Accounting Policies, by Policy (Policies)

6 Months Ended

Jun. 30, 2024

Summary of Significant Accounting Policies [Abstract]

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

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

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

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

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

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

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

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 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:

	Accounts		Royalty		Refund
	Receivable		Receivable		Liability
December 31, 2023	$	337,774	$	88,286	$	186,485
June 30, 2024	$	634,808	$	59,377	$	182,600

Unit-Based Compensation

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

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

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

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:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2024		2023		2024		2023
Net income per common unit – basic:
Net income allocated to common unit holders	$	176,052	$	928,322	$	379,111	$	953,636
Weighted average common units outstanding - basic		88,804,035		88,804,035		88,804,035		88,804,035
Net income per common unit - basic	$	0.00	$	0.01	$	0.00	$	0.01

Net income per common unit – diluted:
Net income allocated to common unit holders - basic	$	176,052	$	928,322	$	379,111	$	953,636
Add: tax adjusted interest convertible debt		-		47,654		-		-
Net income allocated to common unit holders -diluted	$	176,052	$	975,976	$	379,111	$	953,636
Weighted average common units outstanding - basic		88,804,035		88,804,035		88,804,035		88,804,035
Add: diluted units related to convertible debt		-		6,648,898		-		-
Weighted average common units outstanding - diluted		88,804,035		95,452,933		88,804,035		88,804,035
Net income per common unit - diluted	$	0.00	$	0.01	$	0.00	$	0.01

Provision for Income Taxes

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:

	Three Months Ended June 30,		Six Months Ended June 30,
Income tax expense at U.S. statutory rate	$	49,522	$	106,642
State income taxes, net of federal benefit		10,246		22,065
Valuation allowance				-
Provision for income tax	$	59,769	$	128,707

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:

	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024			2023
Provision for Income Taxes	$	59,769		$	-		$	128,707		$	-
Statutory Federal Income Tax Rate		21.00	%		21.00	%		21.00	%		21.00	%
State Income taxes, net of federal benefit		4.35	%		4.35	%		4.35	%		4.35	%
Valuation Allowance		-			(25.35	)%		-			(25.35	)%
Effective Tax Rate		25.35	%		-			25.35	%		-

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

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.

VPR Brands, LP. 10-Q