UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20212022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ______________________
Commission File NumberNumber: 000-56230
Kona Gold Beverage, Inc.KONA GOLD BEVERAGE, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 81-5175120 | |
| (State | ( | |
| 746 North Drive, | | 32934 |
| (Address of principal executive offices) | (Zip Code) |
(844(844)) 714-2224
(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:Act
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock | KGKG | 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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 | ☐ |
| Non-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 ☐ No ☒
The number of shares of the issuer’s common stock, par value $0.00001$0.0001 per share, outstanding as of November 15, 2021August 8, 2022 was .
INDEX TO FORM 10-Q FILING
FOR THE QUARTER ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
| I |
PART I -– FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KONA GOLD BEVERAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 6,188 | $ | 703,825 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $11,961 and $11,926, respectively | 24,943 | 15,993 | ||||||
| Inventory, net of reserve for obsolescence of $150,000 and $150,000, respectively | 1,189,913 | 574,811 | ||||||
| Prepaids | - | 278,707 | ||||||
| Other current assets | 59,834 | 30,373 | ||||||
| Total current assets | 1,280,878 | 1,603,709 | ||||||
| NON-CURRENT ASSETS | ||||||||
| Property, plant and equipment, net | 327,955 | 348,037 | ||||||
| Right-of-use asset, net | 870,736 | 966,955 | ||||||
| Intangible property, net | 71,078 | 75,955 | ||||||
| Deposits | 15,125 | 15,125 | ||||||
| Total assets | $ | 2,565,772 | $ | 3,009,781 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | 854,360 | $ | 541,123 | ||||
| Accrued compensation | 219,583 | 329,583 | ||||||
| Notes payable, net of discount of $99,031 and $0, respectively, current | 198,332 | 7,974 | ||||||
| Notes payable - related parties, current | 1,728,651 | 6,000 | ||||||
| Acquisition obligations, current | 60,000 | 60,000 | ||||||
| Lease liabilities, current | 224,162 | 213,837 | ||||||
| Convertible debt, net of discount of $815,270 and $2,150,067, respectively | 84,730 | 849,933 | ||||||
| Derivative liability | 833,000 | 2,121,000 | ||||||
| Total current liabilities | 4,202,818 | 4,129,450 | ||||||
| NON-CURRENT LIABILITIES | ||||||||
| Notes payable - related parties, net of current | - | 1,525,651 | ||||||
| Notes payable, net of current | 22,219 | 25,338 | ||||||
| Acquisition obligations, net of current | 606,731 | 615,317 | ||||||
| Lease liabilities, net of current | 725,284 | 838,883 | ||||||
| Total liabilities | 5,557,052 | 7,134,639 | ||||||
| COMMITMENTS AND CONTINGENCIES | - | - | ||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| Preferred Stock, $ par value, shares authorized, and issued and outstanding, respectively | 10 | 10 | ||||||
| Common Stock, $ par value, authorized, and , issued and outstanding, respectively | 17,091 | 10,047 | ||||||
| Common stock issuable ( and shares) | 1,386,497 | 1,386,497 | ||||||
| Additional paid-in capital | 16,855,382 | 10,778,761 | ||||||
| Accumulated deficit | (21,250,260 | ) | (16,300,173 | ) | ||||
| Total stockholders’ deficit | (2,991,280 | ) | (4,124,858 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 2,565,772 | $ | 3,009,781 | ||||
See notes to condensed consolidated financial statements
| F-2 |
KONA GOLD BEVERAGE, INC.
Item 1. Financial Statements CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2022 and 2021
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| REVENUES, NET | $ | 1,173,398 | $ | 790,809 | $ | 2,168,529 | $ | 1,252,980 | ||||||||
| COST OF REVENUES | 885,517 | 686,706 | 1,735,393 | 1,000,571 | ||||||||||||
| Gross profit | 287,881 | 104,103 | 433,136 | 252,409 | ||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Selling, general and administrative expenses | 1,031,515 | 644,052 | 1,970,851 | 1,212,732 | ||||||||||||
| LOSS FROM OPERATIONS | (743,634 | ) | (539,949 | ) | (1,537,715 | ) | (960,323 | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest expense | (156,459 | ) | (64,956 | ) | (587,354 | ) | (1,195,866 | ) | ||||||||
| Financing costs | (286,000 | ) | - | (286,000 | ) | - | ||||||||||
| Change in the fair value of derivative liability | 122,000 | 141,497 | (1,671,000 | ) | (124,369 | ) | ||||||||||
| Gain (loss) on extinguishment of debt | (326,230 | ) | - | (873,040 | ) | - | ||||||||||
| Other income (expense) | 1,798 | (4,967 | ) | 5,022 | (7,542 | ) | ||||||||||
| EIDL advance | - | 95,161 | - | 95,161 | ||||||||||||
| NET LOSS | $ | (1,388,525 | ) | $ | (373,214 | ) | $ | (4,950,087 | ) | $ | (2,192,939 | ) | ||||
| NET LOSS PER COMMON SHARES: | ||||||||||||||||
| Basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES: | ||||||||||||||||
| Basic and diluted | 1,560,391,543 | 805,263,473 | 1,363,761,068 | 805,263,473 | ||||||||||||
See notes to condensed consolidated financial statements
| F-3 |
KONA GOLD BEVERAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Three Months Ended June 30, 2022
(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 | ||||||||||||||||||||||||||||
| March 31, 2022 | 1,482,788,393 | $ | 14,828 | 988,000 | $ | 10 | 170,000,000 | $ | 1,386,497 | $ | 14,098,394 | $ | (19,861,735 | ) | $ | (4,362,006 | ) | |||||||||||||||||||
| Common stock issued for conversion of convertible debt and accrued interest | 225,334,552 | 2,253 | 2,667,498 | 2,669,751 | ||||||||||||||||||||||||||||||||
| Common stock issued with employment agreement | 1,000,000 | 10 | 8,490 | 8,500 | ||||||||||||||||||||||||||||||||
| Warrants related to convertible notes | 81,000 | 81,000 | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (1,388,525 | ) | (1,388,525 | ) | ||||||||||||||||||||||||||
| Balance June 30, 2022 (Unaudited) | 1,709,122,945 | $ | 17,091 | 988,000 | $ | 10 | 170,000,000 | $ | 1,386,497 | $ | 16,855,382 | $ | (21,250,260 | ) | $ | (2,991,280 | ) | |||||||||||||||||||
INDEX TO FINANCIAL STATEMENTSFor the Six Months Ended June 30, 2022
(Unaudited)
For the Three Months Ended June 30, 2021 (Unaudited)
For the Six Months Ended June 30, 2021 (Unaudited)
See notes to condensed consolidated financial statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| F-4 |
| Unaudited | Audited | |||||||
| Nine Months Ended | Year Ended | |||||||
| September 30, | December 31, | |||||||
| ASSETS | 2021 | 2020 | ||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 546,528 | $ | 113,168 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $7,709 and $3,967, respectively | 63,715 | — | ||||||
| Other receivables | 14,876 | 14,876 | ||||||
| Inventory | 866,613 | 660,504 | ||||||
| Prepaids | 62,200 | — | ||||||
| Other current assets | 6,517 | 5,572 | ||||||
| Total current assets | 1,560,449 | 794,120 | ||||||
| NON-CURRENT ASSETS | ||||||||
| Property, plant and equipment, net | 281,029 | 167,872 | ||||||
| Right-of-use asset, net | 1,219,103 | 912,993 | ||||||
| Intangible property, net | 74,744 | 69,488 | ||||||
| Goodwill | 1,275,938 | 0 | ||||||
| Note receivable, net of allowance $1,500,000 and $0, respectively | — | — | ||||||
| Deposit | 12,750 | 6,500 | ||||||
| Total non-current assets | 2,863,564 | 1,156,853 | ||||||
| Total assets | $ | 4,424,013 | $ | 1,950,973 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 206,123 | $ | 208,599 | ||||
| Amounts owed to customers | — | 10,508 | ||||||
| Credit card payables | 4,009 | 19,469 | ||||||
| Current note payable | 1,994 | — | ||||||
| Current note payable - related party | 1,500 | 12,000 | ||||||
| Current lease liability | 41,806 | 149,407 | ||||||
| Convertible debt | 2,400,000 | 900,000.00 | ||||||
| Derivative liability | 1,225,741 | 361,152.00 | ||||||
| Accrued compensation | 389,583 | 257,500.00 | ||||||
| Accrued stock compensation | 1,386,497 | 1,386,497 | ||||||
| Accrued liabilities | 183,757 | 81,624 | ||||||
| Total current liabilities | 5,841,010 | 3,386,756 | ||||||
| NON-CURRENT LIABILITIES | ||||||||
| Line of credit | 198,470 | 398,470 | ||||||
| Line of credit - related party | 1,478,151 | 1,495,151 | ||||||
| Note payable - related party, net of current | 53,500 | 56,000 | ||||||
| Note payable - acquisition | 590,418 | — | ||||||
| Note payable | 32,769 | — | ||||||
| PPP note payable | 117,487 | 95,161 | ||||||
| Lease liability, net of current | 1,177,297 | 763,586 | ||||||
| Total liabillities | 9,489,102 | 6,195,124 | ||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 13) | ||||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| Preferred Stock Series A, $ par value, shares authorized, issued, and outstanding, respectively | — | — | ||||||
| Preferred Stock Series B, $ par value, shares authorized, issued and outstanding, respectively | 5 | 5 | ||||||
| Preferred Stock Series C, $ par value, shares authorized, and issued, and outstanding, respectively | — | — | ||||||
| Preferred Stock Series D, $ par value, shares authorized, issued, and outstanding, respectively | 5 | 5 | ||||||
| Common Stock, $ par value, authorized, , and , issued and outstanding, respectively | 8,831 | 7,863 | ||||||
| Additional paid-in capital - warrants | 2,027,691 | 281,565 | ||||||
| Additional paid-in capital | 6,601,818 | 4,746,447 | ||||||
| Accumulated deficit | (13,703,438 | ) | (9,280,036 | ) | ||||
| Total stockholders’ deficit | (5,065,089 | ) | (4,244,151 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 4,424,013 | $ | 1,950,973 | ||||
F-1
KONA GOLD BEVERAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| THREE MONTHS ENDED | NINE MONTHS ENDED | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| REVENUES, NET OF SALES, RETURNS, AND ALLOWANCES OF $16,599 AND $6,600; and $61,041 AND $30,655, RESPECTIVELY | $ | 545,375 | $ | 312,709 | $ | 1,798,999 | $ | 741,812 | ||||||||
| COST OF REVENUES | 442,766 | 222,111 | 1,443,727 | 523,774 | ||||||||||||
| Gross profit | 102,609 | 90,598 | 355,272 | 218,038 | ||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Selling, general and administrative expenses | 756,110 | 500,233 | 1,968,841 | 1,840,004 | ||||||||||||
| Income (Loss) from operations | (653,501 | ) | (409,635 | ) | (1,613,569 | ) | (1,621,966 | ) | ||||||||
| Other income / (expense) | ||||||||||||||||
| Interest expense | (17,149 | ) | (20,628 | ) | (52,091 | ) | (38,246 | ) | ||||||||
| Interest expense related to loan origination fee on convertible note | (70,000 | ) | (10,000 | ) | (135,000 | ) | (25,000 | ) | ||||||||
| Interest expense related to warrants on convertible note | (693,555 | ) | — | (1,746,125 | ) | (281,565 | ) | |||||||||
| Interest expense on convertible note | (36,767 | ) | — | (80,121 | ) | — | ||||||||||
| Gain/(Loss) on derivative | (740,220 | ) | (69,178 | ) | (864,589 | ) | (217,806 | ) | ||||||||
| Tax expense | (19,523 | ) | — | (27,065 | ) | — | ||||||||||
| Gain on the extinquishment of debt | — | — | 95,161 | — | ||||||||||||
| EIDL advance | — | — | — | 7,000 | ||||||||||||
| Other income | — | — | — | 6,291 | ||||||||||||
| Net Income (Loss) | $ | (2,230,715 | ) | $ | (509,441 | ) | $ | (4,423,399 | ) | $ | (2,171,292 | ) | ||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES: | ||||||||||||||||
| Basic and diluted | 829,027,793 | 771,268,436 | 829,027,793 | 771,268,436 | ||||||||||||
| NET LOSS PER COMMON SHARES: | ||||||||||||||||
| Basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.00 | ) | ||||
For the Six Months Ended June 30, 2022 and 2021
(Unaudited)
Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| CASH USED IN OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (4,950,087 | ) | $ | (2,192,939 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operations: | ||||||||
| Depreciation and amortization | 44,250 | 20,503 | ||||||
| Right-of-use asset | 96,219 | 74,261 | ||||||
| Amortization of debt discount | 480,763 | - | ||||||
| Amortization of intangible assets | 4,877 | - | ||||||
| Change in allowance for doubtful accounts | 35 | - | ||||||
| Financing costs | 286,000 | |||||||
| Loss on extinguishment of debt | 873,040 | - | ||||||
| Loss on change in the fair value of derivative liabilities | 1,671,000 | - | ||||||
| Interest expense related to warrants on convertible debt | - | 1,052,571 | ||||||
| Common stock issued for compensation | 8,500 | |||||||
| Common stock issued for acquisition | - | 270,900 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Decrease (increase) in accounts receivable | (8,985 | ) | (344,030 | ) | ||||
| Decrease (increase) in inventory | (615,102 | ) | (92,447 | ) | ||||
| Decrease (increase) in prepaids | 278,707 | (10,244 | ) | |||||
| Decrease (increase) in other current assets | (29,461 | ) | (2,662 | ) | ||||
| Increase (decrease) in accounts payable and accrued expenses | 450,365 | 180,716 | ||||||
| Increase (decrease) in accrued compensation | (110,000 | ) | 117,708 | |||||
| Increase (decrease) in derivative liability | - | 124,369 | ||||||
| Increase (decrease) in lease liability | (99,476 | ) | (74,261 | ) | ||||
| Net cash used in operating activities | (1,619,355 | ) | (875,555 | ) | ||||
| CASH USED IN INVESTING ACTIVITIES: | ||||||||
| Purchase of property, plant and equipment | (24,168 | ) | (26,247 | ) | ||||
| Changes in goodwill | (1,275,938 | ) | ||||||
| Changes in intellectual property | - | (7,604 | ) | |||||
| Net cash used in investing activities | (24,168 | ) | (1,309,789 | ) | ||||
| CASH PROVIDED BY FINANCING ACTIVITIES: | ||||||||
| Changes in line of credit - related party | - | 3,000 | ||||||
| Changes in acquisition obligations | (8,586 | ) | 624,360 | |||||
| Principal repayments of finance lease obligation | (3,798 | ) | - | |||||
| Proceeds from note payable – related party | 200,000 | - | ||||||
| Payment of note payable – related party | (3,000 | ) | (6,000 | ) | ||||
| Proceeds from notes payable | 289,389 | - | ||||||
| Payments of notes payable | (3,119 | ) | - | |||||
| Proceeds from convertible debentures payable, net of expenses | 475,000 | 1,522,984 | ||||||
| Changes from PPP notes payable | - | 22,326 | ||||||
| Net cash provided by financing activities | 945,886 | 2,166,670 | ||||||
| Net cash decrease for period | (697,637 | ) | (18,674 | ) | ||||
| Cash at beginning of period | 703,825 | 113,168 | ||||||
| Cash at end of period | $ | 6,188 | $ | 94,494 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for income taxes | $ | - | $ | 2,275 | ||||
| Cash paid for interest | $ | 256 | $ | 34,941 | ||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Fair value of common shares issued as debt discount on note payable | $ | 135,000 | $ | - | ||||
| Fair value of common shares issued on conversion of debentures and accrued interest | $ | 5,859,165 | $ | - | ||||
| Derivative liability recorded on issuance of convertible note | $ | 680,000 | $ | |||||
See notes to condensed consolidated financial statements
F-2
| F-5 |
KONA GOLD BEVERAGE, INC.
| Common Stock | Preferred Stock | Additional | Total | |||||||||||||||||||||||||
| $.00001 Par | $.00001 Par | Paid | Accumulated | Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | in Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance December 31, 2019 | 763,967,603 | $ | 7,640 | 4,988,000 | $ | 50 | $ | 4,155,777 | $ | (6,154,441 | ) | $ | (1,990,976 | ) | ||||||||||||||
| Common Stock Issued for Compensation | 5,000,000 | 50 | 318,450 | 318,500 | ||||||||||||||||||||||||
| Net Income (loss) | — | (475,644 | ) | (475,644 | ) | |||||||||||||||||||||||
| Balance March 31, 2020 | 768,967,603 | $ | 7,690 | 4,988,000 | $ | 50 | 4,474,227 | $ | (6,630,085 | ) | $ | (2,148,120 | ) | |||||||||||||||
| Common Stock Issued for Sponsorship Agreements | 85,000 | 1 | 2,577 | 2,578 | ||||||||||||||||||||||||
| Common Stock Issued for Compensation | 5,000,000 | 50 | 157,450 | 157,500 | ||||||||||||||||||||||||
| Warrants related to convertible note | 281,565 | 281,565 | ||||||||||||||||||||||||||
| Net Income (loss) | — | (1,066,920 | ) | (1,066,920 | ) | |||||||||||||||||||||||
| Balance June 30, 2020 | 774,052,603 | $ | 7,741 | 4,988,000 | $ | 50 | $ | 4,915,819 | $ | (7,697,005 | ) | $ | (2,773,397 | ) | ||||||||||||||
| Common Stock Conversion to Preferred Stock | (140 | ) | (0 | ) | 140 | 0.00 | — | |||||||||||||||||||||
| Preferred Stock Conversion to Common Stock | 4,000,000 | 40 | (4,000,000 | ) | (40.00 | ) | — | — | ||||||||||||||||||||
| Accrued Common Stock Issues for Compensation | 140 | 0 | 2 | 2 | ||||||||||||||||||||||||
| Net Income (loss) | — | (509,441 | ) | (509,441 | ) | |||||||||||||||||||||||
| Balance September 30, 2020 | 778,052,603 | $ | 7,781 | 988,140 | $ | 10 | $ | 4,915,821 | $ | (8,206,446 | ) | $ | (3,282,836 | ) | ||||||||||||||
| Common Stock Issued for Conversion of Convertible Debt | 8,255,438 | 83 | 112,191 | 112,274 | ||||||||||||||||||||||||
| Net Income (loss) | — | (1,073,590 | ) | (1,073,590 | ) | |||||||||||||||||||||||
| Balance December 31, 2020 | 786,308,041 | $ | 7,863 | 988,140 | $ | 10 | $ | 5,028,012 | $ | (9,280,036 | ) | $ | (4,244,153 | ) | ||||||||||||||
| Common Stock Issued for Conversion of Convertible Debt | 30,418,798 | 304 | 613,505 | 613,809 | ||||||||||||||||||||||||
| Common Stock Issued for Acquisition | 9,000,000 | 90 | 270,810 | 270,900 | ||||||||||||||||||||||||
| Warrants related to convertible note | 1,052,571 | 1,052,571 | ||||||||||||||||||||||||||
| Net Income (loss) | — | (1,819,503 | ) | (1,819,503 | ) | |||||||||||||||||||||||
| Balance March 31, 2021 | 825,726,839 | $ | 8,257 | 988,140 | $ | 10 | $ | 6,964,898 | $ | (11,099,539 | ) | $ | (4,126,375 | ) | ||||||||||||||
| Common Stock Issued for Conversion of Convertible Debt | 25,045,798 | 250 | 508,924 | 509,174 | ||||||||||||||||||||||||
| Net Income (loss) | — | (373,181 | ) | (373,181 | ) | |||||||||||||||||||||||
| Balance June 30, 2021 | 850,772,637 | $ | 8,508 | 988,140 | $ | 10 | $ | 7,473,822 | $ | (11,472,720 | ) | $ | (3,990,381 | ) | ||||||||||||||
| Common Stock Issued for Conversion of Convertible Debt | 29,195,472 | 292 | 406,360 | 406,652 | ||||||||||||||||||||||||
| Common Stock Issued for Compensation | 3,100,000 | 31 | 55,769 | 55,800 | ||||||||||||||||||||||||
| Warrants related to convertible note | 693,555 | 693,555 | ||||||||||||||||||||||||||
| Preferred Stock Conversion to Common Stock | 140 | 0 | 140 | 0.00 | 3 | (3 | ) | 3 | ||||||||||||||||||||
| Net Income (loss) | — | (2,230,715 | ) | (2,230,715 | ) | |||||||||||||||||||||||
| Balance September 30, 2021 | 883,068,249 | $ | 8,831 | 988,280 | $ | 10.00 | $ | 8,629,509 | $ | (13,703,438 | ) | $ | (5,065,086 | ) | ||||||||||||||
F-3
| 2021 | 2020 | |||||||
| CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (4,423,399 | ) | $ | (2,171,292 | ) | ||
| Adjustments to reconcile net income to net cash provided by operations: | ||||||||
| Depreciation and Amortization | 32,755 | 24,778 | ||||||
| Common Stock Issued in Exchange for Services | — | — | ||||||
| Common Stock Issued in Acquisition | 270,900 | — | ||||||
| Common Stock Issued for Sponsorship | — | 2,578 | ||||||
| Common Stock Issued for Compensation | 55,800 | 476,002 | ||||||
| Interest expense related to warrants on convertible debt | 1,746,126 | 281,565 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Decrease (increase) in accounts receivable | (74,223 | ) | 20,620 | |||||
| Decrease (increase) in other receivable | — | — | ||||||
| Decrease (increase) in inventory | (206,109 | ) | (24,019 | ) | ||||
| Decrease (increase) in prepaids | (62,200 | ) | — | |||||
| Decrease (increase) in intercompany transactions | — | — | ||||||
| Decrease (increase) in other current assets | (945 | ) | (3,897 | ) | ||||
| Decrease (increase) in deposits | (6,250 | ) | — | |||||
| Decrease (increase) in right-of-use asset | (306,110 | ) | (306,006 | ) | ||||
| Increase (decrease) in accounts payable | (2,476 | ) | 74,304 | |||||
| Increase (decrease) in credit card payable | (15,461 | ) | 8,116 | |||||
| Increase (decrease) in accrued compensation | 132,083 | 196,042 | ||||||
| Increase (decrease) in accrued stock compensation | — | (4 | ) | |||||
| Increase (decrease) in accrued expenses | 102,133 | 37,666 | ||||||
| Increase (decrease) in derivative liability | 864,589 | 217,806 | ||||||
| Increase (decrease) in lease liability | 306,110 | 287,140 | ||||||
| Net cash provided by (used in) operating activities | (1,586,677 | ) | (878,601 | ) | ||||
| CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES: | ||||||||
| Purchases of property, plant and equipment | (145,912 | ) | (54,134 | ) | ||||
| Changes in goodwill | (1,275,938 | ) | — | |||||
| Changes in intellectual property | (5,256 | ) | 6,132 | |||||
| Net cash provided by (used in) investing activities | (1,427,106 | ) | (48,002 | ) | ||||
| CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES: | ||||||||
| Changes in note payable - related party | (13,000 | ) | (9,000 | ) | ||||
| Changes in line of credit - related party | (217,000 | ) | 325,500 | |||||
| Changes in note payable - acquisition | 590,418 | — | ||||||
| Changes in note payable | 34,763 | |||||||
| Changes line of credit | — | — | ||||||
| Changes in convertible debt | 3,029,636 | 500,000 | ||||||
| Changes in PPP note payable | 22,326 | 95,161 | ||||||
| Net cash provided by (used in) financing activities | 3,447,143 | 911,661 | ||||||
| Net cash increase for period | 433,360 | (14,942 | ) | |||||
| Cash at beginning of period | 113,168 | 36,223 | ||||||
| Cash at end of period | $ | 546,528 | $ | 21,281 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for income taxes | $ | 27,065 | $ | — | ||||
| Cash paid for interest | $ | 52,091 | $ | 38,246 | ||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Preferred Stock Conversion to Common Shares | $ | 3 | $ | — | ||||
F-4
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 2022 and 2021
(Unaudited)
NOTE 1 – ORGANIZATIONBASIS OF PRESENTATION AND DESCRIPTION OF BUSINESSLIQUIDITY
The accompanying interim condensed consolidated financial statements of Kona Gold Beverage,Beverages, Inc. (the “Company”, a Delaware corporation (“Kona Gold,” the “Company,” “we,” “us,”“we”, “us”, or “our”), ownsare unaudited, but in the opinion of management contain all adjustments, including normal recurring adjustments, necessary to present fairly our financial position at June 30, 2022, and operates a linethe results of premier CBD lifestyle brandoperations and other products. As of Septembercash flows for the six months ended June 30, 2021 the Company has four wholly-owned subsidiaries: Kona Gold LLC, a Delaware limited liability company (“Kona”), HighDrate LLC, a Florida limited liability company (“HighDrate”), Gold Leaf Distribution LLC, a Florida limited liability company (“Gold Leaf”),2022, and S and S Beverage, Inc. (“S and S”), a Wisconsin corporation, which the Company acquired in February 2021. The Companybalance sheet as of December 31, 2021, is primarily focused on product developmentderived from the Company’s audited financial statements.
Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with accounting principles generally accepted in the functional beverage sector. Kona Gold creates hemp-infused energy drinks, which includes hemp energy drinks, CBD energy water,United States of America have been condensed or omitted pursuant to the rules and also sells Kona Gold merchandiseregulations of the Securities and apparel, which promotesExchange Commission regarding interim financial reporting. We believe that the disclosures contained in these condensed financial statements are adequate to make the information presented herein not misleading. For further information, refer to the financial statements and the notes thereto included in the Company’s beverages. HighDrate focusesAnnual Report on the development and marketing of CBD-infused energy waters geared towards the fitness and wellness markets. S and S creates and sells unique lemon flavored drinks under the “Ooh La Lemin” brand name. Gold Leaf focuses on the distribution of premium beverages and snacks in key markets.
The Company currently sells its products through resellers, the Company’s websites, and distributors that span across 27 states. The Company’s products are available in wide variety of stores, including grocery stores, convenience 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.
The Company’s Business
The Company has two reportable segments:
Beverage Products
The Company’s hemp-infused energy drink is available in both regular and sugar-free options. These energy drinks are infused with organic hemp protein powder and contain essential vitamins and ingredients that give consumers a natural energy boost. Hemp protein contains no gluten and is compatible with a variety of diets, including vegan and Kosher. Our hemp energy drinks are available in eight flavors: classic hemp, platinum hemp, sugar-free hemp, cherry vanilla, bubble gum, candy apple, cotton candy, and pink grapefruit.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
HighDrate’s CBD-infused energy water is great tasting, sugar-free, and powered by the patented technology of Alkame Holdings Inc.’s wholly-owned subsidiary, Alkame Water Inc. (“Alkame”), which uses its advanced water treatment to create a premium oxygenated alkaline water with natural antioxidants. Alkame believes that, pursuant to a double-blind placebo, peer-backed research project that it conducted, its Level 2 – inputs other than Level 1 that are observable, either directly or indirectly; such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets and liabilities in markets technology can boost the immune system and physical performance. HighDrate’s CBD-infused energy water contains 80 mg of caffeine and 10 mg of CBD. The Company believes that CBD aids the body’s endocannabinoid system in neuroprotection, stress recovery, immune balance, and homeostatic regulation. HighDrate’s CBD-infused energy water is available in six flavors: watermelon, kiwi strawberry, tropical coconut, Georgia peach, sour apple, and blue island punch.
The Company’s product “Storm” is a high-alkaline CBD-infused water. This water is also powered by Alkame’s patented technology, which uses its advanced water treatment to create a premium oxygenated alkaline water with natural antioxidants. Storm high-alkaline CBD water contains 20 mg of CBD.
Ooh La Lemin is lemonadeForm 10-K for the modern age. Made naturalfiscal year ended December 31, 2021, as filed with the Securities and refreshing with no added sugar, low in carbs, and 15 calories. Ooh La Lemin is available in four distinct flavors: original lemonade, peach lemonade, strawberry lemonade, and blue raspberry lemonade.Exchange Commission on April 13, 2022.
The Company also sells branded apparel. The Company uses only high-quality textiles and specialty inks and foils, which provide consumers with a premium fit and feel. The Company currently offers shirts, tanks, hats, and towelsresults of operations for sale.the six months ended June 30, 2022, are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2022.
Effects of COVID-19
In January 2020, the World Health Organization (the “WHO”)WHO announced a global health emergency because of a new strain of coronavirus (“COVID-19”)(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, during the six months ended June 30, 2022, the Company recorded a net loss of $4,950,087 and used cash in operations of $1,619,355 and had a stockholders’ deficit of $2,991,280 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. 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. As a result, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern. The Company’s independent registered public accounting firm, in its report on the Company’s consolidated financial statements for the year ended December 31, 2021, has also expressed substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At June 30, 2022, the Company had cash on hand in the amount of $6,188. Subsequent to June 30, 2022, the Company raised an additional $547,500 through the sale of a secured promissory note. The Company believes it has sufficient cash and working capital to sustain operations through October 31, 2022. 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.
| F-6 |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements are unaudited and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. These unaudited 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 the consolidated financial statements in conformity with GAAPgenerally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosuredisclosures of contingent assets and liabilities at the date of the financial statements. Estimates also affectstatements, and the reported amounts of revenuerevenues and expenses during the reporting period. Actual events and 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 estimates.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Forintangible assets, the purpose of reporting cash flows, the Company considers all unrestricted, highly liquid investments with an initial maturity of three months or less to be cash equivalents.
The estimated fair valuesvaluation allowance for financialdeferred tax assets, accruals for potential liabilities, assumptions made in valuing stock instruments are determined at discrete pointsissued for services, and assumptions used in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The carrying amounts of accounts payable, accruedvaluing warrant liabilities, and notes payable approximate fair value given their short-term nature or effective interest rates. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputsassumptions used in the valuation methodologies in measuring fair value. A fair value hierarchy has been established for valuation inputs that gives the highest priority to quoted price in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarch is as follows:
Level 1 – quoted prices in active markets for identical assets or liabilities;
Level 2 – inputs other than Level 1 that are observable, either directly or indirectly; such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets and liabilities in markets that are not active, or inputs that are observable or an be corroborated by observable market data for substantially the full termdetermination of the assets or liabilities; orCompany’s liquidity.
Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.Revenue Recognition
The Company analyzes all financial instruments with features of both liabilities and equity under Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging (“ASC 815”). Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair value of free-standing derivative instruments such as warrant and option derivatives are valued using the Black-Scholes models.
The Company uses Level 2 inputs for its valuation methodology for the embedded conversion option liabilities as their fair value were determined by using the Black-Scholes option-pricing model based on various assumptions. The Company’s derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives.
Accounts receivable are recorded at net realizable value. The Company determines provisions for uncollectible accounts, sales returns, and claims based upon factors including the credit risk and activity of specific customers, historical trends, and other information. If the Company becomes aware of a specific distributor’s or reseller’s inability to meet its financial obligations, bad debt charges are recorded based on an overall assessment of past due accounts receivable outstanding. Bad debt attributed to accounts receivable in the nine months ended September 30, 2021 and 2020, was approximately $21,000 and $41,600 respectively. These amounts are included in selling, general and administrative expenses in the accompanying Consolidated Statements of Loss. Management will review annually to determine provisions and record an allowance as deemed necessary. In the opinion of management, a provision was deemed necessary for uncollectible accounts for Kona and no provision was deemed necessary for Gold Leaf. The allowances for Uncollectible Accounts at September 30, 2021 and December 31, 2020 were $7,709 and $3,967, respectively, as reflected in the accompanying Consolidated Balance Sheets.
F-7
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The cost of inventory using the standard cost method, which approximates actual cost based on a first-in, first-out method. The Company’s inventories are valued at the lower cost or net realizable value. The Company’s inventory consists almost entirely of finished and unfinished goods, and freight, which include CBD energy waters, CBD waters, hemp energy drinks, lemonades, cans for production, and merchandise and apparel. The Company periodically evaluates and adjusts inventories for obsolescence. In the opinion of management, no provision for obsolescence is deemed necessary. The shelf life of all beverage inventory is two years, and at March 31, 2021, and December 31, 2020, all inventory was current, as reflected in the accompanying Consolidated Balance Sheets.
Property, plant and equipment are reported on the accompanying Consolidated Balance Sheet at cost less accumulated depreciation. Assets with a useful life greater than one year and cost greater than $100 are capitalized. Maintenance and repairs are charged to expense as incurred.
Depreciation is provided using the straight-line method over the estimated useful lives of the asset as follows:
Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company has selected December 31 as the date to perform the annual impairment test.
Intangible assets represent both indefinite lived and definite lived assets. Trademarks are deemed to have definite useful lives of ten years, are amortized, and are tested annually for impairment. Intangible assets are reported on the balance sheet at cost less accumulated amortization. The Company has selected December 31 as the date to perform the annual impairment test.
Management determined that, for the year ending December 31, 2020, there were no identifiable assets or liabilities; therefore, the implied fair value of goodwill is zero. On January 21, 2021, the Company entered into an Agreement and Plan of Merger with S and S and the five S and S Legacy Shareholders and acquired all of the capital stock of S and S. Because of this, goodwill was recorded in the amount of $1,275,938 see Note 5, Goodwill and Intangible Assets. Management determined that there was no impairment of trademarks for the year ending December 31, 2020, see Note 5, Goodwill and Intangible Assets.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On January 1, 2019, the Company adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASC Topic 842”), which requires an entity to recognize a liability and corresponding asset for leases that meet certain criteria. The Company applied ASC Topic 842 using the modified retrospective approach. Under this approach, the Company applied the new standards to all new leases, and leases which have remaining obligations for financial statements issued for fiscal years beginning after December 15, 2018. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward historical lease classification, and not reassess (i) whether a contract was or contained a lease, and (ii) initial direct costs for any leases that existed prior to January 1, 2019. Under this method, the Company did not restate comparative periods in its financial statements. The Company presents right-of-use assets resulting from leases separately from other assets as noncurrent, and amortized accordingly. The corresponding lease liabilities are presented separately from other liabilities on the accompanying Consolidated Balance Sheet.
The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred. The amortization period for the right-of-use asset is from the lease commencement date to the earlier of the end of the lease term or the end of the useful life of the asset.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the incremental borrowing rate or the risk-free rate with the election of the practical expedient. The Company has elected to use the risk-free rate.
The Company sells its products, which primarily includes its hemp energy drinks, CBD energy waters, CBD waters, and logo apparel, to online customers or through resellers and distributors. In evaluating the timing of the transfer of control of products to customers, the Company considers several indicators, including significant risks and rewards of products, the Company’s right to payment, and the legal title of the products. The Company recognizes revenue from product sales to customers, distributors, and resellers when products that do not require further services by the Company 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.
The Company also sells its 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, the Company considers several indicators, including significant risks and rewards of products, the Company’s right to payment, and the legal title of the products. The Company recognizes revenue from product sales to resellers when products that do not require further services by the Company are shipped or delivered, when there are no uncertainties surrounding customer acceptance and when collectability is reasonably assured. Cash received by the Company 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.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On January 1, 2019, the Company adopted ASU No. 2014-09,accordance with Accounting Standards Codification (ASC) 606, 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 customercustomers at the amount expected to be collected. The implementation of Topic ASC 606 had no impact on the prior period financial statements and no cumulative effect adjustment was recognized.
To apply these principles, ASC Topic 606 outlinescreates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes:
Pursuant to ASC Topic 606,include (1) identifying the Company recognizes revenue whencontract or agreement with a customer, (2) identifying our performance obligations underin the termscontract 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 a contractsales 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 which occurs typically upon the transfer of control, including the risks and rewards of ownership. With respect to the Company, performance is deemed to occur upon shipment or delivery of products to its customers based on the written contract terms, which is also when control is transferred.
The Company evaluated the guidance in ASC 606-10-50-5 and the related implementation guidance to determine disaggregation of revenuesat that would be meaningful. The majority of the Company’s revenue earned from its Beverages Segment and its Distribution Segment is recognized when it satisfies a single performance obligation by transferring control of its products to a customer.time. The Company does not have any significant financing componentcontracts with customers requiring performance beyond delivery, and contracts with customers contain no incentives or payment terms,discounts that could cause revenue to be allocated or adjusted over time. Shipping and it does not have any material unsatisfied performance obligations. The Company’s revenueshandling activities are obtained in similar geographical locations withinperformed before the United States. Furthermore,customer obtains control of the Company’s operations in each of its reporting segments are expectedgoods and therefore represent a fulfillment activity rather than a promised service to have essentially the same future prospects, similar gross margins, sales trends, and the nature of its products and customers are essentially the same. The sales from the Company’s beverage product types are organized as one reportable segment, which the Company refers to as the Beverages Segment, and the salescustomer.
All of the Company’s products are offered for sale as finished goods only, and products thatthere are purchasedno performance obligations required post-shipment for customers to derive the expected value from resellers that are distributed by Gold Leaf is organized as its second reportable segment, which the Company refers to as the Distribution Segment. them.
The Company has also determined that disaggregated revenue by netdoes 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 by revenue source would be meaningfulcontracts, we do not currently maintain a contract asset or liability balance for obligations. We assess our contracts and allow investors to understand its business activities, historical performance, or future prospects. Disaggregated sales by revenue source, which includes sales to distributors, online sales, sales through Amazon, and Gold Leaf distribution sales, is included in Note 16, Revenue, to the Consolidated Financial Statements. We also sell merchandise and apparel that comprises approximately 1%reasonableness of the Company’s gross annual sales, and solely exists to promote its beverages. Therefore, the Company’s merchandise and apparel products are notour conclusions on a reportable segment. Merchandise and apparel sales are included with the gross sales for its Beverages Segment.quarterly basis.
Sales are made to customers under terms allowing certain limited rights of return. The Company records an allowance and return for each quarter for 3%3% of total sales. The Company recorded sales returns,return, and allowance atfor the three months ending SeptemberJune 30, 20212022 and 20202021 of approximately $16,60036,700 and $6,60019,800, respectively, and the nineCompany recorded sales return, and allowance for the six months ending SeptemberJune 30, 20212022 and 20202021 of approximately $61,00071,800 and $30,70057,417, respectively which is included in the revenues, net of sales returns and allowances in the accompanying Condensed Consolidated Statements of Loss.
| F-7 |
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)The following table presents our net revenues, by revenue source, and the period-over-period percentage change, for the period presented:
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE OF NET REVENUES BY REVENUE
Three Months Ended June 30, | ||||||||||||
| 2022 | 2021 | |||||||||||
| Revenue Source | Revenue | Revenue | % Change | |||||||||
| Distributors | $ | 219,790 | $ | 414,937 | (47 | )% | ||||||
| Amazon and Walmart Marketplace | 44,565 | 39,256 | 14 | % | ||||||||
| Online Sales | 13,709 | 21,843 | (37 | )% | ||||||||
| Retail | 927,614 | 328,848 | 182 | % | ||||||||
| Shipping | 4,420 | 5,725 | (23 | )% | ||||||||
| Sales Returns and Allowances | (36,700 | ) | (19,800 | ) | 85 | % | ||||||
| Net Revenues | $ | 1,173,398 | $ | 790,809 | 48 | % | ||||||
Six Months Ended June 30, | ||||||||||||
| 2022 | 2021 | |||||||||||
| Revenue Source | Revenue | Revenue | % Change | |||||||||
| Distributors | $ | 413,107 | $ | 672,873 | (39 | )% | ||||||
| Amazon and Walmart Marketplace | 80,089 | 77,759 | 3 | % | ||||||||
| Online Sales | 22,316 | 40,047 | (44 | )% | ||||||||
| Retail | 1,719,015 | 509,130 | 238 | % | ||||||||
| Shipping | 5,802 | 10,588 | (45 | )% | ||||||||
| Sales Returns and Allowances | (71,800 | ) | (57,417 | ) | 25 | % | ||||||
| Net Revenues | $ | 2,168,529 | $ | 1,252,980 | 73 | % | ||||||
The following table presents our net revenues by product lines for the period presented:
| Three Months Ended June 30, | ||||||||||||
| 2022 | 2021 | |||||||||||
| Product Line | Revenue | Revenue | % Change | |||||||||
| Hemp Energy Drinks | $ | 50,792 | $ | 113,434 | (55 | )% | ||||||
| CBD Energy Waters | 17,249 | 31,682 | (46 | )% | ||||||||
| Lemonade Drinks | 209,976 | 329,893 | (36 | )% | ||||||||
| Apparel | 47 | 1,027 | (95 | )% | ||||||||
| Retail | 927,614 | 328,848 | 182 | % | ||||||||
| Shipping | 4,420 | 5,725 | (23 | )% | ||||||||
| Sales returns and allowance | (36,700 | ) | (19,800 | ) | 85 | % | ||||||
| Net Revenues | $ | 1,173,398 | $ | 790,809 | 48 | % | ||||||
| Six Months Ended June 30, | ||||||||||||
| 2022 | 2021 | |||||||||||
| Product Line | Revenue | Revenue | % Change | |||||||||
| Hemp Energy Drinks | $ | 118,574 | $ | 201,926 | (41 | )% | ||||||
| CBD Energy Waters | 41,588 | 51,762 | (20 | )% | ||||||||
| Lemonade Drinks | 354,238 | 535,733 | (34 | )% | ||||||||
| Apparel | 112 | 1,258 | (91 | )% | ||||||||
| Retail | 1,719,015 | 509,130 | 238 | % | ||||||||
| Shipping | 5,802 | 10,588 | (45 | )% | ||||||||
| Sales returns and allowance | (71,800 | ) | (57,417 | ) | 25 | % | ||||||
| Net Revenues | $ | 2,168,529 | $ | 1,252,980 | 73 | % | ||||||
| F-8 |
Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of revenues consist primarilyshares of expenses associated withcommon stock outstanding during the deliveryyear. 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.
SCHEDULE OF POTENTIAL DILUTIVE SECURITIES
June 30, 2022 | June 30, 2021 | |||||||
| Warrants | 178,333,333 | 70,000,000 | ||||||
| Common stock equivalent of Series B Convertible Preferred Stock | 488,000 | 488,000 | ||||||
| Common stock equivalent of Series C Convertible Preferred Stock | - | 140 | ||||||
| Common stock equivalent of Series D Convertible Preferred Stock | 500,000 | 500,000 | ||||||
| Common stock issuable | 170,000,000 | 170,000,000 | ||||||
| Common stock on convertible debentures and accrued interest | 161,707,234 | 80,508,648 | ||||||
| Total | 511,028,567 | 321,496,788 | ||||||
The Company periodically issues stock options and restricted stock awards to direct procurement costsemployees and shippingnon-employees in non-capital raising transactions for services and handlingfor financing costs. The Company bills shippingaccounts for such grants issued and handling fees charged to customersvesting 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 partcompensation expense on the straight-line basis over the vesting period. Recognition of sales and the associatedcompensation expense as part of cost of revenues. The costs are charged to cost of revenuesfor non-employees is in the same period thatand manner as if the associated revenue is earned.
Company had paid cash for the services. The Company evaluatesrecognizes the fair value of stock-based compensation within its long-lived assets for financial impairment as events or changes in circumstances indicate thatStatements of Operations with classification depending on the carrying amount of such assets may not be recoverable. The Company evaluates the recoverability of long-lived assets used in operations by measuring the carrying amountnature of the assets against their estimated undiscounted future cash flows. If such evaluations indicated that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to fair values. Management completed an impairment review as of December 31, 2020 and determined long-lived assets were not impaired.services rendered.
The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes, which clarifies the accounting and disclosure requirements for uncertainty in tax positions. It requires a two-step approach to evaluate tax positions and determine if they should be recognized in the financial statements. The two-step approach involves recognizing tax positions that are “more likely than not” to occur and then measuring those positions to determine if they are recognizable in the financial statements. Management regularly reviews and analyzes all tax and has determined that no uncertain tax positions requiring recognition have occurred.
The Company has no recorded liabilities for uncertain tax positions as of the accompanying Consolidated Balance Sheets dated September 30, 2021 and December 31, 2020, respectively.
FASB’s ASC Topic 718, Stock Compensation (formerly, FASB Statement 123R) (“ASC Topic 718”), prescribes accounting and reporting standards for all stock-based payment transactions in which employee and non-employee services are acquired. The Company measures 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 forCompany’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, awardsand future dividends. Compensation expense is valued usingrecorded based upon the closing price ofvalue derived from the Company’s common stock, par value $0.00001 per share (the “Common Stock”),Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the date of grant.Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.
The Company estimates the fair value of each restricted stock awardAdvertising Costs
Advertising costs are expensed as of the date of grant using the closing price as reported by the OTC Markets Group Inc. (the “OTCM”) on the date of grant. The fair value determined represents the cost for the awardincurred and is recognized over the vesting period during which an employee is required to provide serviceare included in exchange for the award. The Company accounts for forfeitures of restricted stock as they occur.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company expenses costs of advertisingselling and promotions as incurred. The Company includes in advertising costs inventory given away as promotional merchandise or free samples to create sales.marketing expense. Advertising and promotion costs for the threesix months ended SeptemberJune 30, 2022 and 2021, and 2020, was approximatelywere $21,600105,956 and $5,20024,100, respectively, and for the nine months ended September 30, 2021 and 2020, was approximately $45,700respectively. and $20,600, respectively, which amounts were included in selling, general and administrative expenses in the accompanying Consolidated Statements of Loss.
Concentrations
The Company maintainsCompany’s cash balances at financial institutions. Accounts at each institutionon deposit with banks are insuredguaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. Generally, the Company’s policy is to minimize borrowing costs by immediately applying cash receipts to borrowings against its credit facility. From time to time, however, the Company may be exposed to risk for the amounts of funds held in bank accounts in excess of the FDIC limit. To minimize the risk, the Company’s policy is to maintain cash balances with high quality financial institutions.
| F-9 |
Gross sales. During the three months ended June 30, 2022, the Company reported no customers that accounted for more than 10% of gross sales. During the three months ended June 30, 2021, the Company reported one customer represented 30% of the Company’s gross sales. During the six months ended June 30, 2022, the Company reported no customers that accounted for more than 10% of gross sales. During the six months ended June 30, 2021, the Company reported one customer represented 19% of the Company’s gross sales.
Accounts receivable. As of June 30, 2022, the Company had one customer that accounted for 15% of its gross accounts receivable. As of December 31, 2021, the Company had accounts receivable from two customers that comprised 60% of its gross accounts receivable.
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 has not experienced any lossescurrently relies on a few key co-packers, which in such accounts and periodically evaluates the credit worthinessturn 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 financial institutionsflavors and had determinedconcentrates that are used in the credit exposureCompany’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 negligible.available at competitive prices, although there can be no assurance in this regard. 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 six months ended June 30, 2022, the Company’s largest three vendors accounted for approximately 32%, 20%, and 11% of all purchases, respectively. During the six months ended June 30, 2021, the Company’s largest four vendors accounted for approximately 33%, 13%, 12%, and 11% of all purchases, respectively.
Accounts payable. As of June 30, 2022, three vendors accounted for more than 10% the total accounts payable. The Company’s largest four vendors accounted for 10%, 13% and 21% of the total accounts payable, respectively. As of December 31, 2021, four vendors accounted for more than 10% the total accounts payable. The Company’s largest four vendors accounted for 20%, 14%, 12%, and 11% of the total accounts payable, respectively.
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-10 |
Segments
The Company operates in 1 segment for the manufacture and distribution of our products. In accordance with FASB’sthe “Segment Reporting” Topic of the ASC, 260, Earnings per Share, basic income (loss) per common sharethe 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 calculated using the weighted average number of shares outstanding during the periods reported. Diluted earnings per share include the weighted average effect of all dilutive securities outstanding during the periods presented.
Diluted per-share loss is the same as basic per-share loss when there isbased on a loss from continuing operations.
ASC 280-10, Segment Reporting (“ASC 280-10”),management approach to segment reporting, establishes standards for reportingrequirements to report selected segment information regarding operating segments in annual financial statementsquarterly and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280-10 also establishes standards for relatedreport annually entity-wide disclosures about products and services, and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The Company identified two operating segments that report revenue, including both sales to external customers and intersegment sales or transfers, that are 10% or more of the combined revenue, internal and external, of all the Company’s operating segments. Furthermore, each of the operating segments have assets that are 10% or more of the combined assets of all operating segments.
The Company then applied the management approach to the identification of its two reportable segments – the Beverages Segment, consisting of the operations of Kona, HighDrate, and Ooh La Lemin, and the Distribution Segment, consisting of the operations of Gold Leaf. Specifically, the Company has evaluated guidance in ASC 280-10 and determined that aggregation is consistent with the objectives of ASC 280-10 in that aggregation into two reportable segments allows users of our financial statements to view the Company’s business through the eyes of management based upon the way management reviews performance and makes decisions. Additional factors that were considered included: whether or not an operating segment has similar economic characteristics, the nature of the products/services under each operating segment, the nature of the production/go-to-market process, the type and geographic location of ourmajor 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.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Measurement of our products/services.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 further determined that its logo merchandise and apparel, which revenue comprises approximately 1%does not believe the potential impact of the Company’s gross annual sales,new guidance and solely exists for promotion purposes, couldrelated codification improvements will be aggregated withmaterial to its financial position, results of operations and cash flows.
Other recent accounting pronouncements issued by the operations inFASB, its Emerging Issues Task Force, the Beverages Segment. A descriptionAmerican Institute of the Company’s products is contained in Note 1, OrganizationCertified Public Accountants, and Description of Business. For additional information regarding the Company’s two reportable segments, please see Note 18, Segments.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In May 2020, the Company completed a private placement transaction (the “2020 Private Placement”) of three secured convertible debentures (the “2020 Debentures”), convertible for up to shares (the “2020 Conversion Shares”) of Common Stock and a Warrant to purchase Common Stock (the “2020 Warrant”), exercisable for up to shares of Common Stock (the “2020 Warrant Shares”), pursuant to that certain Securities Purchase Agreement between an otherwise unaffiliated third-party investor (the “Selling Stockholder”) and the Company, dated as of May 14, 2020 (the “2020 SPA”). The Company sold and issued the initial 2020 Debenture (the “First 2020 Debenture”) and granted the Warrant promptly after entering in the 2020 SPA. The Company sold and issued the second 2020 Debenture (the “Second 2020 Debenture”) promptly after filing the registration statement on Form S-1 (the “2020 Registration Statement”) with the Securities and Exchange Commission (the “SEC”). The Company sold and issued the third 2020 Debenture (the “Third 2020 Debenture”) promptly after the SEC declared the 2020 Registration Statement effective. The Company agreed to register the 2020 Conversion Shares and 2020 Warrant Shares pursuant to the terms of the Registration Rights Agreement between the Selling Stockholder and Company, dated as of May 14, 2020 (the “2020 Registration Rights Agreement”).
Pursuant to the terms of the Registration Rights Agreement, the Company agreed to file the 2020 Registration Statement with the SEC registering for resale the Conversion Shares and the Warrant Shares within 45 calendar days following the closing of the Private Placement. Further, the Company agreed to use its best efforts to have the 2020 Registration Statement declared effective by the SEC as soon as practicable, but in no event later than the effectiveness deadline,did not or by the 5th trading day following the date on which the Company is notified that the 2020 Registration Statement will not be reviewed or is no longer subject to further review and Pursuant to the terms of the 2020 Registration Rights Agreement, the Company agreed to file the 2020 Registration Statement with the SEC registering for resale the 2020 Conversion Shares and the 2020 Warrant Shares within 45 calendar days following the closing of the 2020 Private Placement. Further, the Company agreed to use its best efforts to have the 2020 Registration Statement declared effective by the SEC as soon as practicable, but in no event later than the effectiveness deadline, or by the 5th trading day following the date on which the Company is notified that the 2020 Registration Statement will not be reviewed or is no longer subject to further review and comments. Pursuant to the 2020 Registration Rights Agreement, the Company is subject to partial liquidated damages equal to 2.0% of the aggregate purchase price paid by the holder pursuant to the 2020 SPA for any of the 2020 Debentures then held by the holder for failure to file the 2020 Registration Statement timely, failure to file with the SEC a request for acceleration in accordance with Rule 461 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), within five trading days after the date the Company is notified that the 2020 Registration Statement will not be reviewed or is not subject to further review, the 2020 Registration Statement is not declared effective by the effectiveness deadline, if after effectiveness, the 2020 Registration Statement ceases for any reason to remain continuously effective as required or if the holders are not permittedbelieved by management to utilize the prospectus therein to resell for more than 30 consecutive calendar days or more than an aggregate of 40 calendar days during any 12-month period, or if after the six-month anniversary of the 2020 Registration Rights Agreement, the Company does not have available adequate current public information as set forth in Rule 144(c). The parties agreed that the maximum aggregate liquidated damages payable to a holder of the 2020 Debentures under the 2020 Registration Rights Agreement is 24% of the aggregate purchase price paid by such holder pursuant to the 2020 SPA. The Selling Stockholder has agreed to waive this 30-consecutive-calendar-day provision for so long as the Company is utilizing its best efforts to file its Annual Report on Form 10-K for its fiscal year ended December 31, 2020, and promptly thereafter files a Post-Effective Amendment to the 2020 Registration Statement. The Commission declared effective both the 2020 Registration Statement and the Post-Effective Amendment to the 2020 Registration Statement.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for registration rights agreements in accordance with ASC subtopic 825-20, Registration Payment Arrangements (“ASC 825-20”). Under ASC 825-20, the Company is required to disclose the nature and terms of the arrangement, the maximum potential amount and to assess each reporting period the probable liability under these arrangements and, if exists, to record or adjust the liability to current period operations. ASC 825-20 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument, should be separately recognized and accounted for as a contingency in accordance with ASC 450-20, Loss Contingencies. The Company recorded no amount for this contingency in other expenses for the year ended December 31, 2020. As a result, there was no contingency recorded as a liability as a component of accrued expenses as of December 31, 2020.
In February 2021, the Company completed a private placement transaction (the “February 2021 Private Placement”) of two secured convertible debentures (the “February 2021 Debentures”), convertible for up to 154,958,678 shares (the “February 2021 Conversion Shares”) of Common Stock and granted a Warrant to purchase Common Stock (the “February 2021 Warrant”), exercisable for up to 50,000,000 shares of Common Stock (the “February 2021 Warrant Shares”), pursuant to that certain Securities Purchase Agreement between the Selling Stockholder and the Company, dated as of February 10, 2021 (the “February 2021 SPA”). The Company sold and issued the initial February 2021 Debenture (the “First February 2021 Debenture”) and granted the February 2021 Warrant promptly after entering in the February 2021 SPA. The Company will sell and issue the second February 2021 Debenture (the “Second February 2021 Debenture”) promptly after the SEC declares effective the February 2021 Registration Statement (as defined below).
The February 2021 Debentures are due 12 months from their respective issuance dates and are secured by all of the Company’s assets and the assets of each of its subsidiaries pursuant to that certain Security Agreement by and among the Selling Stockholder, the Company’s subsidiaries, and the Company. Initially, the February 2021 Debentures are convertible at the lower of (i) the fixed conversion price, which is $0.03 per share, subject to adjustment (the “February 2021 Fixed Conversion Price”), or (ii) 80% of the lowest daily volume weighted average price (“VWAP”) of our Common Stock during the 15 trading days immediately preceding the conversion date, subject to adjustment (the “February 2021 Market Conversion Price”). The February 2021 Debentures contain an adjustment provision that, subject to certain exceptions, reduces the conversion price if the Company issues shares of its Common Stock or common stock equivalents at a price lower than the then-current conversion price of the February 2021 Debentures. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the conversion price of the February 2021 Debentures. The February 2021 Debentures are subject to a “conversion blocker” such that the Selling Stockholder cannot convert any portion of the February 2021 Debentures that would result in the Selling Stockholder and its affiliates holding more than 4.99% of the then-issued and outstanding shares of the Common Stock following such conversion (excluding, for purposes of such determination, shares of the Common Stock issuable upon conversion of the February 2021 Debentures or exercise of the February 2021 Warrant that had not then been converted or exercised, respectively). The Selling Stockholder can increase that 4.99% “conversion blocker” to 9.99% upon at least 65 days’ prior written notice to the Company. The February 2021 Debentures accrue interest at an annual rate equal to 8% and are due and payable on their respective maturity dates (or sooner if the Selling Stockholder converts the February 2021 Debentures or otherwise accelerates the maturity date, as provided for in the February 2021 Debentures). Interest is payable either in cash or, if certain Equity Conditions (as defined in the February 2021 Debentures) are then satisfied, in shares of the Common Stock at the February 2021 Market Conversion Price on the trading day immediately prior to the date paid.
At the Company’s option, it has the right to redeem, in part or in whole, the outstanding principal and interest under the February 2021 Debentures prior to their respective maturity dates; provided, that, as of the date of the holder’s receipt of the redemption notice, (i) the VWAP of the Common Stock is less than the February 2021 Fixed Conversion Price, initially $0.03 per share, and (ii) there is no Equity Conditions failure. The Company must pay an amount equal to the principal amount being redeemed plus outstanding and accrued interest thereon, as well as a redemption premium equal to 15% of the outstanding principal amount being redeemed (the “Redemption Premium”). The Company must provide the holder 15 business days’ advance notice of its intent to make a redemption, setting forth the amount of principal and interest we desire then to redeem plus the applicable Redemption Premium
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The February 2021 Debentures contain an adjustment provision that, subject to certain exceptions, reduces the conversion price if the Company issues shares of Common Stock or common stock equivalents at a price lower than the then-current conversion price of the February 2021 Debentures. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the conversion price of the February 2021 Debentures.
Pursuant to the February 2021 SPA, the purchase price for the First February 2021 Debenture was $900,000, less $41,000 for origination fees, which consisted of the “original issue discount” of $36,000 and $5,000 as a structuring fee. Pursuant to the February 2021 SPA, the purchase price for the Second February 2021 Debenture will be $600,000, less $24,000 as an “original issue discount.”
In connection with the February 2021 Private Placement, the Company also granted the February 2021 Warrant to purchase up to an aggregate of 50 million shares of the Common Stock. The February 2021 Warrant has a three-year term and is immediately exercisable at an exercise price of $ per share, subject to adjustment. If the Company fails to maintain an effective registration statement with the SEC covering the resale of the February 2021 Warrant Shares, or if an Event of Default (as defined below) has occurred and is continuing, then the holder may exercise the February 2021 Warrant on a “cashless” basis. “Event of Default” means an event of default under the February 2021 SPA or the February 2021 Debentures.
The
The February 2021 Warrant contains an adjustment provision that, subject to certain exceptions, reduces the exercise price if the Company issues shares of our Common Stock or common stock equivalents at a price lower than the then-current exercise price of the February 2021 Warrant. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the exercise price of the February 2021 Warrant.
The February 2021 Warrant is subject to an “exercise blocker” such that the Selling Stockholder cannot exercise any portion of the February 2021 Warrant that would result in the Selling Stockholder and its affiliates holding more than 4.99% of the then-issued and outstanding shares of the Common Stock following such exercise (excluding, for purposes of such determination, shares of the Common Stock issuable upon exercise of the February 2021 Warrant or conversion of the February 2021 Debentures that had not then been exercised or converted, respectively). The Selling Stockholder can increase that 4.99% “exercise blocker” to 9.99% upon at least 65 days’ prior written notice to the Company.
Pursuant to the terms of the February 2021 Registration Rights Agreement with the Selling Stockholder, the Company agreed to file a registration statement on Form S-1 (the “February 2021 Registration Statement”) with the SEC registering for resale the February 2021 Conversion Shares and the February 2021 Warrant Shares within 30 calendar days following the closing of the February 2021 Private Placement. The Selling Stockholder has agreed to waive this 30-calendar-day provision for so long as the Company utilized its best efforts to file its Annual Report on Form 10-K for its fiscal year ended December 31, 2020, and promptly thereafter files the February 2021 Registration Statement. Further, the Company agreed to use its best efforts to have the February 2021 Registration Statement declared effective by the SEC as soon as practicable, but in no event later than the effectiveness deadline, or by the 5th trading day following the date on which the Company is notified that the February 2021 Registration Statement will not be reviewed or is no longer subject to further review and comments. Pursuant to the February 2021 Registration Rights Agreement, the Company is subject to partial liquidated damages equal to 2.0% of the aggregate purchase price paid by the holder pursuant to the February 2021 SPA for either of the February 2021 Debentures then held by the holder for failure to file the February 2021 Registration Statement timely, failure to file with the SEC a request for acceleration in accordance with Rule 461 promulgated under the Securities Act, within five trading days after the date
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
the Company is notified that the February 2021 Registration Statement will not be reviewed or is not subject to further review, the February 2021 Registration Statement is not declared effective by the effectiveness deadline, if after effectiveness, the February 2021 Registration Statement ceases for any reason to remain continuously effective as required or if the holders are not permitted to utilize the prospectus therein to resell for more than 30 consecutive calendar days or more than an aggregate of 40 calendar days during any 12-month period, or if after the six-month anniversary of the February 2021 Registration Rights Agreement, the Company does not have available adequate current public information as set forth in Rule 144(c). The parties agreed that the maximum aggregate liquidated damages payable to a holder of the February 2021 Debentures under the February 2021 Registration Rights Agreement is 24% of the aggregate purchase price paid by such holder pursuant to the February 2021 SPA. The Company also agreed, among other things, to indemnify the Selling Stockholder from certain liabilities and to pay all fees and expenses incurred by the Company in connection with the registration of the February 2021 Conversion Shares and the February 2021 Warrant Shares held by the Selling Stockholder. The Commission declared effective the February 2021 Registration Statement.
In August 2021, the Company completed a private placement transaction (the “August 2021 Private Placement”) of two secured convertible debentures (the “August 2021 Debentures”), convertible for up to 1,111,111,110 shares (the “August 2021 Conversion Shares”) of Common Stock and granted a Warrant to purchase Common Stock (the “August 2021 Warrant”), exercisable for up to 100,000,000 shares of Common Stock (the “August 2021 Warrant Shares”), pursuant to that certain Securities Purchase Agreement between the Selling Stockholder and the Company, dated as of August 20, 2021 (the “August 2021 SPA”). The Company sold and issued the initial August 2021 Debenture (the “First August 2021 Debenture”) and granted the August 2021 Warrant promptly after entering in the August 2021 SPA. The Company will sell and issue the second August 2021 Debenture (the “Second August 2021 Debenture”) promptly after the SEC declares effective the August 2021 Registration Statement (as defined below).
The August 2021 Debentures are due 12 months from their respective issuance dates and are secured by all of the Company’s assets and the assets of each of its subsidiaries pursuant to that certain Security Agreement by and among the Selling Stockholder, the Company’s subsidiaries, and the Company. Initially, the August 2021 Debentures are convertible at the lower of (i) the fixed conversion price, which is $0.03 per share, subject to adjustment (the “August 2021 Fixed Conversion Price”), or (ii) 75% of the lowest daily volume weighted average price (“VWAP”) of our Common Stock during the 15 trading days immediately preceding the conversion date, subject to adjustment (the “August 2021 Market Conversion Price”). The August 2021 Debentures contain an adjustment provision that, subject to certain exceptions, reduces the conversion price if the Company issues shares of its Common Stock or common stock equivalents at a price lower than the then-current conversion price of the August 2021 Debentures. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the conversion price of the August 2021 Debentures. The August 2021 Debentures are subject to a “conversion blocker” such that the Selling Stockholder cannot convert any portion of the August 2021 Debentures that would result in the Selling Stockholder and its affiliates holding more than 4.99% of the then-issued and outstanding shares of the Common Stock following such conversion (excluding, for purposes of such determination, shares of the Common Stock issuable upon conversion of the August 2021 Debentures or exercise of the August 2021 Warrant that had not then been converted or exercised, respectively). The Selling Stockholder can increase that 4.99% “conversion blocker” to 9.99% upon at least 65 days’ prior written notice to the Company. The August 2021 Debentures accrue interest at an annual rate equal to 8% and are due and payable on their respective maturity dates (or sooner if the Selling Stockholder converts the August 2021 Debentures or otherwise accelerates the maturity date, as provided for in the August 2021 Debentures). Interest is payable either in cash or, if certain Equity Conditions (as defined in the August 2021 Debentures) are then satisfied, in shares of the Common Stock at the August 2021 Market Conversion Price on the trading day immediately prior to the date paid.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
At the Company’s option, it has the right to redeem, in part or in whole, the outstanding principal and interest under the August 2021 Debentures prior to their respective maturity dates; provided, that, as of the date of the holder’s receipt of the redemption notice, (i) the VWAP of the Common Stock is less than the August 2021 Fixed Conversion Price, initially $0.03 per share, and (ii) there is no Equity Conditions failure. The Company must pay an amount equal to the principal amount being redeemed plus outstanding and accrued interest thereon, as well as a redemption premium equal to 15% of the outstanding principal amount being redeemed (the “Redemption Premium”). The Company must provide the holder 15 business days’ advance notice of its intent to make a redemption, setting forth the amount of principal and interest we desire then to redeem plus the applicable Redemption Premium
The August 2021 Debentures contain an adjustment provision that, subject to certain exceptions, reduces the conversion price if the Company issues shares of Common Stock or common stock equivalents at a price lower than the then-current conversion price of the August 2021 Debentures. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the conversion price of the August 2021 Debentures.
Pursuant to the August 2021 SPA, the purchase price for the First August 2021 Debenture was $1,500,000, less $70,000 for origination fees, which consisted of the “original issue discount” of $60,000 and $10,000 as a structuring fee. Pursuant to the August 2021 SPA, the purchase price for the Second August 2021 Debenture will be $1,500,000, less $60,000 as an “original issue discount.”
In connection with the August 2021 Private Placement, the Company also granted the August 2021 Warrant to purchase up to an aggregate of million shares of the Common Stock. The August 2021 Warrant has a three-year term and is immediately exercisable at an exercise price of $ per share, subject to adjustment. If the Company fails to maintain an effective registration statement with the SEC covering the resale of the August 2021 Warrant Shares, or if an Event of Default (as defined below) has occurred and is continuing, then the holder may exercise the August 2021 Warrant on a “cashless” basis. “Event of Default” means an event of default under the August 2021 SPA or the August 2021 Debentures.
The August 2021 Warrant contains an adjustment provision that, subject to certain exceptions, reduces the exercise price if the Company issues shares of our Common Stock or common stock equivalents at a price lower than the then-current exercise price of the August 2021 Warrant. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the exercise price of the August 2021 Warrant.
The August 2021 Warrant is subject to an “exercise blocker” such that the Selling Stockholder cannot exercise any portion of the August 2021 Warrant that would result in the Selling Stockholder and its affiliates holding more than 4.99% of the then-issued and outstanding shares of the Common Stock following such exercise (excluding, for purposes of such determination, shares of the Common Stock issuable upon exercise of the August 2021 Warrant or conversion of the August 2021 Debentures that had not then been exercised or converted, respectively). The Selling Stockholder can increase that 4.99% “exercise blocker” to 9.99% upon at least 65 days’ prior written notice to the Company.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the terms of the August 2021 Registration Rights Agreement with the Selling Stockholder, the Company agreed to file a registration statement on Form S-1 (the “August 2021 Registration Statement”) with the SEC registering for resale the August 2021 Conversion Shares and the August 2021 Warrant Shares within 30 calendar days following the closing of the August 2021 Private Placement. The Selling Stockholder has agreed to waive this 30-calendar-day provision for so long as the Company utilized its best efforts to file its Annual Report on Form 10-K for its fiscal year ended December 31, 2020, and promptly thereafter files the August 2021 Registration Statement. Further, the Company agreed to use its best efforts to have the August 2021 Registration Statement declared effective by the SEC as soon as practicable, but in no event later than the effectiveness deadline, or by the 5th trading day following the date on which the Company is notified that the August 2021 Registration Statement will not be reviewed or is no longer subject to further review and comments. Pursuant to the August 2021 Registration Rights Agreement, the Company is subject to partial liquidated damages equal to 2.0% of the aggregate purchase price paid by the holder pursuant to the August 2021 SPA for either of the August 2021 Debentures then held by the holder for failure to file the August 2021 Registration Statement timely, failure to file with the SEC a request for acceleration in accordance with Rule 461 promulgated under the Securities Act, within five trading days after the date the Company is notified that the August 2021 Registration Statement will not be reviewed or is not subject to further review, the August 2021 Registration Statement is not declared effective by the effectiveness deadline, if after effectiveness, the August 2021 Registration Statement ceases for any reason to remain continuously effective as required or if the holders are not permitted to utilize the prospectus therein to resell for more than 30 consecutive calendar days or more than an aggregate of 40 calendar days during any 12-month period, or if after the six-month anniversary of the August 2021 Registration Rights Agreement, the Company does not have available adequate current public information as set forth in Rule 144(c). The parties agreed that the maximum aggregate liquidated damages payable to a holder of the August 2021 Debentures under the August 2021 Registration Rights Agreement is 24% of the aggregate purchase price paid by such holder pursuant to the August 2021 SPA. The Company also agreed, among other things, to indemnify the Selling Stockholder from certain liabilities and to pay all fees and expenses incurred by the Company in connection with the registration of the August 2021 Conversion Shares and the August 2021 Warrant Shares held by the Selling Stockholder. The Commission declared effective the August 2021 Registration Statement.
The Company has evaluated all recently issued accounting pronouncements, issued or proposed, by the FASB or other standards-setting bodies as of the period ending September 30, 2021. The Company does not expect a material impact on the Company’s present or future financial position, result of operations, or cash flows from these pronouncements.statements.
NOTE 3 – INVENTORY
Inventory consistedis valued at the lower of cost (first-in, first-out) or net realizable value, and net of reserves is comprised of the following:
| Schedule of Inventory | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| CBD Energy Water | $ | 111,414 | $ | 159,813 | ||||
| Hemp Energy Drink | 248,507 | 343,119 | ||||||
| Storm CBD Water | 29,519 | 28,692 | ||||||
| Ooh La Lemin Drink | 162,004 | — | ||||||
| Merchandise and Apparel | 11,564 | 11,948 | ||||||
| Unfilled Cans, Trays and Sleeves | 44,134 | 38,705 | ||||||
| Miscellaneous Beverages | 95,030 | 33,225 | ||||||
| Raw Materials | 17,444 | |||||||
| Other Inventory | 140,274 | 43,362 | ||||||
| Point of Sale Inventory | 6,723 | 1,640 | ||||||
| Total Inventory | $ | 866,613 | $ | 660,504 | ||||
SCHEDULE OF INVENTORY
June 30, 2022 | December 31, 2021 | |||||||
| Raw materials | $ | 219,683 | $ | 70,592 | ||||
| Finished goods, net | 970,230 | 504,219 | ||||||
| Total | $ | 1,189,913 | $ | 574,811 | ||||
At June 30, 2022 and December 31, 2021, inventory presented above is net of a reserve for slow moving and potentially obsolete inventory of $150,000 and $150,000, respectively.
F-18
| F-11 |
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
Property plant and equipment consistedis comprised of the following:
SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT
| Schedule of property, plant and equipment | ||||||||||||||||
| September 30, 2021 | December 31, 2020 | June 30, 2022 | December 31, 2021 | |||||||||||||
| Furniture and Fixtures | $ | 72,575 | $ | 57,879 | $ | 77,154 | $ | 75,070 | ||||||||
| Computers and Software | 28,108 | 16,638 | 32,325 | 29,196 | ||||||||||||
| Machinery & Equipment | 98,593 | 79,951 | 116,754 | 108,799 | ||||||||||||
| Vehicles | 160,415 | 68,135 | 250,093 | 239,093 | ||||||||||||
| Less: Accumulated Depreciation | (78,662 | ) | (54,731 | ) | ||||||||||||
| Total cost | 476,326 | 452,158 | ||||||||||||||
| Accumulated depreciation | (148,371 | ) | (104,121 | ) | ||||||||||||
| Property, plant and equipment, net | $ | 281,029 | $ | 167,872 | $ | 327,955 | $ | 348,037 | ||||||||
Depreciation for the three months ended September 30, 2021 and 2020, was approximately $12,500 and $9,200 respectively, and for the nine months ended September 30, 2021 and 2020, was approximately $32,800 and $24,800, respectively, andexpense is included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Loss.Loss Depreciation. For the six months ended June 30, 2022 and 2021, depreciation expense was $44,250 and $20,503, respectively.
NOTE 5 –ACQUISITION OF S AND S BEVERAGE, INC.
GOODWILL AND INTANGIBLE ASSETS
In April 2019, Gold Leaf acquired 21,000,000 shares, representing 51.65% of the issued and outstanding shares of common stock, $0.01 par value per share, of BigSupersearch.com, Inc., a California corporation (“BigSupersearch”), and 14,000,000 shares of its Series A preferred stock, representing 76.26% of the issued and outstanding shares of preferred stock, for an aggregate of $61,000, which amount included the purchase price, attorney fees, and transfer fees. At the time of the acquisition, BigSupersearch was considered a “shell company” because it had no operations and no assets. Because no transfer of assets or liabilities occurred, the entire $61,000, representing the consideration paid for all of the issued and outstanding capital stock of BigSupersearch, was recorded as goodwill. Gold Leaf has not commenced operations or done anything with BigSupersearch and it still remains a shell company.
Goodwill may not be amortized. Instead, it is tested at least annually for impairment. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The fair value of goodwill can be measured only as a residual and cannot be measured directly. The Company uses a methodology to determine an amount that achieves a reasonable estimate of the value of goodwill for purposes of measuring an impairment loss. That estimate is referred to as the implied fair value of goodwill.
At December 31, 2019, BigSupersearch had a positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of BigSupersearch exceeded its carrying value, including goodwill. In accordance with the Qualitative Assessment outlined in ASC 350-20-35, Goodwill – Subsequent Measurement (“ASC 350-20-35”), an entity has an unconditional option to bypass the qualitative assessment and proceed directly to performing the first step of the goodwill impairment test.
The Quantitative Assessment is a two-step process as outlined in ASC 350-20-35 and is used to identify both the existence of impairment and the amount of impairment. The first step is to determine the fair value. If the carrying amount is greater than zero and its fair value exceeds its carrying amount, then there is no impairment and the second step is not necessary. If the carrying amount of BigSupersearch exceeds the fair value, then goodwill will be measured for impairment in the second step. The amount of impairment loss recorded is the difference in the excess of the carrying amount over its fair value.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Management determined that for the year ending December 31, 2019, BigSupersearch had no identifiable assets or liabilities; therefore, the implied fair value of goodwill is zero. Based on this assessment, goodwill was impaired by the full carrying amount of $61,000. At March 31, 2021, and at December 31, 2020, BigSupersearch had $0 in goodwill.
On January 21, 2021, the Company entered into an Agreement and Plan of Merger with S and S Beverage, Inc. (“S and S”) and its shareholders and acquired all of the capital stock of S and S. To consummate the Acquisition, a Certificate of Merger was filed with the Wisconsin Department of Financial Institutions (the “Merger Certificate”) on February 1, 2021. On January 22, 2021, (i) Kona Gold, (ii) KGS Temporary Company, Inc. (Kona Gold Beverage, Inc.’s “Acquisition Subsidiary”), (iii) S and S, (iv) William J. Stineman and K&L Beverage, LLC, a Wisconsin limited liability company (as the indemnifying S and S shareholders), and (v) Mr. Stineman (as representative of the S and S Shareholders) entered into the Agreement and Plan of Merger (the “Merger Agreement”). S and S merged with and into our Acquisition Subsidiary; S and S was the surviving entity and became our wholly-owned subsidiary of Kona Gold Beverage, Inc.
Pursuant to the Merger Agreement, and subject to the terms and conditions contained therein, we acquired all of the shares of capital stock of S and S from the five holders thereof (the “S and S Legacy Shareholders”). In consideration thereof, wethe Company issued to them an aggregate of nine million restricted shares of Kona Gold Beverage, Inc.’s common stock (the “Acquisition Stock”) on a pro rata basis. Kona Gold Beverage, Inc.. The Company did not grant them any registration rights in respect of the shares of Acquisition Stock. WeThe Company also agreed to pay an aggregate of $1,050,000$1,050,000 (the “Aggregate Acquisition Payments”), the majority of which is allocated to certain creditors of S and S (including one of the S and S Legacy Shareholders)S’s legacy shareholders) and approximately $89,00089,249 of which (the “Remaining Acquisition Payments”) iswas allocated and paid to the five S and S Legacy Shareholderslegacy shareholders on a pro rata basis. The Company paid approximately $400,000 of the Aggregate Acquisition Payments are scheduled to be paid inat the next two weeks. The balanceclosing of the transaction. The remaining Aggregate Acquisition Payments, including the Remaining Acquisition Payments are scheduled to be paid in monthly installments, in arrears on the tenth calendar day of each month, commencing on March 10, 2021, at a rate equivalent to $ per case of Lemin Superior Lemonade (the product line of S and S that we have now branded as Ooh La Lemin) that we sell until the Aggregate Acquisition Payments have been paid in full. In addition toThe acquisition obligation balance was $675,317 at December 31, 2021. During the six months ended June 30, 2022, the Company paid $8,586 of the remaining Aggregate Acquisition Payments, we also assumedleaving an acquisition obligation balance of $666,731 at June 30, 2022, of which $60,000 is expected to be currently due.
Proforma information for the three and agreed to pay certain other liabilitiessix month period ended June 30, 2022 has been omitted as the operations of S and S as set forth inprior to the Merger Agreement. Because of this goodwill was recorded inacquisition were de minimis. During the amountthree months ended June 30, 2022, revenue of $1,275,938209,861, see loss from operations of $10,258Note 19 – Acquisition, and $5,675 of net loss was attributable to S and S. During the six months ended June 30, 2022, revenue of $368,879, loss from operations of $95,923, and $89,116 of net loss was attributable to S Beverage, Inc.and S.
Changes in goodwill are as follows:NOTE 6 – INTANGIBLE ASSETS
| Schedule of changes in goodwill | ||||||||
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Beginning of year | $ | 0 | $ | — | ||||
| Acquired goodwill | 1,275,938 | — | ||||||
| Impairment | — | — | ||||||
| Total goodwill | $ | 1,275,938 | $ | 0 | ||||
Intangible assetsasset consisted of the following:
SCHEDULE OF INTANGIBLE ASSET
June 30, 2022 | December 31, 2021 | |||||||
| Trademarks | $ | 85,340 | $ | 85,340 | ||||
| Website development | 12,200 | 12,200 | ||||||
| Accumulated amortization | (26,462 | ) | (21,585 | ) | ||||
| Total Intangible Assets, net of amortization | $ | 71,078 | $ | 75,955 | ||||
| F-12 |
| Schedule of intangible assets | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| Trademark (HighDrate) | $ | 81,750 | $ | 81,750 | ||||
| Website Development (Ooh La Lemin) | 12,201 | ��� | ||||||
| Less: Accumulated Amortization | (19,207 | ) | (12,262 | ) | ||||
| Total Intangible Asset | $ | 74,744 | $ | 69,488 | ||||
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Estimated futureDuring the six months ended June 30, 2022 and 2021, the Company recorded amortization expense related to the intangible asset is as follows:
| Schedule of estimated future amortization expense | ||||
| Fiscal year ending: | ||||
| December 31, 2021 (remaining 3 months) | 2,349 | |||
| December 31, 2022 | 9,395 | |||
| December 31, 2023 | 9,395 | |||
| December 31, 2024 | 9,395 | |||
| December 31, 2025 | 9,395 | |||
| Thereafter | 34,815 | |||
| Finite-Lived Intangible Assets, Net | $ | 74,744 | ||
NOTE 6 – NOTE RECEIVABLE
On May 26, 2016, Robert Clark, formed Elev8 Hemp, LLC, a Delaware limited liability company (“Elev8 Hemp”), on behalf of Ryan Medico, the Company’s then-Chief Financial Officer. Mr. Medico was the sole owner of and served as President of Elev8 Hemp.
In June 2016, the Company entered into a letter of intent with Elev8 Hemp to acquire it, such that it would become the Company’s wholly-owned subsidiary. Pursuant to the letter of intent, on June 7, 2016, the Company entered into an Acquisition Agreement with Elev8 Hemp (the “Elev8 Hemp Acquisition Agreement”), whereby the Company agreed to acquire 100% of the ownership of Elev8 Hemp and, in exchange, the Company agreed to issue to Mr. Medico five million restricted shares of the Common Stock, which had a fair market value of $50,0004,877. and $0, respectively. The Elev8 Hemp Acquisition Agreement providedfollowing table summarizes the amortization expense to be recorded in future periods for intangible assets that if the Company failedare subject to adequately capitalize the development of Elev8 Hemp to complete its objectives set forth in its business plan, then Mr. Medico would have the option until March 31, 2018 to purchase Elev8 Hemp from the Company for a purchase price of $50,000amortization:, which could be paid in shares of the Company’s Common Stock.
On October 10, 2016, the Company entered into a Membership Interest Purchase Agreement (the “Membership Interest Purchase Agreement”) with Elev8 Hemp, as the Company’s wholly-owned subsidiary, and Branded Legacy, Inc., formerly known as Elev8 Brands, Inc. and, prior to that, known as PLAD, Inc. (“Branded Legacy”), to sell 100SCHEDULE OF ESTIMATED FUTURE AMORTIZATION EXPENSE% of the then-issued and outstanding membership interests of Elev8 Hemp to Branded Legacy in consideration of its issuance to the Company of
| Year Ending | Amortization | |||
| 2022 (remaining) | $ | 4,877 | ||
| 2023 | 9,754 | |||
| 2024 | 9,754 | |||
| 2025 | 9,754 | |||
| 2026 | 9,754 | |||
| Thereafter | 27,185 | |||
| Total | $ | 71,078 | ||
200,000,000 shares of its common stock, par value $. In connection with this transaction, Mr. Medico became the Chief Executive Officer and the sole director of Branded Legacy. The parties desired to enter into the Membership Interest Purchase Agreement because the Company did not have adequate capital to fund the development of Elev8 Hemp’s business, as well as its own. Until July 2018, Mr. Medico also continued to serve as the Company’s Chief Financial Officer.
On April 14, 2017, the Company’s Board of Directors (the “Board”) declared a dividend to its stockholders of an aggregate of 53,196,608 shares of common stock of Branded Legacy. The Company’s stockholders received one share of common stock of Branded Legacy for every 10 shares of the Company’s Common Stock held on the record date. On the record date, we had approximately 104 stockholders, all of whom received this dividend. After the payment of the dividend, the Company held shares of common stock of Branded Legacy.
On March 6, 2018, the Company entered into a Securities Exchange and Settlement Agreement (the “First Exchange Agreement”) with Branded Legacy. Pursuant to the First Exchange Agreement, the Company exchanged with Branded Legacy the remaining shares of common stock held by the Company for shares of Branded Legacy’s Series D preferred stock. The shares of Series D preferred stock were initially convertible into shares of common stock of Branded Legacy. At December 31, 2018, the balance of the investment in Branded Legacy was $1,648.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On November 26, 2019, we entered into a second Securities and Exchange Agreement with Branded Legacy, whereby we exchanged the remaining investment of shares of Branded Legacy’s Series D preferred stock for its 10-year, unsecured, non-convertible promissory note in our favor in the original principal amount of $1,500,000 (the “Branded Legacy Note”). All principal and accrued and unpaid interest on the Branded Legacy Note is payable, in full, on November 27, 2029. As of the dates of the foregoing transactions, the Company and Branded Legacy were not considered related parties based upon the guidance set forth in ASC Topic 850, Related Party Disclosures.
Management could not ascertain with certainty of the collectability of the Branded Legacy Note due to the dollar amount and duration of the term; therefore, an allowance for $1,500,000 had been assessed and expensed, which was included in the Consolidated Statements of Loss for the year ended December 31, 2019. The Branded Legacy Note and the investment in Branded Legacy consisted of the following:
| Schedule of note receivable | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| Investment in Branded Legacy | $ | — | $ | — | ||||
| Note receivable | 1,500,000 | 1,500,000 | ||||||
| Less: Allowance for doubtful account | (1,500,000 | ) | (1,500,000 | ) | ||||
| Note receivable, net | $ | — | $ | — | ||||
STOCK-BASED COMPENSATION
The Company’s directors, officers, key employees, and non-employees were granted stock-based compensation consisting of restricted stock awards. Stock-based compensation is measured at the grant date, based on the fair valueNotes payable with related parties consists of the award, and is recognized as an expensefollowing at the date of issuance. The Company estimates the fair value of each restricted stock award as of the date of grant using closing price as reported by the OTCM on the date of grant. The Board has not adopted any employee stock purchase plans or other incentive plans, nor does the Company grant stock options to its directors, officers, and employees.
The share-based payments granted for the nine months ended SeptemberJune 30, 2021 and the year ended December 31, 2020, were and shares of the Common Stock, respectively. No stock-based Common Stock was cancelled or forfeited for the nine months ended September 30, 2021 and the year ended December 31, 2020, respectively.
For the nine months ended September 30, 2021 and 2020, the Company recognized stock-based compensation expense, which is included in selling, general and administrative expenses in the accompanying Consolidated Statements of Loss, as follows:
| Stock-based compensation expense | ||||||||
| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2021 | 2020 | |||||||
| Employee stock awards | $ | 55,800 | $ | 476,000 | ||||
| Non-employee stock awards | 270,900 | 2,577 | ||||||
| Total stock-based compensation expense | $ | 326,700 | $ | 478,577 | ||||
The Company expenses stock-based compensation cost in the current period at the grant date. No future years of compensation is expected for the next five fiscal years. The Company has a balance in accrued stock-based compensation at September 30, 20212022 and December 31, 2020, of $1,386,4972021: and $1,386,497, respectively.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
SCHEDULE OF NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – LINE OF CREDIT
On May 5, 2018, Kona entered into a Line of Credit Agreement with Matthew Nicoletti as the lender, which established a revolving line of credit in the amount of up to $400,000. The line of credit matures on May 5, 2022 and is reflected as non-current on the accompanying Consolidated Balance Sheets. Advances under the line of credit bear interest at the rate of 3.75 percent per annum. Payments of principal and accrued interest are payable on the maturity date. At September 30, 2021 and December 31, 2020, the line of credit had an outstanding principal balance of $198,470, respectively, and accrued interest of $42,683 and $32,102, respectively.
NOTE 9 – PAYABLE RELATED PARTY TRANSACTIONS
June 30, 2022 | December 31, 2021 | |||||||
| Note payable – related party (a) | $ | 1,352,651 | $ | 1,352,651 | ||||
| Note payable – related party (b) | 200,000 | - | ||||||
| Note payable – related party (c) | 125,500 | 125,500 | ||||||
| Note payable – related party (e) | 50,500 | 53,500 | ||||||
| Total notes payable – related parties | 1,728,651 | 1,531,651 | ||||||
| Notes payable – related parties, current portion | (1,728,651 | ) | (6,000 | ) | ||||
| Notes payable – related parties, net of current portion | $ | - | $ | 1,525,651 | ||||
| On |
The future maturities are as follows:
| Schedule of future maturities | ||||
| December 31, 2021 (remaining 3 months) | $ | 55,000 | ||
| Long-term Debt | $ | 55,000 |
| (b) | On | |
| (b) | 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, | |
| (c) | 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. Principal payment of $500 per month, with final payment due in March 2023. The outstanding principal balance of this note at December 31, 2021 was $53,500. During the six months ended June 30, 2022, the Company made principal payments of $3,000, leaving an outstanding principal balance of $50,500 at June 30, 2022. |
| F-13 |
At December 31, 2021, accrued interest on notes payable to related parties was $95,873. During the six months ended June 30, 2022, the Company added $27,033 of additional accrued interest, leaving an accrued interest balance on the notes payable to related parties of $122,906 at June 30, 2022. Accrued interest in included in accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets.
NOTE 8 – NOTES PAYABLE
Notes payable consists of the following at June 30, 2022 and December 31, 2021:
SCHEDULE OF NOTES PAYABLE
June 30, 2022 | December 31, 2021 | |||||||
| Note payable (a) | $ | 30,193 | $ | 33,312 | ||||
| Note payable (b) | 39,389 | - | ||||||
| Note payable (c) | 250,000 | - | ||||||
| Less debt discount (c) | (99,031 | ) | - | |||||
| Total notes payable, net | 220,551 | 33,312 | ||||||
| Notes payable, current portion | (198,332 | ) | (7,974 | ) | ||||
| Notes payable, net of current portion | $ | 22,219 | $ | 25,338 | ||||
| (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, 2021, the loan balance was $33,312. During the six months ended June 30, 2022, the Company made principal payments of $3,119, leaving a loan balance of $30,193 at June 30, 2022, of which $7,974 was recorded as the current portion of loan payable on the accompanying Condensed Consolidated Balance Sheet. |
| (b) | 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 percent per annum. The line of credit matures in 2023, at which time all outstanding principal amounts and accrued interest are due and payable. At June 30, 2022 the outstanding principal was $ | |
| (c) | On March 25, 2022, the Company entered into a secured debenture with an otherwise unaffiliated individual in the principal amount of $250,000. The secured note payable matures on March 24, 2023, and bears interest at the rate of 0.97 percent per annum. The secured debenture is secured by nine (9) identified motor vehicles of the Company. In connection with the issuance of the debenture, 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 $135,000, which was recorded as a debt discount against the secured debenture. As of June 30, 2022, the outstanding balance of the secured debentures amounted to $250,000 and the unamortized debt discount was $ |
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – SECURITIES PURCHASE AGREEMENT, DERIVATIVE LIABILITIES, AND WARRANTAt December 31, 2021, there was 0
2020 Securities Purchase Agreement
In May 2020, accrued interest on the notes payable. During the six months ended June 30, 2022, the Company completedadded $651 of additional accrued interest, leaving an accrued interest balance on the 2020 Private Placementnotes payable of $651 at June 30, 2022. Accrued interest in included in accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets.
| F-14 |
NOTE 9 – SECURED CONVERTIBLE DEBENTURES
Secured debentures that are payable to an otherwise unaffiliated third party consists of the 2020 Debenturesfollowing as of June 30, 2022 and December 31, 2021:
SCHEDULE OF SECURED DEBENTURES PAYABLE TO RELATED PARTY
June 30, 2022 | December 31, 2021 | |||||||
| YA II PN, Ltd. | $ | 900,000 | $ | 3,000,000 | ||||
| Less debt discount | (815,270 | ) | (2,150,067 | ) | ||||
| Secured debentures, net | $ | 84,730 | $ | 849,933 | ||||
During the year ended December 31, 2021, the Company issued secured debentures to an otherwise unaffiliated third-party investor (the “Selling Stockholder”) in the aggregate of $4,500,000. The debentures are secured by all tangible and intangible assets of the Company and are also convertible into shares of our common stock at a conversion price of $0.03 per share or a per share amount equivalent to the weighted average (among the principal of the debentures) of 76.7% of the lowest VWAP of the Company’s common stock during the 15 trading days immediately preceding the conversion date, whichever is lower. As the ultimate determination of shares to be issued upon conversion of these debentures can exceed the current number of available authorized shares, we determined that the conversion features of these convertible debentures are not considered indexed to our Company’s own capital stock and characterized the fair value of the conversion features as derivative liability. In connection with the issuances of the debentures, the Company granted to the Selling Stockholder warrants to purchase up to 150 million shares of the Company’s common stock. The warrants are exercisable at $0.03 per share. Fifty million of the warrants will expire on February 10, 2024 and 100,000,0000 of the warrants will expire on August 20, 2024. As a result of these issuances and grants, we incurred the following (a) derivative liability of $3,982,000 related to the conversion feature of the debentures; (b) relative fair value of the warrants granted of $1,581,000; and (c) and original issue discounts of $195,000 of the debentures for a total of $5,758,000, of which, $4,423,000 was accounted as debt discount and the 2020 Warrant pursuantremaining $1,335,000 as financing costs. The debt discount is being amortized to interest expense over the term of the corresponding debentures. As of December 31, 2021, the unamortized debt discount was $2,150,067.
On May 5, 2022, the Company issued similar debentures to the 2020 SPA. The Company sold and issued the First 2020 Debenture and granted the 2020 Warrant promptly after enteringSelling Stockholder in the 2020 SPA. aggregate amount of $500,000. The Company sold and issued the Second 2020 Debenture promptly after filing the 2020 Registration Statement initially with the SEC. The Company sold and issued the Third 2020 Debenture promptly after the SEC declared the 2020 Registration Statement effective. The 2020 Debentures are due 12 months from their respective issuance dates and aredebentures bear interest at a rate of 8% per annum, secured by all of the Company’s assetstangible and theintangible assets of eachthe Company and are also convertible into shares of its subsidiaries pursuant to that certain Security Agreement by and among the Selling Stockholder, the Company’s subsidiaries, and the Company. Initially, the 2020 Debentures are convertiblecommon stock at the lower of (i) the fixeda conversion price which isof $0.050.03 per share subject to adjustment (the “2020 Fixed Conversion Price”), or (ii) 80% of the lowest daily volume weighted average price (“VWAP”) of our Common Stock during the 1510 trading days immediately preceding the conversion date subject. As the ultimate determination of shares of common stock to adjustment (the “2020 Market Conversion Price”). The 2020 Debentures contain an adjustment provisionbe issued upon conversion of these debentures can exceed the current number of available authorized shares, the Company determined that subject to certain exceptions, reduces the conversion price iffeatures of these debentures are not considered indexed to the Company issues shares of its Common Stock or commonCompany’s own stock equivalents at a price lower thanand characterized the then-current conversion price of the 2020 Debentures. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustmentfair value of the conversion pricefeatures as a derivative liability (see Note 10). In connection with the issuances of these debentures, the Company also granted to the selling stockholder warrants to purchase up to 8,333,333 shares of common stock. The warrants are exercisable at $0.03 per share and will expire in three years from their grant date. As a result of these issuances, the Company incurred the following (a) derivative liability of $680,000 related to the conversion feature of the 2020 Debentures. The 2020 Debentures are subject to a “conversion blocker” such that the Selling Stockholder cannot convert any portiondebentures; (b) relative fair value of the 2020 Debentures that would result inwarrants granted of $81,000; and (c) and original issue discount of $25,000 for a total of $786,000, of which, $500,000 was accounted as debt discount and the Selling Stockholder and its affiliates holding more than 4.99%remaining $286,000 as financing costs. The debt discount is being amortized to interest expense over the term of the then-issued corresponding debentures. During the six months ended June 30, 2022, the Company amortized debt discount of $443,764 to interest expense.
During the six months ended June 30, 2022, the note holder converted principal of $2,600,000 and outstanding accrued interest of $137,128, or a total $2,737,128, into shares of common stock with a fair value of $5,859,165. The Company followed the Common Stock following such conversion (excluding, for purposes of such determination, sharesgeneral extinguishment model to record the conversions and settlement of the Common Stock issuable upon conversiondebt. As such, the Company removed the debt and accrued interest totaled $2,737,128, the related unamortized debt discount totaled $1,354,280 at the date of conversion. In addition, the 2020 Debentures or exercise ofCompany revalued the 2020 Warrant that had not then been converted or exercised, respectively). The Selling Stockholder can increase that 4.99% “conversion blocker” to 9.99% upon at least 65 days’ prior written noticederivative related to the Company. The 2020 Debentures accrue interestbifurcated conversion option to its fair value of $3,639,000 at an annual rate equal to 8% and are due and payable on their respective maturity dates (or sooner if the Selling Stockholder converts the 2020 Debentures or otherwise accelerates the maturity date, as provided for in the 2020 Debentures). Interest is payable either in cash or, if certain Equity Conditions (as defined in the 2020 Debentures) are then satisfied, in shares of the Common Stock at the 2020 Market Conversion Price on the trading day immediately prior to the date paid.
At the Company’s option, it has the right to redeem, in part or in whole, the outstanding principal and interest under the 2020 Debentures prior to their respective maturity dates; provided, that, as of the date of the holder’s receiptconversion andremoved that amount. As a result, the Company recorded a loss on extinguishment of debt of $873,040.
As of December 31, 2021, the outstanding balance of the redemption notice, (i)secured debentures amounted to $3,000,000, with an unamortized debt discount of $2,150,067, or a net balance of $849,933. As of June 30, 2022, the VWAPoutstanding balance of the Common Stock is less thansecured debentures amounted to $900,000, with an unamortized debt discount of $815,270, or a net balance of $84,730. During the 2020 Fixed Conversion Price, initially $0.05 per share, and (ii) there is no Equity Conditions failure. The Company must pay an amount equal to the principal amount being redeemed plus outstanding and accrued interest thereon, as well as a redemption premium equal to 15% of the outstanding principal amount being redeemed (the “Redemption Premium”). The Company must provide the holder 15 business days’ advance notice of its intent to make a redemption, setting forth the amount of principal and interest we desire then to redeem plus the applicable Redemption Premium.
The 2020 Debentures contain an adjustment provision that, subject to certain exceptions, reduces the conversion price ifsix months ended June 30, 2022, the Company issues shares of the Common Stock or common stock equivalents at a price lower than the then-current conversion price of the 2020 Debentures. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the conversion price of the 2020 Debentures.
Pursuant to the terms of the Registration Rights Agreement, the Company agreed to file the 2020 Registration Statement with the SEC registering for resale the Conversion Shares and the Warrant Shares within 45 calendar days following the closing of the 2020 Private Placement. The Company also agreed, among other things, to indemnify the Selling Stockholder from certain liabilities and to pay all fees and expenses incurred by the Company in connection with the registration of the Conversion Shares and the Warrant Shares held by the Selling Stockholder.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the 2020 SPA, the purchase price for the First 2020 Debenture was $250,000, less $15,000 for origination fees, which consisted of the “original issue discount”amortized debt discount of $10,000444,793 and $5,000 as a structuring fee. On December 23, 2020, the Company converted $100,000 of the principal of, and $12,274 of accruedto interest on, the First 2020 Debenture into expense.
8,255,438 shares of the Company’s common stock. On January 25, 2021, the Company converted $150,000 of the principal of, and $1,118 of accrued interest on, the First 2020 Debenture into shares of the Company’s common stock, see Note 12, Equity Transactions. At March 31, 2021, no balance remains on the First 2020 Debenture.
| F-15 |
Pursuant to the 2020 SPA, the purchase price for the Second 2020 Debenture was $250,000, less $
10,000 for origination fees, which consistedAs of the “original issue discount” of $June 30, 2022, fee. On January 25, 2021, the Company converted $100,000 of the principal of, and $10,410 of accrued interest on, the Second 2020 Debenture into shares of the Company’s common stock. On February 19, 2021, the Company converted $150,000 of the principal of, and $855 of accrued interest on, the Second 2020 Debenture into shares of the Company’s common stock see Note 12, Equity Transactions. At March 31, 2021, no balance remains on the First 2020 Debenture.
Pursuant to the 2020 SPA, the purchase price for the Third 2020 Debenture was $500,000, less $10,000 for origination fees, which consisted of the “original issue discount” of $10,000 fee. On January 12, 2021, the Company converted $200,000 of the principal of, and $1,425 of accrued interest on, the First 2020 Debenture into shares of the Company’s common stock, see Note 12, Equity Transactions. On May 5, 2021, the Company converted $300,000 of the principal of, and $7,496 of accrued interest on, the First 2020 Debenture into issued an aggregate of shares of common stock see Note 12, Equity Transactions. At September 30, 2021, no balance remains on the Third 2020 Debenture.
February 2021 Securities Purchase Agreement
In February 2021, the Company completed a private placement transaction (the “February 2021 Private Placement”) of two secured convertible debentures (the “February 2021 Debentures”), convertible for up to 154,958,678 shares (the “February 2021 Conversion Shares”) of Common Stock and granted a Warrant to purchase Common Stock (the “February 2021 Warrant”), exercisable for up to shares of Common Stock (the “February 2021 Warrant Shares”), pursuant to that certain Securities Purchase Agreement between the Selling stockholder and the Company, dated as of February 10, 2021 (the “February 2021 SPA”). The Company sold and issued the initial February 2021 Debenture (the “First February 2021 Debenture”) and granted the February 2021 Warrant promptly after entering in the February 2021 SPA. The Company will sell and issue the second February 2021 Debenture (the “Second February 2021 Debenture”) promptly after the SEC declares effective the February 2021 Registration Statement (as defined below).
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The February 2021 Debentures are due 12 months from their respective issuance dates and are secured by all of the Company’s assets and the assets of each of its subsidiaries pursuant to that certain Security Agreement by and among the Selling Stockholder, the Company’s subsidiaries, and the Company. Initially, the February 2021 Debentures are convertible at the lower of (i) the fixed conversion price, which is $0.03 per share, subject to adjustment (the “February 2021 Fixed Conversion Price”), or (ii) 80% of the lowest daily volume weighted average price (“VWAP”) of our Common Stock during the 15 trading days immediately preceding the conversion date, subject to adjustment (the “February 2021 Market Conversion Price”). The February 2021 Debentures contain an adjustment provision that, subject to certain exceptions, reduces the conversion price if the Company issues shares of its Common Stock or common stock equivalents at a price lower than the then-current conversion price of the February 2021 Debentures. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the conversion price of the February 2021 Debentures. The February 2021 Debentures are subject to a “conversion blocker” such that the Selling Stockholder cannot convert any portion of the February 2021 Debentures that would result in the Selling Stockholder and its affiliates holding more than 4.99% of the then-issued and outstanding shares of the Common Stock following such conversion (excluding, for purposes of such determination, shares of the Common Stock upon conversion of the February 2021 Debentures or exercise of the February 2021 Warrant that had not then been converted or exercised, respectively). The Selling Stockholder can increase that 4.99% “conversion blocker” to 9.99% upon at least 65 days’ prior written notice to the Company. The February 2021 Debentures accrue interest at an annual rate equal to 8% and are due and payable on their respective maturity dates (or sooner if the Selling Stockholder converts the February 2021 Debentures or otherwise accelerates the maturity date, as provided for in the February 2021 Debentures). Interest is payable either in cash or, if certain Equity Conditions (as defined in the February 2021 Debentures) are then satisfied, in shares of the Common Stock at the February 2021 Market Conversion Price on the trading day immediately prior to the date paid.
At the Company’s option, it has the right to redeem, in part or in whole, the outstanding principal and interest under the February 2021 Debentures prior to their respective maturity dates; provided, that, as of the date of the holder’s receipt of the redemption notice, (i) the VWAP of the Common Stock is less than the February 2021 Fixed Conversion Price, initially $0.03 per share, and (ii) there is no Equity Conditions failure. The Company must pay an amount equal to the principal amount being redeemed plus outstanding and accrued interest thereon, as well as a redemption premium equal to 15% of the outstanding principal amount being redeemed (the “Redemption Premium”). The Company must provide the holder 15 business days’ advance notice of its intent to make a redemption, setting forth the amount of principal and interest we desire then to redeem plus the applicable Redemption Premium.
The February 2021 Debentures contain an adjustment provision that, subject to certain exceptions, reduces the conversion price if the Company issues shares of Common Stock or common stock equivalents at a price lower than the then-current conversion price of the February 2021 Debentures. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the conversion price of the February 2021 Debentures.
Pursuant to the February 2021 SPA, the purchase price for the First February 2021 Debenture was $900,000, less $41,000 for origination fees, which consisted of the “original issue discount” of $36,000 and $5,000 as a structuring fee. Pursuant to the February 2021 SPA, the purchase price for the Second February 2021 Debenture will be $600,000, less $24,000 as an “original issue discount.”
In connection with the February 2021 Private Placement, the Company also granted the February 2021 Warrant to purchase up to an aggregate of 50 million shares of the Common Stock. The February 2021 Warrant has a three-year term and is immediately exercisable at an exercise price of $0.03 per share, subject to adjustment. If the Company fails to maintain an effective registration statement with the SEC covering the resale of the February 2021 Warrant Shares, or if an Event of Default (as defined below) has occurred and is continuing, then the holder may exercise the February 2021 Warrant on a “cashless” basis. “Event of Default” means an event of default under the February 2021 SPA or the February 2021 Debentures.
The February 2021 Warrant contains an adjustment provision that, subject to certain exceptions, reduces the exercise price if the Company issues shares of our Common Stock or common stock equivalents at a price lower than the then-current exercise price of the February 2021 Warrant. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the exercise price of the February 2021 Warrant.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The February 2021 Warrant is subject to an “exercise blocker” such that the Selling Stockholder cannot exercise any portion of the February 2021 Warrant that would result in the Selling Stockholder and its affiliates holding more than 4.99% of the then-issued and outstanding shares of the Common Stock following such exercise (excluding, for purposes of such determination, shares of the Common Stock issuable upon exercise of the February 2021 Warrant or conversion of the February 2021 Debentures that had not then been exercised or converted, respectively). The Selling Stockholder can increase that 4.99% “exercise blocker” to 9.99% upon at least 65 days’ prior written notice to the Company.
Pursuant to the terms of the February 2021 Registration Rights Agreement with the Selling Stockholder, the Company agreed to file a registration statement on Form S-1 (the “February 2021 Registration Statement”) with the SEC registering for resale the February 2021 Conversion Shares and the February 2021 Warrant Shares within 30 calendar days following the closing of the February 2021 Private Placement. The Selling Stockholder has agreed to waive this 30-calendar-day provision for so long as the Company utilized its best efforts to file its Annual Report on Form 10-K for its fiscal year endedtwo partially converted outstanding debentures.
At December 31, 2020, and promptly thereafter files the February 2021, Registration Statement. Further, the Company agreed to use its best efforts to have the February 2021 Registration Statement declared effective by the SEC as soon as practicable, but in no event later than the effectiveness deadline, or by the 5th trading day following the date on which the Company is notified that the February 2021 Registration Statement will not be reviewed or is no longer subject to further review and comments. Pursuant to the February 2021 Registration Rights Agreement, the Company is subject to partial liquidated damages equal to 2.0% of the aggregate purchase price paid by the holder pursuant to the February 2021 SPA for either of the February 2021 Debentures then held by the holder for failure to file the February 2021 Registration Statement timely, failure to file with the SEC a request for acceleration in accordance with Rule 461 promulgated under the Securities Act, within five trading days after the date the Company is notified that the February 2021 Registration Statement will not be reviewed or is not subject to further review, the February 2021 Registration Statement is not declared effective by the effectiveness deadline, if after effectiveness, the February 2021 Registration Statement ceases for any reason to remain continuously effective as required or if the holders are not permitted to utilize the prospectus therein to resell for more than 30 consecutive calendar days or more than an aggregate of 40 calendar days during any 12-month period, or if after the six-month anniversary of the February 2021 Registration Rights Agreement, the Company does not have available adequate current public information as set forth in Rule 144(c). The parties agreed that the maximum aggregate liquidated damages payable to a holder of the February 2021 Debentures under the February 2021 Registration Rights Agreement is 24% of the aggregate purchase price paid by such holder pursuant to the February 2021 SPA. The Company also agreed, among other things, to indemnify the Selling Stockholder from certain liabilities and to pay all fees and expenses incurred by the Company in connection with the registration of the February 2021 Conversion Shares and the February 2021 Warrant Shares held by the Selling Stockholder.
Pursuant to the February 2021 SPA, the purchase price for the First February 2021 Debenture was $900,000, less $41,000 for origination fees, which consisted of the “original issue discount” of $36,000 and $5,000 as a structuring fee.
At September 30, 2021, the principal balance of the First February 2021 Debenture is $900,000.
On May 5, 2021, the Company and YA II PN, LTD entered into a Limited Amendment Agreement dated as of May 5, 2021, by and between Kona Gold Beverage, Inc., a Delaware corporation (the “Company”), and YA II PN, LTD., a Cayman Islands exempt company (“Investor”). The Company and the Investor agree to a partial Second Closing, whereby the Investor will purchase a portion of the intended Second Convertible Debenture (the “Partial Second Convertible Debenture”) in the face amount of $200,000 for a purchase price of $192,000 (the “Partial Second Convertible Debenture Purchase Price”) within 1 business day following the date hereof. The Investor and the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”), Registration Rights Agreement (the “Registration Rights Agreement”) and related Transaction Documents (as this term is defined in the Securities Purchase Agreement) dated February 10, 2021, the date thereof, pursuant to which the Investor agreed to purchase secured Convertible Debentures (individually referred to as the “First Convertible Debenture” and the “Second Convertible Debenture”) upon various conditions precedent as articulated in Section 8(a) and (b) of the Securities Purchase Agreement and in the Transaction Documents, see above Note 9 – Securities Purchase Agreement, Derivative Liabilities, And Warrant.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the February 2021 SPA, the purchase price for the Second February 2021 Debenture was $600,000, less $200,000 for the “Partial Second Convertible Debenture”, dated May 5, 2021, less for origination fees, which consisted of the “original issue discount” of $16,000. On June 9, 2021, the Company converted $200,000 of the principal of, and $1,578 of accrued interest on the Second Februaryconvertible notes payable was $54,110. During the six months ended June 30, 2022, the Company added $77,785 of additional accrued interest, and converted $137,128 of accrued interest into common stock, leaving an accrued interest balance on the convertible notes payable of $4,767 at June 30, 2022. Accrued interest in included in accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets.
NOTE 10 – DERIVATIVE LIABILITY
The FASB has issued authoritative guidance whereby instruments which do not have fixed settlement provisions are deemed to be derivative instruments. During fiscal year 2021, Debenturethe Company issued convertible debentures, which, if converted into 6,719,269common stock, can potentially exceed the current number of available authorized shares of the Company’sCompany (see Note 11). Since the number of shares is not explicitly limited, the Company is unable to conclude that enough authorized and unissued shares are available to settle the conversion option. In accordance with the FASB authoritative guidance, the conversion features have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
As of June 30, 2022 and December 31, 2021, the derivative liabilities were valued using the Binomial pricing model and/or Black Scholes pricing model with the following assumptions:
SCHEDULE OF DERIVATIVE LIABILITY
At June 30, 2022 | Remaining 2022 | New Derivative 2022 | At December 31, 2021 | |||||||||||||
| Stock Price | $ | 0.0086 | $ | $ | $ | 0.0052 | ||||||||||
| Exercise Price | $ | 0.0058 | $ | .0062 | $ | .0082 | $ | 0.0039 | ||||||||
| Expected Life (Years) | 0.85 | 0.34 | 1.00 | 0.74 | ||||||||||||
| Volatility | 171 | % | 171 | % | 132 | % | 95 | % | ||||||||
| Dividend Yield | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||
| Risk-Free Interest Rate | 2.80 | % | 1.72 | % | 2.16 | % | 0.39 | % | ||||||||
| Fair value: | ||||||||||||||||
| Conversion feature | $ | 833,000 | $ | 3,639,000 | $ | 680,000 | $ | 2,121,000 | ||||||||
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock see Note 11, equity transactions. At September 30, 2021, no balance remainsto estimate the future volatility for its common stock. The expected life of the conversion feature of the notes was based on the Second February 2021 Debenture.
August 2021 Securities Purchase Agreement
In August 2021,remaining term of the notes. The expected dividend yield was based on the fact that the Company completed a private placement transaction (the “August 2021 Private Placement”)has not customarily paid dividends in the past and does not expect to pay dividends in the future.
During the six months ended June 30, 2022, the Company recognized derivative liabilities of two$680,000 upon issuance of additional secured convertible debentures (the “August 2021 Debentures”)(see Note 9), convertible for up to 1,111,111,110 shares (the “August 2021 Conversion Shares”) of Common Stock and granted a Warrant to purchase Common Stock (the “August 2021 Warrant”), exercisable for up to 100,000,000 shares of Common Stock (the “August 2021 Warrant Shares”), pursuant to that certain Securities Purchase Agreement between the Selling stockholder and the Company, dated as of August 20, 2021 (the “August 2021 SPA”). The Company sold and issuedderivative liability balance was increased by $1,671,000, representing the initial August 2021 Debenture (the “First August 2021 Debenture”) and granted the August 2021 Warrant promptly after enteringchange in the August 2021 SPA. The Company will sell and issue the second August 2021 Debenture (the “Second August 2021 Debenture”) promptly after the SEC declares effective the August 2021 Registration Statement (as defined below).
The August 2021 Debentures are due 12 months from their respective issuance dates and are secured by all of the Company’s assets and the assets of each of its subsidiaries pursuant to that certain Security Agreement by and among the Selling Stockholder, the Company’s subsidiaries, and the Company. Initially, the August 2021 Debentures are convertible at the lower of (i) the fixed conversion price, which is $0.03 per share, subject to adjustment (the “August 2021 Fixed Conversion Price”), or (ii) 75% of the lowest daily volume weighted average price (“VWAP”) of our Common Stock during the 15 trading days immediately preceding the conversion date, subject to adjustment (the “August 2021 Market Conversion Price”). The August 2021 Debentures contain an adjustment provision that, subject to certain exceptions, reduces the conversion price if the Company issues shares of its Common Stock or common stock equivalents at a price lower than the then-current conversion price of the August 2021 Debentures. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the conversion price of the August 2021 Debentures. The August 2021 Debentures are subject to a “conversion blocker” such that the Selling Stockholder cannot convert any portion of the August 2021 Debentures that would result in the Selling Stockholder and its affiliates holding more than 4.99% of the then-issued and outstanding shares of the Common Stock following such conversion (excluding, for purposes of such determination, shares of the Common Stock issuable upon conversion of the August 2021 Debentures or exercise of the August 2021 Warrant that had not then been converted or exercised, respectively). The Selling Stockholder can increase that 4.99% “conversion blocker” to 9.99% upon at least 65 days’ prior written notice to the Company. The August 2021 Debentures accrue interest at an annual rate equal to 8% and are due and payable on their respective maturity dates (or sooner if the Selling Stockholder converts the August 2021 Debentures or otherwise accelerates the maturity date, as provided for in the August 2021 Debentures). Interest is payable either in cash or, if certain Equity Conditions (as defined in the August 2021 Debentures) are then satisfied, in shares of the Common Stock at the August 2021 Market Conversion Price on the trading day immediately prior to the date paid.
At the Company’s option, it has the right to redeem, in part or in whole, the outstanding principal and interest under the August 2021 Debentures prior to their respective maturity dates; provided, that, as of the date of the holder’s receipt of the redemption notice, (i) the VWAP of the Common Stock is less than the August 2021 Fixed Conversion Price, initially $0.03 per share, and (ii) there is no Equity Conditions failure. The Company must pay an amount equal to the principal amount being redeemed plus outstanding and accrued interest thereon, as well as a redemption premium equal to 15% of the outstanding principal amount being redeemed (the “Redemption Premium”). The Company must provide the holder 15 business days’ advance notice of its intent to make a redemption, setting forth the amount of principal and interest we desire then to redeem plus the applicable Redemption Premium.
The August 2021 Debentures contain an adjustment provision that, subject to certain exceptions, reduces the conversion price if the Company issues shares of Common Stock or common stock equivalents at a price lower than the then-current conversion price of the August 2021 Debentures. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the conversion price of the August 2021 Debentures.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the August 2021 SPA, the purchase price for the First August 2021 Debenture was $1,500,000, less $70,000 for origination fees, which consisted of the “original issue discount” of $60,000 and $10,000 as a structuring fee. Pursuant to the August 2021 SPA, the purchase price for the Second August 2021 Debenture will be $1,500,000, less $10,000 as an “original issue discount.”
In connection with the August 2021 Private Placement, the Company also granted the August 2021 Warrant to purchase up to an aggregate of 100 million shares of the Common Stock. The August 2021 Warrant has a three-year term and is immediately exercisable at an exercise price of $0.03 per share, subject to adjustment. If the Company fails to maintain an effective registration statement with the SEC covering the resale of the August 2021 Warrant Shares, or if an Event of Default (as defined below) has occurred and is continuing, then the holder may exercise the August 2021 Warrant on a “cashless” basis. “Event of Default” means an event of default under the August 2021 SPA or the August 2021 Debentures.
The August 2021 Warrant contains an adjustment provision that, subject to certain exceptions, reduces the exercise price if the Company issues shares of our Common Stock or common stock equivalents at a price lower than the then-current exercise price of the August 2021 Warrant. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the exercise price of the August 2021 Warrant.
The August 2021 Warrant is subject to an “exercise blocker” such that the Selling Stockholder cannot exercise any portion of the August 2021 Warrant that would result in the Selling Stockholder and its affiliates holding more than 4.99% of the then-issued and outstanding shares of the Common Stock following such exercise (excluding, for purposes of such determination, shares of the Common Stock issuable upon exercise of the August 2021 Warrant or conversion of the August 2021 Debentures that had not then been exercised or converted, respectively). The Selling Stockholder can increase that 4.99% “exercise blocker” to 9.99% upon at least 65 days’ prior written notice to the Company.
Pursuant to the terms of the August 2021 Registration Rights Agreement with the Selling Stockholder, the Company agreed to file a registration statement on Form S-1 (the “August 2021 Registration Statement”) with the SEC registering for resale the August 2021 Conversion Shares and the August 2021 Warrant Shares within 30 calendar days following the closing of the August 2021 Private Placement. The Selling Stockholder has agreed to waive this 30-calendar-day provision for so long as the Company utilized its best efforts to file its Annual Report on Form 10-K for its fiscal year ended December 31, 2020, and promptly thereafter files the August 2021 Registration Statement. Further, the Company agreed to use its best efforts to have the August 2021 Registration Statement declared effective by the SEC as soon as practicable, but in no event later than the effectiveness deadline, or by the 5th trading day following the date on which the Company is notified that the August 2021 Registration Statement will not be reviewed or is no longer subject to further review and comments. Pursuant to the August 2021 Registration Rights Agreement, the Company is subject to partial liquidated damages equal to 2.0% of the aggregate purchase price paid by the holder pursuant to the August 2021 SPA for either of the August 2021 Debentures then held by the holder for failure to file the August 2021 Registration Statement timely, failure to file with the SEC a request for acceleration in accordance with Rule 461 promulgated under the Securities Act, within five trading days after the date the Company is notified that the August 2021 Registration Statement will not be reviewed or is not subject to further review, the August 2021 Registration Statement is not declared effective by the effectiveness deadline, if after effectiveness, the August 2021 Registration Statement ceases for any reason to remain continuously effective as required or if the holders are not permitted to utilize the prospectus therein to resell for more than 30 consecutive calendar days or more than an aggregate of 40 calendar days during any 12-month period, or if after the six-month anniversary of the August 2021 Registration Rights Agreement, the Company does not have available adequate current public information as set forth in Rule 144(c). The parties agreed that the maximum aggregate liquidated damages payable to a holder of the August 2021 Debentures under the August 2021 Registration Rights Agreement is 24% of the aggregate purchase price paid by such holder pursuant to the August 2021 SPA. The Company also agreed, among other things, to indemnify the Selling Stockholder from certain liabilities and to pay all fees and expenses incurred by the Company in connection with the registration of the August 2021 Conversion Shares and the August 2021 Warrant Shares held by the Selling Stockholder.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the August 2021 SPA, the purchase price for the First August 2021 Debenture was $1,500,000, less $70,000 for origination fees, which consisted of the “original issue discount” of $60,000 and $10,000 as a structuring fee. At September 30, 2021, the principal balance of the First August 2021 Debenture is $1,500,000.
Derivative Liability
The 2020 Debentures and the 2021 Debentures have been accounted for utilizing ASC 815. The Company has incurred a liability for the estimated fair value of the First 2020 Debenture. The estimated fair value of the 2020 Debentures and the 2021 Debentures have been calculated using the Black-Scholes fair value option-pricing model with key input variables provided by management, as of the date of issuance, with the valuation offset against additional paid in capital, and at each reporting date, with changes in fair value recorded as gains or losses on revaluation in other income (expense). The Company identified embedded features in the 2020 Debentures and the 2021 Debentures, which caused the 2020 Debentures and the 2021 Debentures to be classified as a liability. These embedded features included the right for the holder to request for the Company to settle the amounts owed pursuant to the 2020 Debentures and the 2021 Debentures to the holder by paying an amount of cash equal to the Black-Scholes value of the remaining unexercised portion of the 2020 Debentures and the 2021 Debentures on the date of the consummation of a fundamental transaction. The accounting treatment of derivative financial instruments requires that the Company treat the whole instrument as liability and record the fair value of the instrumentderivative liability from the respective prior period recorded as a component of other expenses. In addition, prior to the conversion of certain notes payable, the derivative asliability balance related to the embedded conversion feature of the inception date of the instrumentthese notes were revalued to $3,639,000 and to adjust the fair value of the instrument as of each subsequent balance sheet date.
extinguished upon conversion. The remaining derivative liabilities were valued using Black-Scholes pricing model with the following average assumptions:
| Schedule of derivative liabilities | ||||
| September 30, 2021 | ||||
| Stock Price | $ | 0.0166 | ||
| Exercise Price | $ | 0.0124 | ||
| Expected Life | ||||
| Volatility | % | |||
| Dividend Yield | % | |||
| Risk-Free Interest Rate | % | |||
| Fair Value | $ | 1,225,741 | ||
The following table summarizes the changes in the Company’s assets and liabilities measuredrevalued at fair value as of September 30, 2021:
| Schedule of assets and liabilities measured at fair value | ||||||||||||||||
| March 31, 2021 | Quoted prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Convertible promissory notes with embedded conversion option | $ | 1,225,741 | $ | 1,225,741 | ||||||||||||
| Total | $ | 1,225,741 | $ | 1,225,741 | ||||||||||||
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth a summary of change in fair value of the Company’s derivative liabilities for the year ended September 30, 2021:
| Summary of change in fair value of derivative liability | ||||
| Fair value, January 1, 2020 | $ | — | ||
| Change in fair value of embedded conversion features of debenture included in earnings | — | |||
| Embedded conversion option liability recorded in connection with the issuance of 2020 debenture | 148,628 | |||
| Fair value, June 30, 2020 | $ | 148,628 | ||
| Change in fair value of embedded conversion features of debenture included in earnings | (39,725 | ) | ||
| Embedded conversion option liability recorded in connection with the issuance of 2020 debentures | 108,903 | |||
| Fair value, September 30, 2020 | $ | 217,806 | ||
| Change in fair value of embedded conversion features of debenture included in earnings | (69,051 | ) | ||
| Embedded conversion option liability recorded in connection with the issuance of 2020 debentures | 212,397 | |||
| Fair value, December 31, 2020 | $ | 361,152 | ||
| Change in fair value of embedded conversion features of debenture included in earnings | (202,443 | ) | ||
| Embedded conversion option liability recorded in connection with the issuance of 2021 debentures | 468,309 | |||
| Fair value, March 31, 2021 | $ | 627,018 | ||
| Change in fair value of embedded conversion features of debenture included in earnings | (307,585 | ) | ||
| Embedded conversion option liability recorded in connection with the issuance of February 2021 debentures | 166,088 | |||
| Fair value, June 30, 2021 | $ | 485,521 | ||
| Change in fair value of embedded conversion features of debenture included in earnings | (120,306 | ) | ||
| Embedded conversion option liability recorded in connection with the issuance of August 2021 debentures | 860,526 | |||
| Fair value, September 30, 2021 | $ | 1,225,741 |
Warrant
The Company also granted the 2020 Warrant, February 2021 Warrant, and the August 2021 Warrant to purchase up to an aggregate of million shares, million, and million shares of Common Stock, respectively. Each of the 2020 Warrant, February 2021 Warrant, and the August 2021 Warrant has a three-year term. The 2020 Warrant is immediately exercisable at an exercise price of $0.05 per share, subject to adjustment. Each of the February 2021 Warrant and the August 2021 Warrant is immediately exercisable at an exercise price of $0.03833,000 per share, subject to adjustment. If the Company fails to maintain an effective registration statement with the SEC covering the resale of the 2020 Warrant Shares, the February 2021 Warrant Shares, and the August 2021 Warrant Shares, or if an Event of Default (as defined below) has occurred and is continuing, then the holder may exercise, respectively, the 2020 Warrant, the February 2021 Warrant, and the August 2021 Warrant on a “cashless” basis. “Event of Default” means an event of default under the 2020 SPA, the February 2021 SPA and the August 2021 SPA or the 2020 Debentures, February 2021 Debentures and the August 2021 Debentures, respectively.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The 2020 Warrant, February 2021 Warrant, and the August 2021 Warrant, respectively, each contains an adjustment provision that, subject to certain exceptions, reduces the exercise price if the Company issues shares of our Common Stock or common stock equivalents at a price lower than the then-current exercise price of the 2020 Warrant, February 2021 Warrant, and the August 2021 Warrant, respectively. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the exercise price of the 2020 Warrant, February 2021 Warrant, and the August 2021 Warrant, respectively.
Each of the 2020 Warrant, February 2021 Warrant, and the August 2021 Warrant is subject to an “exercise blocker” such that the Selling Stockholder cannot exercise any portion of any of those warrants if such exercise would result in the Selling Stockholder and its affiliates holding more than 4.99% of the then-issued and outstanding shares of the Common Stock following such exercise (excluding, for purposes of such determination, shares of the Common Stock issuable, respectively, upon exercise of the 2020 Warrant, February 2021 Warrant, and the August 2021 Warrant or conversion of the 2020 Debentures, February 2021 Debentures, and the August 2021 Debentures, respectively, that had not then been exercised or converted, respectively). The Selling Stockholder can increase that 4.99% “exercise blocker” to 9.99% upon at least 65 days’ prior written notice to the Company.
During the year ended December 31, 2020, the Company granted the 2020 Warrant that was immediately exercisable for up to shares of Common Stock. During the three months ended March 31, 2021, the Company granted the February 2021 Warrant that was immediately exercisable for up to shares of Common Stock. During the three months ended September 30, 2021, the Company granted the August 2021 Warrant that was immediately exercisable for up to 100,000,000 shares of Common Stock. Each of the 2020 Warrant, February 2021 Warrant, and the August 2021 Warrant was fully expensed as an interest expense related to the respective 2020 Warrant, February 2021 Warrant, and the August 2021 Warrant that was issued in connection with the consummation of the transactions contemplated by the 2020 SPA, the February 2021 SPA, and the August 2021 SPA, respectively, and no liability was recorded as of September 30, 2021 and December 31, 2020, respectively.
NOTE 11 – PAYCHECK PROTECTION PROGRAM LOAN
On May 4, 2020, the Company entered into a Paycheck Protection Promissory Note in the original principal amount of $95,161 (the “First PPP Loan”) with Wells Fargo Bank, N.A (“Wells Fargo”). The First PPP Loan was made under, and is subject to, the terms and conditions of the Paycheck Protection Program (the “PPP”), which was established as part of the Coronavirus Aid, Relief and Economic Security Act the (“CARES Act”) and is administered by the U.S. Small Business Administration (the “SBA”). The PPP provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The term of the First PPP Loan was two years, with a maturity date of May 6, 2022 and it contains a favorable fixed annual interest rate of 1.00%. Payments of principal and interest on the First PPP Loan were deferred until the date on which the amount of the forgiveness determined under the PPP Program Requirements was remitted to Wells Fargo and then would continue monthly until the maturity of the First PPP Loan. If the we failed to apply for forgiveness within 10 months after the last day of the Covered Period, as defined in the PPP Program Requirements, monthly principal and interest payments would commence 10 months from the last day of the Covered Period. Payments of principal and interest must be made on such date as designated by Wells Fargo in the months that they are due. Thereafter, principal and interest would be payable monthly and may be prepaid at any time prior to maturity with no prepayment penalties.
In January 2021, the Company entered into a second Paycheck Protection Promissory Note in the original principal amount of $117,487 (the “Second PPP Loan”) with Wells Fargo. The Second PPP Loan was made under, and is subject to, the terms and conditions of the PPP. The current term of the Second PPP Loan is five years, with a maturity date of January 2026 and it contains a favorable fixed annual interest rate of 1.00%. Payments of principal and interest on the Second PPP Loan were deferred for the first six months of its term, or July 2021. Thereafter, principal and interest are payable monthly and may be prepaid by us at any time prior to maturity with no prepayment penalties.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Under the terms of the CARES Act, recipients can apply for and receive forgiveness for all, or a portion of the loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs, mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”), and on the maintenance of employee and compensation levels during a certain time period following the funding of the First PPP Loan and the Second PPP Loan. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period. The Company has used the proceeds of each of the PPP Loan and the Second PPP Loan for salaries and wages, building lease expense, and utilities. On April 27, 2021, the First PPP Loan was forgiven for the full amount. No assurance is provided that the Company will be able to obtain forgiveness of the Second PPP Loan in whole or in part.
In May 2020, the Company also received an advance in the amount of $7,000 as part of the Economic Injury Disaster Loan program offered by the SBA. This advance was received after the Company filed its application for the First PPP Loan. The advance was not included in any of the documentation related to the First PPP Loan; however, this advance was included as part of the First PPP Loan forgiveness.
NOTE 12 – EQUITY TRANSACTIONS
Preferred Stock
The Company’s issued and outstanding preferred stock, par value $ per share, at September 30, 2021 and December 31, 2020 was , 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 4,000,000 shares of Series A Preferred Stock, par value of $0 per share (the “Series A Preferred Stock”), of which no shares were authorized, issued or outstanding at September 30, 2021 and December 31, 2020 and 4,000,000 shares were authorized, issued and outstanding at September 30, 2021 and December 31, 2020. Each share of Series A Preferred Stock, when outstanding, could have been converted into one share of Common Stock.
Series B Preferred Stock
The Company has shares of Series B Preferred Stock, par value of $0 per share (the “Series B Preferred Stock”) authorized, of of which were issued and outstanding at September 30, 2021 and December 31, 2020, respectively. Each share of Series B Preferred Stock may be converted into one share of the Common Stock.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Series C Preferred Stock
On July 8, 2020, the Company reduced the authorized number of Series C Preferred Stock from 3,300,000 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. The Company also amended the terms of the Series C Preferred Stock, as a result of which the holders of shares of the Series Preferred C Stock became entitled to 2,000,000 votes for every share of Series Preferred C Stock held. The holders of the Series Preferred C Stock are not entitled to receive dividends. Upon any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, before any distribution or payment will be made to the holders of any stock ranking junior to the Series C Preferred Stock, the holders of the Series C Preferred Stock will be entitled to be paid out of the Company’s assets an amount equal to $1.00 in the aggregate for all issued and outstanding shares of the Series C Preferred Stock (as adjusted for any stock dividends, combinations, splits, recapitalizations, and the like with respect to such shares) (the “Preference Value”). After the payment of the full applicable Preference Value of each share of the Series C Preferred Stock, our remaining assets legally available for distribution, if any, will be distributed ratably to the holders of the Common Stock. The Series C Preferred Stock has conversion rights, whereby each share of the Series C Preferred Stock automatically converts into one share of Common Stock on the one-year anniversary of the issuance date, which conversion has occurred.
September 30, 2021 and December 31, 2020, the Company had authorized shares, respectively, of Series C Preferred Stock of which , respectively, were issued and outstanding at June 30, 2021 and December 31, 2020, respectively. At such dates, each share of the Series C Preferred Stock was convertible into one and shares, respectively of the Common Stock. As of September 30, 2021, there are no shares of Series C Preferred Stock issued and outstanding.2022.
Series D Preferred Stock
The Company had authorized shares of Series D Preferred Stock, par value of $0 per share (the “Series D Preferred Stock”), of which shares were issued and outstanding at September 30, 2021 and December 31, 2020, respectively. Each share of the Series D Preferred Stock may be converted into 1,000 shares of Common Stock.
Common Stock
The Company had authorized shares of the Common Stock, of which 883,068,249 shares were issued and outstanding at September 30, 2021 and were issued and outstanding at December 31, 2020.
Equity Transactions
On December 23, 2020, the Company issued an aggregate of shares of Common Stock upon the conversion of $100,000 of the principal of, and $12,274 of accrued interest on, the First 2020 Debenture. At the time of conversion, the VWAP during the previous 15 trading days was $. The First 2020 Debenture was converted at the conversion price of $0.0136, which was the lower of the 2020 Fixed Conversion Price and the 2020 Market Conversion Price.
On January 12, 2021, the Company issued an aggregate of shares of Common Stock upon the conversion of $200,000 of the principal of, and $1,425 of accrued interest on, the Third 2020 Debenture. At the time of conversion, the VWAP during the previous 15 trading days was $0.0231. The Third 2020 Debenture was converted at the conversion price of $0.0185, which was the lower of the 2020 Fixed Conversion Price and the 2020 Market Conversion Price.
On January 25, 2021, the Company issued an aggregate of shares of Common Stock upon the conversion of $150,000 of the principal of, and $1,118 of accrued interest on, the First 2020 Debenture. At the time of conversion, the VWAP during the previous 15 trading days was $0.0266. The First 2020 Debenture was converted at the conversion price of $0.0213, which was the lower of the 2020 Fixed Conversion Price and the 2020 Market Conversion Price.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On January 25, 2021, the Company issued an aggregate of shares of Common Stock upon the conversion of $100,000 of the principal of, and $10,411 of accrued interest on, the Second 2020 Debenture. At the time of conversion, the VWAP during the previous 15 trading days was $0.0266. The Second 2020 Debenture was converted at the conversion price of $0.0213, which was the lower of the 2020 Fixed Conversion Price and the 2020 Market Conversion Price.
Pursuant to the Agreement and Plan of Merger with S and S, the Company issued 9,000,000 shares of its common stock to the five S and S Legacy Shareholders as follows: 6,300,000 shares to K & L Beverage; shares to William J. Stineman; shares to William F. Stineman; shares to Gary Kramer; and shares to Steven Sirus. The per-share fair market value of the common stock was $0.0301, based on the closing price of the Company’s common stock, as reported by OTC Markets Group Inc. on February 5, 2021, the date on which the Company filed its Current Report on Form 8-K disclosing the acquisition.
On February 19, 2021, the Company issued an aggregate of 7,252,634 shares of Common Stock upon the conversion of $150,000 of the principal of, and $855 of accrued interest on, the Second 2020 Debenture. At the time of conversion, the VWAP during the previous 15 trading days was $0.0260. The Second 2020 Debenture was converted at the conversion price of $0.0208, which was the lower of the 2020 Fixed Conversion Price and the 2020 Market Conversion Price.
On May 5, 2021, the Company issued an aggregate of shares of Common Stock upon the conversion of $300,000 of the principal of, and $7,496 of accrued interest on, the Third 2020 Debenture. At the time of conversion, the VWAP during the previous 15 trading days was $0.0266. The Third 2020 Debenture was converted at the conversion price of $0.0213, which was the lower of the 2021 Fixed Conversion Price and the 2021 Market Conversion Price.
On June 9, 2021, the Company issued an aggregate of shares of Common Stock upon the conversion of $200,000 of the principal of, and $1,578 of accrued interest on, the Second 2021 Debenture. At the time of conversion, the VWAP during the previous 15 trading days was $0.0237. The Second 2021 Debenture was converted at the conversion price of $0.030, which was the lower of the 2021 Fixed Conversion Price and the 2021 Market Conversion Price.
On July 23, 2021, the Company issued an aggregate of shares of Common Stock upon the conversion of $150,000 of the principal of, and $3,858 of accrued interest on, the Second 2021 Debenture. At the time of conversion, the VWAP during the previous 15 trading days was $0.0200. The Second 2021 Debenture was converted at the conversion price of $0.0160, which was the lower of the 2021 Fixed Conversion Price and the 2021 Market Conversion Price.
For other equity issuances during the nine months ended September 30, 2021 and the year ended December 31, 2020, please see Note 13, Employees, and Note 14, Sponsorships.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – EMPLOYEES
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. Immediately, Mr. Clark decided to defer receipt of of such shares; thus leaving shares of the Common Stock to be issued to him. Those 120,000,000 shares of the Common Stock were issued to Mr. Clark, as follows: (i) on October 28, 2015, the Company issued of such shares at the per-share fair market value of $, based on the closing price of the Common Stock as reported by the OTCM on the date of issuance; (ii) on March 2, 2016, the Company issued of such shares at the per-share fair market value of $ based on the closing price of the Common Stock as reported by the OTCM on the date of issuance; and (iii) on Mary 16, 2016, the Company issued of such shares at the per-share fair market value of $ based on the closing price of the Common Stock as reported by the OTCM on the date of issuance. The Company accrued shares of the Common Stock on December 31, 2016 that were not issued. At the date of accrual, the per-share fair market value of the shares was $ based on the closing price of the Common Stock as reported by the OTCM on the date of issuance. On April 19, 2018, 40,000,000 shares were cancelled and returned to the Company for accrual valued at $1,000,000 by Mr. Clark. On July 31, 2019, an additional 50,000,000 shares were cancelled and returned to the Company for accrual valued at $180,000. Accordingly, as of September 30, 2020, Mr. Clark was the record and beneficial owner of of shares of the Common Stock and, subject to the July 2020 issuance to Mr. Clark of 140 shares of Series C Preferred, the Company accrued and 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.
The Company issued shares of Common Stock on January 27, 2020 to Lori Radcliffe pursuant to that certain Employment Agreement dated October 7, 2019, by and between Ms. Radcliffe and the Company. At the date of issuance, the per-share fair market value of the shares was $ based on the closing price of the Common Stock as reported by the OTCM on the date of issuance, for a total value of $318,500.
On April 3, 2020, the Company issued shares of the Common Stock to Paul O’Renick pursuant to an Employment Agreement dated October 1, 2019 in exchange for compensation owed in the amount of $157,500 for services provided. At the date of issuance, the per-share fair market value was $ based on the closing price of the Common Stock as reported by the OTCM on the date of issuance.
The Company issued shares of Common Stock on July 30, 2020 to William J Stineman pursuant to that certain Employment Agreement dated December 15, 2020, by and between Mr. Stineman and the Company. At the date of issuance, the per-share fair market value of the shares was $ based on the closing price of the Common Stock as reported by the OTCM on the date of issuance, for a total value of $54,000.
The Company issued shares of Common Stock on July 30, 2020 to John Torrence pursuant to performance award by and between Mr. Torrence and the Company. At the date of issuance, the per-share fair market value of the shares was $ based on the closing price of the Common Stock as reported by the OTCM on the date of issuance, for a total value of $1,800.
NOTE 14 – SPONSORSHIPS
On May 1, 2019, the Company entered into a sponsorship agreement with Ryan Dodd, a professional waterski jumper (the “Dodd Agreement”), whereby the Company agreed to pay monthly sponsorship fees of $1,250 for one year. On May 23, 2019, the Company issued Mr. Dodd shares of Common Stock. At the date of issuance, the shares of Common Stock had a fair market value of $ per share based on the closing price of the Common Stock on the date of issuance as reported by the OTCM, representing $34,388 as payment for the Company’s sponsorship. The Dodd Agreement was extended in January 2020 for an additional one-year term. On April 3, 2020, the Company issued shares of the Common Stock to Ryan Dodd pursuant to the Dodd Agreement. At the date of issuance, the per-share fair market value was $ based on the closing price of the Common Stock as reported by the OTCM on the date of issuance, representing a payment of $2,578 for sponsorship fees.
NOTE 15 – COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. The following represents the Company’s commitments and contingencies as of December 31, 2020:
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Operating Lease – The Company currently leases approximately 4,500 square feet of corporate office and warehouse space located at 746 North Drive, Suite A, Melbourne, Florida 32934. The lease is for a five-year term, and expires on May 31, 2023. The initial monthly base rent was approximately $3,994, plus state taxes. The monthly base rent increases annually by three percent, beginning on June 1, 2019 and each June 1st thereafter. During the lease year that commenced on June 1, 2020, the Company’s monthly base rent will be $4,114. For the three and nine months ended September 30, 2021, the Company recognized operating lease expense of $13,944 and $36,643, respectively, which is included in in selling, general and administrative expenses in the accompanying Consolidated Statements of Loss.
NOTE 16 – LEASE LIABILITIES
The Company reported the following operating lease liabilities as of September 30, 2021:
Amounts recognized as right-of-use assets, net related to operating leases are included in noncurrent assets in the accompanying Consolidated Balance Sheet, while related lease liabilities are included in current portion of long-term debt and long-term debt. At September 30, 2021 and December 31, 2020, the right-of-use asset and lease liability related to the operating leases were as follows:
| Schedule of right-of-use asset and lease liability related to operating leases | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| Right-of-use asset | $ | 1,503,115 | $ | 1,072,094 | ||||
| Amortization of right-of-use asset | (284,012 | ) | (159,101 | ) | ||||
| Right-of-use asset, net | $ | 1,219,103 | $ | 912,993 | ||||
| Operating lease liability | ||||||||
| Current portion of long-term lease | $ | 41,806 | $ | 149,407 | ||||
| Long-term lease | 1,177,297 | 763,586 | ||||||
| Total operating lease liability | $ | 1,219,103 | $ | 912,993 | ||||
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The future payments due under operating leases is as follows:
| Schedule of future payments due under operating leases | ||||
| Fiscal year ending: | ||||
| December 31, 2021 (3 months remaining) | 41,806 | |||
| December 31, 2022 | 230,954 | |||
| December 31, 2023 | 242,966 | |||
| December 31, 2024 | 251,127 | |||
| December 31, 2025 | 254,282 | |||
| 2026 and thereafter | 197,968 | |||
| Operating Leases, Future Minimum Payments Due | $ | 1,219,103 | ||
NOTE 17 – REVENUE
The Company determined that the majority of the Company’s revenue earned from its two reporting segments is recognized when it satisfies a single performance obligation by transferring control of its products to a customer. The Company does not have a significant financing component or payment terms, and the Company does not have any material unsatisfied performance obligations. The Company’s revenues are obtained in similar geographical locations within the United States. The Company’s operating segments are expected to have essentially the same future prospects, similar gross margins, sales trends, and the nature of our products and customers are essentially the same. Furthermore, the Company regularly reviews disaggregated revenue by source for evaluating the financial performance of its operations and making resource decisions. The Company’s revenue is broken down by the following:
The following tables presents our net revenues, by revenue source, and the period-over-period percentage change, for the period presented:
| Schedule of net revenues, by revenue source | ||||||||||||
| Three Months Ended September 30, | ||||||||||||
| 2020 | 2021 | |||||||||||
| Revenue Source | Revenue | Revenue | % Change | |||||||||
| Distributors | $ | 140,003 | $ | 150,929 | 8 | % | ||||||
| Amazon | 46,078 | 41,669 | (10 | )% | ||||||||
| Online Sales | 15,663 | 17,678 | 13 | % | ||||||||
| Gold Leaf Distribution | 108,719 | 347,247 | 219 | % | ||||||||
| Shipping | 8,846 | 4,451 | 50 | % | ||||||||
| Sales Returns and Allowances | (6,600 | ) | (16,599 | ) | 152 | % | ||||||
| Net Revenues | $ | 312,709 | $ | 545,375 | 74 | % | ||||||
| Nine Months Ended September 30, | ||||||||||||
| 2020 | 2021 | |||||||||||
| Revenue Source | Revenue | Revenue | % Change | |||||||||
| Distributors | $ | 367,912 | $ | 784,023 | 113 | % | ||||||
| Amazon | 121,317 | 119,428 | (2 | )% | ||||||||
| Online Sales | 35,176 | 57,725 | 64 | % | ||||||||
| Gold Leaf Distribution | 228,881 | 883,825 | 286 | % | ||||||||
| Shipping | 19,181 | 15,039 | (22 | )% | ||||||||
| Sales Returns and Allowances | (30,655 | ) | (61,041 | ) | 99 | % | ||||||
| Net Revenues | $ | 741,812 | $ | 1,798,999 | 143 | % | ||||||
The following tables presents our net revenues, by revenue source, as a percentage of total net revenues for the periods presented:
| Schedule of net revenues, by revenue source, as a percentage | ||||||||
| Three Months Ended September 30, | ||||||||
| Revenues | 2020 | 2021 | ||||||
| Distributors and Resellers | 45 | % | 28 | % | ||||
| Amazon | 15 | % | 8 | % | ||||
| Online Sales | 5 | % | 3 | % | ||||
| Gold Leaf Distribution | 35 | % | 64 | % | ||||
| Shipping | 3 | % | 1 | % | ||||
| Sales Returns, and Allowances | (2 | )% | (3 | )% | ||||
| Nine Months Ended September 30, | ||||||||
| Revenues | 2020 | 2021 | ||||||
| Distributors and Resellers | 50 | % | 44 | % | ||||
| Amazon | 16 | % | 7 | % | ||||
| Online Sales | 5 | % | 3 | % | ||||
| Gold Leaf Distribution | 31 | % | 49 | % | ||||
| Shipping | 3 | % | 1 | % | ||||
| Sales Returns, and Allowances | (4 | )% | (3 | )% | ||||
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 – SEGMENTS
The Company has two reportable segments:
Amounts that do not relate to a reportable segment have been allocated to “Corporate and Eliminations.”
The following tables present information about our reportable segments.
| Schedule of Segment Reporting Information | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| CURRENT ASSETS: | ||||||||
| Beverages Segment | $ | 1,386,003 | $ | 824,835 | ||||
| Distribution Segment | (253,117 | ) | (146,894 | ) | ||||
| Corporate and eliminations | 427,563 | 105,671 | ||||||
| Total Current Assets | $ | 1,560,449 | $ | 783,612 | ||||
| NON-CURRENT ASSETS: | ||||||||
| Beverages Segment | $ | 2,216,976 | $ | 1,063,074 | ||||
| Distribution Segment | 638,620 | 85,546 | ||||||
| Corporate and eliminations | 7,968 | 8,233 | ||||||
| Total Non-Current Assets | $ | 2,683,564 | $ | 1,156,853 | ||||
| CURRENT LIABILITIES: | ||||||||
| Beverages Segment | $ | 1,899,473 | $ | 1,879,305 | ||||
| Distribution Segment | 144,926 | 72,576 | ||||||
| Corporate and eliminations | 3,796,611 | 1,424,367 | ||||||
| Total Current Liabilities | $ | 5,841,010 | $ | 3,376,248 | ||||
| NON-CURRENT LIABILITIES: | ||||||||
| Beverages Segment | $ | 2,993,658 | $ | 2,616,018 | ||||
| Distribution Segment | 654,434 | 192,350 | ||||||
| Corporate and eliminations | — | — | ||||||
| Total Non-Current Liabilities | $ | 3,648,092 | $ | 2,808,368 | ||||
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| REVENUES, NET OF SALES, RETURNS, AND ALLOWANCES: | ||||||||||||||||
| Beverages Segment | $ | 245,918 | $ | 207,763 | $ | 613,016 | $ | 1,018,041 | ||||||||
| Distribution Segment | 108,719 | 374,247 | 228,881 | 883,825 | ||||||||||||
| Corporate and Eliminations | (41,928 | ) | (36,635 | ) | (100,085 | ) | (102,867 | ) | ||||||||
| Total Revenues, Net of Sales, Returns, and Allowances | $ | 312,709 | $ | 545,375 | $ | 741,812 | $ | 1,798,999 | ||||||||
| COST OF REVENUES: | ||||||||||||||||
| Beverages Segment | $ | 160,289 | 201,413 | 417,159 | 864,872 | |||||||||||
| Distribution Segment | 83,912 | 258,151 | 173,638 | 622,210 | ||||||||||||
| Corporate and Eliminations | (22,090 | ) | (16,798 | ) | (67,023 | ) | (43,355 | ) | ||||||||
| Total Cost of Revenues | $ | 222,111 | $ | 442,766 | $ | 523,774 | $ | 1,443,727 | ||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Beverages Segment | $ | 339,688 | $ | 514,995 | $ | 1,380,612 | $ | 1,308,456 | ||||||||
| Distribution Segment | 70,385 | 152,578 | 198,547 | 353,239 | ||||||||||||
| Corporate and Eliminations | 90,160 | 88,537 | 260,845 | 307,146 | ||||||||||||
| Total Operating Expenses | $ | 500,233 | $ | 756,110 | $ | 1,840,004 | $ | 1,968,841 | ||||||||
| OTHER INCOME / (EXPENSE): | ||||||||||||||||
| Beverages Segment | $ | (19,455 | ) | $ | (34,964 | ) | $ | (35,887 | ) | $ | 11,964 | |||||
| Distribution Segment | (1,173 | ) | (1,708 | ) | 3,932 | 4,041 | ||||||||||
| Corporate and Eliminations | (79,178 | ) | (1,540,542 | ) | (517,371 | ) | (2,825,835 | ) | ||||||||
| Total Other Income / (Expense) | $ | (99,806 | ) | $ | 1,577,214 | $ | (549,326 | ) | $ | (2,809,830 | ) | |||||
| NET LOSS: | ||||||||||||||||
| Beverages Segment | $ | (273,514 | ) | $ | (543,609 | ) | $ | (1,220,642 | ) | $ | (1,167,251 | ) | ||||
| Distribution Segment | (46,751 | ) | (38,190 | ) | (139,372 | ) | (87,583 | ) | ||||||||
| Corporate and Eliminations | (189,176 | ) | (1,648,916 | ) | (811,278 | ) | (3,168,565 | ) | ||||||||
| Total Net Loss | $ | (509,441 | ) | $ | (2,230,715 | ) | $ | (2,171,292 | ) | $ | (4,423,399 | ) | ||||
NOTE 11 – 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.
| F-16 |
Operating Leases
The Company leases approximately 4,500 square feet of corporate office and warehouse space located at 746 North Drive, Suite A, Melbourne, Florida 32934. The lease is for a five-year term and expires on May 31, 2023. The initial monthly base rent was approximately $3,994, plus state taxes. The monthly base rent increases annually by 3 percent.
The Company leases a 30,000 square foot warehouse and main distribution hub in Greer, South Carolina. The lease is for a 63-month term that commenced in May 2019 and expires on August 1, 2026. Beginning in April 2020, the Company’s monthly rent includes monthly base payments of $10,200, plus applicable monthly CAM fees (“Common Area Maintenance”). The monthly base rent increases annually by 2 percent.
The Company leases a 10,000 square foot distribution hub in Conway, South Carolina. The lease is for a 62-month term that commenced in October 2021 and expires in November 2026. The Company’s monthly rent is approximately $7,261 plus applicable monthly CAM fees (Common Area Maintenance). The monthly base rent increases annually by 1.5 percent.
Finance Leases
On March 17, 2020, the Company entered into a lease agreement for equipment. The finance lease is for a 62-month term that commenced in April 2020 and expires in March 2025. The agreement includes monthly payments of $676.
During the six months ended June 30, 2022 and 2021, lease costs totaled $152,841 and $93,569, respectively.
Our ROU asset balance was $966,955 as of December 31, 2021. During the six months ended June 30, 2022, the Company recorded reduction of ROU assets of $96,219 related to its leases, resulting in an ROU asset balance of $870,736 as of June 30, 2022.
As of December 31, 2021, lease liabilities totaled $1,052,720, comprised of finance lease liabilities of $25,481 and operating lease liabilities of $1,027,239. During the six months ended June 30, 2022, the Company made payments of $3,798 against its finance lease liability and $99,476 against its operating lease liability. As of June 30, 2022, lease liabilities totaled $949,446, comprised of finance lease liabilities of $21,683 and operating lease liabilities of $927,763. At June 30, 2022, the current portion of lease liabilities was $224,162, leaving a long-term lease liabilities balance of $725,284.
As of June 30, 2022, the weighted average remaining lease terms for operating lease and finance lease are 4.14 years and 2.75 years, respectively. As of June 30, 2022, the weighted average discount rate for operating lease is 10.00% and 2.09% for finance lease.
Future minimum lease payments under the leases are as follows:
SCHEDULE OF FUTURE PAYMENTS DUE UNDER OPERATING lEASES
| Years Ending December 31, | Amount | |||
| 2022 (remaining) | $ | 154,969 | ||
| 2023 | 282,347 | |||
| 2024 | 262,715 | |||
| 2025 | 261,083 | |||
| 2026 and thereafter | 198,217 | |||
| Total payments | 1,159,331 | |||
| Less: Amount representing interest | (209,885 | ) | ||
| Present value of net minimum lease payments | 949,446 | |||
| Less: Current portion | (224,162 | ) | ||
| Non-current portion | $ | 725,284 | ||
| F-17 |
NOTE 1912 – ACQUISITION OFSTOCKHOLDERS’ EQUITY
Preferred Stock
The Company’s issued and outstanding preferred stock, par value $ per share, at June 30, 2022 and December 31, 2021 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 no shares were issued or outstanding at June 30, 2022 and December 31, 2021, respectively. Each share of Series A Preferred Stock, when outstanding, could have been converted into one share of Common Stock.
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 June 30, 2022 and December 31, 2021, respectively. Each share of Series B Preferred Stock may be converted into one share of Common Stock.
Series C Preferred Stock
On July 8, 2020, the Company reduced 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. The Company also amended the terms of the Series C Preferred Stock. The holders of shares of the Series Preferred C Stock are now entitled to 2,000,000 votes for every share of our Series Preferred C Stock held. The holders of the Series Preferred C Stock are not entitled to receive dividends. Upon any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, before any distribution or payment will be made to the holders of any stock ranking junior to the Series C Preferred Stock, the holders of the Series C Preferred Stock will be entitled to be paid out of the Company’s assets an amount equal to $1.00 in the aggregate for all issued and outstanding shares of the Series C Preferred Stock (as adjusted for any stock dividends, combinations, splits, recapitalizations, and the like with respect to such shares) (the “Preference Value”). After the payment of the full applicable Preference Value of each share of the Series C Preferred Stock, our remaining assets legally available for distribution, if any, will be distributed ratably to the holders of the Common Stock. The Series C Preferred Stock has conversion rights, whereby each share of the Series C Preferred Stock automatically converts into one share of Common Stock on the one-year anniversary of the issuance date.
The Company has authorized shares, of Series C Preferred Stock of which shares were issued and outstanding December 31, 2020. In July 2021 each share of the Series C Preferred Stock automatically converted into one share of Common Stock on the one-year anniversary of the issuance date. At June 30, 2022 and December 31, 2021, no 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 June 30, 2022 and December 31, 2021, respectively. Each share of the Series D Preferred Stock may be converted into 1,000 shares of Common Stock.
Common Stock
The Company has authorized shares of the Common Stock, respectively, of which shares were issued and outstanding at June 30, 2022, and were issued and outstanding at December 31, 2021.
| F-18 |
Equity Transactions
On April 1, 2022, the Company granted shares of Common Stock to Peter Troy pursuant to that certain Employment Agreement dated October 1, 2021, by and between Mr. Troy and the Company. At the date of grant, the fair market value of the shares was $ per share based on the closing price of the Common Stock, for a total value of $8,500.
During the six months ended June 30, 2022, the Company issued an aggregate of shares of Common Stock with a fair value of $5,859,165 upon the conversion of $2,600,000 of principal, and $137,128 of accrued interest on its secured convertible debentures, at an average price of $0.0040 (see Note 9).
During the six months ended June 30, 2022, and in connection with the issuance of the 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 $135,000 and recorded as a debt discount in the accompanying condensed consolidated balance sheet.
During the six months ended June 30, 2021, the Company issued an aggregate of shares of Common Stock with a fair value of $1,122,984 upon the conversion of $1,100,000 of principal, and $22,882 of accrued interest on its secured convertible debentures, at an average price of $0.0204.
During the six months ended June 30, 2021, the Company issued shares of its Common Stock with a fair value of $270,900 for the acquisition of S AND S BEVERAGE, INC.and S.
Common Stock Issuable
On January 21, 2021,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, Plan of Merger with S and S and its shareholders and acquired all of the capital stock of S and S. To consummate the Acquisition, a Certificate of Mergertogether with the Wisconsin Department of Financial Institutions (the “Merger Certificate”) on February 1, 2021. On January 22, 2021, (i) Kona Gold, (ii) KGS Temporary Company, Inc. (Kona Gold Beverage, Inc. “Acquisition Subsidiary”), (iii) S and S, (iv) William J. Stineman and K&L Beverage, LLC, a Wisconsin limited liability company (asClark Employment Agreement, the indemnifying S and S shareholders), and (v) Mr. Stineman (as representative of the S and S Shareholders) entered into the Agreement and Plan of Merger (the “Merger“Amended Clark Employment Agreement”). S and S merged with and into our Acquisition Subsidiary; S and S was the surviving entity and became our wholly-owned subsidiary of Kona Gold Beverage, Inc.
Pursuant to the Mergerterms of the Amendment Clark Employment Agreement, the Company agreed to issue, among other securities, shares of the Common Stock. Immediately, Mr. Clark decided to defer receipt of 80,000,000 of such shares; thus leaving 120,000,000 shares of the Common Stock to be issued to him.
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 subject(iii) on Mary 16, 2016, the Company issued of such shares. On April 19, 2018, (i) shares were cancelled and returned to the termsCompany, and conditions contained therein, on July 31, 2019, (ii) an additional we acquired all of the shares of capital stock of Swere cancelled and S from the five S and S Legacy Shareholders. In consideration thereof, we issued to them an aggregate of nine million restricted shares of Kona Gold Beverage, Inc.’s common stock (the “Acquisition Stock”) on a pro rata basis. Kona Gold Beverage, Inc. did not grant them any registration rights in respect of the shares of Acquisition Stock. We also agreed to pay an aggregate of $1,050,000 (the “Aggregate Acquisition Payments”), the majority of which is allocated to certain creditors of S and S (including one of the S and S Legacy Shareholders) and approximately $89,000 of which (the “Remaining Acquisition Payments”) is allocatedreturned to the five S and S Legacy Shareholders on a pro rata basis. $400,000 of the Aggregate Acquisition Payments are scheduled to be paid in the next two weeks. The balance of the Aggregate Acquisition Payments, including the Remaining Acquisition Payments, are scheduled to be paid in monthly installments, in arrears on the tenth calendar day of each month, commencing on March 10, 2021, at a rate equivalent to $ per case of Lemin Superior Lemonade (the product line of S and S that we have now branded as Ooh La Lemin) that we sell until the Aggregate Acquisition Payments have been paid in full. In addition to the Aggregate Acquisition Payments, we also assumed and agreed to pay certain other liabilities of S and S as set forth in the Merger Agreement.
The following is a balance sheet comparison of S and S as of January 21, 2021:
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| Schedule of acquisition | ||||||||
| Balance Sheet | Book Value | Fair Value | ||||||
| Accounts receivable, net of allowance of $24,280 | $ | 9,437 | $ | 33,717 | ||||
| Inventory | 240,797 | 249,648 | ||||||
| Property, plant and equipment, net (Website Development) | 12,201 | 12,201 | ||||||
| Total Assets | $ | 262,435 | $ | 295,566 | ||||
| Accounts payable and accrued liabilities | $ | 55,553 | $ 956 | |||||
| Outstanding checks | 23,058 | — | ||||||
| Interest payable | 11,915 | — | ||||||
| Due to customers | 19,667 | — | ||||||
| Current note payable - related party | 811,761 | 1,050,000.00 | ||||||
| Common Stock, $30.05 par value, 10,000 shares issued and outstanding, respectively | 300,500 | |||||||
| Additional paid-in-capital | 437,701 | |||||||
| Accumulated deficit | (1,397,720 | ) | ||||||
| Total liabilities and stockholders’ deficit | $ | 262,435 | ||||||
The following are the accounts included in the Company’s accompanying balance sheet dated March 31, 2021 as a result of the S and S transaction:
| Balance Sheet | ||||
| Accounts receivable | $ | 33,717 | ||
| Website Development (Ooh La Lemin) | 12,201 | |||
| Goodwill | 1,275,938 | |||
| Total Assets | $ | 1,321,856 | ||
| Accounts payable and accrued liabilities | $ | 956 | ||
| Loan on Acquisition | 650,000 | |||
| Due to merger payments | 400,000 | |||
| Common stock, $.00001 par value, 9,000,000 shares issued | 90 | |||
| Additional paid-in capital | 270,810.00 | |||
| Total liabilities and stockholders’ deficit | $ | 1,321,856 | ||
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 – GOING CONCERN
The accompanying Consolidated 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 Consolidated Financial Statements, during the three months ending September 30, 2021, the Company incurred a net loss of approximately $2.2 2,230,715 million, and during the nine months ending September 30, 2021, incurred a net loss of approximately $4.4 million 4,423,399, used cash in operations of approximately $1.5 million 1,586,677 and had a stockholders’ deficit of $5,065,089 as of September 30, 2021. In the year ending December 31, 2020, the Company incurred a net loss of $3,125,595, used cash in operations of $1,370,123 and had a stockholders’ deficit of $4,244,153 Company. Accordingly, as of December 31, 2020.
The Company attributes this significant increase to losses incurred from corporate related expenses during the nine months ending September 30, 2021. During the first and third quarters of fiscal 2021,2019, the Company signed two separate Securities Purchase Agreement, whereas,owed to Mr. Clark an aggregate of shares to be reissued to him upon his request pursuant to the Company incurred interest expense to related warrants on both convertible notes and a loss onterms of the related derivatives,oral agreement with him which were integralvalued at $1,386,497 based on their fair value at the date of grant. The common shares issuable balance at June 30, 2022 and December 31, 2021 were $1,386,497.
Summary of Warrants
A summary of warrants for the six months ended June 30, 2022, is as follows:
SCHEDULE OF SUMMARY OF WARRANTS
| Weighted | ||||||||
| Number | Average | |||||||
| of | Exercise | |||||||
| Warrants | Price | |||||||
| Balance outstanding, December 31, 2021 | 170,000,000 | $ | 0.03 | |||||
| Warrants granted | 8,333,333 | 0.03 | ||||||
| Warrants exercised | - | - | ||||||
| Warrants expired or forfeited | - | - | ||||||
| Balance outstanding, June 30, 2022 | 178,333,333 | $ | 0.03 | |||||
| Balance exercisable, June 30, 2022 | 178,333,333 | $ | 0.03 | |||||
| F-19 |
Information relating to the growth of the Company. During the third quarter, the Company attributes the increase to costs related to both our Beverage Segment and Distribution Segment of selling, general and administrative expenses, specifically salaries, which are integral to the success of the Company. In addition, corporate-related expenses, specifically audit related and legal expenses related to securities in the current year that are integral to the success of our Company. The Company continued to be impactedoutstanding warrants at June 30, 2022, summarized by the COVID-19 pandemic during the third quarter of the 2021 fiscal year as the Company continued to have logistical delays in delivery of our products to customers. In addition, the Company has experienced delays in obtaining product related to logistical delays. Despite the increase in losses and impacts from COVID-19, the Company realized an increase in sales in the first three quarters of fiscal 2021 over the previous first three quarters of fiscal 2020. The Company attributes this to the acquisition of S and S, which has added to the Company’s portfolio. In addition, the Company has signed more favorable agreements with larger, reputable tier 1 and mid-size distributors and grocery chains that had unforeseen delays and had been impacted by the COVID-19 pandemic. In addition, we also attribute the increase in sales to our Distribution Segment which has seen approximately 286% increase in the first three quarters of fiscal 2021 over the previous first three quarters of fiscal 2020; and approximately 244% increase in the three months ending September 30, 2021 over the three months ending September 30, 2020. We expect that revenue will increase during the balance of fiscal 2021 as distribution related to our current distributors that had been affected by COVID-19, but have resumed more normal distribution, are seeing fewer forward-looking impacts from the COVID-19 pandemic. The Company expects that it will continue to enter into additional, larger, more favorable agreements with larger, tier 1 and mid-size distributors in our Beverage Segment during the balance of fiscal 2021, and our Distribution Segment will continue to see growth with the expansion of a new location.
As a result, the Company’s continuation as a going concernexercise price, is dependent on the ability to obtain additional financing until we can generate sufficient cash flow from operations to meet our obligations. We intend to continue to seek additional debt or equity financing to continue our operations. There is no assurance that we will ever be profitable or that debt or equity financing will be available to us in the amounts, on terms, and at times deemed acceptable to us, if at all. The issuance of additional equity securities by us would result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, would increase our liabilities and future cash commitments. If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to continue our business, as planned, and as a result may be required to scale back or cease operations for our business, the result of which would be that our stockholders would lose some or all of their investment. The accompanying Consolidated Financial Statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 21 – CONCENTRATIONS
The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, less intercompany transactions. In addition, certain customers had outstanding accounts receivables that individually represented 10% or more of the Company’s total outstanding accounts receivables, less intercompany transactions, but before receivable allowances. These customers are as follows:
SCHEDULE OF OUTSTANDING WARRANTS
| Outstanding | Exercisable | |||||||||||||||||||||
| Exercise Price Per Share | Shares | Life (Years) | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||||||||
| $ | 0.03 | 158,333,333 | 2.01 | $ | 0.03 | 158,333,333 | $ | 0.03 | ||||||||||||||
| $ | 0.05 | 20,000,000 | 0.87 | $ | 0.05 | 20,000,000 | $ | 0.02 | ||||||||||||||
| 178,333,333 | 1.89 | $ | 0.03 | 178,333,333 | $ | 0.03 | ||||||||||||||||
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSBased on the fair market value of $ per share on June 30, 2022, there was no intrinsic value attributed to both the outstanding and exercisable warrants at June 30, 2022.
In connection with the accompanying Consolidated Balance Sheet asissuance of September 30, 2021,convertible secured debentures on May 2, 2022 (see Note 9), the Company’s net accounts receivable wereCompany granted warrants with a relative fair value of $63,715, representing total accounts receivable of approximately $139,203, less sales returns and allowance of approximately $61,041, less doubtful accounts of approximately $7,709, and less intercompany transactions of approximately $6,738. In the accompanying Consolidated Balance Sheet as of December 31, 2020, the Company’s net accounts receivable were $(10,508), representing total accounts receivable of approximately $22,166103,000 less sales returns and allowance of approximately $28,707 and less doubtful accounts of approximately $3,967. The breakdown of the Company’s accounts receivable is as follows:
| Schedule of accounts receivable | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| Total Accounts Receivable | $ | 139,235 | $ | 22,166 | ||||
| Less: Sales Returns and Allowances | 61,041 | 28,707 | ||||||
| Less: Doubtful Accounts | 7,709 | 3,967 | ||||||
| Less: Intercompany Transactions | 6,738 | — | ||||||
| Accounts Receivable, net | $ | 63,715 | $ | (10,508 | ) | |||
The Company determined that four customers accounted for approximately 70% (or approximately 25%, 20%, 13% and 12%), orto purchase up to an aggregate of $97,8328,333,333, shares of the outstanding total accounts receivableCommon Stock. Each warrant has a three-year term from issuance and is immediately exercisable at an exercise price of $139,235 as$0.03 per share, subject to adjustment. The relative fair value of September 30, 2021. The Companythese options at grant date was approximately $103,000, which was determined that four customers accounted for approximately using a Black-Scholes-Merton option pricing model with the following assumptions: fair value of our stock price of $760.0180% (or approximately per share, the expected term of three years, volatility of 26132%, dividend rate of 220%, and risk-free interest rate of 142.16% and 14%), or an aggregate of $16,904, of the outstanding total accounts receivable of $22,166 as of December 31, 2020.
In the accompanying Consolidated Statements of Loss for the three months ended September 30, 2021, one customer represented 12% of the Company’s total net revenue of $545,375 for the three months ended September 30, 2021. In the accompanying Consolidated Statements of Loss for the three months ended September 30, 2020, no one customer represented 10% of the Company’s total net revenue of $312,709 for the three months ended September 30, 2020. In the accompanying Consolidated Statements of Loss for the nine months ended September 30, 2021, one customer represented 13% of the Company’s total net revenue of $1,798,999 for the nine months ended September 30, 2021. In the accompanying Consolidated Statements of Loss for the nine months ended September 30, 2020, no one customer represented 10% or more of the Company’s total net revenue of $741,812 for the nine months ended September 30, 2020.
Kona Gold Beverage, Inc.
(formerly known as Kona Gold Solutions, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 and cans 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.
The Company had certain vendors that individually represented 10% or more of the Company’s inventory purchases. For the three months ended September 30, 2021, the Company purchased 29% of its inventory from two vendors. Of these vendors, $45,242 is due to these vendors as of the balance sheet dated September 30, 2021. For the year ended December 31, 2020, the Company did not purchase in excess of 10% of its inventory from any single vendor.
NOTE 2213 –SUBSEQUENT EVENTS
ManagementSubsequent to June 30, 2022, the Company issued an aggregate of shares of Common Stock upon the conversion of $300,000 of principal, and $2,542 of accrued interest on its secured convertible debentures, at an average price of $0.0042 (see Note 9).
Pursuant to a Securities Purchase Agreement dated July 28, 2022 (the “SPA”), the Company completed a private placement of a Senior Secured Promissory Note (the “Senior Note”) with an initial principal amount of $595,000 and the grant of a common stock purchase Warrant (the “Warrant”) that is exercisable for the purchase of up to an aggregate of million shares (the “Warrant Shares”) of its Common Stock with an otherwise unrelated third-party investor (the “Investor”). In addition, to secure the Company’s obligations to the Investor under the Senior Note, the Company also entered into a Security Agreement (the “Security Agreement”) with and in favor of the Investor. The Company’s subsidiaries are also parties to the Security Agreement.
The transactions contemplated by the SPA were consummated on July 29, 2022 (the “Issue Date”). Upon the funding, the Company sold and issued the Senior Note and granted the Warrant. Pursuant to the SPA, the purchase price for the Senior Note was $595,000, less $92,325 in fees, which consisted of an 8% “original issue discount” of $47,500, due diligence and structuring fees of $38,325, and $6,500 for the Investor’s legal fees.
The Senior Note is due 12 months from its issuance date and 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 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 the Company’s Common Stock (the “Conversion Shares”) at a fixed conversion price of $0.0045 per share, subject to adjustment due to merger, consolidation, exchange of shares, recapitalization, reorganization, or similar event as set forth in the Senior Note (the “Conversion Price”). The Senior Note contains an adjustment provision that, subject to certain exceptions, reduces the conversion price if the Company issues shares of its Common Stock or common stock equivalents at a price lower than the then-current Conversion Price of the Senior Note. Upon any stock splits, reverse stock splits, distributions, stock dividends, or other similar event, the Investor will be entitled to participate in such an event on an “as converted” basis. The Senior Note is subject to a “conversion blocker” such that the Investor cannot convert any portion of the Senior Note that would result in the Investor and its affiliates holding more than 4.99% of the then-issued and outstanding shares of the Company’s Common Stock following such conversion (excluding, for purposes of such determination, shares of the Common Stock issuable upon conversion of the Senior Note or exercise of the Warrant that had not then been converted or exercised, respectively). The Investor does not have the right to convert the Senior Note until six months after the Issue Date. The Senior Note accrues interest at an annual rate equal to 10% and is due and payable on its maturity date (or sooner if the Investor converts the Senior Note or otherwise accelerates the maturity date, as provided for in the Senior Note). Interest is payable in cash on the maturity date or, in shares of the Common Stock at the then-current Conversion Price if the Investor converts the Senior Note or otherwise accelerates the maturity date, as provided for in the Senior Note.
| F-19 |
At our option, the Company has evaluated subsequent events through November 15, 2021,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. The Company 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”). The Company must provide seven Trading Days’ (as such term is defined in the Senior Nate) prior notice to the then-holder of the Senior Note of its 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 the Senior Note prior to such redemption.
The Company also granted the Warrant to purchase up to an aggregate of the Warrant Shares. The Warrant has a -year term and is immediately exercisable at an exercise price of $ per share, subject to adjustment and is exercisable by the then-holder on a “cashless” basis.
The Warrant contains an adjustment provision that, subject to certain exceptions, reduces the exercise price if the Company issues shares of its 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 also, in certain circumstances, the number of Warrant Shares. The Warrant is subject to an “exercise blocker,” such that the September 30, 2021 Consolidated Financial Statements were issued, and has determinedInvestor cannot exercise any portion of the following events have occurredWarrant that would warrant additional disclosure:
| F-20 |
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For a description of our significant accounting policies
The following discussion and an understandinganalysis of the significant factors that influenced our performance duringresults of operations and financial condition for the three months and ninesix months ended SeptemberJune 30, 2021, this “Management’s Discussion2022 and Analysis of Financial Condition and Results of Operations” (hereafter referred to as “MD&A”)2021 should be read in conjunction with the unaudited consolidated financial statements including theand related notes appearingand the other financial information that are included elsewhere in Part I, Item 1 of this Quarterly Report on Form 10-Q, as wellReport. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our Annual Reportplans, objectives, expectations, and intentions. Forward-looking statements are statements not based on Form 10-K forhistorical 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 fiscal year ended December 31, 2020 (the “2020 Form 10-K”).
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 aboutRegarding Forward-Looking Statements,
This Quarterly Report on Form 10-Q includes” 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 constituteare “forward-looking, statements.” These forward-looking statements are often characterized by the terms “may,” “believes,” “projects,” “intends,” “plans,” “expects,” or “anticipates,” and do not reflect historical facts.
Specific forward-lookingincluding statements contained in this portionAnnual 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 the Quarterly Report include, butsuch words and similar expressions are intended to identify such forward-looking statements. These statements are not limited to: (i) statements that are based on current projectionsguarantees of future performance and expectations about the markets in which we operate, (ii) statements about current projections and expectations of general economic conditions, (iii) statements about specific industry projections and expectations of economic activity, (iv) statements relating to our future operations, prospects, results, and performance, (v) statements about the Chapter 11 Case, (vi) statements that the cash on hand and additional cash generated from operations together with potential sources of cash through issuance of debt or equity will provide the Company with sufficient liquidity for the next 12 months, and (vii) statements that the outcome of pending legal proceedings will not have a material adverse effect on business, financial position and results of operations, cash flow or liquidity.
Forward-looking statements involve risks, uncertainties, and other factors,assumptions, which are difficult to predict. Therefore, actual outcomes and results may cause our actual results, performance or achievements to bediffer materially different from thosewhat is expressed or impliedforecasted in or suggested by such forward-looking statements. Factors and risks that could affect our results, future performance and capital requirements and cause them to materially differ from those contained in the forward-looking statements include those identified in our 2020 Form 10-K under Item 1A “Risk Factors”, as well as other factors that we are currently unable to identify or quantify, but that may exist in the future.
In addition, the foregoing factors may generally affect our business, results of operations and financial position. Forward-looking statements speak only as of the date the statements were made. We do not undertake and specifically decline any obligation to update any forward-looking statements. Any information contained on our websites www.konagoldbeverage.com,www.konagoldhemp.com,www.highdrateme.com, and www.goldleafdist.com or any other websites referenced in this Quarterly Report are not part of this Quarterly Report.
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.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.
| 1 |
Results of Operations
Overview
Our business has grown rapidly since inception in 2015, and we anticipate that our business will continue to grow; however,grow significantly. In the yearthree months ended December 31, 2020,June 30, 2022, the Company saw unforeseen delaysan increase in signing more favorable agreements with larger, reputable tier 1 and mid-sizegrowth compared to the same period of the prior year period, as distribution by our current distributors and grocery chainsnew distributors, who were, and wewhose clients were, additionally impactedaffected by COVID-19 had resumed and saw fewer COVID-19 pandemic-related distribution impacts. The Company acquired S and S Beverage, Inc. (“S and S”), in early 2021, which increased our product variety, resulting in the COVID-19 pandemic during the fiscal year. The COVID-19 delayed the Company’s launch of a varietycommencement of new products during most of the 2020 fiscal year – drinks and non-drink line broadening items. Our Beverages Segment has three maindistribution contracts.
We derive our revenue streams: product sales from online consumers, product sales through resellers, and product sales from distributors. Product sales include 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 four energy drinks, our HighDrate CBD-infused energy waters, and our apparel, such as t-shirts and hats. In early 2019,2021, we broadened our product line to include Ooh La Lemin lemonade. We also distribute our products and other companies’ products at retail. In late 2021, we expanded our distribution operations with the creationaddition of a second distribution center, which now functions as our Distribution Segment. Our Distribution Segment has one main revenue stream: product sales to convenience stores, grocery stores, or smoke and gift shops, which complement our current product offering. Product sales include sales of our beverages, as well as beverages and snacks purchased for resale from several other beverage producers.center.
We have experienced and expect to continue to experience substantial growth in our operations as we seek to expand withthrough additional products and acquisitions that complement our current product offerings. We expect that revenue will continue to increase in the balance offiscal year 2022 compared to fiscal year 2021, as distribution related toby our current distributors, who were, and whose clients were, affected by COVID-19 that havehas resumed distribution, will continueand we expect to see fewer COVID-19 pandemic-related distribution impacts from the COVID-19 pandemic going forward. COVID-19 continues to impact the Company infor fiscal year 2021 with logistical delays in delivery of our products to customers. In addition, the Company has experienced delays in obtaining product related to logistical delays. Despite the impact from COVID-192022. Based on our revenues in the fiscal year 2020 and 2021,those expectations, we stillnow anticipate to sign larger,signing more favorable agreements with larger, reputable tier 1 and mid-size distributors, in our Beverages Segment in the remaining quarter of fiscal 2021. Additionally, we expect that our Distribution Segment will continue to see growth with the expansion of a new location.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.
Impact of Inflation
Recent inflationary trends have led to a moderate increase in some of the costs to produce and ship our products. To date, we have not passed the increases in those costs to our consumers. Continued prolonged periods of inflationary pressure on some or all of those costs could have a material adverse effect on our profit margins from sales of those products or could require us to increase prices for those products, which could reduce consumer demand for those products.
Three Months Ended Septemberended June 30, 20212022 compared to the Three Months Ended Septemberended June 30, 20202021
Overview
As reflected in the accompanying financial statements, during the three months ended SeptemberJune 30, 2021,2022, we incurred a net loss of approximately $2.2 million,$1,388,525, compared to a net loss of approximately $509,400$373,214 for the three months ended SeptemberJune 30, 2020. As of September 30, 2021, we had a stockholders’ deficit of approximately $5.1 million.2021.
The following is a more detailed discussion of our financial condition and results of operations for the period presented, along with prior periods.
| 2 |
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 September 30, | Three Months Ended | |||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2021 | |||||||||||||||||||||
| Revenue Source | Revenue | Revenue | % Change | Revenue | Revenue | % Change | ||||||||||||||||||
| Distributors and Resellers | $ | 140,003 | $ | 150,929 | 8 | % | ||||||||||||||||||
| Amazon | 46,078 | 41,669 | (10 | )% | ||||||||||||||||||||
| Distributors | $ | 219,790 | $ | 414,937 | (47 | )% | ||||||||||||||||||
| Amazon and Walmart Marketplace | 44,565 | 39,256 | 14 | % | ||||||||||||||||||||
| Online Sales | 15,663 | 17,678 | 13 | % | 13,709 | 21,843 | (37 | )% | ||||||||||||||||
| Gold Leaf Distribution | 108,719 | 347,247 | 219 | % | ||||||||||||||||||||
| Retail | 927,614 | 328,848 | 182 | % | ||||||||||||||||||||
| Shipping | 8,846 | 4,451 | (50 | )% | 4,420 | 5,725 | (23 | )% | ||||||||||||||||
| Sales Returns and Allowances | (6,600 | ) | (16,599 | ) | 152 | % | (36,700 | ) | (19,800 | ) | 85 | % | ||||||||||||
| Net Revenues | $ | 312,709 | $ | 545,375 | 74 | % | $ | 1,173,398 | $ | 790,809 | 48 | % | ||||||||||||
The following table presents our net revenues by revenue source, as a percentage of total net revenuesproduct lines for the periods presented:
| Three Months Ended September 30, | ||||||||
| Revenues | 2020 | 2021 | ||||||
| Distributors and Resellers | 45 | % | 28 | % | ||||
| Amazon | 15 | % | 8 | % | ||||
| Online Sales | 5 | % | 3 | % | ||||
| Gold Leaf Distribution | 35 | % | 64 | % | ||||
| Shipping | 3 | % | 1 | % | ||||
| Sales Returns and Allowances | (2 | )% | (3 | )% | ||||
Three Months Ended June 30, | ||||||||||||
| 2022 | 2021 | |||||||||||
| Product Line | Revenue | Revenue | % Change | |||||||||
| Hemp Energy Drinks | $ | 50,792 | $ | 113,434 | (55 | )% | ||||||
| CBD Energy Waters | 17,249 | 31,682 | (46 | )% | ||||||||
| Lemonade Drinks | 209,976 | 329,893 | (36 | )% | ||||||||
| Apparel | 47 | 1,027 | (95 | )% | ||||||||
| Retail | 927,614 | 328,848 | 182 | % | ||||||||
| Shipping | 4,420 | 5,725 | (23 | )% | ||||||||
| Sales returns and allowance | (36,700 | ) | (19,800 | ) | 85 | % | ||||||
| Net Revenues | $ | 1,173,398 | $ | 790,809 | 48 | % | ||||||
During the three months ended SeptemberJune 30, 2021,2022, we reported net revenues of approximately $545,400,$1,173,398, which is an increase of approximately $232,700,$382,589, or approximately 74%48%, compared to net revenues of approximately $312,700$790,809 for the three months ended SeptemberJune 30, 2020. A decrease2021. An increase of approximately $40,900 was attributed$598,881 of our revenue is attributable to our Beverages Segment,increased retail revenue, while our Distribution Segment reported an increaseproduct sales decreased in net revenue ofby approximately $265,500. We attribute this decrease in our Beverages Segment sales to unforeseen production delays in our product line from our copackers. In addition, our Beverages Segment continued to be impacted by the COVID-19 pandemic during the third quarter of the 2021 fiscal year as we continued to have logistical delays in delivery of our products to customers. The Company has also continued to experience delays in obtaining product for production related to logistical delays.$216,290. We attribute the significant increase in revenuesretail revenue to attaining a larger percentage of the territory in which the Company distributes, including the addition of a third distribution hub in late fiscal 2021 and the hiring of additional employees to service this territory. We attribute the decrease in product sales to certain delays in production of a new product line and existing product lines, as well as to a change-over in our Distribution Segmentcustomer mix from the prior period due to increasinga non-repetitive, regional, one-off customer relationship in the prior period and a different regional customer imposing slotting fees in the current period (which fees we declined to pay). We anticipate that the rollout of our distribution area, broadeningdrink products with a national retailer will commence late in the third quarter. Additionally, the Company experienced delays in the rebranding of our drinks and non-drinkhemp product line and distribution agreements.the subsequent production. We expect that our product revenue will increase in the last quarter of theremaining fiscal year 2022 compared to fiscal year 2021, and we do not anticipate further delays. Additionally, the Company hired additional sales personnel to lead sales efforts as we will continue to see fewer impacts from the COVID-19 pandemic going forward. We anticipate to sign larger,Company expands into new territories and the Company anticipates signing more favorable agreements with larger, reputable tier 1 and mid-size distributors, in our Beverages Segment during the remaining quarter of fiscal 2021. Additionally,big box stores, and grocery chains. In addition, we anticipate that our Distribution Segmentretail revenue will continue to see growthincrease as we broaden our customer base with the expansion of a new locationincreased distribution to additional grocery and additional sales employees to distribute our drink and non-drink line.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 SeptemberJune 30, 2021,2022, we reported cost of revenues of approximately $442,800,$885,517, which is an increase of approximately $220,700,$198,837, or approximately 99%29%, compared to approximately $222,100$686,706 for the three months ended SeptemberJune 30, 2020.2021. This increase is attributed to an increase in sales in Distribution Segmentboth our products and retail distribution in the third quarter of fiscal 2021,2022, compared to the prior year period. The cost of salesrevenues increase was largerless than the increase in sales.revenues. This is primarily attributed to an increased costcosts in the prior period in obtaining our ingredients for our product line in our Beverages Segment, an increased costproducts, for production of our product in our Beverages Segment,products, and an increased cost offor shipping our product in our Beverages Segment.products. We expect that we will continue to see an increased cost of salesrevenues in excess of the expectedremaining fiscal year 2022, primarily due to an anticipated increase in sales for the remaining quarter of fiscal year 2021,revenues. In addition, as the cost of shipping our products continues to remain high. The Company continueselevated, 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.products in fiscal year 2022.
| 3 |
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses (“SG&A&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 June 30, 2022, to approximately $1,031,515 from approximately $644,052, an increase of approximately $387,463 over the same period last year. The increase was driven by increased operating expenses associated with hiring additional sales employees, advertising and marketing, travel expenses, legal and accounting fees, rent related to an additional distribution warehouse, vehicle and shipping expenses, and partially offset by lower professional fees. 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 were approximately $756,100will continue to increase.
Other Income and Expenses
Other expense for the three months ended SeptemberJune 30, 2021,2022 was approximately $644,891, as compared to other income of approximately $500,200 in the three months ended September 30, 2020, an increase of $255,900, or approximately 51%. The increase in SG&A expenses was primarily due to an increase in salaries and wages of 77% attributed to both our Beverages Segment and Distribution Segment; an increase in professional fees of 335% attributed to our Beverages Segment; an increase in our advertising and promotion expenses of 295% attributed to both our Beverages Segment and Distribution Segment; an increase in vehicles expenses of 102% attributed to our Distribution Segment; and an increase in travel expenses of 278% attributed to both our Beverages Segment and Distribution Segment. These increases were offset by a decrease in bad debt expense of 105% attributed to our Beverages Segment.
Salaries and wages were approximately $382,900 in the three months ended September 30, 2021, compared to approximately $216,700$166,735 for the three months ended SeptemberJune 30, 2020, an increase of approximately $166,200, which2021. The change was attributedattributable to both our Beverages Segment (approximately $120,000) and our Distribution Segment (approximately $46,100). This increase was the result of hiring additional employees, who are pivotal to the success of our Company. Professional fees were approximately $90,400 for the three months ended September 30, 2021, compared to $20,800 for the three months ended September 30, 2020, an increase of approximately $69,700, which was attributed to our corporate-related activities. This increase was the result of raising capital that we believed was necessary for our anticipated growth. Advertising and promotion expenses were approximately $21,600 for the three months ended September 30, 2021, compared to approximately $5,500 for the three months ended September 30, 2020, an increase of approximately $16,100. This increase was attributed to both our Beverages Segment and Distribution Segment and the result of promoting drink and non-drink product lines through samples, trade shows and events, and store displays. Vehicle expense was approximately $29,400 in the three months ended September 30, 2021, compared to approximately $14,600 for the three months ended September 30, 2020, an increase of approximately $14,800, which was attributed to our Distribution Segment. Additional delivery vehicles were purchased during fiscal year 2021 and, with the increase in the number of delivery vehicles, our cost of general repairs and maintenance made to our delivery vehicles, as a group, increased. Travel expenses were approximately $10,400 for the three months ended September 30, 2021, compared to approximately $2,700 for the three months ended September 30, 2020, an increaseinterest expense of approximately $7,600. This increase was attributed to both our Beverages Segment and Distribution Segment and the result of promoting drink and non-drink product lines at trade shows and events for Beverages Segment, and travel$91,503 related to the expansion of our Distribution Segment. This increase was offset by a decrease in badincreased debt expense, which was approximately $(2,100) inlevels and debt amortization, the three months ended September 30, 2021, compared to approximately $38,900 for the three months ended September 30, 2020, a decrease of approximately $41,000, which was primarily attributed to our Beverages Segment. This decrease was the result of a decrease in uncollectible accounts and a decrease in the allowance for uncollectible accountschange in the three months ended September 30, 2021, compared to three months ended September 30, 2020,fair value of derivative liabilities of approximately $19,497, a loss on debt extinguishment of approximately $326,230, and financing costs of $286,000, which was related to outstanding invoices from distributors impacted by the COVID-19 pandemic during the third quarter of the 2020 fiscal year.
We expect that we will continue to expand our business, operations, and incur additional SG&A expenses related to operations in both our Beverages Segment and Distribution Segment. Additionally, corporate-related expenses associated with having our Common Stock quoted on the OTCQB and being required to file certain reports and other information with the SEC. We anticipate hiring additional personaldid not occur in the remaining quarterprior year period, all of fiscal 2021 who, we expect, will bewhich changes are integral to the success of our growing Company.non-cash expenses.
Net Loss
We incurred a net loss of approximately $2.2 million$1,388,525 for the three months ended SeptemberJune 30, 2021,2022, an increase of approximately $1.7 million$1,015,311 compared to the previous three months ending September 30, 2020,prior year period in which hadwe incurred a net loss of approximately $509,400. This$373,214. The three month net loss in the three months ended September 30, 2021 is primarily relateddue to our to corporate-relatedincreased gross profit offset by increased SG&A expenses which include interest expense related toand the Warrants issuedincrease in connection with the Debentures and non-cash expense on our derivative liability. The fair value of the Debentures are re-measured each reporting period until the Debentures are either converted or expire. In each reporting period during the term of the Debentures, the change in the fair value will either be recognizedother expenses, as a non-cash expense or non-cash income. The change in the fair value of the Debentures is not impacted by our actual operations but instead is strongly tied to the change in the market value of our Common Stock.discussed above.
NineSix Months Ended Septemberended June 30, 20212022 compared to the NineSix Months Ended Septemberended June 30, 20202021
Overview
As reflected in the accompanying financial statements, during the ninesix months ended SeptemberJune 30, 2021,2022, we incurred a net loss of approximately $4.4 million$4,975,087 and used cash in operations of approximately $1.6 million,$1,619,355, compared to a net loss of approximately $2.2 million$2,192,939 and used cash in operations of approximately $6878,600$875,555 for the ninesix months ended SeptemberJune 30, 2020.2021. As of SeptemberJune 30, 2021,2022, we had a stockholders’ deficit of approximately $5.1 million.$2,991,280.
The following is a more detailed discussion of our financial condition and results of operations for the period presented, along with prior periods.
| 4 |
Revenue
The following table presents our net revenues, by revenue source, and the period-over-period percentage change, for the period presented:
| Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2021 | |||||||||||||||||||||
| Revenue Source | Revenue | Revenue | % Change | Revenue | Revenue | % Change | ||||||||||||||||||
| Distributors and Resellers | $ | 367,912 | $ | 784,023 | 113 | % | ||||||||||||||||||
| Amazon | 121,317 | 119,428 | (2 | )% | ||||||||||||||||||||
| Distributors | $ | 413,107 | $ | 672,873 | (39 | )% | ||||||||||||||||||
| Amazon and Walmart Marketplace | 80,089 | 77,759 | 3 | % | ||||||||||||||||||||
| Online Sales | 35,176 | 57,725 | 64 | % | 22,316 | 40,047 | (44 | )% | ||||||||||||||||
| Gold Leaf Distribution | 228,881 | 883,825 | 286 | % | ||||||||||||||||||||
| Retail | 1,719,015 | 509,130 | 238 | % | ||||||||||||||||||||
| Shipping | 19,181 | 15,039 | (22 | )% | 5,802 | 10,588 | (45 | )% | ||||||||||||||||
| Sales Returns and Allowances | (30,655 | ) | (61,041 | ) | 99 | % | (71,800 | ) | (57,417 | ) | 25 | % | ||||||||||||
| Net Revenues | $ | 741,812 | $ | 1,798,999 | 143 | % | $ | 2,168,529 | $ | 1,252,980 | 73 | % | ||||||||||||
The following table presents our net revenues by revenue source, as a percentage of total net revenuesproduct lines for the periods presented:
| Nine Months Ended September 30, | ||||||||
| Revenues | 2020 | 2021 | ||||||
| Distributors and Resellers | 50 | % | 44 | % | ||||
| Amazon | 16 | % | 7 | % | ||||
| Online Sales | 5 | % | 3 | % | ||||
| Gold Leaf Distribution | 31 | % | 49 | % | ||||
| Shipping | 3 | % | 1 | % | ||||
| Sales Returns, and Allowances | (4 | )% | (3 | )% | ||||
| Six Months Ended June 30, | ||||||||||||
| 2022 | 2021 | |||||||||||
| Product Line | Revenue | Revenue | % Change | |||||||||
| Hemp Energy Drinks | $ | 118,574 | $ | 201,926 | (41 | )% | ||||||
| CBD Energy Waters | 41,588 | 51,762 | (20 | )% | ||||||||
| Lemonade Drinks | 354,238 | 535,733 | (34 | )% | ||||||||
| Apparel | 112 | 1,258 | (91 | )% | ||||||||
| Retail | 1,719,015 | 509,139 | 238 | % | ||||||||
| Shipping | 5,802 | 10,588 | (25 | )% | ||||||||
| Sales returns and allowance | (71,800 | ) | (57,417 | ) | 25 | % | ||||||
| Net Revenues | $ | 2,168,529 | $ | 1,252,980 | 73 | % | ||||||
During the ninesix months ended SeptemberJune 30, 2021,2022, we reported net revenues of approximately $1,799,000,$2,168,529, which is an increase of approximately $1,057,100,$915,549, or approximately 143%73%, compared to net revenues of approximately $741,800$1,252,980 for the ninesix months ended SeptemberJune 30, 2020.2021. An increase of approximately $404,700 was attributed$1,209,999 of our revenue is attributable to our Beverages Segment,increased retail revenue, while our Distribution Segment reported anproduct sales decreased in net revenue by approximately $294,450. We attribute the significant increase in net revenuesretail revenue to attaining a larger percentage of approximately $654,900.the territory in which the Company distributes, including the addition of a third distribution hub in late fiscal 2021 and the hiring of additional employees to service this territory. We attribute thisthe decrease in product sales to certain delays in production of a new product line and existing product lines, as well as to a change-over in our customer mix from the prior period due to a non-repetitive, regional, one-off customer relationship in the prior period and a different regional customer imposing slotting fees in the current period (which fees we declined to pay). We anticipate that the rollout of our drink products with a national retailer will commence late in the third quarter. Additionally, the Company experienced delays in the rebranding of our hemp product line and the subsequent production. We expect that our product revenue will increase in the remaining fiscal year 2022 compared to fiscal year 2021, and we do not anticipate further delays. Additionally, the Company hired additional sales personnel to an effort to signlead sales efforts as the Company expands into new territories and the Company anticipates signing more favorable agreements with larger, reputable tier 1 and mid-size distributors, big box stores, and grocery chains. These contracts saw unforeseen delays and were additionally impacted by the COVID-19 pandemic during the fiscal year. The COVID-19 delayed the Company’s launch of a variety of new products during most of the 2020 fiscal year – drinks and non-drink line broadening items. We attribute this decrease in our Beverages Segment sales to unforeseen production delays in our product line from our copackers. In addition, we anticipate that our Beverages Segment continued to be impacted by the COVID-19 pandemic during the nine months ended September 30, 2021 as we continued to have logistical delays in delivery of our products to customers. The Company has also continued to experience delays in obtaining product for production related to logistical delays. We also attribute this increase to the acquisition of a beverage company in the first quarter of fiscal 2021 that broadened our drink product line in our Beverages Segment. We attribute the increase in revenues in our Distribution Segment to increasing our distribution area, broadening our drinks and non-drink line, and distribution agreements. We expect thatretail revenue will increase in the last quarter of the fiscal year 2021 as we will continue to see fewer impacts from the COVID-19 pandemic going forward. We anticipateincrease as we broaden our customer base with increased distribution to sign larger, more favorable agreements with larger, tier 1additional grocery and mid-size distributors in our Beverages Segment during the remaining quarter of fiscal 2021. Additionally, we anticipate our Distribution Segment will continue to see growth with the expansion of a new location and additional sales employees to distribute our drink and non-drink line.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 ninesix months ended SeptemberJune 30, 2021,2022, we reported cost of revenues of approximately $1,443,700,$1,735,393, which is an increase of approximately 920,000,$734,822, or approximately 176%73%, compared to approximately $523,800$1,000,571 for the ninesix months ended SeptemberJune 30, 2020.2021. This increase is attributed to an increase in sales in both our Beverages Segmentproducts and Distribution Segmentretail distribution in the second quarter of fiscal 2021,2022, compared to the prior year period. The cost of salesrevenues increase was larger thancomparable to the increase in sales. This is attributed to an increased cost in obtaining our ingredientsrevenues for our product line in our Beverages Segment, an increased cost for production of our product in our Beverages Segment, and an increased cost of shipping our product in our Beverages Segment.the same period. We expect that we will continue to see an increased cost of sales larger thanrevenues in the remaining fiscal year 2022, primarily due to an anticipated increase in sales for the remaining quarter of fiscal year 2021revenues. In addition, as the cost of shipping our productproducts continues to remain high. The Company continueselevated, 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 product.products in fiscal year 2022.
| 5 |
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.
SG&A Selling, general and administrative expenses were approximately $1,968,900 forincreased in the ninesix months ended SeptemberJune 30, 2021, compared2022, to approximately $1,840,000 in the nine months ended September 30, 2020,$1,970,851 from approximately $1,212,732, an increase of $128,800, or approximately 9%.$939,336 over the same period last year. The increase in SG&Awas driven by increased operating expenses was primarily due to an increase inassociated with hiring additional sales employees, advertising and marketing, travel expenses, legal and accounting fees, of 22% attributedrent related to our corporate-related expenses; an increase of 28% in rent expense attributed to both our Beverages Segmentadditional distribution warehouse, vehicle and our Distribution Segment; an increase in professional fees of 308% attributed to our corporate-related activities; an increase in insurance of 192% attributed to both our Beverages Segment; an increase in our advertisingshipping expenses, and promotion expenses of 118% attributed to both our Beverages Segment and Distribution Segment; and a 47% increase in OTCM fees attributed to corporate-related expenses. These increases werepartially offset by a decrease in salaries and wages of 20% attributedlower professional fees. We expect that, as we expand our business operations, SG&A expenses will continue to our Beverages Segment; a decrease in sponsorships of 49% attributed to our Beverages Segment; and a decrease in bad debt expense of 49% attributed to our Beverages Segment.increase.
Legal and accounting fees were approximately $277,500 for the nine months ended September 30, 2021, an increase of approximately $49,400, compared to approximately $228,100 for the nine months ended September 30, 2020, which was attributed to our corporate-related activities. This increase was the result of audit related and legal expenses related to securities in the current year that integral to the success of our growing Company. Rent expenses were approximately $150,000 for the nine months ended September 30, 2021, compared to approximately $117,000 for the nine months ended September 30, 2020, an increase of approximately $33,000. This increase was attributed to both our Beverages Segment and our Distribution Segment and the result of our moving to a larger warehouse facility that was necessary due to our anticipated growth. Professional fees were approximately $185,900 for the nine months ended September 30, 2021, compared to approximately $45,300 for the nine months ended September 30, 2020, an increase of approximately $139,600, which was attributed to our corporate-related activities. Insurance expense was approximately $29,600 for the nine months ended September 30, 2021, compared to approximately $10,100 for the nine months ended September 30, 2020, an increase of approximately $19,400. This increase was attributed to our Beverages Segment and the result of signing larger, more favorable agreements with larger, tier 1 and mid-size distributors and customers. Advertising and promotion expenses were approximately $45,700 for the nine months ended September 30, 2021, compared to approximately $21,000 for the nine months ended September 30, 2020, an increase of approximately $24,700. This increase was attributed to both our Beverages Segment and Distribution Segment and the result of promoting drink and non-drink product lines through samples, trade shows and events, and store displays. OTCM fees attributed to corporate-related expenses were approximately $75,000 for the nine months ended September 30, 2021, compared to approximately $50,900 for the nine months ended September 30, 2020, an increase of approximately $24,100. This increase was the result of fees paid to the OTCM to have our Common Stock quoted on the OTCQB versus the OTC Pink. These increases were offset by a decrease in salaries and wages, which were approximately $904,300 in the nine months ended September 30, 2021, compared to approximately $1.1 million for the nine months ended September 30, 2020, a decrease of approximately $226,900, which was attributed primarily to our Beverages Segment. This decrease was the result of issuance of shares of our Common Stock made in the prior year to employees pursuant to their agreements. Sponsorships were approximately $12,200 in the nine months ended September 30, 2021, compared to approximately $23,800 for the nine months ended September 30, 2020, a decrease of approximately $11,600, which was attributed to our Beverages Segment. This decrease was the result of terminating sponsorships that were no longer advantageous to the Company. Bad debt was approximately $21,200 in the nine months ended September 30, 2021, compared to approximately $41,600 for the nine months ended September 30, 2020, a decrease of approximately $20,400, which was attributed to our Beverages Segment. This decrease was the result of a decrease in uncollectible accounts and a decrease in the allowance for uncollectible accounts in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, which was related to outstanding invoices from distributors impacted by the COVID-19 pandemic during the first three quarters of the 2020 fiscal year.
We expect that as we will continue to expand our business operations and continue to incur additional SG&A expenses related to operations in both our Beverages Segment and Distribution Segment. Additionally, corporate-related expenses associated with having our Common Stock quoted on the OTCQB and being required to file certain reports and other informationstatus as a fully registered issuer with the SEC. We anticipate hiring additional personalSEC under the Securities Exchange Act of 1934, SG&A expenses will continue to increase.
Other Income and Expenses
Other expense for the six months ended June 30, 2022 was approximately $3,412,372, as compared to other expense of approximately $1,232,616 for the six months ended June 30, 2021. The change was attributable to the decrease in interest expense of approximately $608,512 related to our debt levels and debt amortization, the increase in the remaining quarterchange in the fair value of fiscal 2021 who, we expect, will be integral toderivative liabilities of approximately $1,546,631, a loss on debt extinguishment of approximately $873,040, and financing costs of $286,000, which did not occur in the successprior year period, all of our growing Company.which changes are non-cash expenses.
Net Loss
We incurred a net loss of approximately $4.4 million$4,950,087 for the ninesix months ended SeptemberJune 30, 2021,2022, an increase of approximately $2.2 million$2,757,148 compared to the previousprior year nine months ending September 30, 2020,period in which hadwe incurred a net loss of approximately $2.2 million.$2,192,939. This net loss is primarily corporate-relateddue to increase in gross profit, offset by increased SG&A expenses that are necessary for our growth, which include interest expense related toand the Warrant issuedincrease in connection with the Debentures and non-cash expense on our derivative liability. The fair value of the Debentures will be re-measured each reporting period until the Debentures are either converted or expire. In each reporting period during the term of the Debentures, the change in the fair value will either be recognizedother expenses, as a non-cash expense or non-cash income. The change in the fair value of the Debentures is not impacted by our actual operations but instead is strongly tied to the change in the market value of our Common Stock.discussed above.
Segments – Three and Nine Months Ended September 30, 2021 and 2020
For the three and nine months ended September 30, 2021 and 2020, we had two reportable segments: (i) Beverages Segment and (ii) Distribution Segment. Amounts that are not allocated to either of these reportable segments are reported in “Corporate and Eliminations.” We evaluate performance and allocate resources based on net revenue, cost of revenues, and gross profit. Information regarding the operations of these reportable segments is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| REVENUES, NET OF SALES, RETURNS, AND ALLOWANCES: | ||||||||||||||||
| Beverages Segment | $ | 245,918 | $ | 207,763 | $ | 613,016 | $ | 1,018,041 | ||||||||
| Distribution Segment | 108,719 | 374,247 | 228,881 | 883,825 | ||||||||||||
| Corporate and Eliminations | (41,928 | ) | (36,635 | ) | (100,085 | ) | (102,867 | ) | ||||||||
| Total Revenues, Net of Sales, Returns, and Allowances | $ | 312,709 | $ | 545,375 | $ | 741,812 | $ | 1,798,999 | ||||||||
| COST OF REVENUES: | ||||||||||||||||
| Beverages Segment | $ | 160,289 | 201,413 | 417,159 | 864,872 | |||||||||||
| Distribution Segment | 83,912 | 258,151 | 173,638 | 622,210 | ||||||||||||
| Corporate and Eliminations | (22,090 | ) | (16,798 | ) | (67,023 | ) | (43,355 | ) | ||||||||
| Total Cost of Revenues | $ | 222,111 | $ | 442,766 | $ | 523,774 | $ | 1,443,727 | ||||||||
| Gross profit: | ||||||||||||||||
| Beverages | $ | 339,688 | $ | 514,995 | $ | 1,380,612 | $ | 1,308,456 | ||||||||
| Distribution | 70,385 | 152,578 | 198,547 | 353,239 | ||||||||||||
| Corporate and Eliminations | 90,160 | (88,537 | ) | 260,845 | 307,146 | |||||||||||
| Gross profit | $ | 500,233 | $ | 756,110 | $ | 1,840,004 | $ | 1,968,841 | ||||||||
Liquidity and Capital Resources
Going Concern
We have incurred operating losses since inception and have negative cash flow from operations since inception. As of SeptemberJune 30, 2021,2022, we had a stockholders’ deficit of approximately 5.1 million$2,991,280 and we incurred a net loss of approximately $4.4 million$4,950,087 during the ninesix months ended SeptemberJune 30, 2021.2022. We also utilized cash in operations of approximately $1.6 million$1,619,355 during the ninesix months ended SeptemberJune 30, 2021.2022. As a result, our continuation as a going concern is dependent on our ability to obtain additional financing until we can generate sufficient cash flow from operations to meet our obligations. We intend to continue to seek additional debt or equity financing to continue our operations.
Our consolidated financial statements have been prepared on a going concern basis, which implies we may not continue to meet our obligations and continue our operations for the next fiscal year. The continuation of our Company as a going concern is dependent upon our ability to obtain necessary debt or equity financing to continue operations until we begin generating positive cash flow. Refer to auditors going concern.
There is no assurance that we will ever be profitable or that debt or equity financing will be available to us in the amounts, on terms, and at times deemed acceptable to us, if at all. The issuance of additional equity securities by us would result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, would increase our liabilities and future cash commitments. If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to continue our business, as planned, and as a result may be required to scale back or cease operations for our business, the result of which would be that our stockholders would lose some or all of their investment. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue as a going concern.
| 6 |
Lines of Credit
Notes Payable with Related Parties
Since inception, we have financed our operations primarily through internally generated funds, private salesNotes payable with related parties consists of stock, accruals of compensation,the following at June 30, 2022 and the use of our lines of credit. In summary, our lines of credit are as follows:December 31, 2021:
| Total Amount Available | Interest Rate (per annum) | Outstanding Principal Balance as of September 30, 2021 | Accrued Interest as of September 30, 2021 | |||||||||||||
| Kona Gold Line of Credit #1 – Related Party | $ | 1,500,000 | 3.75 | % | $ | 1,372,651 | $ | 73,906 | ||||||||
| Kona Gold Line of Credit #2a | $ | 400,000 | 3.75 | % | $ | 198,470 | $ | 42,683 | ||||||||
| Gold Leaf Line of Credit – Related Party | $ | 200,000 | 3.75 | % | $ | 125,500 | $ | 7,065 | ||||||||
June 30, 2022 | December 31, 2021 | |||||||
| Note payable – related party (a) | $ | 1,352,651 | $ | 1,352,651 | ||||
| Note payable – related party (b) | 200,000 | - | ||||||
| Note payable – related party (c) | 125,500 | 125,500 | ||||||
| Note payable – related party (e) | 50,500 | 53,500 | ||||||
| Total notes payable – related parties | 1,728,651 | 1,531,651 | ||||||
| Notes payable – related parties, current portion | (1,728,651 | ) | (6,000 | ) | ||||
| Notes payable – related parties, net of current portion | $ | - | $ | 1,525,651 | ||||
Notes Payable – Related Party
We had the following outstanding notes payable from a related party during the nine months ended September 30, 2021:
| Note (1) | Issuance Date | Original Borrowing Amount | Interest Rate | Maturity Date | Largest Outstanding Balance since January 1, 2018 | Outstanding Balance as of September 30, 2021 | ||||||||||||||
| Long-term Loan – Kona Gold | October 31, 2018 | $ | 20,000 | 0 | % | April 4, 2022 | $ | 20,000 | $ | — | ||||||||||
| Long-term Loan – Gold Leaf | February 19, 2019 | $ | 70,000 | 0 | % | March 15, 2022 | $ | 70,000 | $ | 55,000 | ||||||||||
| (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, 2023, at which time all outstanding principal amounts and accrued interest are due and payable. At June 30, 2022 the outstanding principal was $200,000. | |
| (b) | On August 29, 2019, the Company entered into a 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, 2022, at which time all outstanding principal amounts and accrued interest are due and payable. At June 30, 2022 and December 31, 2021, outstanding principal was $125,500 and $125,500, respectively. | |
| (c) | 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. Principal payment of $500 per month, with final payment due in March 2023. The outstanding principal balance of this note at December 31, 2021 was $53,500. During the six months ended June 30, 2022, the Company made principal payments of $3,000, leaving an outstanding principal balance of $50,500 at June 30, 2022. |
At December 31, 2021, accrued interest on notes payable to related parties was $95,873. During the six months ended June 30, 2022, the Company added $27,033 of additional accrued interest, leaving an accrued interest balance on the notes payable to related parties of $122,906 at June 30, 2022. Accrued interest in included in accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets.
| 7 |
Note Receivable – Branded Legacy
Notes Payable
Notes payable consists of the following at June 30, 2022 and December 31, 2021:
June 30, 2022 | December 31, 2021 | |||||||
| Note payable (a) | $ | 30,193 | $ | 33,312 | ||||
| Note payable (b) | 39,389 | - | ||||||
| Note payable (c) | 250,000 | - | ||||||
| Less debt discount (c) | (99,031 | ) | - | |||||
| Total notes payable, net | 220,551 | 33,312 | ||||||
| Notes payable, current portion | (198,332 | ) | (7,974 | ) | ||||
| Notes payable, net of current portion | $ | 22,219 | $ | 25,338 | ||||
| (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, 2021, the loan balance was $33,312. During the six months ended June 30, 2022, the Company made principal payments of $3,119, leaving a loan balance of $30,193 at June 30, 2022, of which $7,974 was recorded as the current portion of loan payable on the accompanying Condensed Consolidated Balance Sheet. | |
| (b) | 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 percent per annum. The line of credit matures in 2023, at which time all outstanding principal amounts and accrued interest are due and payable. At June 30, 2022 the outstanding principal was $39,389, which was recorded as the current portion of loan payable on the accompanying Condensed Consolidated Balance Sheet. | |
| (c) | On March 25, 2022, the Company entered into a secured debenture with an otherwise unaffiliated individual in the principal amount of $250,000. The secured note payable matures on March 24, 2023, and bears interest at the rate of 0.97 percent per annum. The secured debenture is secured by nine (9) identified motor vehicles of the Company. In connection with the issuance of the debenture, 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. As of June 30, 2022, the outstanding balance of the secured debentures amounted to $250,000 and the unamortized debt discount was $99,031, which was recorded as the current portion of loan payable on the accompanying Condensed Consolidated Balance Sheets. |
At December 31, 2021, there was no accrued interest on the notes payable. During the six months ended June 30, 2022, the Company added $651 of additional accrued interest, leaving an accrued interest balance on the notes payable of $651 at June 30, 2022. Accrued interest in included in accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets.
Secured Convertible Debentures
Secured debentures that are payable to an otherwise unaffiliated third party consists of the following as of June 30, 2022 and December 31, 2021:
June 30, 2022 | December 31, 2021 | |||||||
| YA II PN, Ltd. | $ | 900,000 | $ | 3,000,000 | ||||
| Less debt discount | (790,270 | ) | (2,150,067 | ) | ||||
| Secured debentures, net | $ | 109,730 | $ | 849,933 | ||||
| 8 |
During the year ended December 31, 2021, the Company issued secured debentures to an otherwise unaffiliated third-party investor (the “Selling Stockholder”) in the aggregate of $4,500,000. The debentures are secured by all tangible and intangible assets of the Company and are also convertible into shares of our common stock at a conversion price of $0.03 per share or a per share amount equivalent to the weighted average (among the principal of the debentures) of 76.7% of the lowest VWAP of the Company’s common stock during the 15 trading days immediately preceding the conversion date, whichever is lower. As the ultimate determination of shares to be issued upon conversion of these debentures can exceed the current number of available authorized shares, we determined that the conversion features of these convertible debentures are not considered indexed to our Company’s own capital stock and characterized the fair value of the conversion features as derivative liability. In connection with the issuances of the debentures, the Company granted to the Selling Stockholder warrants to purchase up to 170 million shares of the Company’s common stock. The warrants are exercisable at $0.03 per share. Twenty million of the warrants will expire on May 14, 2023, 50 million of the warrants will expire on February 10, 2024, and 100,000,000 of the warrants will expire on August 20, 2024. As a result of these issuances and grants, we incurred the following (a) derivative liability of $3,982,000 related to the conversion feature of the debentures; (b) relative fair value of the warrants granted of $1,581,000; and (c) and original issue discounts of $195,000 of the debentures for a total of $5,758,000, of which, $4,423,000 was accounted as debt discount and the remaining $1,335,000 as financing costs. The debt discount is being amortized to interest expense over the term of the corresponding debentures. As of December 31, 2021, the unamortized debt discount was $2,150,067.
On May 26, 2016, Robert Clark formed Elev8 Hemp, LLC, a Delaware limited liability company (“Elev8 Hemp”), on behalf of Ryan Medico, our then-Chief Financial Officer. Mr. Medico was5, 2022, the sole owner of and served as President of Elev8 Hemp.
In June 2016, we entered into a letter of intent with Elev8 Hemp to acquire it, such that it would become our wholly-owned subsidiary. PursuantCompany issued similar debentures to the letter of intent, on June 7, 2016, we entered into an Acquisition Agreement with Elev8 Hemp (the “Elev8 Hemp Acquisition Agreement”), whereby we agreed to acquire 100% of the ownership of Elev8 Hemp and, in exchange, we agreed to issue to Mr. Medico five million restricted shares of our Common Stock, which had a fair market value of $50,000. The Elev8 Hemp Acquisition Agreement provided that, if we failed to adequately capitalize the development of Elev8 Hemp to complete its objectives set forth in its business plan, Mr. Medico would have the option until March 31, 2018 to repurchase Elev8 Hemp from us for a purchase price of $50,000, which could be paid in shares of our Common Stock.
On October 10, 2016, we entered into a Membership Interest Purchase Agreement (the “Membership Interest Purchase Agreement”) with Branded Legacy, to sell 100% of the issued and outstanding membership interests of Elev8 Hemp to Branded Legacy in consideration of Branded Legacy’s issuance to us of 200,000,000 shares of its common stock, par value $0.00001. In connection with this transaction, Mr. Medico became the Chief Executive Officer and sole director of Branded Legacy. The parties desired to enter into the Membership Interest Purchase Agreement because we did not have adequate capital to fund the development of Elev8 Hemp’s business, as well as our own. Until July 2018, Mr. Medico also continued to serve as our Chief Financial Officer.
On April 14, 2017, our Board declared a dividend to our stockholders of an aggregate of 53,196,608 shares of common stock of Branded Legacy. Our stockholders received one share of common stock of Branded Legacy for every 10 shares of our Common Stock held on the record date. On the record date, we had approximately 104 stockholders, all of whom received this dividend. After the payment of the dividend, we held 146,803,392 shares of common stock of Branded Legacy.
On March 6, 2018, we entered into a Securities Exchange and Settlement Agreement (the “First Exchange Agreement”) with Branded Legacy. Pursuant to the First Exchange Agreement, we exchanged with Branded Legacy the remaining 146,803,392 shares of its common stock held by us for 2,746,723 shares of Branded Legacy’s Series D preferred stock. The shares of Series D preferred stock were initially convertible into 164,803,380 shares of Branded Legacy’s common stock.
On November 26, 2019, we entered into a second Securities and Exchange Agreement with Branded Legacy, whereby we exchanged the 2,746,723 shares of Branded Legacy’s Series D preferred stock for its 10-year Promissory Note in our favorSelling Stockholder in the original principalaggregate amount of $1,500,000 (the “Branded Legacy Note”).$500,000. The Branded Legacy Note is unsecured, non-convertible, and all principal and accrued and unpaiddebentures bear interest thereon is due and payable on November 27, 2029.
In more recent discussions with our independent registered public accounting firm, we determined that the Branded Legacy Note should be classified asat a note receivable on our balance sheets as of September 30, 2021 and December 31, 2020, with a full reservation due to current doubts about collectability due to the dollar amount and duration of the term of the Branded Legacy Note, rather than disclosing the note receivable as an “investment” but not recording it on the balance sheets. Because of this re-classification, the Banded Legacy Note is no longer an off-balance sheet arrangement.
Paycheck Protection Promissory Note and Economic Injury Disaster Loan
On May 4, 2020, we entered into a Paycheck Protection Promissory Note in the original principal amount of $95,161 (the “PPP Loan”) with Wells Fargo Bank, N.A. The PPP Loan was made under, and is subject to, the terms and conditions of the Paycheck Protection Program (the “PPP”), which was established as part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The PPP provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The current term of the PPP Loan is two years, with a maturity date of May 6, 2022 and it contains a favorable fixed annual interest rate of 1.00%. Payments of principal and interest on the PPP Loan are deferred for the first six months of the term of the PPP Loan, or November 2020. Thereafter, principal and interest are payable monthly and may be prepaid by us at any time prior to maturity with no prepayment penalties.
In January 2021, the Company entered into a Paycheck Protection Promissory Note in the original principal amount of $117,487 (the “PPP Loan 2”) with Wells Fargo Bank, N.A. The PPP Loan was made under, and is subject to, the terms and conditions of the Paycheck Protection Program (the “PPP”), which was established as part of the Coronavirus Aid, Relief and Economic Security Act the (“CARES Act”) and is administered by the U.S. Small Business Administration. The PPP provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The current term of the PPP Loan is five years, with a maturity date of January 2026 and it contains a favorable fixed annual interest rate of 1.00%. Payments of principal and interest on the PPP Loan are deferred for the first six months of the term of the PPP Loan, or November 2020. Thereafter, principal and interest are payable monthly and may be prepaid by us at any time prior to maturity with no prepayment penalties.
Under the terms of the CARES Act, recipients can apply for and receive forgiveness for all, or a portion of the loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for certain permissible purposes as set forth in the PPP, including, but not limited to, payroll costs, mortgage interest, rent or utility costs (collectively, “Qualifying Expenses”), and on the maintenance of employee and compensation levels during a certain time period following the funding of the PPP Loan. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period. We have used the proceeds of the PPP Loan for salaries and wages, building lease expense, and utilities. However, no assurance is provided that we will be able to obtain forgiveness of the PPP Loan in whole or in part.
On April 27, 2021, the Paycheck Protection Promissory Note, dated May 4, 2020, in the original principal amount of $95,161 (the “PPP Loan”) with Wells Fargo Bank, N.A was forgiven for the full amount. The PPP Loan was made under, and is subject to, the terms and conditions of the Paycheck Protection Program (the “PPP”), which was established as part of the Coronavirus Aid, Relief and Economic Security Act the (“CARES Act”) and is administered by the U.S. Small Business Administration.
In May 2020, we also received an advance in the amount of $7,000 as part of the Economic Injury Disaster Loan program offered by the U.S. Small Business Administration. This advance was received after we filed our application with regarding to the PPP. The advance was not included in any of the documentation related to the PPP Loan. We are in the process of determining how this advance will be included as part of the PPP Loan forgiveness.
2020 Securities Purchase Agreement
In May 2020, the Company completed the 2020 Private Placement of the 2020 Debentures and the 2020 Warrant pursuant to the 2020 SPA. The Company sold and issued the First 2020 Debenture and granted the 2020 Warrant promptly after entering in the 2020 SPA. The Company sold and issued the Second 2020 Debenture promptly after filing the 2020 Registration Statement initially with the SEC. The Company sold and issued the Third 2020 Debenture promptly after the SEC declared the Registration Statement effective. The 2020 Debentures are due 12 months from their respective issuance dates and are8% per annum, secured by all of the Company’s assetstangible and theintangible assets of eachthe Company and are also convertible into shares of its subsidiaries pursuant to that certain Security Agreement by and among the Selling Stockholder, the Company’s subsidiaries, and the Company. Initially, the 2020 Debentures are convertiblecommon stock at the lower of (i) the fixeda conversion price which is $0.05of $0.03 per share subject to adjustment (the “2020 Fixed Conversion Price”), or (ii) 80% of the lowest daily volume weighted average price (“VWAP”) of our Common Stock during the 1510 trading days immediately preceding the conversion date, subject to adjustment (the “2020 Market Conversion Price”). The 2020 Debentures contain an adjustment provision that, subject to certain exceptions, reducesdate. As the conversion price if the Company issues sharesultimate determination of its Common Stock or common stock equivalents at a price lower than the then-current conversion price of the 2020 Debentures. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the conversion price of the 2020 Debentures. The 2020 Debentures are subject to a “conversion blocker” such that the Selling Stockholder cannot convert any portion of the 2020 Debentures that would result in the Selling Stockholder and its affiliates holding more than 4.99% of the then-issued and outstanding shares of the Common Stock following such conversion (excluding, for purposes of such determination, shares of the Common Stock issuable upon conversion of the 2020 Debentures or exercise of the 2020 Warrant that had not then been converted or exercised, respectively). The Selling Stockholder can increase that 4.99% “conversion blocker” to 9.99% upon at least 65 days’ prior written notice to the Company. The 2020 Debentures accrue interest at an annual rate equal to 8% and are due and payable on their respective maturity dates (or sooner if the Selling Stockholder converts the 2020 Debentures or otherwise accelerates the maturity date, as provided for in the 2020 Debentures). Interest is payable either in cash or, if certain Equity Conditions (as defined in the 2020 Debentures) are then satisfied, in shares of the Common Stock at the 2020 Market Conversion Price on the trading day immediately prior to the date paid.
At the Company’s option, it has the right to redeem, in part or in whole, the outstanding principal and interest under the 2020 Debentures prior to their respective maturity dates; provided, that, as of the date of the holder’s receipt of the redemption notice, (i) the VWAP of the Common Stock is less than the 2020 Fixed Conversion Price, initially $0.05 per share, and (ii) there is no Equity Conditions failure. The Company must pay an amount equal to the principal amount being redeemed plus outstanding and accrued interest thereon, as well as a redemption premium equal to 15% of the outstanding principal amount being redeemed (the “Redemption Premium”). The Company must provide the holder 15 business days’ advance notice of its intent to make a redemption, setting forth the amount of principal and interest we desire then to redeem plus the applicable Redemption Premium.
The 2020 Debentures contain an adjustment provision that, subject to certain exceptions, reduces the conversion price if the Company issues shares of the Common Stock or common stock equivalents at a price lower than the then-current conversion price of the 2020 Debentures. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the conversion price of the 2020 Debentures.
Pursuant to the terms of the Registration Rights Agreement, the Company agreed to file the Registration Statement with the SEC registering for resale the Conversion Shares and the Warrant Shares within 45 calendar days following the closing of the 2020 Private Placement. The Company also agreed, among other things, to indemnify the Selling Stockholder from certain liabilities and to pay all fees and expenses incurred by the Company in connection with the registration of the Conversion Shares and the Warrant Shares held by the Selling Stockholder.
Pursuant to the 2020 SPA, the purchase price for the First 2020 Debenture was $250,000, less $15,000 for origination fees, which consisted of the “original issue discount” of $10,000 and $5,000 as a structuring fee. On December 23, 2020, the Company converted $100,000 of the principal of, and $12,274 of accrued interest on, the First 2020 Debenture into 8,255,438 shares of the Company’s common stock. On January 25, 2021, the Company converted $150,000 of the principal of, and $1,118 of accrued interest on, the First 2020 Debenture into 7,094,732 shares of the Company’s common stock, see Note 11, equity transactions. At September 30, 2021, no balance remains on the principal balance of the First 2020 Debenture.
Pursuant to the 2020 SPA, the purchase price for the Second 2020 Debenture was $250,000, less $10,000 for origination fees, which consisted of the “original issue discount” of $10,000 fee. On January 25, 2021, the Company converted $100,000 of the principal of, and $10,410 of accrued interest on, the Second 2020 Debenture into 5,183,613 shares of the Company’s common stock. On February 19, 2021, the Company converted $150,000 of the principal of, and $855 of accrued interest on, the Second 2020 Debenture into 7,252,634 shares of the Company’s common stock see Note 11, equity transactions. At September 30, 2021, no balance remains on the principal balance of the Second 2020 Debenture.
Pursuant to the 2020 SPA, the purchase price for the Third 2020 Debenture was $500,000, less $10,000 for origination fees, which consisted of the “original issue discount” of $10,000 fee. On January 12, 2021, the Company converted $200,000 of the principal of, and $1,425 of accrued interest on, the First 2020 Debenture into 10.887,819 shares of the Company’s common stock, see Note 11, equity transactions. On May 5, 2021, the Company converted $300,000 of the principal of, and $7,496 of accrued interest on, the First 2020 Debenture into issued an aggregate of 14,436,426 shares of common stock see Note 11, equity transactions. At September 30, 2021, no balance remains on the principal balance of the Third 2020 Debenture.
February 2021 Securities Purchase Agreement
In February 2021, the Company completed a private placement transaction (the “February 2021 Private Placement”) of two secured convertible debentures (the “February 2021 Debentures”), convertible for up to 154,958,678 shares (the “February 2021 Conversion Shares”) of Common Stock and granted a Warrant to purchase Common Stock (the “February 2021 Warrant”), exercisable for up to 50,000,000 shares of Common Stock (the “February 2021 Warrant Shares”), pursuant to that certain Securities Purchase Agreement between the Selling stockholder and the Company, dated as of February 10, February 2021 (the “February 2021 SPA”). The Company sold andbe issued the initial February 2021 Debenture (the “First February 2021 Debenture”) and granted the February 2021 Warrant promptly after entering in the February 2021 SPA. The Company will sell and issue the second February 2021 Debenture (the “Second February 2021 Debenture”) promptly after the SEC declares effective the February 2021 Registration Statement (as defined below).
The February 2021 Debentures are due 12 months from their respective issuance dates and are secured by all of the Company’s assets and the assets of each of its subsidiaries pursuant to that certain Security Agreement by and among the Selling Stockholder, the Company’s subsidiaries, and the Company. Initially, the February 2021 Debentures are convertible at the lower of (i) the fixed conversion price, which is $0.03 per share, subject to adjustment (the “February 2021 Fixed Conversion Price”), or (ii) 80% of the lowest daily volume weighted average price (“VWAP”) of our Common Stock during the 15 trading days immediately preceding the conversion date, subject to adjustment (the “February 2021 Market Conversion Price”). The February 2021 Debentures contain an adjustment provision that, subject to certain exceptions, reduces the conversion price if the Company issues shares of its Common Stock or common stock equivalents at a price lower than the then-current conversion price of the February 2021 Debentures. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the conversion price of the February 2021 Debentures. The February 2021 Debentures are subject to a “conversion blocker” such that the Selling Stockholder cannot convert any portion of the February 2021 Debentures that would result in the Selling Stockholder and its affiliates holding more than 4.99% of the then-issued and outstanding shares of the Common Stock following such conversion (excluding, for purposes of such determination, shares of the Common Stock issuable upon conversion of these debentures can exceed the February 2021 Debentures or exercisecurrent number of available authorized shares, the February 2021 WarrantCompany determined that hadthe conversion features of these debentures are not then been converted or exercised, respectively). The Selling Stockholder can increase that 4.99% “conversion blocker” to 9.99% upon at least 65 days’ prior written noticeconsidered indexed to the Company. The February 2021 Debentures accrue interest at an annual rate equal to 8%Company’s own stock and are due and payable on their respective maturity dates (or sooner if the Selling Stockholder converts the February 2021 Debentures or otherwise accelerates the maturity date, as provided for in the February 2021 Debentures). Interest is payable either in cash or, if certain Equity Conditions (as defined in the February 2021 Debentures) are then satisfied, in shares of the Common Stock at the February 2021 Market Conversion Price on the trading day immediately prior to the date paid.
At the Company’s option, it has the right to redeem, in part or in whole, the outstanding principal and interest under the February 2021 Debentures prior to their respective maturity dates; provided, that, as of the date of the holder’s receipt of the redemption notice, (i) the VWAP of the Common Stock is less than the February 2021 Fixed Conversion Price, initially $0.03 per share, and (ii) there is no Equity Conditions failure. The Company must pay an amount equal to the principal amount being redeemed plus outstanding and accrued interest thereon, as well as a redemption premium equal to 15% of the outstanding principal amount being redeemed (the “Redemption Premium”). The Company must provide the holder 15 business days’ advance notice of its intent to make a redemption, setting forth the amount of principal and interest we desire then to redeem plus the applicable Redemption Premium.
The February 2021 Debentures contain an adjustment provision that, subject to certain exceptions, reduces the conversion price if the Company issues shares of Common Stock or common stock equivalents at a price lower than the then-current conversion price of the February 2021 Debentures. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the conversion price of the February 2021 Debentures.
Pursuant to the February 2021 SPA, the purchase price for the First February 2021 Debenture was $900,000, less $41,000 for origination fees, which consisted of the “original issue discount” of $36,000 and $5,000 as a structuring fee. Pursuant to the February 2021 SPA, the purchase price for the Second February 2021 Debenture will be $600,000, less $24,000 as an “original issue discount.”
In connection with the February 2021 Private Placement, the Company also granted the February 2021 Warrant to purchase up to an aggregate of 50 million shares of the Common Stock. The February 2021 Warrant has a six-year term and is immediately exercisable at an exercise price of $0.03 per share, subject to adjustment. If the Company fails to maintain an effective registration statement with the SEC covering the resale of the February 2021 Warrant Shares, or if an Event of Default (as defined below) has occurred and is continuing, then the holder may exercise the February 2021 Warrant on a “cashless” basis. “Event of Default” means an event of default under the February 2021 SPA or the February 2021 Debentures.
The February 2021 Warrant contains an adjustment provision that, subject to certain exceptions, reduces the exercise price if the Company issues shares of our Common Stock or common stock equivalents at a price lower than the then-current exercise price of the February 2021 Warrant. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the exercise price of the February 2021 Warrant.
The February 2021 Warrant is subject to an “exercise blocker” such that the Selling Stockholder cannot exercise any portion of the February 2021 Warrant that would result in the Selling Stockholder and its affiliates holding more than 4.99% of the then-issued and outstanding shares of the Common Stock following such exercise (excluding, for purposes of such determination, shares of the Common Stock issuable upon exercise of the February 2021 Warrant or conversion of the February 2021 Debentures that had not then been exercised or converted, respectively). The Selling Stockholder can increase that 4.99% “exercise blocker” to 9.99% upon at least 65 days’ prior written notice to the Company.
Pursuant to the terms of the February 2021 Registration Rights Agreement with the Selling Stockholder, the Company agreed to file a registration statement on Form S-1 (the “February 2021 Registration Statement”) with the SEC registering for resale the February 2021 Conversion Shares and the February 2021 Warrant Shares within 30 calendar days following the closing of the February 2021 Private Placement. The Selling Stockholder has agreed to waive this 30-calendar-day provision for so long as the Company utilized its best efforts to file its Annual Report on Form 10-K for its fiscal year ended December 31, 2020, and promptly thereafter files the February 2021 Registration Statement. Further, the Company agreed to use its best efforts to have the February 2021 Registration Statement declared effective by the SEC as soon as practicable, but in no event later than the effectiveness deadline, or by the 5th trading day following the date on which the Company is notified that the February 2021 Registration Statement will not be reviewed or is no longer subject to further review and comments. Pursuant to the February 2021 Registration Rights Agreement, the Company is subject to partial liquidated damages equal to 2.0% of the aggregate purchase price paid by the holder pursuant to the February 2021 SPA for either of the February 2021 Debentures then held by the holder for failure to file the February 2021 Registration Statement timely, failure to file with the SEC a request for acceleration in accordance with Rule 461 promulgated under the Securities Act, within five trading days after the date the Company is notified that the February 2021 Registration Statement will not be reviewed or is not subject to further review, the February 2021 Registration Statement is not declared effective by the effectiveness deadline, if after effectiveness, the February 2021 Registration Statement ceases for any reason to remain continuously effective as required or if the holders are not permitted to utilize the prospectus therein to resell for more than 30 consecutive calendar days or more than an aggregate of 40 calendar days during any 12-month period, or if after the six-month anniversary of the February 2021 Registration Rights Agreement, the Company does not have available adequate current public information as set forth in Rule 144(c). The parties agreed that the maximum aggregate liquidated damages payable to a holder of the February 2021 Debentures under the February 2021 Registration Rights Agreement is 24% of the aggregate purchase price paid by such holder pursuant to the February 2021 SPA. The Company also agreed, among other things, to indemnify the Selling Stockholder from certain liabilities and to pay all fees and expenses incurred by the Company in connection with the registration of the February 2021 Conversion Shares and the February 2021 Warrant Shares held by the Selling Stockholder.
Pursuant to the February 2021 SPA, the purchase price for the First February 2021 Debenture was $900,000, less $41,000 for origination fees, which consisted of the “original issue discount” of $36,000 and $5,000 as a structuring fee. At September 30, 2021, the principal balance of the First 2021 Debenture is $900,000.
On May 5, 2021, the Company and YA II PN, LTD entered into a Limited Amendment Agreement dated as of May 5, 2021, by and between Kona Gold Beverage, Inc., a Delaware corporation (the “Company”), and YA II PN, LTD., a Cayman Islands exempt company (“Investor”). The Company and the Investor agree to a partial Second Closing, whereby the Investor will purchase a portion of the intended Second Convertible Debenture (the “Partial Second Convertible Debenture”) in the face amount of $200,000 for a purchase price of $192,000 (the “Partial Second Convertible Debenture Purchase Price”) within 1 business day following the date hereof. The Investor and the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”), Registration Rights Agreement (the “Registration Rights Agreement”) and related Transaction Documents (as this term is defined in the Securities Purchase Agreement) dated February 10, 2021, the date thereof, pursuant to which the Investor agreed to purchase secured Convertible Debentures (individually referred to as the “First Convertible Debenture” and the “Second Convertible Debenture”) upon various conditions precedent as articulated in Section 8(a) and (b) of the Securities Purchase Agreement and in the Transaction Documents, see above Note 9 – Securities Purchase Agreement, Derivative Liabilities, And Warrant.
Pursuant to the February 2021 SPA, the purchase price for the Second February 2021 Debenture was $600,000, less $200,000 for the “Partial Second Convertible Debenture”, dated May 5, 2021, less for origination fees, which consisted of the “original issue discount” of $16,000. On June 9, 2021, the Company converted $200,000 of the principal of, and $1,578 of accrued interest on the Second 2021 Debenture into 6,719,269 shares of the Company’s common stock see Note 11, equity transactions. At September 30, 2021, no balance remains on the principal balance of the Second February 2021 Debenture.
August 2021 Securities Purchase Agreement
In August 2021, the Company completed a private placement transaction (the “August 2021 Private Placement”) of two secured convertible debentures (the “August 2021 Debentures”), convertible for up to 1,111,111,110 shares (the “August 2021 Conversion Shares”) of Common Stock and granted a Warrant to purchase Common Stock (the “August 2021 Warrant”), exercisable for up to 100,000,000 shares of Common Stock (the “August 2021 Warrant Shares”), pursuant to that certain Securities Purchase Agreement between the Selling stockholder and the Company, dated as of August 10, 2021 (the “August 2021 SPA”). The Company sold and issued the initial August 2021 Debenture (the “First August 2021 Debenture”) and granted the August 2021 Warrant promptly after entering in the August 2021 SPA. The Company will sell and issue the second August 2021 Debenture (the “Second August 2021 Debenture”) promptly after the SEC declares effective the August 2021 Registration Statement (as defined below).
58
The August 2021 Debentures are due 12 months from their respective issuance dates and are secured by all of the Company’s assets and the assets of each of its subsidiaries pursuant to that certain Security Agreement by and among the Selling Stockholder, the Company’s subsidiaries, and the Company. Initially, the August 2021 Debentures are convertible at the lower of (i) the fixed conversion price, which is $0.03 per share, subject to adjustment (the “August 2021 Fixed Conversion Price”), or (ii) 75% of the lowest daily volume weighted average price (“VWAP”) of our Common Stock during the 15 trading days immediately preceding the conversion date, subject to adjustment (the “August 2021 Market Conversion Price”). The August 2021 Debentures contain an adjustment provision that, subject to certain exceptions, reduces the conversion price if the Company issues shares of its Common Stock or common stock equivalents at a price lower than the then-current conversion price of the August 2021 Debentures. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the conversion price of the August 2021 Debentures. The August 2021 Debentures are subject to a “conversion blocker” such that the Selling Stockholder cannot convert any portion of the August 2021 Debentures that would result in the Selling Stockholder and its affiliates holding more than 4.99% of the then-issued and outstanding shares of the Common Stock following such conversion (excluding, for purposes of such determination, shares of the Common Stock issuable upon conversion of the August 2021 Debentures or exercise of the August 2021 Warrant that had not then been converted or exercised, respectively). The Selling Stockholder can increase that 4.99% “conversion blocker” to 9.99% upon at least 65 days’ prior written notice to the Company. The August 2021 Debentures accrue interest at an annual rate equal to 8% and are due and payable on their respective maturity dates (or sooner if the Selling Stockholder converts the August 2021 Debentures or otherwise accelerates the maturity date, as provided for in the August 2021 Debentures). Interest is payable either in cash or, if certain Equity Conditions (as defined in the August 2021 Debentures) are then satisfied, in shares of the Common Stock at the August 2021 Market Conversion Price on the trading day immediately prior to the date paid.
At the Company’s option, it has the right to redeem, in part or in whole, the outstanding principal and interest under the August 2021 Debentures prior to their respective maturity dates; provided, that, as of the date of the holder’s receipt of the redemption notice, (i) the VWAP of the Common Stock is less than the August 2021 Fixed Conversion Price, initially $0.03 per share, and (ii) there is no Equity Conditions failure. The Company must pay an amount equal to the principal amount being redeemed plus outstanding and accrued interest thereon, as well as a redemption premium equal to 15% of the outstanding principal amount being redeemed (the “Redemption Premium”). The Company must provide the holder 15 business days’ advance notice of its intent to make a redemption, setting forth the amount of principal and interest we desire then to redeem plus the applicable Redemption Premium.
The August 2021 Debentures contain an adjustment provision that, subject to certain exceptions, reduces the conversion price if the Company issues shares of Common Stock or common stock equivalents at a price lower than the then-current conversion price of the August 2021 Debentures. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the conversion price of the August 2021 Debentures.
Pursuant to the August 2021 SPA, the purchase price for the First August 2021 Debenture was $1,500,000, less $70,000 for origination fees, which consisted of the “original issue discount” of $60,000 and $10,000 as a structuring fee. Pursuant to the August 2021 SPA, the purchase price for the Second August 2021 Debenture will be $1,500,000, less $10,000 as an “original issue discount.”
In connection with the August 2021 Private Placement, the Company also granted the August 2021 Warrant to purchase up to an aggregate of 100 million shares of the Common Stock. The August 2021 Warrant has a three-year term and is immediately exercisable at an exercise price of $0.03 per share, subject to adjustment. If the Company fails to maintain an effective registration statement with the SEC covering the resale of the August 2021 Warrant Shares, or if an Event of Default (as defined below) has occurred and is continuing, then the holder may exercise the August 2021 Warrant on a “cashless” basis. “Event of Default” means an event of default under the August 2021 SPA or the August 2021 Debentures.
59
The August 2021 Warrant contains an adjustment provision that, subject to certain exceptions, reduces the exercise price if the Company issues shares of our Common Stock or common stock equivalents at a price lower than the then-current exercise price of the August 2021 Warrant. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the exercise price of the August 2021 Warrant.
The August 2021 Warrant is subject to an “exercise blocker” such that the Selling Stockholder cannot exercise any portion of the August 2021 Warrant that would result in the Selling Stockholder and its affiliates holding more than 4.99% of the then-issued and outstanding shares of the Common Stock following such exercise (excluding, for purposes of such determination, shares of the Common Stock issuable upon exercise of the August 2021 Warrant or conversion of the August 2021 Debentures that had not then been exercised or converted, respectively). The Selling Stockholder can increase that 4.99% “exercise blocker” to 9.99% upon at least 65 days’ prior written notice to the Company.
Pursuant to the terms of the August 2021 Registration Rights Agreement with the Selling Stockholder, the Company agreed to file a registration statement on Form S-1 (the “August 2021 Registration Statement”) with the SEC registering for resale the August 2021 Conversion Shares and the August 2021 Warrant Shares within 30 calendar days following the closing of the August 2021 Private Placement. The Selling Stockholder has agreed to waive this 30-calendar-day provision for so long as the Company utilized its best efforts to file its Annual Report on Form 10-K for its fiscal year ended December 31, 2020, and promptly thereafter files the August 2021 Registration Statement. Further, the Company agreed to use its best efforts to have the August 2021 Registration Statement declared effective by the SEC as soon as practicable, but in no event later than the effectiveness deadline, or by the 5th trading day following the date on which the Company is notified that the August 2021 Registration Statement will not be reviewed or is no longer subject to further review and comments. Pursuant to the August 2021 Registration Rights Agreement, the Company is subject to partial liquidated damages equal to 2.0% of the aggregate purchase price paid by the holder pursuant to the August 2021 SPA for either of the August 2021 Debentures then held by the holder for failure to file the August 2021 Registration Statement timely, failure to file with the SEC a request for acceleration in accordance with Rule 461 promulgated under the Securities Act, within five trading days after the date the Company is notified that the August 2021 Registration Statement will not be reviewed or is not subject to further review, the August 2021 Registration Statement is not declared effective by the effectiveness deadline, if after effectiveness, the August 2021 Registration Statement ceases for any reason to remain continuously effective as required or if the holders are not permitted to utilize the prospectus therein to resell for more than 30 consecutive calendar days or more than an aggregate of 40 calendar days during any 12-month period, or if after the six-month anniversary of the August 2021 Registration Rights Agreement, the Company does not have available adequate current public information as set forth in Rule 144(c). The parties agreed that the maximum aggregate liquidated damages payable to a holder of the August 2021 Debentures under the August 2021 Registration Rights Agreement is 24% of the aggregate purchase price paid by such holder pursuant to the August 2021 SPA. The Company also agreed, among other things, to indemnify the Selling Stockholder from certain liabilities and to pay all fees and expenses incurred by the Company in connection with the registration of the August 2021 Conversion Shares and the August 2021 Warrant Shares held by the Selling Stockholder.
Pursuant to the August 2021 SPA, the purchase price for the First August 2021 Debenture was $1,500,000, less $70,000 for origination fees, which consisted of the “original issue discount” of $60,000 and $10,000 as a structuring fee. At September 30, 2021, the principal balance of the First August 2021 Debenture is $1,500,000.
Derivative Liability
The 2020, 2021 Debentures, and 2021-2 Debentures have been accounted for utilizing ASC 815. The Company has incurred a liability for the estimated fair value of the First 2020 Debenture. The estimated fair value of the 2020 Debentures has been calculated using the Black-Scholes fair value option-pricing model with key input variables provided by management, as of the date of issuance, with the valuation offset against additional paid in capital, and at each reporting date, with changes in fair value recorded as gains or losses on revaluation in other income (expense). The Company identified embedded features in the 2020, 2021 and 2021-2 Debentures, which caused the 2020, 2021 and 2021-2 Debentures to be classified as a liability. These embedded features included the right for the holder to request for the Company to settle the amounts owed pursuant to the 2020, 2021 and 2021-2 Debentures to the holder by paying an amount of cash equal to the Black-Scholes value of the remaining unexercised portion of the 2020, 2021 and 2021-2 Debentures on the date of the consummation of a fundamental transaction. The accounting treatment of derivative financial instruments requires that the Company treat the whole instrument as liability and recordcharacterized the fair value of the instrumentconversion features as a derivative asliability (see Note 10). In connection with the issuances of these debentures, the Company also granted to the selling stockholder warrants to purchase up to 8,333,333 shares of common stock. The warrants are exercisable at $0.03 per share and will expire in three years from their grant date. As a result of these issuances, the Company incurred the following (a) derivative liability of $546,000 related to the conversion feature of the inception date of the instrument and to adjust thedebentures; (b) relative fair value of the instrumentwarrants granted of $81,000; and (c) and original issue discount of $25,000 for a total of $674,000, of which, $500,000 was accounted as of each subsequent balance sheet date.
debt discount and the remaining $152,000 as financing costs. The derivative liabilities were valued using Black-Scholes pricing model withdebt discount is being amortized to interest expense over the following average assumptions:
| September 30, 2021 | ||||
| Stock Price | $ | 0.0166 | ||
| Exercise Price | $ | 0.0124 | ||
| Expected Life | 1 | |||
| Volatility | 87.69 | % | ||
| Dividend Yield | 0 | % | ||
| Risk-Free Interest Rate | .08 | % | ||
| Fair Value | $ | 1,225,741 | ||
The following table summarizes the changes in the Company’s assets and liabilities measured at fair value as of September 30, 2021:
| September 30, 2021 | Quoted prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Convertible promissory notes with embedded conversion option | $ | 1,225,741 | $ | 1,225,741 | ||||||||||||
| Total | $ | 1,225,741 | $ | 1,225,741 | ||||||||||||
The following table sets forth a summary of change in fair valueterm of the Company’s derivative liabilities for the year ended June 30, 2021:
| Fair value, January 1, 2020 | $ | — | ||
| Change in fair value of embedded conversion features of debenture included in earnings | — | |||
| Embedded conversion option liability recorded in connection with the issuance of 2020 debenture | 148,628 | |||
| Fair value, June 30, 2020 | $ | 148,628 | ||
| Change in fair value of embedded conversion features of debenture included in earnings | (39,725 | |||
| Embedded conversion option liability recorded in connection with the issuance of 2020 debentures | 108,903 | |||
| Fair value, September 30, 2020 | $ | 217,806 | ||
| Change in fair value of embedded conversion features of debenture included in earnings | (69,051 | |||
| Embedded conversion option liability recorded in connection with the issuance of 2020 debentures | 212,397 | |||
| Fair value, December 31, 2020 | $ | 361,152 | ||
| Change in fair value of embedded conversion features of debenture included in earnings | (202,443 | |||
| Embedded conversion option liability recorded in connection with the issuance of 2021 debentures | 468,309 | |||
| Fair value, March 31, 2021 | $ | 627,018 | ||
| Change in fair value of embedded conversion features of debenture included in earnings | (307,585 | |||
| Embedded conversion option liability recorded in connection with the issuance of 2021 debentures | 166,088 | |||
| Fair value, June 30, 2021 | $ | 485,521 | ||
| Change in fair value of embedded conversion features of debenture included in earnings | (120,306 | ) | ||
| Embedded conversion option liability recorded in connection with the issuance of 2021-2 debentures | 860,526 | |||
| Fair value, September 30, 2021 | $ | 1,225,741 |
Warrant
The Company also granted the 2020 Warrant, 2021 Warrant and the 2021-2 Warrant to purchase up to an aggregate of 20 million shares, 50,000,000, and 100,000,000 of the Common Stock, respectively. The 2020 Warrant, 2021 Warrant and the 2021-2 Warrant, respectively, has a three-year term and is immediately exercisable at an exercise price of $0.05 per share, subject to adjustment. If the Company fails to maintain an effective registration statement with the SEC covering the resale of the 2020 Warrant, 2021 Warrant and the 2021-2 Warrant Shares, or if an Event of Default (as defined below) has occurred and is continuing, then the holder may exercise, respectively, the 2020 Warrant and the 2021 Warrant on a “cashless” basis. “Event of Default” means an event of default under the 2020 SPA, 2021 SPA and the 2021-2 SPA or the 2020 Debentures, 2021 Debentures and the 2021-2 Debentures, respectively.
The 2020 Warrant, 2021 Warrant and the 2021-2 Warrant, respectively, contains an adjustment provision that, subject to certain exceptions, reduces the exercise price if the Company issues shares of our Common Stock or common stock equivalents at a price lower than the then-current exercise price of the 2020 Warrant, 2021 Warrant and the 2021-2 Warrant, respectively. Any stock splits, reverse stock splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events will also result in an adjustment of the exercise price of the 2020 Warrant, 2021 Warrant and the 2021-2 Warrant, respectively.
The 2020 Warrant, 2021 Warrant and the 2021-2 Warrant, respectively, is subject to an “exercise blocker” such that the Selling Stockholder cannot exercise any portion, respectively, of the 2020 Warrant, 2021 Warrant and the 2021-2 Warrant would result in the Selling Stockholder and its affiliates holding more than 4.99% of the then-issued and outstanding shares of the Common Stock following such exercise (excluding, for purposes of such determination, shares of the Common Stock issuable, respectively, upon exercise of the 2020 Warrant, 2021 Warrant and the 2021-2 Warrant or conversion of the 2020 Debentures, 2021 Debentures and the 2021-2 Debentures, respectively, that had not then been exercised or converted, respectively). The Selling Stockholder can increase that 4.99% “exercise blocker” to 9.99% upon at least 65 days’ prior written notice to the Company.
corresponding debentures. During the year ended December 31, 2020,2021, the Company granted the 2020 Warrant that was immediately exercisable for upamortized debt discount of $443,793 to 20,000,000 shares of Common Stock. interest expense.
During the threesix months ended June 30, 2022, the Selling Stockholder converted principal of $2,600,000 and accrued interest of $137,128, or a total $2,737,128, into 678,413,399 shares of common stock with a fair value of $5,859,165. The Company followed the general extinguishment model to record the conversions and settlement of the debt. The debt and accrued interest totaled $2,737,128, the related unamortized debt discount totaled $790,270, and the shares issued were measured at their respective fair value upon conversion which amounted to $5,859,165. In addition, the bifurcated conversion option derivatives, after a final mark-up to $3,639,000, were also removed. As a result, the Company recorded a loss on extinguishment of debt of $873,040.
As of December 31, 2021, the outstanding balance of the secured debentures amounted to $3,000,000, with an unamortized debt discount of $2,150,067, or a net balance of $849,933. As of June 30, 2022, the outstanding balance of the secured debentures amounted to $900,000, with an unamortized debt discount of $790,270, or a net balance of $109,730. During the six months ended June 30, 2022, the Company granted the 2021 Warrant that was immediately exercisable for upamortized debt discount of $444,793 to 50,000,000interest expense.
As of June 30, 2022, 161,707,234 shares of Common Stock.common stock were potentially issuable under the conversion terms of the two partially converted outstanding debentures.
At December 31, 2021, accrued interest on the convertible notes payable was $54,110. During the threesix months ended SeptemberJune 30, 2021,2022, the Company grantedadded $77,785 of additional accrued interest, and converted $137,128 of accrued interest into common stock, leaving an accrued interest balance on the 2021-2 Warrant that was immediately exercisable for up to 100,000,000 sharesconvertible notes payable of Common Stock. The 2020 Warrant, 2021 Warrant$4,767 at June 30, 2022. Accrued interest in included in accounts payable and accrued expenses in the 2021-2 Warrant, respectively, was fully expensed as an interest expense related to the 2020 Warrant, 2021 Warrant and the 2021-2 Warrant issued in connection with the consummation of the transactions contemplated by the 2020 SPA, 2021 SPA and 2021-2 SPA, respectively, and no liability was recorded as of September 30, 2021 and December 31, 2020, respectively.accompanying Condensed Consolidated Balance Sheets.
| 9 |
Cash Flows
In summary, our use of cash has been as follows:
| For the Nine Months Ended September 30, 2021 | For the Six Months Ended June 30, 2022 | |||||||
| Net cash used in operating activities | $ | 1,586,677 | ) | $ | (1,619,356 | ) | ||
| Net cash used in investing activities | $ | (1,427,106 | ) | $ | (24,168 | ) | ||
| Net cash provided by financing activities | $ | 3,447.143 | $ | 945,886 | ||||
Operating Activities
Cash provided by or used in operating activities primarily consists of net income adjusted for certain non-cash items, including depreciation, amortization, stock-based payments, interest expense related tofinancing costs, changes in allowance for doubtful accounts, loss on extinguishment of debt, and the Warrant issuedchange in the Private Placement,fair value of our derivative liabilities, stock-based compensation, and the effect of changes in working capital and other activities. Cash used in operating activities for the ninesix months ended SeptemberJune 30, 20212022 was approximately $1.6 million$1,619,355 and consisted of a net loss of approximately $4.4 million,$4,950,087, adjustments for non-cash items, including adjustments related todepreciation, amortization, financing costs, loss on extinguishment of debt, loss on the issuancechange in fair value of shares of our Common Stock for an acquisition, Common Stock issued forderivative liabilities, and stock based compensation, interest expense related towhich in the Warrant, and depreciation ofaggregate total approximately $2.1 million,$3,464,684, and approximately $731,100$113,952 used in working capital and other activities.
Investing Activities
Cash used in investing activities for the ninesix months ended SeptemberJune 30, 20212022 was approximately $1.4 million$24,168 and was attributable to capital expenditures of approximately, $145,900, and goodwill of approximately $1.28 million, which was attributed to an acquisition.expenditures.
Financing Activities
Cash provided by financing activities for ninesix months ended SeptemberJune 30, 20212022 was approximately $3.5 million$945,886 and was due tocomprised of proceeds from convertible debta notes payable of approximately $3.0 million, proceeds from note payable for an acquisition of approximately $590,400, proceeds from note payable for approximately $34,800, changes from the PPP Loan of approximately $22,300, $217,000 was used to pay principal$964,389, offset by payment on aour line of credit to related party of $3,000, payments of our acquisition obligations of $8,586, payment of our note payable of $3,119, and $13,000 was used to pay principal on a note payable.
Non-Cash Investing and Financing Activities
For the nine months ended September 30, 2021, there were no non-cash investing and financing activities.payment of finance lease obligations of $3,798.
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 three monthsperiod ended SeptemberJune 30, 2021.2022. 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.
| 10 |
Leases
On January 1, 2019, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update 2016-02, Leases (Topic 842) (“ASC Topic 842”), which requires an entity to recognize a liability and corresponding asset for leases that meet certain criteria. We applied ASC Topic 842 using the modified retrospective approach. Under this approach, we applied the new standards to all new leases, and leases which have remaining obligations for financial statements issued for fiscal years beginning after December 15, 2018. We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward historical lease classification, and not reassess (i) whether a contract was or contained a lease, and (ii) initial direct costs for any leases that existed prior to January 1, 2019. Under this method, we did not restate comparative periods in our financial statements. We present right-of-use assets resulting from leases separately from other assets as noncurrent, and amortized accordingly. The corresponding lease liabilities are presented separately from other liabilities on the accompanying balance sheets.
We recognize a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred. The amortization period for the right-of-use asset is from the lease commencement date to the earlier of the end of the lease term or the end of the useful life of the asset.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the incremental borrowing rate or the risk-free rate with the election of the practical expedient. We have elected to use the risk-free rate.
Please refer to Note 15, Lease Liabilities, to our consolidated financial statements for the nine months ended September 30, 2021 for additional information related to our right-of-use assets and lease liabilities.
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.
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.
On January 1, 2019, we adoptedWe 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. The implementation of Topic ASC 606 had no impact on the prior period financial statements and no cumulative effect adjustment was recognized.
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.
We evaluated the guidance in ASC 606-10-50-5 and the related implementation guidance to determine disaggregation of revenues that would be meaningful. The majority of ourOur revenue earned from our Beverages Segment and our Distribution Segment is recognized when we satisfy a single performance obligation by transferring control of our products to a customer. We do not have significant financing components or payment terms, and we do not have any material unsatisfied performance obligations. Our revenues are obtained in similar geographical locations within the United States. Furthermore, the operations in each of our reporting segments are expected to have essentially the same future prospects, similar gross margins, sales trends, and the nature of our products and customers are essentially the same. The sales from our beverage product types are organized as one reportable segment, which we refer to as the Beverages Segment, and the sales of our products and products that are purchased from resellers that are distributed by Gold Leaf is organized as our second reportable segment, which we refer to as the Distribution Segment. We have also 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 Gold Leaf 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. Therefore, our merchandise and apparel products are not a reportable segment. Merchandise and apparel sales are included with the gross sales for our Beverages Segment.one operating segment.
| 11 |
Accounts Receivable and Allowance for Doubtful Account Receivable
Accounts receivable are recorded at net realizable value. We determine provisionsDuring the prior year, the Company consolidated and restructured its operations. The Company now operates in one segment for uncollectible accounts, sales returns,the manufacture and claims based upon factors includingdistribution of our products and those of otherwise unrelated beverage products. In accordance with the credit risk“Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and activity of specific distributorsPresident, who reviews operating results to make decisions about allocating resources and resellers, historical trends, and other information. If we become aware of a specific distributor’s or reseller’s inability to meet its financial obligations, bad debt charges are recorded based on an overall assessment of past due accounts receivable outstanding. Inassessing performance for the opinion of management, a provision was deemed necessary for uncollectible accounts.
Inventory
The cost of inventory using the standard cost method,entire Company. Existing guidance, which approximates actual costis based on a first-in, first-out method. Our inventories are valued atmanagement 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 lowercountries 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 cost or net realizable value. Our inventory consists almost entirely of finishedproducts and unfinished goods,services; and freight, which include CBD energy waters, CBD waters, hemp energy drinks, cans for production,procurement, manufacturing, and merchandise and apparel. We periodically evaluate and adjust inventories for obsolescence. Indistribution processes. Since the opinion of management, no provision for obsolescence is deemed necessary. The shelf life ofCompany operates in one segment, all beverage inventory is two years, and as of September 30, 2021, we had approximately $866,600 of product in inventory, which was an increase of approximately $206,100, compared to approximately $660,500 at December 31, 2020. We expect the balance of inventory to increase in direct relation to the increase in sales that we expect. See Note 2, Summary of Significant Accounting Policies, Subsection F, Inventories, of our consolidated financial statements for the nine months ended September 30, 2021, for an additional description of our inventory that had a material effect on our consolidated financial statements.
Goodwill and Intangible Assets
Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interestsinformation required by “Segment Reporting” can be found in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. We have selected December 31 as the date to perform the annual impairment test.
Intangible assets represent both indefinite lived and definite lived assets. Trademarks are deemed to have definite useful lives of ten years, are amortized, and are tested annually for impairment. Intangible assets are reported on the balance sheet at cost less accumulated amortization. We have selected December 31 as the date to perform the annual impairment test. See Note 2, Summary of Significant Accounting Policies, Subsection H, Goodwill and Intangible Assets, of our consolidated financial statements for the nine months ended September 30, 2021, for an additional description of intangible assets that had a material effect on our consolidatedaccompanying financial statements.
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 ninethree and six months ended Septemberending June 30, 2021, and 2020,2022, we recognized $85,000 of stock-based compensation expense of approximately $326,700, and $478,600, respectively.expense. We had a balance in accruedrecognized no stock-based compensation at September 30, 2021 and December 31, 2020 of approximately $1.4 million, respectively.during the prior year period. See Note 6,13, Stock-BasedShare-Based Compensation,of our consolidated financial statements for the ninesix months ended SeptemberJune 30, 20212022, for an additional description of our stock-based compensation that had a material effect on our consolidated financial statements.
Related Party Transactions
See Note 8, Related Party Transactions, to our consolidated financial statements for the nine months ended September 30, 2021 for an additional description of related party transactions 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 the December 31, 2020this 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.
| 12 |
Recently Issued Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies Subsection S, Recently Issued Accounting Pronouncements,to our consolidated financial statements for the nine monthsperiod ended SeptemberJune 30, 20212022 for a discussion of recent accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a Smaller Reporting Company, we areA smaller reporting company is not required to provide the information required by this Item.
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 SeptemberJune 30, 2021,2022, 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 SeptemberJune 30, 2021,2022, 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.
| 13 |
PART II – OTHER INFORMATION
ITEM 1.Legal Proceedings 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 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.
ITEM 2.Unregistered Sales of Equity Securities and Use of funds 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 SecuritiesDEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.Mine Safety Disclosures MINE SAFETY DISCLOSURE
None.Not applicable.
ITEM 5.Other Information OTHER INFORMATION
None.
| 14 |
ITEM 6. ExhibitsEXHIBITS
The following exhibits are filed with or incorporated by reference into this Quarterly Report.
| 15 |
| 16 |
| 17 |
| 18 |
| 19 |
| 101.INS* | Inline XBRL Instance Document |
| Inline XBRL Taxonomy Extension Schema Document | |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| *Filed herewith |
| 20 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| By: | /s/ Robert Clark | |
| Robert Clark | ||
| Chief Executive Officer | ||
| August 12, 2022 | By: | /s/ Lori Radcliffe |
| Chief Financial Officer | ||
73
| 21 |