, 2019, the Company had one customer that comprised approximately 68% of its combined accounts receivables and contract receivables with recourse and the combined amount was approximately $838,306.

Distribution Agreements and Supplier Concentration

The Company’s only business line in 2018 was the distribution of “Iron Energy” drink that continued to be part of the Company’s product offering in 2019. The cancelation of the “Iron Energy” drink distribution agreement in 2020 will not significantly affect the company or its revenue.

At the beginning of 2019, the Company established relationships with other European manufacturers that can manufacture a wide range of “panned” products such as nuts, raisin, pretzels, fruits and many other “panned” and healthy snacks items, as well as chocolate bars, multi-flavor truffles, sticks, chocolate cups, 5-bites, chocolate covered gummies, chocolate Easter eggs, custom Christmas chocolate figures as well as Advent calendars and many other products to support demand from the Company’s national retailers.

Vendor Concentration

Currently, the Company is sourcing all its chocolate products from the Millano Group, a related party. The Company has not entered into a distributor agreement but is currently evaluating entering into an agreement with Millano Group. The Company, due to relationships with other European manufacturers could find other sources to replace its chocolate products if the Company terminates Millano Group as its supplier for chocolate products. See Note 10 - Related Party Transactions.

Income Taxes

Under ASC 740, Income Taxes, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when it is more likely than not that some or all of the deferred tax assets will not be realized. As of September 30, 2020 and 2019, there were no net deferred tax assets, as the Company established a 100% valuation allowance, due to the uncertainty of the realization of net operating loss carryforwards prior to their expiration.

VERONI BRANDS CORP.

Notes to Unaudited Financial Statements

Note 2 – Summary of Significant Accounting Policies (Continued)

Loss Per Common Share

Basic loss per common share excludes dilution and is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per common share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the loss of the entity. As of September 30, 2020 and 2019, there are no outstanding dilutive securities.

Fair Value of Financial Instruments

The Company follows guidance for accounting for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Additionally, the Company adopted guidance for fair value measurement related to nonfinancial items that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 inputs are unobservable inputs for the asset or liability. The carrying amounts of financial assets such as cash approximate their fair values because of the short maturity of these instruments.

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents and accounts payable approximate their fair values at September 30, 2020 and 2019 due to their short-term nature and management’s belief that their carrying amounts approximate the amount for which the assets could be sold or the liabilities could be settled.

Share-Based Compensation

The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50, Equity–Based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date. In June 2018, the Financial Accounting Standards Board adopted Accounting Standards Update 2018-07 Compensation – Stock

Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. In that update, ASC 505 has been rescinded in its entirety and share based compensation issued to nonemployees will now fall under ASC 718 and its associated fair value measurements. Due to the Emerging Growth Company (see below) status of the Company, the Company expects it will adopt the update on January 1, 2020.

VERONI BRANDS CORP.

Notes to Unaudited Financial Statements

Note 2 – Summary of Significant Accounting Policies (Continued)

Emerging Growth Company

The Company has elected to be an emerging growth company as defined under the Jumpstart Our Business Startups Act of 2012 (“Jobs Act”). Included with this election, the Company has also elected to use the provisions within the Jobs Act that allow companies that go public to continue to use the private company adoption date rules for new accounting policies. Should the Company obtain revenues in excess of $1 billion on an annual basis, have its non-affiliated market capitalization increase to over $700 million as of the last day of its second quarter, or raise in excess of $1 billion in public offerings of its equity or instruments directly convertible into its equity, it will forfeit its status under the Jobs Act as an emerging growth company.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 provides guidance in GAAP about the recognition of assets and liabilities by lessees for those leases classified as operating leases under GAAP. The guidance requires that a lessee should recognize in the statement of financial position a liability to make lease payments and a right-to-use asset representing the company’s right to use the underlying assets for the term of the lease. The guidance allows a lessee who enter into a lease with a term of 12 months or less to make an accounting policy election to not recognize assets and liabilities. In November 2019, the FASB provided updated guidance that allowed certain entities to delay the adoption of the standard and the provisions of ASU 2016-02 are effective for the fiscal periods beginning after December 15, 2020, and for interim periods within fiscal years beginning after December 15, 2021. Early application is permitted. The Company has not yet elected this accounting guidance and continues to review the effect adoption will have on its financial position and results of operations.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The update also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The update should be applied on a prospective basis. The provisions of ASU 2017-04 are effective for the fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company has not yet elected this accounting guidance.

On June 20, 2018, the FASB issued ASU 2018-07, which simplifies the accounting for share based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. For emerging growth companies, the amendments in ASU 2018-07 are effective for fiscal years beginning after December 15, 2019. The Company adopted the guidance effective January 1, 2020. Through September 30, 2020 the Company had no share-based expenses.

Note 3 – Inventory

Finished Goods inventory consist of “Iron Energy” energy drinks, chocolates, and related products imported from Poland and is stated at the lower of actual cost (first-in, first-out method) or net realizable value. Cost includes all freight (ocean, air and truck) costs to the warehouse, import duties, regulatory and miscellaneous fees. Inventory is as follows:

VERONI BRANDS CORP.

Notes to Unaudited Financial Statements

During the first nine months of 2020, the Company removed beverage product totaling approximately $22,600 from inventory due to reaching the end of its shelf life and became unsaleable.

Note 4 – Prepaid Expenses

Prepaid Inventory

The Company’s foreign suppliers will generally require that the Company pay in advance of an inventory shipment to it from Europe. The Company’s payments to suppliers to secure future delivery, but prior to transfer of title of those shipments, are recorded as prepaid inventory.

Prepaid were as follows:

Note 5 – Notes Payable Other

On February 6, 2019 the Company issued a promissory note in the amount of $150,000, bearing interest at 4 percent monthly or the equivalent of 48 percent per annum rate. The note was repaid in full June 2019. The Company issued to the lender 26,965 shares of the Company’s common stock value at $20,224 lieu of a cash payment of interest.

On February 22, 2019, the Company entered into a promissory note in the amount of $215,000. The note matured on December 31, 2019 and was converted in shares of the Company’s common stock at $0.75 per share during the term of the note. The Company agreed to issue to the lender 150,000 shares of the Company’s common stock on or before December 31, 2019 as a one-time consideration for making the loan in lieu of a cash payment of interest. The common stock issuable under the term of the promissory note was valued at $112,500 with an effective interest rate of 88.5% and was amortized over the term of the note. Through December 31, 2019 approximately $112,500 has been amortized and recorded as Interest Expense. In December 2019 the lender converted the promissory note into 286,667 shares of the Company’s common stock at the conversion price of $0.75 per share.

On March 11, 2019, the Company issued a promissory note in the amount of $65,000. The note accrued interest at 5 percent every 45 days on the unpaid principal balance or the equivalent of 40.6% per annum rate. The promissory note was repaid in full on June 11, 2019. The Company issued to the lender 10,000 shares of the Company’s common stock valued at $7,500 in lieu of a cash payment of interest.

During the first quarter of 2020, the Company entered into an insurance premium financing agreement of $14,859. The note balance as of September 30, 2020 was $3,715 and will be fully repaid in 2020.

Note 6 – Paycheck Protection Program Loan (PPP)

Under the Small Business Administration (“SBA”), the Company applied for the Paycheck Protection Program (“PPP”) loan. These loans are forgiven if used for payroll, payroll benefits, including health insurance and retirement plans, as well as certain rent payments, leases, and utility payments, which are limited to 40% of the loan proceeds, all of which if paid within either 8 weeks or 24 weeks of the receipt of the loan proceeds. At the time of this filing, we anticipate a significant amount of this loan will be forgiven; however, the forgiveness application process is not yet complete. The Company has elected to record these advances under the debt treatment for these loans, under GAAP guidance. Unforgiven portions of these loans will be repaid over 5 years, accruing interest at 1% per annum. The PPP loan has a loan balance of $56,250 as of September 30, 2020.

VERONI BRANDS CORP.

Notes to Unaudited Financial Statements

Note 7 – Economic Injury Disaster Loan (EIDL)

On August 27, 2020, the Company executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business.

Pursuant to that certain Loan Authorization and Agreement (the “SBA Loan Agreement”), the principal amount of the EIDL Loan is up to $150,000, with proceeds to be used for working capital purposes. On September 2, 2020 the Company received $149,900. Interest accrues at the rate of 3.75% per annum. Installment payments, including principal and interest, are due monthly beginning August 27, 2021 (twelve months from the date of the SBA Note (defined below)) in the amount of $720. The balance of principal and interest is payable thirty years from the date of the SBA Note.

In connection therewith, the Company executed (i) a note for the benefit of the SBA (the “SBA Note”), which contains customary events of default and (ii) a Security Agreement, granting the SBA a security interest in all tangible and intangible personal property of the Company, which also contains customary events of default (the “SBA Security Agreement”).

Note 8 – Contract Receivables Liability with Recourse

On February 21, 2019, the Company entered into a factoring agreement with Advance Business Capital d/b/a Interstate Capital for a term of one year. On September 11, 2019, the lender (now doing business as Triumph Business Capital), entered into an amended agreement with the Company which lowered the interest rate charged by the lender from 0.49% for every 10 days to Prime Rate (floor of 5.5%) plus 3%. As of September 30, 2020 and December 31, 2019 the Company owes $657,258 and $1,414,639 respectively, for advances on their receivables. The Company bears all credit risk related to the receivables factored. The Company has given a security interest in substantially all of its assets and the president of the Company, a major shareholder have guaranteed the debt.

Note 9 – Stockholders’ Equity

The Board of Directors is authorized to issue preferred stock by series that will establish the number of shares to be included and fix the designation, powers, preferences and rights of the shares each such series and the qualifications, limitations or restrictions thereof. At September 30, 2020, the Company has not established any series of preferred stock.

The Company is authorized to issue 100,000,000 shares of common stock and 20,000,000 shares of preferred stock.

From January 1 to September 30, 2019 the Company issued 232,997 shares of its common stock at $0.75 per share. 203,000 shares of common stock were issued in a private placement for $152,250 and 29,997 shares were issued for services to a consultant. The Company recorded 150,000 shares of common stock that are issuable and valued at $112,500 for the consideration for a promissory note the Company issued February 22, 2019.

From January 1 to September 30, 2020 the Company issued 60,000 shares of common stock in consideration of cash proceeds of $45,000.

At September 30, 2020, the Company has no outstanding options or warrants.

VERONI BRANDS CORP.

Notes to Unaudited Financial Statements

Note 10 –Related Party Transactions

During 2018, two significant shareholders of the Company advanced the Company $157,059. The advance was evidenced by two individual notes totaling $155,000 which were due on or before August 1, 2019 and a payable of $2,059. The two notes had a fixed interest fee of $1,000 for each of the notes. One shareholder was repaid in June 2019 his promissory note and accrued interest which totaled $61,000. The due date for the second shareholder note has been extended to be due on or before August 1, 2020 and as of March 31, 2020, $100,370 has been repaid leaving an outstanding loan balance of $0 and a payable of $0. At September 30, 2020 and December 31, 2019 the related party balances were as follows:

The Company is purchasing all of its chocolate products from Millano Group, a related party (controlled by the father of a major shareholder), and was owed $646,840 at September 30, 2020. The balance is reflected in accounts payable related party.

On March 30, 2020 the Millano Group agreed to reimburse the Company $184,848 for a 2019 customer credit for a recall that is reflected in accounts receivable related party. The Cost of Sales has been reduced by $184,848 during the first quarter of 2020 due to this credit.

Note 11– Office Lease

On February 4, 2019, the Company entered into a sublease for office space located in Bannockburn, Illinois. The sublease terminates on September 30, 2022. Rent for the nine months ending September 30, 2020 and 2019 was $43,299 and $36,575. The annual rent per the sublease is as follows:

The Company also paid a security deposit of $9,310.

Note 12– Revenue

During the nine months ended September 30, 2020, the Company had three customers whose sales accounted for approximately 99% of revenue.

The following table presents revenues by product line for the nine months ended September 30:

VERONI BRANDS CORP.

Notes to Unaudited Financial Statements

Note 13– Commitments and Contingencies

The Company’s operations are subject to the Federal Food, Drug and Cosmetic Act; the Bioterrorism Act; and regulations created by the U.S. Food and Drug Administration (“FDA”). The FDA regulates manufacturing and holding requirements for foods, specifies the standards of identity for certain foods and prescribes the format and content of certain information that must appear on food product labels. In addition, the published applicable rules under the Food Safety Modernization Act (“FSMA”) regulates food products imported into the United States and provides the FDA with mandatory recall authority.

For the purchase of products harvested or manufactured outside the United States, and for the shipment of products to customers located outside of the United States, the Company is subject to customs laws regarding the import and export of shipments. The Company’s activities, including working with customs brokers and freight forwarders, are subject to regulation by U.S. Customs and Border Protection, part of the Homeland Security.

Note 14 – Subsequent Events

The Company has analyzed its operations subsequent to September 30, 2020 through the date these financial statements were issued, and has determined that it does not have any material subsequent events to disclose.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Veroni Brands Corp. (formerly “Echo Sound Acquisition Corporation”) (“Veroni” or the “Company”) was incorporated on December 7, 2016, under the laws of the state of Delaware. The business purpose of the Company is to facilitate the sales and distribution of premium food and beverage products from Europe.

Prior to 2018, the Company’s operations were limited to issuing shares to its original stockholders and effecting a change in control of the Company. In 2018, the Company commenced its principal operations. The Company originated as a blank check company and qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act which became law in April 2012.

In January 2019, the Company expanded its product offerings and established a relationship with another manufacturer, Millano Group, a related party, to import chocolate products, as well as snacks, for distribution to major retailers throughout the United States. The Company recently became the vendor of record and successfully delivered these products to several national retailers.

In February 2019, the Company engaged Tyler Distribution and Continental Logistics, two operating companies of Port Jersey Logistics, to better serve its customers throughout the United States. Management believes that this partnership will give the Company a tremendous opportunity to support its growth, as it will be able to store and ship products and fulfill its purchase orders received from its customers.

The Company has also established relationships with other European manufacturers that can provide a wide range of “panned” products, meaning those that are coated with a sugar syrup, chocolate, or both, such as nuts, raisins, pretzels, and fruit, as well as healthy snack items, and specialty confection goods.

For the fiscal year ended December 31, 2019, the Company’s independent auditors issued a report raising substantial doubt about the Company’s ability to continue as a going concern. For the year ending December 31, 2019, the Company has an accumulated deficit of $907,000 since its inception. As of December 31, 2019, the Company had a cash balance available of approximately $99,010 and working capital of $2,715, which is not sufficient to meet its operating requirements for the next twelve months. Therefore, the Company’s ability to continue as a going concern is dependent on its ability to grow its revenue and generate sufficient cash flows from operations to meet its obligations and/or obtaining additional financing from its shareholders or other sources, as may be required. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern; however, the above condition raises substantial doubt about the Company’s ability to continue as a going concern.

Results of Operations

Three Months Ended September 30, 2020 Compared to September 30, 2019. During the three months ended September 30, 2020, the Company generated revenues of $2,046,846 and a gross profit of $574,265, compared to revenues of $1,899,828 and gross profit of $310,048 in 2019. The increase in revenue relates to the addition of a national pharmacy chain as a retailer of its products and furnishing private label branded products to another retailer that has better margins than those furnished in 2019.

Operating expenses of $572,815 during the three months ended September 30, 2020 consisted of warehouse and selling expenses of $150,308 and general and administrative costs of $422,507. For the comparable 2019 period, warehouse and selling expenses and general and administrative costs were $57,231 and $154,788, respectively, for a total of $212,019 in operating expenses. The increase in warehouse and selling expenses is related to certain fees paid to obtain new retailers and the increase in general and administrative costs were due to the addition of an employee and increased salary for the Company’s chief executive officer in 2020. Additionally, salary commenced in June 2019, causing 2020 to be higher due to the full year.

Other expense for the three months ended September 30, 2020 mainly consists of factoring fees of $20,300, compared to factoring fees of $94,625 for the same period in 2019. The decrease in the fees is related to the renegotiation of the factoring agreement in the third quarter of 2019. See “Accounts Receivable Financing” below.

Nine Months Ended September 30, 2020 Compared to September 30, 2019. During the nine months ended September 30, 2020, the Company generated revenues of $4,859,463 and a gross profit of $1,272,255, compared to revenues of $5,230,968 and gross profit of $945,175 in 2019. The decrease in revenue relates to the Company not participating in Easter chocolate sales, as compared to 2019 when the Company supplied product Easter products to Aldi stores, and a lower demand for products in 2020 attributable to a weakened economy. The improvement in gross margin is due to lower freight costs in 2020 as compared to 2019. Also, during the quarter ended March 31, 2020, Millano Group, the Company’s chocolate supplier, agreed to give the Company a credit of approximately $184,000 for chocolate that the Company had to write-off in the quarter ended December 31, 2019. The write-off in 2019 was a result of the product being unsaleable due to a proprietary labeling problem. This resulted in the Company applying for a credit in 2020 and obtaining the supplier’s approval. The credit reduced the Company’s cost of sales and increased the gross profit by approximately $184,000 for the quarter ended March 31, 2020.

Operating expenses of $1,082,737 during the nine months ended September 30, 2020 consisted of warehouse and selling expenses of $285,899 and general and administrative costs of $796,838. For the comparable 2019 period, warehouse and selling expenses and general and administrative costs were $388,032 and $324,934, respectively, for a total of $712,966 in operating expenses. The increase in operating expenses is related to the fact that officer and other salaries commenced in June 2019, resulting in $364,000 of the increase. Additionally, legal and accounting increased by $44,000. The Company paid $474,492 of salaries and wages during the 2020 nine-month period, compared to $45,000 for the same period in 2019. Also, the Company incurred $145,505 of legal and professional services for the nine months ended September 30, 2020, compared to $118,335 during the same period in 2019.

Other expense for the nine months ended September 30, 2020 mainly consists of factoring fees of $72,867, compared to factoring fees of $231,253 for the same period in 2019. The decrease in the fees is related to the renegotiation of the factoring agreement in the third quarter of 2019. See “Accounts Receivable Financing” below.

Liquidity and Capital Resources

During the nine months ended September 30, 2020, the Company’s operating activities provided net cash of $594,220, primarily through its net income of $117,651 and decreases in its contract receivables with recourse of $716,185 and inventory in the amount of $107,628 and increases in accounts payable related party of $100,228 and accrued liabilities of $18,095, offset by increases in trade accounts receivable, accounts receivable related party, and prepaid expenses of $169,596, $184,848, and $71,606, respectively, and a decrease in contract liabilities of $57,467. Net cash used by financing activities totaled $545,885, with $757,380 used to pay contract receivables with recourse, offset with $149,900 in proceeds from debt. In comparison, the Company used net cash of $985,801 during the comparable 2019 period for its operating activities, with $1,092,504 being provided by financing activities. The financing activities for the nine months ended September 30, 2019 were largely the result of proceeds of $865,577 from factoring its receivables. The Company had a cash balance of $147,346 and working capital of $315,552 as of September 30, 2020, as compared to a cash balance of $99,010 and working capital of $2,715, as of December 31, 2019.

The Company’s proposed activities will necessitate significant uses of capital into and beyond 2020, particularly for the financing of inventory. While the Company has recently entered into a factoring arrangement, sales of equity securities in the Company would result in reduced financing costs. Since the beginning of 2018 and through the date of this report, the Company has engaged in sales of its equity securities in private placements. Through September 30, 2020, 10,591,400 shares have been sold for total gross proceeds of $563,533, 29,997 shares have been issued for services rendered valued at $22,497, 186,965 shares valued at $140,223 have been issued in lieu of interest, 286,667 shares have been issued upon conversion of a $215,000 promissory note, and a total of 2,270,000 shares were redeemed for $45,200.

Plan of Operations

For the next few years, the Company will continue to focus on obtaining visibility for the products by contacting convenience store locations and small distributors to those types of locations. The Company is targeting metropolitan areas, such as Chicago, Los Angeles, Las Vegas and cities in New Jersey, New York and Miami. In addition, the Company will also continue to expand the number of products to be imported from Europe and distributed throughout the United States.

The Company is also implementing strategies for long-term operational improvements that should positively impact working capital. It plans to invest a total of $500,000 into shelf space for various products, so as to reach a sustained reduction in handling costs, improved service levels, faster order fulfillment, and fewer write-offs of excess or obsolete inventory.

Currently, these efforts are being funded through the proceeds of the Company’s private placements, as discussed above, as well as short-term borrowing from the Company’s shareholders and third parties. As part of the Company’s efforts to gain visibility and to raise capital, it proposes to establish a trading market for its shares. Management of Veroni believes that having a trading market for the Company’s common stock will make other sources of financing available and assist it in engaging with larger distributors.

There is no assurance that the Company’s activities will generate sufficient revenues to sustain its operations without additional capital, or if additional capital is needed, that such funds, if available, will be obtainable on terms satisfactory to the Company. Accordingly, given the Company’s limited cash and cash equivalents on hand, the Company will be unable to implement its business plans and proposed operations unless it obtains additional financing or otherwise is able to generate revenues and profits. In 2019, the Company entered into a factoring agreement covering its accounts receivable (see below). The Company may raise additional capital through sales of debt or equity, obtain loan financing or develop and consummate other alternative financial plans. In the near term, the Company plans to rely on its primary stockholder to continue his commitment to fund the Company’s continuing operating requirements. Management anticipates a total capital raise of up to $5,000,000 over the course of the following four consecutive quarters; provided, however, that the Company will require a minimum of $600,000 for the next 12 months to fund its operations, which will be used to fund expenses related to operations, office supplies, travel, salaries and other incidental expenses. Management believes that this capital would allow the Company to meet its operating cash requirements, and would facilitate the Company’s business of selling and distributing its products. Management also believes that the acquisition of such assets would generate revenue to cover overhead cost and general liabilities of the Company, and allow the Company to achieve overall sustainable profitability.

During the first quarter of 2020, the Company did not experience a decrease in sales revenues. However, with COVID-19-related lockdowns, shutdowns, and layoffs being in effect during the entire second and third quarters, the Company experienced decreased demand for its products, as well as longer lead times in obtaining product from its manufacturers. Since most of Veroni’s retailer base is comprised of national and international retailers, the collection of receivables is not expected to be negatively impacted over the long-term, but short-term issues may arise. In addition, efforts to raise additional capital, may be negatively impacted due to volatility and uncertainty in the domestic and global economy. This may delay the Company’s planned implementation of strategies to improve its working capital situation and reduce its borrowing costs. Management of the Company is unable to predict how sales revenues for the remainder of the current fiscal year will be impacted by the COVID-19 situation.

Under the Small Business Administration (“SBA”), the Company applied for the Paycheck Protection Program (“PPP”) loan. These loans are forgiven if used for payroll, payroll benefits, including health insurance and retirement plans, as well as certain rent payments, leases, and utility payments, which are limited to 40% of the loan proceeds, all of which if paid within either 8 weeks or 24 weeks of the receipt of the loan proceeds. At the time of this filing, we anticipate a significant amount of this loan will be forgiven; however, the forgiveness application process is not yet complete. The Company has elected to record these advances under the debt treatment for these loans, under GAAP guidance. Unforgiven portions of these loans will be repaid over 5 years, accruing interest at 1% per annum. The PPP loan has a loan balance of $56,250 as of September 30, 2020.

The Company has also applied for an Economic Injury Disaster Loan (“EIDL”) of up to $150,000, with proceeds to be sued for working capital purposes. On September 2, 2020, the Company received $149,900. Interest accrues at the rate of 3.75% per annum. Installment payments of $720, which include principal and interest, are due monthly beginning August 27, 2021 (twelve months from the date of the SBA note) and continue for a period of thirty years from the date of the note. The note contains customary events of default and is secured by a security interest in all tangible and intangible personal property of the Company.

Accounts Receivable Financing

On February 21, 2019, the Company entered into a factoring agreement with an unrelated third party, Advance Business Capital LLC, dba Interstate Capital (“ICC”), pursuant to which the Company sells the majority of its accounts receivable to ICC for 85% of the value of the receivable. The term of the agreement is for 12 months and automatically renews for additional 12-month periods. The accounts receivable are sold with recourse back to the Company, meaning that the Company bears the risk of non-payment by the account debtor. To secure its obligations to ICC, the Company has granted a blanket security interest in its other assets, such as inventory, equipment, machinery, furniture, fixtures, contract rights, and general intangibles. The loan is guaranteed by two major shareholders of the Company. On September 11, 2019, the lender (which now does business as Triumph Business Capital) entered into an amended agreement with the Company which lowered the interest charged by the lender from 0.49% for every 10 days to prime rate (with a floor of 5.5%) plus 3%. As of September 30, 2020, the Company owed $657,258 for advances on its receivables.

Potential Revenue

The Company expects to generate revenue from selling its products. Further, depending on the market environment, the Company plans on acquiring the rights to sell and distribute other food and beverage products.

Alternative Financial Planning

The Company has no alternative financial plans at the moment. If the Company is not able to successfully raise monies as needed through a private placement or other securities offering (including, but not limited to, a primary public offering of securities), the Company’s ability to survive as a going concern and implement any part of its business plan or strategy will be severely jeopardized.

Critical Accounting Policies

The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires making estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable to smaller reporting companies.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures and Changes in Internal Controls

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.

As of September 30, 2020, our management carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act. Based on this evaluation, the President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2020, because of the identification of the material weakness in internal control over financial reporting described below. Notwithstanding the material weakness that existed as of September 30, 2020, our President and Chief Financial Officer has concluded that the financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the financial position, results of operations and cash flows of the Company and its subsidiaries in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management, we conducted an assessment of the effectiveness of our internal control over financial reporting based on criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992, as of September 30, 2020.

As a result of our material weakness described below, management has concluded that, as of September 30, 2020, our internal control over financial reporting was not effective based on the criteria in “Internal Control-Integrated Framework” issued by COSO.

Material Weakness in Internal Control over Financial Reporting

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility, that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In connection with its assessment, management identified the following material weaknesses at September 30, 2020:

Due to our limited resources, we expect these weaknesses in internal control to continue while we implement our business plan.

Changes in Internal Control over Financial Reporting

During the period covered by this quarterly report, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently involved in any pending or threatened legal proceedings.

Item 1A. Risk Factors

Not applicable to smaller reporting companies.

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.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

*In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

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.