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.
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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.
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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.
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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.
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