UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
For the transition period from _______ to _______
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State of incorporation) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| OTC Markets Group Inc. |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☐ | Smaller reporting company | ||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The number of shares of the issuer’s common stock, par value $0.0001 per share, outstanding as of May 12, 2023 was .
TABLE OF CONTENTS
| i |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KONA
GOLD BEVERAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| Inventory, net of reserve for obsolescence of $ | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| NON-CURRENT ASSETS | ||||||||
| Property, plant and equipment, net | ||||||||
| Right-of-use asset, net | ||||||||
| Intangible property, net | ||||||||
| Deposits | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accrued compensation | ||||||||
| Notes payable, net of discount of $ | ||||||||
| Notes payable - related parties, current | ||||||||
| Acquisition obligations, current | ||||||||
| Lease liabilities, current | ||||||||
| Convertible debt, net of discount of $ | ||||||||
| Total current liabilities | ||||||||
| NON-CURRENT LIABILITIES | ||||||||
| Notes payable, net of current | ||||||||
| Lease liabilities, net of current | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| Preferred Stock, $ par value, shares authorized, and issued and outstanding, respectively | ||||||||
| Common Stock, $ par value, authorized, and , issued and outstanding, respectively | ||||||||
| Common stock issuable ( shares) | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
See notes to condensed consolidated financial statements.
| F-1 |
KONA
GOLD BEVERAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| REVENUES, NET | $ | $ | ||||||
| COST OF REVENUES | ||||||||
| Gross profit | ||||||||
| OPERATING EXPENSES | ||||||||
| Selling, general and administrative expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income / (expense) | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Financing costs | ( | ) | ||||||
| Change in the fair value of derivative liability | ( | ) | ||||||
| Loss on extinguishment of debt | ( | ) | ( | ) | ||||
| Other income (expense) | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| NET LOSS PER COMMON SHARE: | ||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | ||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES: | ||||||||
| Basic and diluted | ||||||||
See notes to condensed consolidated financial statements.
| F-2 |
KONA
GOLD BEVERAGE, INC.
STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited)
| Common Stock | Preferred Stock | Common Shares | Additional | Total | ||||||||||||||||||||||||||||||||
| $.00001 Par | $.00001 Par | Issuable | Paid | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | in Capital | Deficit | Deficit | ||||||||||||||||||||||||||||
| Balance December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Common stock issued for conversion of convertible debt and accrued interest | ||||||||||||||||||||||||||||||||||||
| Warrants related to convertible notes | ||||||||||||||||||||||||||||||||||||
| Warrants issued for financing costs (ELOC) | ||||||||||||||||||||||||||||||||||||
| Common stock issued upon cashless exercise of warrants | ( | ) | ||||||||||||||||||||||||||||||||||
| Preferred stock issued to a related party for common stock issuable | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
Balance March 31, 2023 (Unaudited) | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Common Shares | Additional | Total | ||||||||||||||||||||||||||||||||
| $.00001 Par | $.00001 Par | Issuable | Paid- | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | in Capital | Deficit | Deficit | ||||||||||||||||||||||||||||
| Balance December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Common stock issued for conversion of convertible debt and accrued interest | ||||||||||||||||||||||||||||||||||||
| Common stock issued with note payable received as debt discount | ||||||||||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance March 31, 2022 (Unaudited) | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
| F-3 |
KONA
GOLD BEVERAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2023 and 2022
(Unaudited)
| Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| CASH USED IN OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by operations: | ||||||||
| Depreciation and amortization | ||||||||
| Change in allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Change in inventory reserves | ||||||||
| Right-of-use asset amortization | ||||||||
| Amortization of debt discount | ||||||||
| Amortization of intangible assets | ||||||||
| Preferred stock issued for common stock issuable | ||||||||
| Fair value of warrants issued for financing costs | ||||||||
| Loss on sale of property and equipment | ||||||||
| Loss on extinguishment of debt | ||||||||
| Gain on change in fair value of derivative liabilities | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Decrease (increase) in accounts receivable | ( | ) | ||||||
| Decrease (increase) in inventory | ( | ) | ||||||
| Decrease (increase) in prepaids | ||||||||
| Decrease (increase) in other current assets | ||||||||
| Decrease (increase) in deposits | ||||||||
| Increase (decrease) in accounts payable and accrued expenses | ||||||||
| Increase (decrease) in accrued compensation | ( | ) | ||||||
| Increase (decrease) in lease liability | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH USED IN INVESTING ACTIVITIES: | ||||||||
| Purchase of purchase property, plant and equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| CASH PROVIDED BY FINANCING ACTIVITIES: | ||||||||
| Proceeds from note payable - related party | ||||||||
| Repayment of note payable - related party | ( | ) | ( | ) | ||||
| Changes in acquisition obligations | ( | ) | ( | ) | ||||
| Principal repayments of finance lease obligation | ( | ) | ( | ) | ||||
| Proceeds from notes payable, net of expenses | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Proceeds from convertible debentures payable, net of expenses | ||||||||
| Net cash provided by financing activities | ||||||||
| Net cash increase (decrease) for period | ( | ) | ||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Recording of right of use asset and lease liability | $ | $ | ||||||
| Common shares issued on conversion of debentures and accrued interest | $ | $ | ||||||
| Fair value of warrants issued upon issuance of convertible notes | $ | $ | ||||||
See notes to condensed consolidated financial statements.
| F-4 |
KONA
GOLD BEVERAGE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2023 and 2022
NOTE 1 – OPERATIONS AND GOING CONCERN
The Company was formerly known as Kona Gold Solutions, Inc., and in October 2020, changed its name to Kona Gold Beverage, Inc., a Delaware corporation (“Kona Gold,” the “Company,” “we,” “us,” or “our”). As of March 31, 2023, the Company has three wholly-owned subsidiaries: Kona Gold LLC, a Delaware limited liability company (“Kona”), HighDrate LLC, a Florida limited liability company (“HighDrate”), and Gold Leaf Distribution LLC, a Florida limited liability company (“Gold Leaf”). Kona focuses on the development and marketing of functional and better-for-you beverages: Ooh La Lemin Lemonades that are available in a variety of sparkling and non-sparkling flavors and Kona Gold Energy Drinks that are low-to-zero calorie functional beverages that are high in B vitamins, amino acids, and omegas. HighDrate focuses on the development and marketing of CBD-infused energy waters geared to the fitness and wellness markets. Gold Leaf focuses on the distribution of premium beverages and snacks in key markets, all of which complement our current product offerings.
The Company currently sells its products through resellers, the Company’s websites, and distributors that span across 18 states. The Company’s products are available in wide variety of stores, including convenience and grocery stores, smoke shops, and gift shops.
As used herein, the terms “Kona Gold,” the “Company,” “we,” “us,” or “our”, refer to Kona Gold individually or, as the context requires, collectively with its subsidiaries on a consolidated basis.
Effects of COVID-19
In January 2020, the WHO announced a global health emergency because of a new strain of coronavirus (known as COVID-19) that originated in Wuhan, China and generated significant risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in global exposure. The COVID-19 pandemic is disrupting businesses and affecting production and sales across a range of industries, as well as causing volatility in the financial markets. The extent of the impact of the COVID-19 pandemic on the Company’s consumer demand, sales, and financial performance will depend on certain developments, including, among other things, the duration and spread of the outbreak and the impact on the Company’s consumers and employees, all of which are uncertain and cannot be predicted. Management is actively monitoring this situation and potential impacts on our financial condition, liquidity, and results of operations.
Going Concern
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements,
in the three months ended March 31, 2023, the Company recorded a net loss of $
At
March 31, 2023, the Company had cash on hand in the amount of $
| F-5 |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. These consolidated financial statements have been prepared on the accrual basis of accounting and in accordance with generally accepted accounting principles (“GAAP”) in the United States.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for reserves of uncollectible accounts receivable, assumptions used in valuing inventories at net realizable value, impairment testing of recorded long-term tangible and intangible assets, the valuation allowance for deferred tax assets, accruals for potential liabilities, assumptions made in valuing stock instruments issued for services, and assumptions used in valuing warrant liabilities, and assumptions used in the determination of the Company’s liquidity.
Accounts Receivable
Accounts receivable are generally recorded at the invoiced amounts net of an allowance for expected losses. The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding.
The
allowance for accounts receivable is established through a provision reducing the carrying value of receivables. At March 31, 2023 and
December 31, 2022, the allowance was $
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (“ASC 606”). The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which include (1) identifying the contract or agreement with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied.
Revenue and costs of sales are recognized when control of the products transfers to our customer, which generally occurs upon shipment from our facilities. The Company’s performance obligations are satisfied at that time. The Company does not have any significant contracts with customers requiring performance beyond delivery, and contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than a promised service to the customer.
| F-6 |
All of the Company’s products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them.
The Company does not allow for returns, except for damaged products when the damage occurred pre-fulfillment. Damaged product returns have historically been insignificant. Because of this, the stand-alone nature of our products, and our assessment of performance obligations and transaction pricing for our sales contracts, we do not currently maintain a contract asset or liability balance for obligations. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.
Sales
are made to customers under terms allowing certain limited rights of return. The Company records an allowance for returns for each quarter
for
The following table presents our net revenues, by revenue source, and the period-over-period percentage change, for the period presented:
| Three Months Ended 31, | ||||||||||||
| 2023 | 2022 | |||||||||||
| Revenue Source | Revenue | Revenue | % Change | |||||||||
| Distributors | $ | $ | % | |||||||||
| Amazon | ( | )% | ||||||||||
| Online Sales | ( | )% | ||||||||||
| Retail | % | |||||||||||
| Shipping | ( | )% | ||||||||||
| Sales Returns and Allowances | ( | ) | ( | ) | % | |||||||
| Net Revenues | $ | $ | % | |||||||||
The following table presents our net revenues by product lines for the period presented:
| Three Months Ended 31, | ||||||||||||
| 2023 | 2022 | |||||||||||
| Product Line | Revenue | Revenue | % Change | |||||||||
| Energy Drinks | $ | $ | ( | )% | ||||||||
| CBD Energy Waters | ( | )% | ||||||||||
| Lemonade Drinks | % | |||||||||||
| Apparel | ( | )% | ||||||||||
| Retail | % | |||||||||||
| Shipping | ( | )% | ||||||||||
| Sales returns and allowance | ( | ) | ( | ) | % | |||||||
| Net Revenues | $ | $ | % | |||||||||
Advertising Costs
Advertising
costs are expensed as incurred and are included in selling and marketing expense. Advertising costs aggregated $
Stock Compensation Expense
The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on the straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered.
| F-7 |
The fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.
Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net income applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive.
March 31, 2023 | March 31, 2022 | |||||||
| Warrants | ||||||||
| Common stock equivalent of Series B Convertible Preferred Stock | ||||||||
| Common stock equivalent of Series C Convertible Preferred Stock | ||||||||
| Common stock equivalent of Series D Convertible Preferred Stock | ||||||||
| Common stock issuable | ||||||||
| Restricted common stock | ||||||||
| Common stock on convertible debentures and accrued interest | ||||||||
| Total | ||||||||
Fair Value of Financial Instruments
The Company uses various inputs in determining the fair value of its financial assets and liabilities and measures these assets on a recurring basis. Financial assets recorded at fair value are categorized by the level of subjectivity associated with the inputs used to measure their fair value. Accounting Standards Codification Section 820 defines the following levels of subjectivity associated with the inputs:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3—Unobservable inputs based on the Company’s assumptions.
The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, short-term bank loans, accounts payable, notes payable and other payables, approximate their fair values because of the short maturity of these instruments. The carrying values of capital lease obligations and long-term financing obligations approximate their fair values because interest rates on these obligations are based on prevailing market interest rates.
| F-8 |
Segments
During
the 2022 fiscal year, the Company consolidated and restructured its operations. The Company now operates in
Concentrations
The
Company’s cash balances on deposit with banks are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $
Gross
sales. During the three months ended March 31, 2023, the Company reported no customers that accounted for
Accounts
receivable. As of March 31, 2023, the Company had accounts receivable from five customers that comprised
Co-Packers. The raw materials used in the production of the Company’s products are obtained by the Company’s co-packers and consist primarily of materials such as the flavors, caffeine, sugars or sucralose, taurine, vitamins, CBD, and hemp seed protein contained in its beverages, the bottles in which its beverages are packaged, and the labeling on the outside of its beverages. These principal raw materials are subject to price and availability fluctuations. The Company currently relies on a few key co-packers, which in turn rely on a few key suppliers. The Company continually endeavors to have back-up co-packers, which co-packers would in turn depend on their third-party suppliers to supply certain of the flavors and concentrates that are used in the Company’s beverages. The Company is also dependent on these co-packers to negotiate arrangements with their existing suppliers that would enable the Company to obtain access to certain of such concentrates or flavor formulas under certain extraordinary circumstances. Additionally, in a limited number of cases, the Company’s co-packers may have contractual restrictions with their suppliers or the Company’s co-packers may need to obtain regulatory approvals and licenses that may limit the co-packers’ ability to enter into agreements with alternative suppliers. Contractual restrictions in the agreements the Company has with certain distributors may also limit the Company’s ability to enter into agreements with alternative distributors. The Company believes that a satisfactory supply of co-packers will continue to be available at competitive prices, although there can be no assurance in this regard. With respect to Gold Leaf’s operations, the Company continually endeavors to contract with additional beverage vendors to ensure the Company has adequate inventory. The Company believes that a satisfactory supply of vendors will continue to be available at competitive prices, although there can be no assurance in this regard.
Purchases
from vendors. During the three months ended March 31, 2023, the Company’s largest three vendors accounted for approximately
Accounts
payable. As of March 31, 2023, two vendors accounted for more than
| F-9 |
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.
Other recent accounting pronouncements issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
NOTE 3 – INVENTORY
Inventory is valued at the lower of cost (first-in, first-out) or net realizable value, and net of reserves is comprised of the following:
March 31, 2023 | December 31, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods, net | ||||||||
| Total | $ | $ | ||||||
At
March 31, 2023 and December 31, 2022, inventory presented above is net of a reserve for slow moving and potentially obsolete inventory
of $
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
Property and equipment is comprised of the following:
March 31, 2023 | December 31, 2022 | |||||||
| Furniture and Fixtures | $ | $ | ||||||
| Computers and Software | ||||||||
| Machinery & Equipment | ||||||||
| Vehicles | ||||||||
| Total cost | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
Depreciation
for the three months ended March 31, 2023 and 2022, was $
NOTE 5 – INTANGIBLE ASSETS
Intangible asset consisted of the following:
March 31, 2023 | December 31, 2022 | |||||||
| Intangible Assets | ||||||||
| Trademarks | $ | $ | ||||||
| Website development | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Total Intangible Assets, net of amortization | $ | $ | ||||||
| F-10 |
During
the three months ended March 31, 2023 and 2022, the Company recorded amortization expense of $
| Year Ending | Amortization | |||
| 2023 (remaining) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
NOTE 6 – NOTES PAYABLE – RELATED PARTIES
Notes payable with related parties consists of the following at March 31, 2023 and December 31, 2022:
March 31, 2023 | December 31, 2022 | |||||||
| Note payable – related party (a) | $ | $ | ||||||
| Note payable – related party (b) | ||||||||
| Note payable – related party (c) | ||||||||
| Note payable – related party (d) | ||||||||
| Total notes payable – related parties | $ | $ | ||||||
| (a) | ||
| (b) | ||
| (c) | ||
| (d) |
| F-11 |
At
December 31, 2022, accrued interest on notes payable to related parties was $
NOTE 7 – NOTES PAYABLE
Notes payable consists of the following at March 31, 2023 and December 31, 2022:
March 31, 2023 | December 31, 2022 | |||||||
| Note payable (a) | $ | $ | ||||||
| Note payable (b) | ||||||||
| Note payable (c) | ||||||||
| Note payable (d) | ||||||||
| Note payable (e) | ||||||||
| Note payable (f) | ||||||||
| Note payable (g) | ||||||||
| Total notes payable | ||||||||
| Less debt discount (e) | ( | ) | ( | ) | ||||
| Total notes payable, net | ||||||||
| Notes payable, current portion | ( | ) | ( | ) | ||||
| Notes payable, net of current portion | $ | $ | ||||||
| (a) | ||
| (b) | ||
| (c) | ||
| (d) |
|
| F-12 |
| In
connection with the issuance of the original debenture in 2022, the Company issued to the lender million shares of the Company’s
common stock at a price of $ per share. The Company determined the fair value of the million shares was $ | ||
| (e) |
Upon execution of the advance and receipt of funds, the Company recorded the difference of $ | |
| (f) | ||
| (g) |
| F-13 |
At December 31, 2022 on item (d), accrued interest on the notes payable was $
As
of December 31, 2022, the unamortized debt discount was $
NOTE 8 – SECURED CONVERTIBLE DEBENTURES
Secured debentures that are payable to an otherwise unaffiliated third party consists of the following as of March 31, 2023 and December 31, 2022:
March 31, 2023 | December 31, 2022 | |||||||
| Mast Hill Note 1 | ||||||||
| Mast Hill Note 2 | ||||||||
| Less debt discount | ( | ) | ( | ) | ||||
| Secured debentures, net | $ | $ | ||||||
Mast Hill
On
July 28, 2022, the Company issued senior secured debentures to an otherwise unaffiliated third-party investor (the
“Investor”) in the aggregate of $
As
of December 31, 2022 the balance due under the obligation was $
Mast Hill Debenture 2
On
March 13, 2023, the Company issued an additional senior secured debenture to the Investor in the aggregate of $
At our option, we have the
right to redeem, in full, the outstanding principal and interest under the debenture prior to its maturity date; provided, that,
as of the date of the then-holder’s receipt of the redemption notice, there has not been an Event of Default. We must pay an amount
equal to the principal amount being redeemed plus outstanding and accrued interest thereon, as well as a $
In connection with the issuances of the debentures, the Company granted to the Investor warrants
to purchase up to
| F-14 |
As of March 31, 2023, no shares of common stock were potentially issuable under the conversion terms of the outstanding debentures.
At
December 31, 2022, accrued interest on the convertible notes payable was $
As
of December 31, 2022, the unamortized debt discount was $
NOTE 9 – ACQUISITION OBLIGATION
On
January 21, 2021, the Company entered into an Agreement and Plan of Merger with S and S and its shareholders and acquired all of the
capital stock of S and S. In consideration thereof, the Company issued to them an aggregate of restricted shares of Kona
Gold Beverage, Inc.’s common stock (the “Acquisition Stock”) of a fair value of $
NOTE 10 – LEASE LIABILITIES
The Company determines whether a contract is, or contains, a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. The Company leases its office and warehouse locations, and certain warehouse equipment. Leases with an initial term of 12 months or less are not included on the balance sheets.
Operating Leases
The
Company leases approximately
The
Company leases a
| F-15 |
The
Company leases a
Finance Leases
On
March 17, 2020, the Company entered into a lease agreement for equipment.
During
the three months ended March 31, 2023 and 2022, lease costs totaled $
Our
ROU asset balance was $
As
of December 31, 2022, lease liabilities totaled $
As
of March 31, 2023, the weighted average remaining lease terms for operating lease and finance lease are
Future minimum lease payments under the leases are as follows:
| Years Ending December 31, | Amount | |||
| 2023 (remaining) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and thereafter | ||||
| Total payments | ||||
| Less: Amount representing interest | ( | ) | ||
| Present value of net minimum lease payments | ||||
| Less: Current portion | ( | ) | ||
| Non-current portion | $ | |||
NOTE 11 – STOCKHOLDERS’ EQUITY
Preferred Stock
The Company’s issued and outstanding preferred stock, par value $ per share, at March 31, 2023 and December 31, 2022 was and , respectively. The Board, without further stockholder approval, may issue preferred stock in one or more series from time to time and fix or alter the designations, relative rights, priorities, preferences, qualifications, limitations and restrictions of the shares of each series.
Series A Preferred Stock
The Company had authorized shares of Series A Preferred Stock, par value of $ per share (the “Series A Preferred Stock”), of which shares were issued or outstanding at March 31, 2023 and December 31, 2022, respectively. Each share of Series A Preferred Stock, when outstanding, could have been converted into one share of Common Stock.
| F-16 |
Series B Preferred Stock
The Company had authorized shares of Series B Preferred Stock, par value of $ per share (the “Series B Preferred Stock”), of which were issued and outstanding at March 31, 2023 and December 31, 2022, respectively. Each share of Series B Preferred Stock may be converted into one share of Common Stock.
Series C Preferred Stock
On
February 13, 2023, the Company increased the authorized number of Series C Preferred Stock from to shares, par value $
per share (the “Series C Preferred Stock”), by filing a Certificate of Designation of the Preferences, Rights, and Limitations
of the Series C Preferred Stock with the Secretary of State of the State of Delaware. On July 8, 2020, the Company amended the terms
of the Series C Preferred Stock filed a Certificate of Designation of the Preferences, Rights, and Limitations of the Series C Preferred
Stock with the Secretary of State of the State of Delaware.
At March 31, 2023, shares of Series C Preferred Stock were issued and outstanding, and at December 31, 2022, shares of Series C Preferred Stock were issued and outstanding.
Series D Preferred Stock
The Company had authorized shares of Series D Preferred Stock, par value of $ per share (the “Series D Preferred Stock”), of which shares were issued and outstanding at March 31, 2023 and December 31, 2022, respectively. Each share of the Series D Preferred Stock may be converted into shares of Common Stock.
Common Stock
On February 13, 2023, the Company increased the authorized number of shares of Common Stock from to shares, par value $ per share (the “Common Stock”), by filing a Certificate of Amendment to the amended and restated Certificate of Incorporation with the Secretary of State of the State of Delaware. The Company has authorized shares of the Common Stock, of which shares were issued and outstanding at March 31, 2023, and shares were issued and outstanding at December 31, 2022, respectively.
Equity Transactions
During
the three months ended March 31, 2023, the Company issued an aggregate of shares of Common Stock with a fair value of $
During
the three months ended March 31, 2023, the Company issued an aggregate of
| F-17 |
During
the three months ended March 31, 2022, the Company issued an aggregate of shares of Common Stock with a fair value of $
During
the three months ended March 31, 2022, and in connection with the issuance of a debenture, the Company issued to the lender
shares of the Company’s common stock at a price of $ per share (see Note 8). The fair value of the shares issued
was $
2023 Equity Purchase Agreement
Pursuant
to an Equity Purchase Agreement (the “Purchase Agreement”) dated as of March 30, 2023 (the “EPA”), the Company
(i) agreed to sell to the same entity with whom we had entered into the Securities Purchase Agreement dated as of March 13, 2023 up to $
The Commitment Period commences on the Execution Date, and ends on the earlier of (i) the date on which the Investor shall have purchased Put Shares pursuant to the Purchase Agreement equal to the Maximum Commitment Amount, (ii) March 30, 2025, (iii) written notice of termination by the Company to the Investor (which shall not occur during any Valuation Period or at any time that the Investor holds any of the Put Shares), (iv) the Registration Statement for the Put Shares is no longer effective after its initial effective date, or (v) the date that, pursuant to or within the meaning of any Bankruptcy Law, the Company commences a voluntary case or any person commences a proceeding against the Company, a Custodian is appointed for the Company or for all or substantially all of its property, or the Company makes a general assignment for the benefit of its creditors.
We
also granted the Warrant to purchase up to an aggregate of the
Common Stock Issuable
On
August 12, 2015, the Company entered into an Employment Agreement with Robert Clark (the “Clark Employment Agreement”). On
December 1, 2016, the Company entered into an Amendment to Employment Agreement (the “Clark Amendment”; and, together with
the Clark Employment Agreement, the “Amended Clark Employment Agreement”). Pursuant to the terms of the Amendment Clark Employment
Agreement, the Company agreed to issue, among other securities, shares of the Common Stock.
| F-18 |
The
shares of the Common Stock were issued to Mr.
Clark, as follows: (i) on October 28, 2015, the Company issued of such shares; (ii) on March 2, 2016, the Company issued of such, and (iii) on Mary 16, 2016, the Company
issued of such shares. On April 19, 2018, (i) shares were cancelled and returned to the Company, and on July 31, 2019, (ii) an additional shares were cancelled and returned
to the Company. Accordingly, as of December 31, 2019, the Company owed to Mr. Clark an aggregate of shares to be reissued
to him upon his request pursuant to the terms of the oral agreement with him which were valued at $
Issuance of Class C Preferred Stock to a related party
On
February 16, 2023, we issued shares of our Series C Preferred Stock to Robert Clark, CEO and major shareholder. The Company determined the fair value of the
shares was $
Summary of Warrants
A summary of warrants for the three months ended March 31, 2023 is as follows:
| Weighted | ||||||||
| Number | Average | |||||||
| of | Exercise | |||||||
| Warrants | Price | |||||||
| Balance outstanding, December 31, 2022 | ||||||||
| Warrants granted | ||||||||
| Warrants exercised | ( | ) | ||||||
| Warrants expired or forfeited | ||||||||
| Balance outstanding, March 31, 2023 | $ | |||||||
| Balance exercisable, March 31, 2023 | $ | |||||||
Information relating to outstanding warrants at March 31, 2023, summarized by exercise price, is as follows:
| Outstanding | Exercisable | |||||||||||||||||||||
| Exercise Price Per Share | Shares | Life (Years) | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | |||||||||||||||||||||
Based on the fair market value of $ per share on March 31, 2023, there was no intrinsic value attributed to both the outstanding and exercisable warrants at March 31, 2023.
In
connection with the issuance of senior convertible secured debentures on March 13, 2023 (see Note 8), the Company granted warrants with
a relative fair value of $
| F-19 |
In
connection with the issuance of 2023 Equity Purchase Agreement on March 30, 2023 (see Note 11), the Company granted warrants to purchase
up to an aggregate of shares of the Common Stock. Each warrant has a five-year term from issuance and is immediately exercisable
at an exercise price of $ per share, subject to adjustment. The fair value of these warrants at grant date was $
NOTE 13 – SUBSEQUENT EVENTS
April 2023 Security Purchase Agreement
Pursuant
to a Securities Purchase Agreement dated as of April 25, 2023 (the “SPA”), the Company, completed a private placement of
a Senior Secured Promissory Note (the “Senior Note”) with an initial principal amount of $
The
transactions contemplated by the SPA were consummated on April 25, 2023 (the “Issue Date”). Upon the funding, we sold and
issued the Senior Note and granted the Warrant. Pursuant to the SPA, the purchase price for the Senior Note was $
The
Senior Note is due 12 months from its issuance date and is secured by all of our assets and the assets of each of our subsidiaries pursuant
to the Security Agreement. The security interest granted to the Investor under the Security Agreement is subordinate to the continuing
security interest that remains in effect pursuant to the previous grant of a security interest in connection with a still-outstanding
debenture to an earlier investor. Initially, the Senior Note is convertible into shares of our Common Stock (the “Conversion Shares”)
at a fixed conversion price of $
At
our option, we have the right to redeem, in full, the outstanding principal and interest under the Senior Note prior to its maturity
date; provided, that, as of the date of the then-holder’s receipt of the redemption notice, there has not been an
Event of Default. We must pay an amount equal to the principal amount being redeemed plus outstanding and accrued interest thereon, as
well as a $
| F-20 |
Further, commencing on May 10, 2023, and continuing on the tenth day of each calendar month thereafter, we are required to redeem an amount equivalent to the sum of $ for each 12-count case of our beverages that we sell in the ordinary course, calculated two months in arrears. Accordingly, the first redemption payment is due and payable on May 10, 2023 for the cases sold during the month of March, 2023. Mandatory redemption payments are based upon revenues recognized by us in accordance with US GAAP for each such month, rather than upon the receipt by us of funds received from sales during a relevant month. However, if we have made a per-case redemption payment to the holder pursuant to the terms of the “Mast Hill Debenture 2”, then, for such month, the mandatory payment under this Senior Note is waived. The above-referenced seven trading days’ prior notice and conversion provisions do not apply to any of the mandatory redemption payments.
We
also granted the Warrant to purchase up to an aggregate of the
The Warrant contains an adjustment provision that, subject to certain exceptions, reduces the exercise price if we issue shares of our Common Stock or common stock equivalents at a price lower than the then-current exercise price of the Warrant. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will result in an equitable adjustment of the exercise price of the Warrant and, in certain circumstances, the number of Warrant Shares. The Warrant is subject to an “exercise blocker,” such that the Investor cannot exercise any portion of the Warrant that would result in the Investor and its affiliates holding more than % of the then-issued and outstanding shares of our Common Stock following such exercise (excluding, for purposes of such determination, shares of the Common Stock issuable upon exercise of the Warrant or conversion of the Senior Note that had not then been exercised or converted, respectively).
Cashless Conversion of Secured Convertible Debentures
On
April 21, 2023, the Company issued an aggregate of shares of Common Stock to Mast Hill upon the conversion of $
Addendum of Advance Agreement
On
April 3, 2023, the Company entered into a First Addendum to Standard Merchant Cash Advance Agreement (the “First Addendum”)
to amend an Advance Agreement (the “Advance”), dated as of November 2, 2022. The original note was in the principal amount
of $
On
May 2, 2023, the Company entered into a First Addendum to Standard Merchant Cash Advance Agreement (the “First Addendum”)
to amend an Advance Agreement (the “Advance”), dated as of September 30, 2022. The original note was in the principal amount
of $
| F-21 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations and financial condition for the three months ended March 31, 2023 and 2022 should be read in conjunction with the financial statements and related notes and the other financial information that are included elsewhere in this Quarterly Report. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. We disclaim any obligation to update forward-looking statements. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” and “Description of Business” sections in this Annual Report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. We and our representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this Annual Report and other filings with the SEC, reports to our stockholders, and news releases. All statements that express expectations, estimates, forecasts, or projections are forward-looking statements. In addition, other written or oral statements which constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “project,” “forecast,” “may,” “should,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by such forward-looking statements.
We undertake no obligation to update or revise any of the forward-looking statements after the date of this Annual Reports to confirm forward-looking statements to actual results. Important factors on which such statements are based are assumptions concerning uncertainties, including, but not limited to, uncertainties associated with the following:
| ● | Inadequate capital and barriers to raising the additional capital or to obtaining the financing needed to implement our business plans; | |
| ● | Our failure to earn revenues or profits; | |
| ● | Volatility or decline of our stock price; | |
| ● | Potential fluctuation in our financial results; | |
| ● | Rapid and significant changes in markets; | |
| ● | Litigation with or legal claims and allegations by outside parties; | |
| ● | Impacts from the COVID-19 pandemic; and | |
| ● | Insufficient revenues to cover operating costs. |
The following discussion should be read in conjunction with the financial statements and the notes thereto which are included in this Annual Report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ substantially from those anticipated in any forward-looking statements included in this discussion as a result of various factors.
Results of Operations
Overview
Our business has grown rapidly since inception in 2015, and we anticipate that our business will continue to grow significantly. In the three months ended March 31, 2023, the Company saw an increase in growth compared to the same period of the prior year period. The Company continues to increase our product variety, commencement of new distribution contracts, and expand our footprint as a national brand.
| 1 |
We derive our revenue from sales of our products to online consumers, to resellers, and to distributors, Product sales to resellers include sales to convenience stores, grocery stores, and smoke and gift shops that complement our current product offering. Product sales to distributors include our Ooh La Lemin lemonade, our energy drinks, and our HighDrate CBD-infused energy waters. We also distribute our products and other companies’ products at retail.
We have experienced and expect to continue to experience substantial growth in our operations as we seek to expand through additional products and acquisitions that complement our current product offerings. We expect that revenue will increase in fiscal year 2023 compared to fiscal year 2022, as the Company anticipates signing more favorable agreements with larger, reputable tier 1 and mid-size distributors, big box stores, and grocery chains. The following is a more detailed discussion of our financial condition and results of operations for the period presented.
Three Months ended March 31, 2023 compared to Three Months ended March 31, 2022
Overview
As reflected in the accompanying financial statements, during the three months ended March 31, 2023, we incurred a net loss of approximately $1.6 million and used cash in operations of approximately $215,544, compared to a net loss of approximately $3.6 million and use of cash in operations of approximately $669,504 for the three months ended March 31, 2022. As of March 31, 2023, we had a stockholders’ deficit of approximately $4.5 million.
The following is a more detailed discussion of our financial condition and results of operations for the period presented, along with prior periods.
Revenue
The following table presents our net revenues, by revenue source, and the period-over-period percentage change, for the period presented:
| Three Months Ended 31, | ||||||||||||
| 2023 | 2022 | |||||||||||
| Revenue Source | Revenue | Revenue | % Change | |||||||||
| Distributors | $ | 221,746 | $ | 189,952 | 17 | % | ||||||
| Amazon | 13,063 | 35,524 | (63 | )% | ||||||||
| Online Sales | 5,236 | 10,971 | (52 | )% | ||||||||
| Retail | 1,070,283 | 791,402 | 35 | % | ||||||||
| Shipping | 969 | 2,382 | (59 | )% | ||||||||
| Sales Returns and Allowances | (36,400 | ) | (35,100 | ) | 4 | % | ||||||
| Net Revenues | $ | 1,274,897 | $ | 995,131 | 28 | % | ||||||
The following table presents our net revenues by product lines for the period presented:
| Three Months Ended 31, | ||||||||||||
| 2023 | 2022 | |||||||||||
| Product Line | Revenue | Revenue | % Change | |||||||||
| Energy Drinks | $ | 9,624 | $ | 62,892 | (85 | )% | ||||||
| CBD Energy Waters | 1,867 | 14,472 | (87 | )% | ||||||||
| Lemonade Drinks | 228,554 | 159,018 | 44 | % | ||||||||
| Apparel | - | 65 | (100 | )% | ||||||||
| Retail | 1,070,283 | 791,402 | 35 | % | ||||||||
| Shipping | 969 | 2,382 | (59 | )% | ||||||||
| Sales returns and allowance | (36,400 | ) | (35,100 | ) | 4 | % | ||||||
| Net Revenues | $ | 1,274,897 | $ | 995,131 | 28 | % | ||||||
| 2 |
During the three months ended March 31, 2023, we reported net revenues of approximately $1.3 million, which is an increase of approximately $279,766, or approximately 28%, compared to net revenues of approximately $995,131 for the three months ended March 31, 2022. An increase of approximately $278,881 of our revenue is attributable to increased retail revenue, while our remaining net revenue decreased in net revenue by approximately $144,247. We attribute the significant increase in retail revenue to obtaining larger retail chains, and attaining a larger percentage of the territory in which the Company distributes. We attribute the slight decrease in remaining net revenue to delays in production of the Company’s rebranded product line. We expect that our remaining net revenue will increase in the remaining fiscal year 2023 compared to fiscal year 2022. Additionally, the Company anticipates signing more favorable agreements with larger, reputable tier 1 and mid-size distributors, big box stores, and grocery chains. In addition, we anticipate that our retail revenue will continue to increase as we broaden our customer base with increased distribution to additional grocery and convenience chains.
Cost of Revenues
Cost of revenues consists primarily of expenses associated with products sold to distributors and resellers, including product and shipping costs. Costs also include credit card fees, fees incurred for sales that occur on Amazon.com, and other transaction fees related to the processing of consumer transactions. Typically, we expect that the cost of revenues will increase as a direct correlation to increases in sales. Thus, our cost of revenues increases on an absolute basis versus on a percentage of sales basis. At the same time, when sales increase, thereby increasing our orders with our co-packers, our cost of products decreases because of the volume discounts we receive from our co-packers.
During the three months ended March 31, 2023, we reported cost of revenues of approximately $986,859, which is an increase of approximately $136,983, or approximately 16%, compared to approximately $849,876 for the three months ended March 31, 2022. This increase is attributed to an increase in sales in both our products and retail distribution in 2023, compared to the prior year period. The cost of revenues increase was smaller than the increase in revenues. This is primarily attributed to decreased costs in obtaining our ingredients for our products, for production of our products, and for shipping our products. We expect that we will continue to see an increased cost of revenues in the remaining fiscal year 2023, primarily due to an anticipated increase in revenues. In addition, as the cost of shipping our products continues to remain elevated, we also anticipate increased costs for obtaining our ingredients for our products, increased costs for production of our products, and increased costs of shipping our products. We continue to seek alternative methods to reduce costs for production and the cost of shipping our products in fiscal year 2023.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses (“SG&A”) expenses consist primarily of professional fees, salaries and wages, advertising, rent, travel expenses, sponsorships, and general office and administrative expenses related to maintaining our facilities. Selling, general and administrative expenses increased in the three months ended March 31, 2023, to approximately $1,273,961 from approximately $939,336, an increase of approximately $334,625 over the same period last year. The increase was driven by increased operating expenses associated with hiring additional sales employees, legal and accounting fees, professional fees, and expired product and partially offset by lower advertising and shipping expenses. We expect that, as we expand our business operations, SG&A expenses will continue to increase.
We expect that as we expand our business operations and continue to incur additional corporate-related expenses associated with our status as a fully registered issuer with the SEC under the Securities Exchange Act of 1934, SG&A expenses will continue to increase.
Other Income and Expenses
Other expense for the three months ended March 31, 2023 was approximately $606,634, as compared to other expense of approximately $2.8 million for the three months ended March 31, 2022. The change was attributable to the decrease in interest expense of approximately $137,304 related to decreased debt levels and debt amortization, the decrease in the change in the fair value of derivative liabilities of approximately $2.8 million, a decrease in the loss on debt extinguishment of approximately $396,636, and was offset with the recording of financing costs of approximately $163,000 in the current period, which did not occur in the prior period.
| 3 |
Net Loss
We incurred a net loss of approximately $1.6 million for the three months ended March 31, 2023, a decrease of approximately $2.0 million compared to the prior year period in which we incurred a net loss of approximately $3.6 million. This net loss is primarily due a slight increase in SG&A expenses and offset by a significant decrease in other expenses, as discussed above.
Liquidity and Capital Resources
Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, during the three months ended March 31, 2023, the Company recorded a net loss of $1,592,557 and used cash in operations of $215,544 and had a stockholders’ deficit of $4,544,952 as of that date. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date of the financial statements being issued. In addition, the Company’s independent registered public accounting firm, in its report on our December 31, 2022 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern. The Company’s financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At March 31, 2023, the Company had cash on hand in the amount of $76,609. Subsequent to Mach 31, 2023, the Company received proceeds of $230,000 on the sale of a senior note. The Company believes it has enough cash to sustain operations through December 31, 2023. The continuation of the Company as a going concern is dependent upon its ability to obtain necessary debt or equity financing to continue operations until it begins generating positive cash flow. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders, in case or equity financing.
Notes Payable with Related Parties
Notes payable with related parties consists of the following at March 31, 2023 and December 31, 2022:
March 31, 2023 | December 31, 2022 | |||||||
| Note payable – related party (a) | $ | 1,352,651 | $ | 1,352,651 | ||||
| Note payable – related party (b) | 260,000 | 260,000 | ||||||
| Note payable – related party (c) | 125,500 | 125,500 | ||||||
| Note payable – related party (d) | 46,000 | 47,500 | ||||||
| Total notes payable – related parties | $ | 1,784,151 | $ | 1,785,651 | ||||
| (a) | On April 4, 2019, the Company entered into an unsecured Line of Credit Agreement with Robert Clark. Mr. Clark is the Company’s President, Chief Executive Officer, Secretary, and Chairman of the Board. The agreement established a revolving line of credit in the amount of up to $1,500,000. Advances under this line of credit bear interest at the rate of 3.75 percent per annum. The line of credit matures on April 4, 2024, at which time all outstanding principal amounts and accrued interest are due and payable. At March 31, 2023 and December 31, 2022, outstanding principal was $1,352,651 and $1,352,651, respectively. |
| 4 |
| (b) | On May 6, 2022, the Company entered into an unsecured Line of Credit Agreement with Robert Clark. Mr. Clark is the Company’s President, Chief Executive Officer, Secretary, and Chairman of the Board. The agreement established a revolving line of credit in the amount of up to $300,000. Advances under this line of credit bear interest at the rate of 3.75 percent per annum. The line of credit matures on May 6, 2024, at which time all outstanding principal amounts and accrued interest are due and payable. At March 31, 2023 and December 31, 2022, outstanding principal was $260,000 and $260,000, respectively. | |
| (c) | On August 29, 2019, the Company entered into an unsecured Line of Credit Agreement with Robert Clark. Mr. Clark is the Company’s President, Chief Executive Officer, Secretary, and Chairman of the Board. The agreement established a revolving line of credit in the amount of up to $200,000. Advances under this line of credit bear interest at the rate of 3.75 percent per annum. The line of credit matures on August 29, 2023, at which time all outstanding principal amounts and accrued interest are due and payable. During the period ended March 31, 2023 Mr. Clark made additional advances of $80,000 that were repaid by the end of the period. At March 31, 2023 and December 31, 2022, outstanding principal was $125,500 and $125,500, respectively. | |
| (d) | On February 19, 2019, the Company issued an unsecured Standard Promissory Note in Favor of Robert Clark, as lender, in the original principal amount of $70,000. Mr. Clark is the Company’s President, Chief Executive Officer, Secretary, and Chairman of the Board. The note bears no interest. Principal payments of $500 per month commenced in March 2019, with final payment due in March 2021. On March 15, 2022, the Company issued an Amendment to the original issued Standard Promissory Note in Favor of Robert Clark for the remaining outstanding principal of $58,000. On April 3, 2023, the Company issued an Amendment to the original issued Standard Promissory Note in Favor of Robert Clark for the remaining outstanding principal of $46,000 Principal payment of $500 per month, with final payment due in March 2024. The outstanding principal balance of this note at December 31, 2022 was $47,500. During the three months ended March 31, 2023, the Company made principal payments of $1,500, leaving an outstanding principal balance of $46,000 at March 31, 2023. |
At December 31, 2022, accrued interest on notes payable to related parties was $153,959. During the three months ended March 31, 2023, the Company added $15,831 of additional accrued interest, leaving an accrued interest balance on the notes payable to related parties of $169,790 at December 31, 2022. Accrued interest is included in accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets.
Notes Payable
Notes payable consists of the following at March 31, 2023 and December 31, 2022:
March 31, 2023 | December 31, 2022 | |||||||
| Note payable (a) | $ | 25,354 | $ | 26,994 | ||||
| Note payable (b) | 43,613 | 44,550 | ||||||
| Note payable (c) | 40,256 | 40,103 | ||||||
| Note payable (d) | 250,000 | 250,000 | ||||||
| Note payable (e) | 207,175 | 626,388 | ||||||
| Note payable (f) | 85,000 | - | ||||||
| Note payable (g) | 196,588 | - | ||||||
| Total notes payable | 847,986 | 988,035 | ||||||
| Less debt discount (e) | (57,234 | ) | (218,481 | ) | ||||
| Total notes payable, net | 790,752 | 769,554 | ||||||
| Notes payable, current portion | (732,753 | ) | (712,499 | ) | ||||
| Notes payable, net of current portion | $ | 57,999 | $ | 57,055 | ||||
| (a) | On August 21, 2021, the Company financed the purchase of a vehicle for $34,763, after making a down payment of $20,000. The loan term is for 60 months, annual interest rate of 5.44%, with monthly principal and interest payments of $665, and secured by the purchased vehicle. At December 31, 2022, the loan balance was $26,994. During the three months ended March 31, 2023, the Company made principal payments of $1,640, leaving a loan balance of $25,354 at March 31, 2023. |
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| (b) | On September 30, 2022, the Company financed the purchase of a vehicle for $46,576, after making a down payment. The loan term is for 60 months, annual interest rate of 9.44%, with monthly principal and interest payments of $980, and secured by the purchased vehicle. At December 31, 2022, the loan balance was $44,550. During the three months ended March 31, 2023, the Company made principal payments of $937, leaving a loan balance of $43,613 at March 31, 2023. | |
| (c) | In April 2021, the Company entered into a Line of Credit Agreement with Wells Fargo Bank. The Line of Credit is personally guaranteed by Robert Clark, the Company’s President, Chief Executive Officer, Secretary, and Chairman of the Board. The agreement established a revolving line of credit in the amount of up to $42,000. Advances under this line of credit bear interest at the rate of 11.50% per annum. The line of credit matures in 2023, at which time all outstanding principal amounts and accrued interest are due and payable. As of March 31, 2023 and December 31, 2022, the outstanding principal was $40,256 and $40,103, respectively, which was recorded as the current portion of loan payable on the accompanying Consolidated Balance Sheet. | |
| (d) | On March 25, 2022, the Company entered into a secured debenture with an otherwise unaffiliated individual in the principal amount of $250,000 that was due on March 23, 2023. On March 23, 2023, the Company entered into a First Amendment to Secured Debenture (the “First Amendment”) to amend a Secured Debenture (the “Debenture”), dated as of March 25, 2022. The Debenture is amended and restated in its entirety with the following terms (i) maturity date was extended to March 24, 2024; (ii) interest accrues on the outstanding principal at a rate equal to 12% per annum; (iii) monthly payments of principal and interest shall be made in the amount of $22,212, starting April 24, 2023 until the maturity date, at which date the entirety of the balance of principal plus interest is due. The secured debenture is secured by nine identified motor vehicles of the Company. As of March 31, 2023 and December 31, 2022, the outstanding balance of the secured debentures amounted to $250,000.
In connection with the issuance of the original debenture in 2022, the Company issued to the lender 25 million shares of the Company’s common stock at a price of $0.004 per share. The Company determined the fair value of the 25 million shares was $135,000, which was recorded as a debt discount against the secured debenture. At December 31, 2022, the unamortized debt discount was $31,531. During the three months ended March 31, 2023, the Company amortized debt discount of $31,531 to interest expense on the loan, leaving no remaining unamortized debt discount at March 31, 2023. | |
| (e) |
On September 30, 2022, November 2, 2022, and December 15, 2022, the Company entered into secured non-interest-bearing advance agreements with unaffiliated third parties for the purchase of future receipts/revenues. Under the agreements, the Company received an aggregate lump sum payment of $561,957, and, in return, the purchaser received a secured right to collect a fix sum of future receipts/revenue of $798,456 to be collected by the Company. In accordance with the agreements, the Company agreed to sell, assign, and transfer to the purchaser of all the Company’s payments, receipts, settlements, and funds paid to or received by or for the account of the Company from time to time on and after the dates of the agreements in payment or settlement of the Company’s existing and future accounts, payment intangibles, credit, debit, and/or stored value card transactions, contract rights, and other entitlements arising from or relating to the payment of monies from the Company’s customers and/or other payors or obligors. Two of the agreements require aggregate weekly payments of $9,019 and the third requires daily payments of $1,291. The Company’s obligations under the agreements are secured by the assets described above, and guaranteed by Robert Clark, the Company’s Chief Executive Officer. As of December 31, 2022, the outstanding balance to be paid amounted to $626,388. During the three months ended March 31, 2023, the Company made payments of $419,213, leaving an aggregate outstanding amount to be paid of $207,175 at March 31, 2023.
Upon execution of the advance and receipt of funds, the Company recorded the difference of $236,499 between the cash collected and the face amount of the obligation as a “note discount” and will amortize the “note discount” as interest expense over the life of the advance. At December 31, 2022, the unamortized “note discount” was $186,950. During the three months ended March 31, 2023, the Company amortized “note discount” of $129,716 to interest expense on the obligation. As of March 31, 2023, the unamortized “note discount” was $57,234. |
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| (f) | On March 9, 2023, the Company entered into a Line of Credit Agreement with American Express National Bank. The Line of Credit is personally guaranteed by Robert Clark, the Company’s President, Chief Executive Officer, Secretary, and Chairman of the Board. The agreement established a revolving line of credit in the amount of up to $85,000. Advances under this line of credit bear interest at the rate of 19.32% per annum. The line of credit matures on September 9, 2024, at which time all outstanding principal amounts and accrued interest are due and payable. The line of credit requires minimum monthly payments of $5,572. At March 31, 2023, the outstanding principal was $85,000. | |
| (g) | On March 7, 2023, the Company entered into a Line of Credit Agreement with Celtic Bank. The Line of Credit is personally guaranteed by Robert Clark, the Company’s President, Chief Executive Officer, Secretary, and Chairman of the Board. The agreement established a revolving line of credit in the amount of up to $200,000. Advances under this line of credit bear interest at the rate of 35.90 percent per annum. The line of credit matures on March 7, 2024, at which time all outstanding principal amounts and accrued interest are due and payable. At March 31, 2023, the outstanding principal was $196,588. |
At December 31, 2022 on item (d), accrued interest on the notes payable was $1,874. During the three months ended March 31, 2023, the Company added $5,630 of additional accrued interest on item (d), leaving $7,504 of accrued interest balance on the notes payable on item (d) at March 31, 2023. Accrued interest is included in accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets.
As of December 31, 2022, the unamortized debt discount was $218,481. During the three months ended March 31, 2023, the Company amortized debt discount of $161,247 to interest expense on the loans. As of March 31, 2023, the unamortized debt discount was $57,234.
Secured Convertible Debentures
Secured debentures that are payable to an otherwise unaffiliated third party consists of the following as of March 31, 2023 and December 31, 2022:
March 31, 2023 | December 31, 2022 | |||||||
| Mast Hill Note 1 | 472,648 | 595,000 | ||||||
| Mast Hill Note 2 | 475,000 | - | ||||||
| Less debt discount | (318,270 | ) | (183,940 | ) | ||||
| Secured debentures, net | $ | 629,378 | $ | 411,060 | ||||
Mast Hill
On July 28, 2022, the Company issued a senior secured debenture to an otherwise unaffiliated third-party investor (the “Investor”) in the aggregate of $595,000. The debenture bears interest at a rate of 10% per annum, matures on July 28, 2023, and is convertible into shares of our common stock at a conversion price of $0.0045 per share. If the Company issues subsequent equity instruments at an effective price per share that is lower than the conversion price of $0.0045 per shares, then the conversion price shall be reduced, at the option of the Holder, to a price equal to the Weighted Average Price (as defined), provided, further, that if the conversion price is equal to or less than $0.003, then the conversion price shall be reduced at the option of the Holder to a price equal to the lower price. The senior secured debenture is secured by all of the Company’s assets and the assets of each of its subsidiaries pursuant to the Security Agreement. The security interest granted to the Investor under the Security Agreement was subordinate to the continuing security interest that remains in effect pursuant to the previous grant of a security interest in connection with a then-outstanding debenture to an earlier investor all tangible and intangible assets. In connection with the issuances of the debenture, the Company granted to the Investor warrants to purchase up to 100 million shares of the Company’s common stock, which expire on July 28, 2027. The warrants are exercisable at $0.0045 per share. As a result of these issuances and grants, we incurred the following (a) relative fair value of the warrants granted of $223,000; and (b) original issue discounts of $92,325 of the debentures for a total of $315,325 which was allocated as debt discount. The debt discount is being amortized to interest expense over the term of the corresponding debentures. As of December 31, 2022, the unamortized debt discount was $183,940. During the three months ended March 31, 2023, the Company amortized debt discount of $78,831 to interest expense on the loan. As of March 31, 2023, the unamortized debt discount was $105,109.
As of December 31, 2022 the balance due under the obligation was $595,000. During the three months ended March 31, 2023, the Company converted $157,400 of principal and accrued interest into 72,000,000 shares of common stock with a fair value of $315,000 resulting in a loss on extinguishment of debt of $157,600. As of March 31, 2023, $472,648 was due under the note.
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Mast Hill Debenture 2
On March 13, 2023, the Company issued an additional senior secured debenture to the Investor in the aggregate of $475,000. The debenture bears interest at a rate of 16% per annum, matures on March 13, 2024, and is convertible into shares of our common stock at a conversion price of $0.0045 per share.
At our option, we have the right to redeem, in full, the outstanding principal and interest under the debenture prior to its maturity date; provided, that, as of the date of the then-holder’s receipt of the redemption notice, there has not been an Event of Default. We must pay an amount equal to the principal amount being redeemed plus outstanding and accrued interest thereon, as well as a $750 administrative fee (the “Redemption Amount”). We must provide seven Trading Days’ (as such term is defined in the debenture) prior notice to the then-holder of the debenture of our intent to make a redemption. If such notice of redemption is received six months after the Issue Date, the then-holder has the right to convert any or all of such to-be-prepaid amount into shares of our Common Stock in accordance with the conversion provisions of the debenture prior to such redemption.
Further, commencing on May 10, 2023, and continuing on the tenth day of each calendar month thereafter, we are required to redeem an amount equivalent to the sum of $2.00 for each 12-count case of our beverages that we sell in the ordinary course, calculated two months in arrears. Accordingly, the first redemption payment is due and payable on May 10, 2023 for the cases sold during the month of March, 2023. Mandatory redemption payments are based upon revenues recognized by us in accordance with US GAAP for each such month, rather than upon the receipt by us of funds received from sales during a relevant month. The above-referenced seven trading days’ prior notice and conversion provisions do not apply to any of the mandatory redemption payments.
In connection with the issuance of the debenture, the Company granted to the Investor warrants to purchase up to 80 million shares of the Company’s common stock, which expire on March 13, 2028. The warrants are exercisable at $0.0045 per share. As a result of these issuances and grants, we incurred the following (a) relative fair value of the warrants granted of $150,000 and (b) original issue discounts and fees of $74,00 of the debentures for a total of $224,000, which was allocated as debt discount. The debt discount is being amortized to interest expense over the term of the corresponding debenture. During the three months ended March 31, 2023, the Company amortized debt discount of $10,839 to interest expense on the loan. As of March 31, 2023, the unamortized debt discount was $213,161.
As of March 31, 2023, no shares of common stock were potentially issuable under the conversion terms of the outstanding debentures.
At December 31, 2022, accrued interest on the convertible notes payable was $25,756. During the three months ended March 31, 2023, the Company added $19,214 of additional accrued interest, and converted $37,466 of accrued interest, leaving an accrued interest balance on the convertible notes payable of $7,504 at March 31, 2023. Accrued interest is included in accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets.
As of December 31, 2022, the unamortized debt discount was $183,940. During the three months ended March 31, 2023, the Company added $224,000 related to the issuance of secured debentures, and amortized debt discount of $89,670 to interest expense on the loans. As of March 31, 2023, the unamortized debt discount was $318,270.
Cash Flows
In summary, our use of cash has been as follows:
| For the Three Months Ended March 31, 2023 | ||||
| Net cash used in operating activities | $ | (215,544 | ) | |
| Net cash used in investing activities | $ | - | ||
| Net cash provided by financing activities | $ | 252,365 | ||
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Operating Activities
Cash provided by or used in operating activities primarily consists of net income adjusted for certain non-cash items, including depreciation, amortization, changes in allowance for doubtful accounts, loss on extinguishment of debt, and the change in the fair value of our derivative liabilities, and the effect of changes in working capital and other activities. Cash used in operating activities for the three months ended March 31, 2023 was approximately $215,544 and consisted of a net loss of approximately $1.6 million, adjustments for non-cash items, depreciation, amortization, loss on extinguishment of debt, loss on the change in fair value of derivative liabilities, which in the aggregate total approximately $869,179, and approximately $507,834 used in working capital and other activities.
Investing Activities
Cash used in investing activities for three months ended March 31, 2023 was nil and for the three months ended was approximately $21,131 and was attributable to capital expenditures.
Financing Activities
Cash provided by financing activities for three months ended March 31, 2023 was approximately $252,365 and was comprised of proceeds from a notes payable of $284,595 and proceeds from convertible debentures payable of $401,000, offset by payments on our line of credit to related party of $1,500, payments of our acquisition obligations of $5,147, payment of our note payable of $424,644, and payment of finance lease obligations of $1,939.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies
Our discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to provisions for uncollectible accounts receivable, inventories, valuation of intangible assets, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for 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.
The accounting policies that we follow are set forth in Note 2, Summary of Significant Accounting Policies, of our consolidated financial statements for the quarter ended March 31, 2023. These accounting policies conform to accounting principles generally accepted in the United States, and have been consistently applied in the preparation of the consolidated financial statements.
Revenue Recognition and Deferred Revenue
We sell our products, which includes our hemp energy drink, CBD energy water, CBD water, and logo apparel, to online customers or through resellers and distributors. In evaluating the timing of the transfer of control of products to customers, we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title of the products. We recognize revenue from product sales to customers, distributors, and resellers when products that do not require further services by us are shipped, when there are no uncertainties surrounding customer acceptance, and when collectability is reasonably assured. Sales are made to customers under terms allowing certain limited rights of return. Amounts billed to customers in sales transactions related to shipping and handling, represent revenues earned for the goods provided and are included in net sales. Costs of shipping and handling are included in cost of products sold.
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We also sell our products, and beverages purchased for resale from several other beverage manufacturers, to convenience stores, grocery stores, and smoke and gift shops. In evaluating the timing of the transfer of control of products to customers, we consider several indicators, including significant risks and rewards of products, our right to payment, and the legal title of the products. We recognize revenue from product sales to resellers when products that do not require further services by us are shipped or delivered, when there are no uncertainties surrounding customer acceptance and when collectability is reasonably assured. Cash received by us prior to shipment is recorded as deferred revenue. Sales are made to customers under terms allowing certain limited rights of return. Amounts billed to customers in sales transactions related to shipping and handling, represent revenues earned for the goods provided and are included in net sales. Costs of shipping and handling are included in cost of products sold.
We recognize revenue in accordance with ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC Topic 606”). The underlying principle of ASC Topic 606 is to recognize revenue to depict the transfer of goods or services to a customer at the amount expected to be collected. To apply these principles, ASC Topic 606 outlines a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes:
| 1. | Identifying the contract(s) or agreement(s) with a customer; | |
| 2. | Identifying the separate performance obligations in the contract or agreement; | |
| 3. | Determining the transaction price; | |
| 4. | Allocating the transaction price to the separate performance obligations in the contract or agreement; and | |
| 5. | Recognizing revenue as each performance obligation is satisfied. |
Pursuant to ASC Topic 606, we recognize revenue when performance obligations under the terms of a contract are satisfied, which occurs typically upon the transfer of control, including the risks and rewards of ownership. With respect to us, performance is deemed to occur upon shipment or delivery of products to our customers based on the written contract terms, which is also when control is transferred.
Our revenue earned is recognized when we satisfy a single performance obligation by transferring control of our products to a customer. We have determined that disaggregated revenue by net sales by revenue source would be meaningful and allow investors to understand our business activities, historical performance, or future prospects. Disaggregated sales by revenue source, which includes sales to distributors, online sales, sales through Amazon, and distribution sales. This is the same information used by our Chief Operating Decision Maker for evaluating the financial performance of our operations and making resource decisions. We also sell merchandise and apparel that comprises approximately 1% of our gross annual sales, and solely exists to promote our beverages. Merchandise and apparel sales are included with the gross sales for our one operating segment.
During the prior year, the Company consolidated and restructured its operations. The Company now operates in one segment for the manufacture and distribution of our products and those of otherwise unrelated beverage products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements.
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Stock-Based Compensation
FASB’s ASC Topic 718, Stock Compensation (formerly, FASB Statement 123R), prescribes accounting and reporting standards for all stock-based payment transactions in which employee and non-employee services are acquired. We measure the cost of employee and non-employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Fair value for restricted stock awards is valued using the closing price of our Common Stock on the date of grant. For our three months ending March 31, 2023 and 2022, we recognized no stock-based compensation expense. See Note 12, Share-Based Compensation, of our consolidated financial statements for the three months ended March 31, 2023, for an additional description of our stock-based compensation that had a material effect on our consolidated financial statements.
Emerging Growth Company Status
On April 5, 2012, the JOBS Act, was enacted. The JOBS Act provides that, among other things, an “emerging growth company” can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. As an emerging growth company, we have irrevocably elected to take “opt out” of taking advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth public companies on a case-by-case basis.
We intend to rely on certain of the other exemptions and reduced reporting requirements provided by the JOBS Act. As an emerging growth company, we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b), and (ii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis).
We will remain an emerging growth company until the earlier to occur of (1) the last day of our fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenues of at least $1.07 billion, or (c) in which we are deemed to be a “large accelerated filer” under the rules of the SEC, which means the market value of our common shares that is held by non-affiliates exceeds $700 million as of the last day of our second quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
We are also a “smaller reporting company” meaning that the market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
Recently Issued Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies to our consolidated financial statements for the period ended March 31, 2023 for a discussion of recent accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A smaller reporting company is not required to provide the information required by this Item.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure control and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2023, the period covered in this Report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations on the Effectiveness of Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We know of no other material pending legal proceedings to which we or any of our subsidiaries is a party or to which any of our assets or properties, or the assets or properties of any of our subsidiaries, are subject and, to the best of our knowledge, no adverse legal activity is anticipated or threatened. In addition, we do not know of any such proceedings contemplated by any governmental authorities.
We know of no material proceedings in which any of our directors, officers, or affiliates, or any registered or beneficial stockholder is a party adverse to us or any of our subsidiaries or has a material interest adverse to us or any of our subsidiaries.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None that has not been previously disclosed in a Current Report on Form 8-K.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed with or incorporated by reference into this Quarterly Report.
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