EDGAR 10-K Filing

Company CIK: 1802546
Filing Year: 2022
Filename: 1802546_10-K_2022_0001493152-22-009739.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
As used in this Annual Report, the terms “we,” “us,” “our,” and the “Company” refer to Kona Gold Beverage, Inc., a Delaware corporation.
Corporate Overview - Formation, Corporate Changes and Material Mergers and Acquisitions
We were originally incorporated as Class-ique Talent Agency, Inc. (“CTA”), under the laws of the State of Nevada in March 1997. In October 2001, CTA entered into an Agreement and Plan of Reorganization (the “Reorganization Plan”) with PhaserTek, Inc., a Delaware corporation (“PhaserTek”), pursuant to which CTA acquired all of the outstanding shares of common stock of PhaserTek in exchange for shares of common stock of CTA, resulting in PhaserTek becoming a wholly-owned subsidiary of CTA. In accordance with the terms of the Reorganization Plan, CTA changed its name to PhaserTek Medical, Inc. (“PhaserTek Medical”) in 2002. In 2004, PhaserTek Medical changed its name to Union Equity, Inc. (“UE Nevada”). For purposes of changing UE Nevada’s state of incorporation, UE Nevada formed Union Equity, Inc. in the State of Delaware (“UE Delaware”) in 2004. Pursuant to Articles of Merger, in December 2004, UE Nevada merged with and into UE Delaware, the surviving company. In July 2015, we changed our name to Kona Gold Solutions, Inc. In October 2020, we changed our name to Kona Gold Beverage, Inc.
We have four wholly-owned subsidiaries: (i) Kona Gold, LLC (“Kona”), a Delaware limited liability company formed in August 2015; (ii) HighDrate, LLC (“HighDrate”), a Florida limited liability company formed in January 2018; (iii) S and S Beverage, Inc., (“S and S”), a Wisconsin corporation formed in June 2018 that we acquired in February 2021; and (iv) Gold Leaf Distribution LLC (“Gold Leaf”), a Florida limited liability company formed in January 2019.
● Kona focuses on creating great tasting and healthy hemp-infused energy drinks in the functional beverage market for those who lead an active lifestyle. Kona is a proud member of the Hemp Industries Association (“HIA”) and strives to promote the benefits of hemp seed in our products. The hemp seed in our energy drinks contains all 20 amino acids that are already found in the human body. For those leading a healthy lifestyle, hemp seed protein is considered to be a complete protein and is compatible with a variety of diets, including vegan and Kosher.
● HighDrate focuses on the development and marketing of CBD-infused energy waters available in a variety of great tasting flavors. HighDrate’s CBD-infused energy waters are geared to the fitness and wellness markets. Our CBD-infused energy waters are powered by Alkame’s patented technology, which provides premium oxygenated alkaline water with natural antioxidants. All of our waters are infused with CBD.
● S and S focuses on the development and marketing of Ooh La Lemin and Ooh La Lemin Sparkling, which is a lemonade that has no added sugar, is low in carbohydrates, and has only 15 calories for Ooh La Lemin, and only 10 calories for Ooh La Lemin Sparkling. Ooh La Lemin is available in four flavors: (i) Original Lemonade, (ii) Blue Raspberry Lemonade, (iii) Peach Lemonade, and (iv) Strawberry Lemonade. Ooh La Lemin Sparkling is available in six flavors: (i) Original, (ii) Cucumber Watermelon, (iii) Blue Raspberry, (iv) Pineapple Mango, (v) Citrus Splash, and (vi) Huckleberry.
● Gold Leaf focuses on the distribution of premium beverages and snacks, such as alkaline waters, beverages for kids, energy drinks, fruit flavored sodas, low-carb lemonade, healthy aloe juice drinks, as well as CBD-infused jellybeans, in key markets, all of which complement our current product offerings. These markets include over 1,400 accounts in grocery stores, convenience stores, smoke shops, vape shops, and specialty stores located in Florida and South Carolina.
Business Overview
We are a lifestyle company that specializes in developing premier hemp and CBD products in the functional beverage and fitness markets. Focusing on the hemp energy drink, CBD energy water, and CBD water markets, we believe that we have positioned ourselves as a premium lifestyle brand.
We currently sell Kona, HighDrate, and S and S products through resellers, our websites, and distributors that span across 9 states. Our products are available in a wide variety of stores, including convenience and grocery stores, smoke shops, and gift shops. Gold Leaf also distributes our own products, as well as products purchased for resale from several other beverage manufacturers. These premium beverages and snacks are available in more than 1,400 grocery stores, convenience stores, smoke shops, vape shops, and specialty stores.
Product Lines
Within our Company, we market five distinct product lines: hemp-infused energy drinks, CBD-infused energy water, CBD-infused high-alkaline water, low carb and low-calorie lemonade, and apparel with our trademark logo.
Our 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.
HighDrate’s CBD-infused energy water is great tasting, sugar-free, and powered by Alkame’s patented technology, which uses its advanced water treatment to create a premium oxygenated alkaline water with natural antioxidants. Alkame believes based on a double-blind placebo, peer-backed research project that it conducted, its 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. We believe 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.
S and S’s Ooh La Lemin is a lemonade that has no added sugar, is low in carbohydrates, and has only 15 calories and is available in four flavors: (i) Original Lemonade, (ii) Blue Raspberry Lemonade, (iii) Peach Lemonade, and (iv) Strawberry Lemonade. Ooh La Lemin Sparkling is a lemonade that has no added sugar, is low in carbohydrates, and has only 10 calories and is available in six flavors: (i) Original, (ii) Cucumber Watermelon, (iii) Blue Raspberry, (iv) Pineapple Mango, (v) Citrus Splash, and (vi) Huckleberry.
Our 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.
We also sell branded apparel. We use only high-quality textiles and specialty inks and foils, which provide consumers with a premium fit and feel. We currently offer shirts, tanks, hats, and towels for sale. Revenues generated from sales of our apparel historically has represented approximately less than 1% of our gross annual sales.
Distributors and Resellers
Our markets include over 1,400 accounts in grocery stores, convenience stores, smoke shops, vape shops, and specialty stores located in Florida and South Carolina. In addition to distributing the Company’s own beverage products, the Company also distributes other products, including alkaline waters, beverages for kids, energy drinks, fruit flavored sodas, low-carb lemonade, healthy aloe juice drinks, and CBD-infused jellybeans, all of which complement the Company’s current product offerings.
We sell our products primarily to beverage distributors and resellers, retail grocery, smoke shops and specialty stores, wholesalers, merchandisers, convenience stores, and beverage services. We focus on sales to consumers in the functional beverages sector that lead an active lifestyle and need a balance that will meet their needs of providing their minds and bodies with a focused boost and quick recovery. Our beverages support consumers that lead a healthy lifestyle based on choices made about daily habits by providing products that provide a healthy alternative in their beverage choices. A healthy lifestyle can result in consumers feeling fit and energetic and can reduce their risk for disease. We believe our products help consumers stay hydrated, revitalized, aided in stamina, and allow for faster recovery. Hemp protein contains no gluten and is compatible with a variety of diets, including vegan and Kosher. The hemp seed protein contained in our energy drinks is a great protein that contains all 20 amino acids found in the human body.
We also distribute premium beverages and snacks in key markets through our wholly-owned subsidiary, Gold Leaf. Gold Leaf distributes our products as well as products purchased for resale from several other beverage manufacturers. The distributed products include alkaline waters, beverages for kids, energy drinks, fruit flavored sodas, low-carb lemonade, healthy aloe juice drinks, and CBD-infused jellybeans, all of which complement our current product offerings.
Industry Overview
Our distributors and resellers and consumers span across several industries, including energy drinks, hemp or CBD drinks, health and fitness, and apparel.
Energy Drinks
The energy drink industry continues grow every year with an estimated $14 billion in sales in the United States in 2021, and sales are expected to reach $53 billion globally. The energy drink by the name “Red Bull” dominated the industry in 2020, comprising approximately 25% of the energy drink market. In 2020, an energy drink by the name of “Monster,” market share was approximately 15%.
The introduction of “Red Bull” in 1997, and the many other energy drinks that followed in its footsteps, has helped turn the energy drink industry into significant choice of consumers in the overall beverage industry. The rise of “Red Bull” and “Monster,” which accounted for 40 percent of the energy drink sales in the United States in 2020, has resulted in the energy drink industry rivaling the coffee industry. Energy drinks have an average of 200 mg of caffeine, which is equivalent to about two cups of coffee. The liquid and dry coffee industry accounted for approximately $102.5 billion in sales in 2019, which grew from $4.1 billion dollars in 2003. Starbucks Corporation was the sales leader of the coffee industry with approximately 40% of the market share in 2018, followed by Dunkin’ Brands Inc. with 40% of the market share in 2019.
Hemp or CBD Drinks
The HIA reported that the 2018 Farm Bill poised to restore industrial hemp to nationwide legal production for the first time since World War II, offering vast opportunities for the industry and investment in a market expected to triple in four years. With the removal of hemp from federal prohibition under the CSA, the total hemp industry is expected to grow 18.4% from 2018 through 2022. Hemp Business Journal estimates that the hemp-derived CBD market will grow to a $1.3 billion market by 2022. The U.S. hemp market, which includes CBD, textiles, and hemp seed, is expected to lead the global market in 2020, representing approximately 32% of the global market. This growth is fueled by the public’s growing demand for CBD products. The 2018 Farm Bill aims the industry to accelerate and establish itself as a global hemp powerhouse led by hemp-derived CBD, and establishes legal production for CBD.
Health and Fitness
The health and fitness industry, which includes food and beverages, saw consumer awareness drive trends to health and wellness, plant-based, and clean-label products in 2021. We believe that conscious consumerism will continue to drive these trends in 2022. We believe that consumers are making food and beverage choices based on their personal definition of health. Further, we believe that consumers are looking for healthy alternatives to obtain relief from pain and anxiety, and that CBD has become a viable option because it balances the mind and body. Women have traditionally been early adapters of health and wellness trends and CBD-infused products, food, and beverages have been recognized by women to have a connection between happiness and health.
Apparel
The global apparel market is projected to grow to $1.5 trillion dollars in 2021, compared to $1.3 trillion in 2015. Brand names and logos for leading energy drink companies such as Monster and Rockstar can be found on men’s and women’s apparel around the world; however, the biggest apparel companies not affiliated with energy drinks control the majority of the market. Energy drink apparel is not expected to be a large contributor to the apparel industry.
Competition
The beverage industry is highly competitive. The principal areas of competition are pricing, packaging, and developing new products and flavors, as well as highly intensive promoting and marketing strategies. Our products compete with a wide range of drinks produced by a relatively large number of companies, many of which have substantially greater financial, marketing, and distribution resources than we do. Important factors affecting our ability to compete successfully include brand and product image, taste and flavor of products, trade and consumer promotions, rapid and effective development of new and unique cutting-edge products, attractive and different packaging, brand exposure, and marketing, as well as pricing. We also rely on our beverage distributors to allocate more attention to our products than those of our competitors, provide stable and reliable distribution, and secure adequate shelf space in retail outlets. Competitive pressures in the “alternative,” energy, coffee, and “functional” beverage categories could cause our products to maintain or to lose market share or we could experience price erosion, which could have a material adverse effect on our business and results of operations.
Our energy products have entered an already crowded market, and we aware of both our strengths and shortcomings as we compete in the energy drink market. Our energy products are part of niche industry that includes CBD, hemp seed, organic, and lifestyle, which we believe separates our energy drinks from others in the market. Within the global CBD beverage market, sales are expected to grow at a faster rate than conventional energy drinks. In 2020, the CBD beverage market was valued at $3.4 billion, and is expected to reach $14.6 billion by 2026 with a compounded annual growth rate of 27.5%. Combined with the THC-infused beverage market, the CBD Beverage Market is expected to reach $1.4 billion in the United States alone by 2025. The Alkaline Water Company, Inc. (NASDAQ and TSXV: WTER), HEXO Corp. (NYSE and TSX: HEXO), Tilray, Inc. (NASDAQ: TLRY), and Canopy Growth Corporation (NYSE: CGC; TSX: WEED) are prominent players in the CBD beverage market.
We compete not only for consumer preference, but also for maximum marketing and sales efforts by multi-brand licensed bottlers, brokers, and distributors and resellers, many of which have a principal affiliation with competing companies and brands. Our products compete with all liquid refreshments and in many cases with products of much larger and, in many cases better financed competitors. Our energy drinks compete directly with Red Bull, Monster, and Rockstar. We also compete with smaller companies.
Co-Packing
We do not directly produce our hemp-infused energy drinks, Storm CBD-infused waters, HighDrate CBD-infused energy waters, or Ooh La Lemin, but instead outsource the production of our products with our specifications to third-party bottlers and co-packers. We use co-packers to produce our beverage products. The co-packers are responsible for the production and packaging of the finished products, including the procurement of all required ingredients and packaging materials. We have partnered with multiple co-packers in the United States to provide fulfillment of our products from quality, low-cost sources. These partners are integral to our success, providing, we believe, the ability to scale as needed. We store all of our products, except for Ooh La Lemin, in our warehouses located in Greer, South Carolina and Melbourne, Florida. Ooh La Lemin is stored in our co-packers warehouse.
Our ability to estimate demand for our products is imprecise, particularly with new products, and may be less precise during periods of rapid growth, particularly in new markets. If we materially underestimate demand for our products, are unable to secure sufficient ingredients or raw materials, including, but not limited to, aluminum cans, plastic bottles, caps, labels, flavors, juice concentrates, coffee, tea, dietary ingredients, other ingredients, and certain sweeteners, are unable to procure adequate packing arrangements, or are unable adequately or timely to ship our products, we might not be able to satisfy demand on a short-term basis. That short-term supply inability may also result in a longer-term reduction in orders for our products.
Raw Materials and Suppliers
The raw materials used in the production of our products are obtained by our co-packers and consist primarily of materials such as the flavors, caffeine, sugars or sucralose, taurine, vitamins, CBD, and hemp seed protein contained in our beverages, the bottles in which our beverages are packaged, and the labeling on the outside of our beverages. These principal raw materials are subject to price and availability fluctuations. We currently rely on a few key co-packers, which in turn rely on a few key suppliers. We continually endeavor 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 our beverages. We are also dependent on these co-packers to negotiate arrangements with their existing suppliers that would enable us to obtain access to certain of such concentrates or flavor formulas under certain extraordinary circumstances. Additionally, in a limited number of cases, our co-packers may have contractual restrictions with their suppliers or our co-packers may need to obtain regulatory approvals and licenses that may limit our co-packers’ ability to enter into agreements with alternative suppliers. Contractual restrictions in the agreements we have with certain distributors may also limit our ability to enter into agreements with alternative distributors. We believe 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, we continually endeavor to contract with additional beverage vendors to ensure we have adequate inventory. We believe that a satisfactory supply of vendors will continue to be available at competitive prices, although there can be no assurance in this regard.
Quality Control
All quality control is handled by our co-packers. To date, we have not had any quality issues with our products. In the future, if any quality issues were to arise, we expect that we would resolve them with the specific co-packer involved or engage a new co-packer for our products.
Distribution
Distribution patterns in the energy drink and water industries are such that large buying groups dictate what products are used in their channels. Working with these large buying groups could open large distribution channels that could potentially supply our product offerings in several market segments. We have distribution agreements with each distributor with which we partner that distributes our products. Our distribution agreements are for a one-year term and typically automatically renews unless the distributor or we terminate the agreement. We ship product directly from our distribution center in South Carolina, our warehouse in Florida, or directly from our co-packers to our distribution partners in the United States. Our distributors consist of state-wide tier 1 distributors and regional small-to-medium size distributors.
Business Strategy
We have pursued specific and definable market segments with a multi-tiered, multi-channel approach. We have leveraged our products with direct sales and a distribution strategy using established beverage distributors. We are pursuing direct-ship opportunities, such as grocery stores and convenient stores, which would allow us to ship product to one location where the direct-ship store could then self-distribute our product to its multiple retail locations. We also continue to focus on our online presence by selling our products on popular e-commerce websites, such as Amazon.com, where we ship bulk product to its warehouse and Amazon handles all product fulfillment. Finally, we operate three e-commerce websites, where we sell directly to consumers in the United States. We continue to look to online retail markets and additional established distributors for revenue growth.
Marketing Strategy
Our sales and marketing strategy for all of our beverage products is to focus on developing brand awareness through image enhancing programs and product samplings. We use our branded vehicles and other promotional vehicles at events, where we offer samples of our products to consumers. We utilize “push-pull” methods to enhance shelf and display space exposure in sales outlets (including racks, coolers, and barrel coolers), advertising, in-store promotions, and in-store placement of point-of-sale materials to encourage demand from consumers for our products. We also support our brands with prize promotions, price promotions, competitions, endorsements from selected public and sports figures, sports personality endorsements, sampling and sponsorship of selected athletes, teams, series, bands, esports, causes, and events. In-store posters, outdoor posters, social media (directly and through our sponsorships and endorsements), and coupons may also be used to promote our brands.
We believe that one of the keys to success in the beverage industry is differentiation, making our brands and products visually appealing and distinctive from other beverages on the shelves of retailers. We review our products and packaging on an ongoing basis and, where practical, endeavor to make them different and unique. The labels and graphics for many of our products are redesigned and refreshed from time to time in order to maximize their visibility and identification, wherever they may be placed in stores, which we continue to reevaluate from time to time.
Promotion Strategy
Public relations and industry media have helped in our over-all market awareness plans. Our announcements of distribution partnerships have assisted in identifying new partners to distribute our products. We believe that announcing these partnerships in industry specific media help expand market awareness of our products. Feature articles and product reviews have also helped launch and support brand awareness. We include our products in industry specific buying guides, which has assisted in creating new relationship with distributors and retail outlets. Finally, we focus on creating products that we believe taste great and use attractive branding with our labels and other materials to catch consumers’ attention either in person at a retail store or online on a website.
Pricing Strategy
We strive to set the pricing of products at levels that are competitive with leaders in each respective market segment. We offer industry-standard discounts to distributors and retailers. We do not typically include quantity discounts but such discounts may be negotiated with major buying groups.
Sales Strategy
Our sales strategy is to exploit the energy drink and water markets in 2022, with the groundwork that we laid out in 2020 and 2021. We believe that tradeshows will play a major role in creating market awareness of our brands. Currently, our energy drinks are available for sale on Amazon.com, Inc.’s website, the largest internet-based retailer in the United States.
Our sales and marketing strategy for all our beverages is to focus our efforts on developing brand awareness through image enhancing programs and product sampling. We use our branded vehicles and other promotional vehicles at events where we offer samples of our products to consumers. We utilize “push-pull” methods to enhance shelf and display space exposure in sales outlets (including racks, coolers, and barrel coolers), advertising, in-store promotions, and in-store placement of point-of-sale materials to encourage demand from consumers for our products. We also support our brands with prize promotions, price promotions, competitions, endorsements from selected public and sports figures, sports personality endorsements, sampling and sponsorship of selected athletes, teams, series, bands, esports, causes, and events. In-store posters, outdoor posters, social media (directly and through our sponsorships and endorsements) and coupons may also be used to promote our brands.
We believe that one of the keys to success in the beverage industry is differentiation, making our brands and products visually appealing and distinctive from other beverages on the shelves of retailers. We review our products and packaging on an ongoing basis and, where practical, endeavor to make them different and unique. The labels and graphics for many of our products are redesigned and refreshed from time to time to maximize their visibility and identification, wherever they may be placed in stores, which we continue to reevaluate from time to time.
Intellectual Property
Our policy is to protect our intellectual property through, among other things, a combination of trade secrets, know-how, and trademarks. We have taken measures to protect our trade secrets and know-how, to the extent possible. We have three trademarks. One is for use of “Kona Gold Hemp Energy Drinks” registered in the Company’s name. The second trademark is for the use of “HighDrate” registered in the Company’s name. The third trademark is for the use of “OOH LA LEMIN” registered in the Company’s name. We do not have any patents.
Government Regulation and Compliance
The production, distribution, and sale in the United States of many of our products are subject to various U.S. federal and state regulations, including, but not limited to: the FDCA; the Occupational Safety and Health Act; various environmental statutes; the Safe Drinking Water and Toxic Enforcement Act of 1986 (“California Proposition 65”); and a number of other federal, state, and local statutes and regulations applicable to the production, transportation, sale, safety, advertising, marketing, labeling, and ingredients of such products.
Further, the regulation of food products in the United States, including products containing CBD, is complex, multi-faceted, and currently undergoing significant change. The FDA, the FTC, the USDA, and other regulatory authorities at the federal, state, and local levels extensively regulate, among other things, the research, development, testing, composition, production, import, export, labeling, storage, distribution, promotion, marketing, and post-market reporting of foods, including those that contain CBD. We, along with our third-party suppliers, co-packers, and third-party bottlers, are required to navigate a complex regulatory framework. The various federal, state, and local regulations regarding foods containing CBD are evolving, and we continue to monitor those developments. However, we cannot predict the timing, scope, or terms of any new or revised state, federal or local regulations relating to animal foods containing CBD.
Regulation of Hemp and CBD
Historically, the DEA regulated CBD, pursuant to the CSA, which establishes a framework of controls over certain substances, depending on whether they are classified in one of five risk-based schedules. Schedule I substances are the most stringently controlled, as they have been determined to have a high potential for abuse, there are no currently accepted medical uses in the United States, and there is a lack of accepted safety for use of the substance under medical supervision. The CSA classifies “marijuana” as a Schedule I controlled substance and previously defined “marijuana” to include all parts of the cannabis plant, whether growing or not; the seeds of the plant; the resin extracted from any part of the plant; and every compound mixture, salt, derivative, mixture, or preparation of the plant, its seeds, or its resin (with a few exceptions, such as mature stalks of the plant and seeds incapable of germination). Pursuant to this definition, the DEA interpreted CBD to fall within the statutory definition of “marijuana” as a compound or derivative of the cannabis plant.
In February 2014, Congress enacted the 2014 Farm Bill to allow for the limited growth and cultivation of industrial hemp, which was defined as including all parts of the cannabis plant, whether growing or not, with a delta-9 THC concentration of not more than 0.3% on a dry weight basis. This statute also allowed, as permitted by state law, the growing and cultivating of industrial hemp under the auspices of a state agricultural pilot program and by institutions of higher education and state departments of agriculture.
In December 2018, Congress enacted the 2018 Farm Bill to allow more broadly for the production of hemp pursuant to state and tribal plans overseen by the USDA. The 2018 Farm Bill amended the statutory definition of “marijuana” under the CSA specifically to exclude “hemp”, which is defined as any part of the cannabis plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 THC concentration of not more than 0.3% on a dry weight basis. Under this definition, as long as CBD meets the statutory definition of “hemp,” then it is no longer a Schedule I controlled substance under the CSA. However, the 2018 Farm Bill did not modify the FDCA and specifically preserved the FDA’s authority to regulate products containing cannabis or cannabis-derived compounds, such as CBD, pursuant to the FDCA.
Under the 2018 Farm Bill framework, states and Native American tribes may submit to the USDA, through the relevant state department of agriculture, a plan under which the state or Native American tribe will monitor and regulate the production of industrial hemp. For those states that do not have an approved state plan, the production of hemp will be subject to a USDA established plan, although states retain the ability to prohibit hemp production within their borders. On October 31, 2019, the USDA issued the IFR to implement the 2018 Farm Bill, which established the required regulatory framework governing commercial hemp production in the United States. The USDA has begun reviewing hemp production plans submitted by state and tribal governments, although several states have informed the USDA that they will continue to operate under their 2014 Farm Bill pilot programs for the time being. Pursuant to the 2018 Farm Bill, the 2014 Farm Bill will remain effective until October 31, 2020 (one year after the date of publication of the IFR). In addition, no state or Native American tribe may prohibit the transportation or shipment of hemp or hemp products produced in accordance with the 2018 Farm Bill through the state or territory, as applicable. The USDA has interpreted this provision also to apply to interstate transportation of hemp that complies with the 2014 Farm Bill through October 31, 2020. Effective March 22, 2021, The USDA issued the final rule, which creates the U.S.Domestic Hemp Production Program. The program provides requirements for maintaining records about the land where hemp is produced, testing the levels of total delta-9 tetrahydrocannabinol, disposing of non-compliant plants, licensing hemp producers, and ensuring compliance under the new program. The Agricultural Marketing Service (AMS), has been delegated authority to administer the U.S. Domestic Hemp Production Program.
FDA Regulation of Foods
The FDA regulates foods under the FDCA and its implementing regulations. The FDCA defines “food” as articles used for food or drink for people or animals, which includes products that are intended primarily for nutritional use, taste, or aroma and the components of such products. The FDA also imposes certain requirements on foods relating to their composition, production, labeling, and marketing. Among other items, the facilities in which our products and ingredients are produced must register with the FDA, comply with cGMPs and comply with a range of food safety requirements.
Although foods are not required to obtain premarket approval from the FDA, any substance that is added to or is expected to become a component of food must be used in accordance with a food additive regulation, unless it is generally recognized as safe (“GRAS”) under the conditions of its intended use. A food may be adulterated if it uses an ingredient that is neither GRAS nor an approved food additive, and that food may not be legally marketed in the United States. The FDA has confirmed that the use of cannabis or cannabis-derived compounds in food products is subject to these food additive requirements. At this time, there are no approved food additive petitions or regulations for any cannabis-derived food additive and, while the FDA has issued a “no questions” response to certain GRAS notifications for hemp seed products, these GRAS determinations do not encompass hemp and CBD products more generally.
Additionally, the FDCA prohibits the introduction or delivery for introduction into interstate commerce of any food that contains an approved drug for which substantial clinical investigations have been instituted and made public (unless certain exceptions apply). Under this prohibition, the FDA has stated that foods that contain CBD are adulterated because CBD is an active ingredient in an FDA-approved drug that was the subject of substantial clinical investigations before it was marketed as a food, and that none of the exceptions applies.
Although the FDA has stated that it interprets the FDCA to prohibit the introduction or delivery for introduction into interstate commerce of any food into which CBD has been added and has taken enforcement action against marketers of certain CBD products (some in collaboration with the FTC), the FDA is in the process of evaluating its regulatory approach to products containing cannabis and cannabis-derived compounds. The FDA has formed an internal working group to evaluate the issue and on May 31, 2019 held a public hearing to obtain scientific data and information about the safety, producing, product quality, marketing, labeling, and sale of products containing cannabis or cannabis-derived compounds. The hearing featured extensive discussion from a variety of stakeholders regarding the use of hemp and CBD in FDA-regulated products, including foods. At the hearing, FDA stated that, while it does not have a policy of enforcement discretion with respect to any CBD products, the agency’s biggest concern is the marketing of products that puts the health and safety of consumers at risk, such as those claiming to prevent, diagnose, mitigate, treat, or cure serious diseases in the absence of requisite drug approvals.
Further, on March 5, 2020, the FDA issued a report to Congress that was required under the 2018 Farm Bill in which the agency announced that it is currently evaluating a risk-based enforcement policy for CBD to provide more clarity to the industry and the public while the agency takes potential steps to establish a clear regulatory pathway. Although it is unclear whether or when the FDA will ultimately issue such an enforcement policy, the agency reemphasized that it will continue to take action against unlawful CBD products that pose a risk of harm to the public, including products with therapeutic claims; products that include contaminants such as heavy metals, THC, and other harmful substances; products associated with false statements, such as omitted ingredients and incorrect statements about the amount of CBD; and products marketed to vulnerable populations, such as infants and children.
The labeling of foods is regulated by both the FDA and state regulatory authorities. FDA regulations require proper identification of the product, a net quantity statement, a statement of the name and place of business of the producer or distributor, and proper listing of all of the ingredients in order of predominance by weight. The FDA may classify some of our products differently than we do and may impose more stringent regulations, which could lead to possible enforcement action.
Under the FDCA, the FDA may require the recall of a food product if there is a reasonable probability that the product is adulterated or misbranded, and the use of or exposure to the product will cause serious adverse health consequences or death. In addition, food producers may voluntarily recall or withdraw their products from the market. If the FDA believes that our products are adulterated, misbranded, or otherwise marketed in violation of the FDCA, the agency may take further enforcement action, including:
● restrictions on the production or marketing of a product;
● required modification of promotional materials or issuance of corrective marketing information;
● issuance of safety alerts, press releases, or other communications containing warnings or other safety information about a product;
● warning or untitled letters;
● product seizure or detention;
● refusal to permit the import or export of products;
● fines, injunctions, or consent decrees; and
● imposition of civil or criminal penalties.
Legislation may be introduced in the United States at the federal, state, and municipal level in respect of each of the subject areas. Public health officials and health advocates are increasingly focused on the public health consequences associated with obesity, especially as it affects children, and are seeking legislative change to reduce the consumption of sweetened beverages. There also has been an increased focus on caffeine content in beverages.
The FDA revised regulations with respect to serving size information and nutrition labeling on food and beverage products, including requirements to disclose the amount of added sugars in such products. In December 2018, the USDA promulgated regulations requiring that, by January 1, 2022, the labels of certain bioengineered foods must include a disclosure that the food is bioengineered. We may incur significant costs to alter our existing packaging materials to comply with these and other new regulations. Additionally, these new regulations may impact, reduce, or otherwise affect the purchase and consumption of our products by consumers.
Proposals to limit or restrict the sale and/or advertising of energy drinks to minors or persons below a specified age, to restrict the venues in which energy drinks can be sold, or to restrict the use of the Supplemental Nutrition Assistance Program (formerly food stamps) to purchase energy drinks have been raised or enacted in certain states, counties, and municipalities throughout the United States. Any such limitations or restrictions could adversely affect our business, financial condition, or results of operations.
We also may in the future be affected by other existing, proposed, and potential future regulations or regulatory actions, any of which could adversely affect our business, financial condition, and results of operations. Changes in government regulation, or failure to comply with existing regulations, could adversely affect our business, financial condition, and results of operations.
Environmental Compliance
Our facilities in the United States are subject to federal, state, and local environmental laws and regulations. Compliance with these provisions has not had, nor do we expect such compliance will have, any material adverse effect upon our capital expenditures, net income, or competitive position. We believe that we are not subject to any material costs for compliance with any environmental laws.
Insurance
Our products are subject to risks. While we have planned for these contingencies and have purchased insurance to address potential liabilities associated with product production, there can be no assurance that all potential liabilities will be covered by insurance or that the insurance coverage will be adequate.
Employees
We believe the people who work for us are critical to our continued success. As of April 1, 2022, we employed a total of 21 persons, all of whom were employed on a full-time basis. We strive to attract and retain qualified personnel; however, due to the size and scope of our business, we do not have any formal human capital strategies.
Many of our employees, including members of our management team, were reporting to work remotely due to the COVID-19 (“COVID-19”) pandemic that was announced by the World Health Organization (the “WHO”) in January 2020, which resulted in the closure of our offices in Florida for a period of time. To date, these employees have returned to our offices, and we are once again fully operational. Our warehouses operated as normal.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
We have a limited operating history on which to judge our new business prospects and management.
We commenced operations in the beverage industry in 2015. Accordingly, we have only a limited operating history upon which to have to base an evaluation of our business and prospects. Operating results for future periods are subject to numerous uncertainties and we cannot assure you that we will achieve or sustain profitability. Our prospects must be considered in light of the risks encountered by companies in the early stage of development, particularly companies in new and rapid evolving markets. We cannot assure you that we will successfully address any of these risks.
We have incurred losses in recent years and may never achieve or maintain profitability.
We have had losses for several years and had an accumulated deficit of $16,300,173 at December 31, 2021, which included our net loss of $7,020,137 for the year ended December 31, 2021, as compared to an accumulated deficit of $9,280,036, which included net loss of $3,125,595 for year ended December 31, 2020. We have implemented several initiatives intended to improve our revenues and reduce our operating costs with a goal of profitability. If we are unsuccessful in this regard, it will have a material adverse impact on our business, prospects, operating results, and financial condition. Our prior losses have had, and any future losses may continue to have, an adverse effect on our working capital. If we fail to generate revenue and become profitable, or if we are unable to fund our continuing losses, our stockholders could lose all or part of their investment.
Our recurring losses and significant accumulated deficit have raised substantial doubt regarding our ability to continue as a going concern.
We have experienced recurring operating losses over the last two years and have a significant accumulated deficit. We expect to continue to generate operating losses and consume significant cash resources for the foreseeable future. Without additional financing, these conditions raise substantial doubt about our ability to continue as a going concern, meaning that we may be unable to continue operations for the foreseeable future or realize assets and discharge liabilities in the ordinary course of operations. If we seek additional financing to fund our business activities in the future and there remains doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all. If we are unable to obtain sufficient funding, our business, prospects, financial condition, and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements, and it is likely that our stockholders will lose all or a part of their investment.
We do not have sufficient working capital to fund our planned operations, and, as a result, we may need to raise additional capital in the future, which may not be available when needed, on acceptable terms or at all.
We have limited capital resources. To date, we have financed our operations entirely through equity investments by our management and other investors, the incurrence of debt, salary deferments, and stock issuance deferments, and we expect to continue to do so in the foreseeable future. During the years ended December 31, 2021 and 2020, we relied on aggregate of approximately $7.1 million from incurrence of debt, salary deferments, and stock issuance deferments, to fund our operations. Taking into account the sale and issuance of a $900,000 debenture on February 10, 2021, the issuance of a $600,000 debenture on June 10, 2021, the issuance of a $1.5 million debenture on August 20, 2021, and an additional issuance of a $1.5 million debenture on November 1, 2021. We believe our current cash resources will fund 3 months of our financial obligations and operations. Taking into account our planned activities and sources of capital, we believe that we will require approximately $2 million to fund our financial obligations and operations for the next 12 months in excess of what we anticipate that we will generate from our operations. However, our estimates of our operating revenues and expenses and working capital requirements could be incorrect, and we may use our cash resources faster than we anticipate. Further, some or all of our ongoing or planned investments may not be successful and could further deplete our capital without immediate, or any, cash returns.
Until we can generate sufficient revenues to finance our cash requirements from our operations, which we may never do, we may need to increase our liquidity and capital resources by one or more measures, which may include, among others, reducing operating expenses, restructuring our balance sheet by negotiating with creditors and vendors, entering into strategic partnerships or alliances, or raising additional financing through the issuance of debt, equity, or convertible securities. Further, even if our near-term liquidity expectations prove correct, we may still seek to raise capital through one or more of these financing alternatives. However, we may not be able to obtain capital when needed or desired, on terms acceptable to us or at all.
Inadequate working capital would have a material adverse effect on our business and operations and could cause us to fail to execute our business plan, fail to take advantage of future opportunities, or fail to respond to competitive pressures or customer requirements. A lack of sufficient funding may also require us to significantly modify our business model and/or reduce or cease our operations. Furthermore, if we continue to issue equity or convertible debt securities to raise additional funds, our existing stockholders may experience significant dilution, and the new equity or debt securities may have rights, preferences, and privileges that are superior to those of our existing stockholders. We may incur substantial costs in pursuing any future capital-raising transactions, including investment banking, legal and accounting fees, printing and distribution expenses, and other similar costs, which would reduce the benefit of the capital received from the transaction.
The COVID-19 pandemic could have a material adverse impact on our business, results of operations, and financial condition.
In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In January 2020, the WHO declared the COVID-19 outbreak a “Public Health Emergency of International Concern.” This worldwide outbreak has resulted in the implementation of significant governmental measures, including lockdowns, closures, quarantines, and travel bans intended to control the spread of the virus. Companies are also taking precautions, such as requiring employees to work remotely, imposing travel restrictions, and temporarily closing businesses and facilities. These restrictions continued in fiscal year 2021 with continued outbreaks, and future prevention and mitigation measures, have had an adverse impact on global economic conditions and subsequent adverse impact on consumer confidence and spending, and adversely affect the supply of, as well as the demand for, our products. Uncertainties regarding the economic impact of COVID-19 have and are likely to result in sustained market turmoil, which could also negatively impact our business, financial condition, and cash flow. For example, to date, COVID-19 has adversely impacted new product launches by Kona and HighDrate, Gold Leaf’s distribution of new product lines, and the commencement of new distribution contracts, all of which adversely affected our business, financial condition, and cash flow. However, we acquired S and S during the COVID-19 pandemic and increased our product variety due to the acquisition, resulting in the commencement of distribution contracts.
Our co-packers source raw materials used in our products from suppliers located in the United States. The impact of COVID-19 on these suppliers, or any of our other suppliers, distributors and resellers, or transportation or logistics providers, have and may continue to negatively affect the price and availability of our ingredients and/or packaging materials and impact our supply chain. If the disruptions caused by COVID-19 continue for an extended period of time, our ability to meet the demands of our consumers may be materially impacted. To date, we have not experienced any reduction in the available supply of our products; however, we have been impacted by transportation and logistical delays. Additionally, at times during the COVID-19 pandemic, many of our employees, including members of our management team, have been working remotely as a result of the closure of our offices and warehouses in compliance with local and state regulations in response to the COVID-19 pandemic. To date, these employees have returned to our offices, and we are once again fully operational. Our warehouses operated as normal. If our operations or productivity become, or continue to be, impacted throughout the duration of the COVID-19 outbreak and government-mandated closures, those occurrences may negatively impact our business, financial condition, and cash flow. The extent to which the COVID-19 pandemic will further impact our business will depend on future developments and, given the uncertainty around the extent and timing of the potential future spread or mitigation and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our business at this time.
The extent of the effect of COVID-19 on our operational and financial performance will depend on future developments, including the duration, spread, and intensity of the outbreak, all of which are uncertain and difficult to predict, considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain the overall impact of COVID-19 on our business. However, if the pandemic continues for a prolonged period, it could have a material adverse effect on our business, results of operations, financial condition, and cash flow and adversely impact the quoted price of our Common Stock on the over-the-counter market.
We sell our products in highly competitive markets, which results in pressure on our profit margins and limits our ability to maintain or increase the market share of our products.
The beverage business is a highly competitive and risky business, and is subject to significant competition and pricing pressures. We compete with many national, regional, and local businesses, many of which have more resources than we do. We could experience increased competition from existing or new companies in the energy and beverage market, which could create increasing pressures to grow our business. Competitors could offer products with prices that may match or are lower than the prices we offer. While we believe that the products we offer are generally competitive with those offered by other companies, continued pricing pressure or improvements in research and shifts in consumer preferences away from hemp-based beverages could adversely impact our consumer base or pricing structure and could have a material and adverse effect on our business, financial condition, results of operations, and cash flow.
Our future growth is largely dependent upon our ability to expand successfully into new markets and new distribution channels, as well as to attract new consumers to our products.
Our business operates in markets that are characterized by rapidly changing products, evolving industry standards, and potential new entrants. Our future success depends upon a number of factors, including our ability to expand our product offerings into new territories and locations throughout the United States, including having our products offered in national retail stores such as Costco, Walmart, and Target. We cannot provide any assurance that our products will be offered in any such national chain. Failure to expand our distribution network to include distributors with reach into national retail stores will have an adverse effect on our growth, which, in turn, could adversely affect our business, financial condition, results of operations, and cash flow.
Changes in consumer preferences and perceptions may lessen the demand for our products, which would reduce sales and harm our business.
We believe we are highly dependent upon positive consumer perceptions of the safety and quality of our products, as well as similar products distributed by other companies. Consumer perception of CBD or hemp products in particular can be substantially influenced by scientific research findings, national media attention, and other publicity about product use. Adverse publicity from these sources regarding the safety, quality, or efficacy of our products could harm our reputation and results of operations. If consumer preferences and perceptions of our products change, the resulting demand for our products could decrease, which could adversely affect our business, financial condition, and results of operations.
Increases in our costs materially affect our operating results.
Our principal beverage products contain hemp, CBD, and ginseng. Increases in costs of these, or other ingredients in our products paid by our co-packers, with respect to our Company, or our suppliers, with respect to our Distribution Subsidiary, and the costs of which are passed on to us, could have a material adverse effect on our profit margins, as well as on our business, financial condition, and operating results. Further, other factors, such as inflation, increased food costs, increased labor and employee benefit costs, and increased energy costs may adversely affect our operating costs and we may not be able to pass along any such increased costs to our consumers. Increases in costs could adversely affect our profitability and operating results.
We do not have long-term contracts with any of our co-packers or our suppliers, and as a result they could seek to increase prices significantly or fail to deliver.
We do not rely on written contracts or long-term arrangements with our co-packers or our suppliers. Although we have not experienced significant problems with our co-packers or our suppliers, as applicable, our co-packers or suppliers may implement significant price increases or may not meet our requirements in a timely fashion, if at all. If any undesirable issues occur with our current co-packers or suppliers, we may be forced to find other co-packers and suppliers. We may encounter difficulties in finding substitute co-packers in a timely manner, if at all, given the strict licensing requirements in the CBD industry and the limited number of co-packers that currently hold such licenses that are necessary to comply with federal law. We may not be able to obtain terms as favorable as those received from our current co-packers and suppliers, which in turn would increase our costs. In addition, it is possible that the substitute co-packers and suppliers may not have the necessary materials to meet our demand.
We must monitor our inventory and product mix against forecasted demand on a continuous basis. If we underestimate demand, we risk having inadequate supplies. We also face the risk of having too much inventory on hand that may reach its expiration date and become unsalable, and we may be forced to rely on markdowns or promotional sales to dispose of excess or slow-moving inventory. If we are unable to manage our supply chain effectively, our operating costs could increase and our profit margins could decrease, which could have a material adverse effect on our financial condition, operating results, and cash flow.
Any prolonged disruption in the operations of any of our co-packing facilities could harm our business.
All of our distribution is managed domestically. Any prolonged disruption in the operations of any of these facilities, whether due to technical or labor difficulties, destruction or damage to the facility, real estate issues, or other reasons, could result in increased costs and reduced revenues and our profitability and prospects could be harmed.
We may not be able to manage our co-packing capabilities effectively, which may adversely affect our results of operations.
We must accurately forecast demand for all of our products in order to ensure that we have enough products available to meet the needs of our consumers. Our forecasts are based on multiple assumptions that may cause our estimates to be inaccurate and affect our ability to ensure that we have sufficient co-packing capacity to meet the demand for our products, which could prevent us from meeting increased consumer demand and harm our brand and our business. If we do not accurately align our co-packing capabilities with demand, our business, financial condition, and results of operations may be materially adversely affected.
If the ingredients used in our products are contaminated, alleged to be contaminated, or are otherwise rumored to have adverse effects, our results of operations could be adversely affected.
We, through our co-packers, buy ingredients from a variety of third-party suppliers. If these materials are alleged or prove to include contaminants that affect the safety or quality of our products or are otherwise rumored to have adverse effects, for any reason, we may sustain the costs of, and possible litigation resulting from, a product recall and need to find alternative ingredients, to delay production, or to discard or otherwise dispose of products, which could materially adversely affect our business, financial condition, and results of operations. In addition, even if product liability claims against us are not successful or are not fully pursued, these claims could be costly and time-consuming and could require our management to spend their time defending claims, rather than operating our business.
Our business depends, in part, on the sufficiency and effectiveness of our marketing.
Due to the competitive nature of our industry, we must effectively and efficiently promote and market our products through advertisements to sustain and improve our competitive position in our market. Marketing investments may be costly. In addition, we may, from time to time, change our marketing strategies and spending. We may also change our marketing strategies and spending in response to actions by our consumers, competitors, and other companies that produce and/or distribute beverage products. The sufficiency and effectiveness of our marketing are important to our ability to retain and improve our market share and margins. If our marketing is not successful or if we fail to implement sufficient and effective marketing or adequately respond to changes in industry marketing strategies, our business, financial condition, and results of operations may be adversely affected.
Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operate and grow successfully.
We have benefited substantially from the leadership and performance of our senior management, as well as other key employees. Our ability to grow our brand successfully hinges on our ability to retain our current management and key employees, and to attract and retain qualified personnel in the future. We cannot provide any assurance that we will be able to retain our personnel or attract new, qualified personnel. In addition, we do not maintain any “key person” life insurance policies. The loss of the services of members of our senior management or key employees could prevent or delay the implementation and completion of our strategic objectives or divert management’s attention to seeking qualified replacements. If we are unable to attract or retain key personnel, our profitability and growth potential could be harmed.
We may not be able to protect our intellectual property adequately, which could harm the value of our brands and branded products and adversely affect our business.
We depend in large part on our brands and branded products and believe that they are very important to our business, as well as on our proprietary hemp-infused processes. We rely on a combination of trademarks, trade secrets, and similar intellectual property rights to protect our brands and branded products. The success of our business depends on our continued ability to use our existing trademarks in order to increase brand awareness and further develop our branded products in domestic markets. We own three trademarks that are registered with the USPTO and have another trademark registration pending in the United States. We may not be able to protect our trademarks adequately and our use of trademarks may result in liability for trademark infringement, trademark dilution, or unfair competition. We may from time to time be required to institute litigation to enforce our trademarks or other intellectual property rights, or to protect our trade secrets. Such litigation could result in substantial costs and diversion of resources and could negatively affect our sales, profitability, and prospects, regardless of whether we are able to successfully enforce our rights. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations, and financial condition.
We may be subject to product liability claims or regulatory actions if our products are alleged to have caused significant loss or injury.
We may be subject to product liability claims, regulatory action, and litigation if our products are alleged to have caused loss or injury or failed to include adequate instructions for use or failed to include adequate warnings concerning possible side effects or interactions with other substances. Previously unknown adverse reactions resulting from consumption of CBD products alone or in combination with medications or other substances could also occur. In addition, the sale of any ingested product involves a risk of injury due to tampering by unauthorized third parties or product contamination. Our products may also be subject to product recalls, including voluntary recalls or withdrawals, if they are alleged to pose a risk of injury or illness, or if they are alleged to have been mislabeled, misbranded, or adulterated, or otherwise to be in violation of governmental regulations. A product liability claim or regulatory action against us could result in increased costs and could adversely affect our reputation and goodwill with our consumers generally. There can be no assurance that we will be able to obtain and maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or otherwise to protect against potential product liability claims could result in us becoming subject to significant liabilities that are uninsured and also could adversely affect our commercial arrangements with third parties.
Our annual and quarterly financial results are subject to significant fluctuations due to a variety of factors, many of which are beyond our control, which makes our results difficult to predict and could cause our results to fall short of expectations.
Our operating results can vary significantly from quarter-to-quarter and year-to-year depending on various factors, many of which are beyond our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our operating results in future quarters may fall below expectations. Each of the following factors may affect our operating results:
● the level of product and price competition;
● variations in the timing and volume of our sales;
● our ability to deliver products in a timely manner in sufficient volumes;
● our ability to recognize product trends;
● our success in expanding our business network and managing our growth;
● our ability to develop and market product enhancements and new products;
● the timing of product enhancements, activities of and acquisitions by competitors;
● the ability to hire additional qualified employees; and
● our ability to control costs.
Consequently, our results of operations may decline quickly and significantly in response to changes in order patterns or rapid decreases in demand for our products. We anticipate that fluctuations in operating results will continue in the future; thus, our historical operating results may not be useful to you in predicting our future operating results.
We may require additional capital to finance our operations in the future, but that capital may not be available when it is needed and could be dilutive to existing stockholders.
We may require additional capital for future operations. We plan to finance anticipated ongoing expenses and capital requirements with funds generated from the following sources: (i) cash provided by operating activities; (ii) available cash and cash investments; and (iii) capital raised through debt and equity transactions. Current conditions in the capital markets are such that traditional sources of capital may not be available to us when needed or may be available only on unfavorable terms. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions, and a number of other factors, many of which are outside of our control, and on our financial performance. Accordingly, we cannot assure you that we will be able to raise additional capital successfully at all or on terms that are acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effect on our liquidity, financial condition, results of operations, and prospects. Further, if we raise capital by issuing stock, the holdings of our existing stockholders will be diluted.
If we raise capital by issuing debt securities, such debt securities would rank senior to our shares of common stock, $0.00001 par value per share (our “Common Stock”), upon our bankruptcy or liquidation. In addition, we may raise capital by issuing equity securities that may be senior to our Common Stock for the purposes of dividend and liquidating distributions, which may adversely affect the market price of our Common Stock. Finally, upon bankruptcy or liquidation, holders of our debt securities and shares of our preferred stock and our lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our Common Stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our Common Stock, or both.
The success of our new and existing products is uncertain.
We have committed, and expect to continue to commit, significant resources and capital to develop and market existing product enhancements and new products. These products are relatively untested, and we cannot assure you that we will achieve market acceptance for these products, or other new products that we may offer in the future. Moreover, these and other new products may be subject to significant competition with offerings by new and existing competitors. In addition, new products and enhancements may pose a variety of technical challenges and require us to attract additional qualified employees. The failure to develop and market these new products or enhancements successfully could seriously harm our business, financial condition, and results of operations.
Our business is dependent upon market acceptance by consumers.
We are substantially dependent on market acceptance of our products by consumers, our ability to change with consumer tastes, and to meet consumer needs with new products. If consumers do not accept our products, our sales and revenue will either fail to materialize or decline, resulting in a reduction in our operating income or possible increases in losses. Demand for CBD and hemp products is also influenced by the popularity of certain aesthetics, cultural and demographic trends, marketing and advertising expenditures, legality concerns, and general economic conditions. Because these factors can change rapidly, consumer demand also can shift quickly. The success of new product introductions depends on various factors, including product selection and quality, sales and marketing efforts, and timely production. We may not always be able to respond quickly and effectively to changes in consumer taste and demand due to the amount of time and financial resources that may be required to bring new products to market. The inability to respond quickly to market changes could have an impact on our expected growth potential and the growth potential of the market for CBD and hemp beverages. Even if this market develops, we may not succeed in our plan to become a category leader. Although we believe that our products in the United States are gaining better consumer acceptance, we cannot predict the future growth rate and size of this market.
If we are able to expand our operations, we may be unable to manage our future growth successfully.
If we are able to expand our operations in the United States, as planned, we may experience periods of rapid growth, which will require additional resources. Any such growth could place substantial strain on our management and our operational, financial, and other resources, and we will need to train, motivate, and manage current employees, as well as attract management, sales, finance and accounting, technical, and other professionals. In addition, we will need to expand the scope of our infrastructure and our physical resources. Any failure to expand these areas and implement appropriate procedures and controls in an efficient manner and at a pace consistent with our business objectives and such growth could have a material adverse effect on our business and results of operations.
Any future litigation, or settlements resulting from legal proceedings relating to our business operations, could have a material adverse impact on our results of operations, and financial condition, and liquidity.
From time to time, we may be subject to allegations, and may be party to legal claims and regulatory proceedings, relating to our business operations. Such allegations, claims, and proceedings may be brought by third parties, including our consumers, employees, governmental or regulatory bodies, or competitors. Defending against such claims and proceedings, regardless of their merits or outcomes, is costly and time consuming and may divert management’s attention and personnel resources from our normal business operations, and the outcome of many of these claims and proceedings cannot be predicted. If any of these claims or proceedings were to be determined adversely to us, a judgment, a fine, or a settlement involving a payment of a material sum of money were to occur, or injunctive relief were issued against us, our business, financial condition and results of operations could be materially adversely affected. Our reputation could also be affected and such adverse litigation results or publicity may also negatively impact our business, financial condition, and results of operations.
Premiums for our insurance coverage may not continue to be commercially justifiable, and our insurance coverage may have limitations and other exclusions and may not be sufficient to cover our potential liabilities.
We have insurance to protect our assets, operations, and employees. While we believe our insurance coverage addresses all material risks to which we are exposed and is adequate and customary in our current state of operations, such insurance is subject to coverage limits and exclusions and may not be available for the risks and hazards to which we are exposed. No assurance can be given that such insurance will be adequate to cover our liabilities or will be generally available in the future or, if available, that premiums will be commercially justifiable. In addition, insurance that is otherwise readily available, such as general liability, and directors’ and officers’ insurance, may become more difficult for us to find, and become more expensive, due to our CBD products. We cannot provide any assurance that we will be able to obtain such insurance in the future, or that the cost will be affordable to us. If we are unable to obtain such insurance, or if we were to incur substantial liability that was not covered by insurance or was in excess of policy limits, we may be prevented from entering into certain business sectors, our growth may be inhibited, and we may be exposed to additional risk and financial liabilities, which could have a material adverse effect on our business, results of operations, and financial condition.
Risks Related to the Regulation of Our Business and Products
We and our co-packers and suppliers are subject to extensive governmental regulation and may be subject to enforcement if we are not in compliance with applicable requirements.
We and our co-packers and suppliers are subject to a broad range of federal, state, and local laws and regulations that govern, among other issues, the testing, development, production, distribution, marketing, and post-market reporting of foods, including those that contain CBD. These include laws administered by the U.S. Food and Drug Administration (“FDA”), the U.S. Federal Trade Commission (“FTC”), the U.S. Department of Agriculture (“USDA”), and other federal, state, and local regulatory authorities. Because we market products that are regulated as food, we and the companies that co-pack our products are subject to the requirements of the Federal Food, Drug, and Cosmetic Act (“FDCA”) and regulations promulgated thereunder by the FDA. The statute and regulations govern, among other things, the production, composition, ingredients, packaging, labeling, and safety of beverages. The FDA requires that facilities that produce food products comply with a range of requirements, including hazard analysis and preventative controls regulations, current good manufacturing practices (“cGMPs”), and supplier verification requirements. Production facilities are subject to periodic inspection by federal, state, and local authorities. If we cannot successfully contract with co-packers for our products and if they cannot conform to our specifications and the strict regulatory requirements of the FDA and applicable state and local laws, they may be subject to adverse inspectional findings or enforcement actions, which could materially impact our ability to market our products, could result in their inability to continue to co-pack for us, or could result in a recall of our products that have already been distributed. If the FDA or other regulatory authority determines that we or they have not complied with the applicable regulatory requirements, our business, financial condition, and results of operations may be materially adversely impacted. If we do not comply with labeling requirements, including making unlawful claims about our products, we could be subject to public warning letters and possible further enforcement actions (which other companies distributing CBD products have faced).
Failure by us, our co-packers, or our suppliers to comply with applicable laws and regulations or to obtain and maintain necessary permits, licenses, and registrations relating to our operations could subject us to administrative and civil penalties, including fines, injunctions, recalls or seizures, warning letters, restrictions on the production or marketing of our products, or refusals to permit the import or export of products, as well as potential criminal sanctions, any or all of which could result in increased operating costs resulting in a material effect on our operating results and business.
The FDA has stated that it interprets the FDCA to prohibit the sale of food products that contain CBD. The FDA is currently evaluating a potential regulatory pathway for CBD products pursuant to its current authority; but, unless and until such changes are promulgated, the FDA and other federal and state regulatory authorities could take enforcement action to prevent us from marketing beverages with CBD, which could adversely impact our business, financial condition, and results of operations or cause us to halt product sales altogether.
Although hemp and CBD are no longer controlled substances subject to regulation by the U.S. Drug Enforcement Agency (the “DEA”), the FDA has stated publicly that it is nonetheless unlawful under the FDCA to introduce food containing CBD into interstate commerce. The FDCA prohibits the introduction or delivery for introduction into interstate commerce of any food that contains an approved drug or a drug for which substantial clinical investigations have been instituted and made public, unless a statutory exemption applies. The FDA has publicly stated its conclusion that none of the statutory exceptions has been met for CBD.
On May 31, 2019, the FDA held a public hearing to obtain scientific data and information about the safety, production, product quality, marketing, labeling, and sale of products containing cannabis or cannabis-derived compounds (such as CBD) to provide the FDA with information as it considers policy options related to the regulation of these products, particularly in light of the changes to the legal status of hemp enacted in the Agriculture Improvement Act of 2018 (the “2018 Farm Bill”). The FDA has also formed an internal working group to evaluate the potential pathways to market for CBD products, which could include seeking statutory changes from Congress or promulgating new regulations. If legislative action is necessary, such legislative changes could take years to finalize and may not include provisions that would enable us to produce, market, and/or sell our CBD products, and the FDA could similarly take years to promulgate new regulations. Additionally, while the FDA’s enforcement focus to date has primarily been on CBD products that are associated with therapeutic claims, the agency has recently issued warning letters to companies that market CBD products without such claims. There is an unquantifiable risk that the FDA could take enforcement action against us, our co-packers, or our suppliers, or those marketing similar products to us, which could limit or prevent us from marketing our products and have a material adverse impact on our business, financial condition, and results of operations. While the FDA announced on March 5, 2020 that it is currently evaluating a risk-based enforcement policy for CBD to provide more clarity to the industry and the public while the agency takes potential steps to establish a clear regulatory pathway, it remains unclear whether or when the FDA will ultimately issue such an enforcement policy.
Moreover, local, state, federal, and international CBD, hemp, and cannabis laws and regulations are rapidly changing and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance requirements or alteration of certain aspects of our business plan in the event that our CBD products become subject to new restrictions. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations. It is also possible that regulations may be enacted in the future that will be directly applicable to our products. We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our activities in the hemp and CBD industry. The constant evolution of laws and regulations may require us to incur substantial costs associated with legal and compliance fees and ultimately require us to alter our business plan.
Our products contain CBD derived from hemp. The 2018 Farm Bill enacted a number of changes to the legal status of hemp and hemp products, including removal from the statutory list of controlled substances. However, implementation of the 2018 Farm Bill is ongoing, and there is still significant uncertainty regarding the legal status of hemp and hemp-based products under U.S. law.
Our products that contain CBD are subject to various state and federal laws regarding the production and sale of hemp-based products. Historically, the DEA had interpreted CBD to be subject to the Controlled Substances Act (the “CSA”) under the definition for “marijuana,” a Schedule I controlled substance. However, the 2018 Farm Bill removed “hemp,” from the definition of “marijuana.” “Hemp” is defined as the plant, Cannabis sativa L., and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol (“THC”) concentration of not more than 0.3% on a dry weight basis. As a result of the enactment of the 2018 Farm Bill, and since we believe that the CBD contained in our products and the hemp from which it is derived meet the definition of “hemp,” we believe that our CBD products and the hemp from which they are derived are not Schedule I controlled substances under the CSA. However, there is a risk that we could be subject to enforcement action, including prosecution, if any of our products are determined not to meet the definition of “hemp” and to constitute “marijuana” under the CSA based on THC levels or other violations, which would have a negative impact on our business and operations.
In addition, the 2018 Farm Bill contained provisions that require the USDA, among other things, to promulgate a new regulatory framework that will govern the growth and cultivation of hemp, where hemp grown in compliance with the framework would be permitted in interstate commerce throughout the United States. On October 31, 2019, the USDA issued an interim final rule (“IFR”) establishing the regulations necessary for domestic hemp production, including provisions for the USDA to approve plans submitted by states and Native American tribes for the monitoring and regulation of hemp production at the state level. Effective March 22, 2021, The USDA issued the final rule, which creates the U.S. Domestic Hemp Production Program. The program provides requirements for maintaining records about the land where hemp is produced, testing the levels of total delta-9 tetrahydrocannabinol, disposing of non-compliant plants, licensing hemp producers, and ensuring compliance under the new program. The Agricultural Marketing Service (AMS), has been delegated authority to administer the U.S. Domestic Hemp Production Program. While the 2018 Farm Bill requires state and tribal plans to meet certain basic requirements as outlined in the IFR, nothing preempts or limits state or tribal laws that are more stringent than the 2018 Farm Bill, and the requirements for lawful hemp production will vary from state to state. We and our co-packers and suppliers must expend resources to monitor the evolving federal and state legal landscape for hemp production, and any violations of these laws, or alleged violations, could disrupt our business and result in a material adverse effect on our operations.
Within the United States, we and our co-packers and suppliers face a variety of state and local restrictions on the cultivation of hemp, and if state or local regulatory authorities take enforcement action to prevent us from selling our products, our business, financial condition, and results of operations could be materially adversely impacted.
The growth and cultivation of hemp is subject to a complex regulatory framework that is implemented and affected by multiple federal agencies, as well as state and local authorities. In 2014, four years prior to enacting the 2018 Farm Bill, Congress enacted the Agricultural Act of 2014 (the “2014 Farm Bill”) to allow for the limited growth and cultivation of industrial hemp under federal law. This statute allowed institutions of higher education and state departments of agriculture to grow and cultivate industrial hemp for agricultural or other academic research purposes, or for hemp to be grown under the auspices of a state agricultural pilot program, in states where such growth and cultivation is legal under state law. While the 2014 Farm Bill will be repealed after October 31, 2020, and although the 2018 Farm Bill created a pathway under which hemp and its derivatives, including CBD, would no longer be a Schedule I controlled substance under the CSA and would be protected from interference in interstate commerce, the USDA only recently issued the IFR that contains the regulatory framework that will govern the growth and cultivation of hemp, and, currently, several states continue to operate under the 2014 Farm Bill. Alongside the current federal regulatory developments, state and local authorities have enacted their own restrictions on the cultivation or sale of hemp or hemp-derived CBD, including laws that ban the cultivation or possession of hemp or any other plant of the cannabis genus and derivatives thereof, such as CBD. Currently several states ban the cultivation and possession of hemp or CBD, while others have taken enforcement action against human food products that contain CBD, and states may enact new laws or regulations that prohibit or limit the sale of such products at any time. In the event of a change in federal or state laws and regulations that are adverse to our CBD products, we may be restricted or limited with respect to sale or distribution of those products, which could adversely impact our intended business plan with respect to such products.
The USDA has only recently issued the IFR and started accepting state and tribal hemp production plans for review, and it remains to be seen which states will submit their own regulatory plans for the cultivation of hemp and which will become subject to the USDA framework. The timing and content of state regulatory plans may impact our ability to obtain sufficient quantities of CBD at an acceptable price and on a timely basis. If our current co-packers and suppliers were to face increased regulation or be unable to continue to supply our business, we may be unable to fulfill orders for our products or find a suitable replacement co-packers and suppliers in a timely fashion or with comparable pricing. If our current co-packers or suppliers or any future co-packers or suppliers fail to comply with the applicable regulatory requirements, our business may suffer.
Changes in existing laws or regulations, including how such existing laws or regulations are enforced by federal, state, and local authorities, or the adoption of new laws or regulations may increase our costs and otherwise adversely affect our business, financial condition, and results of operations.
In addition to the legal framework applicable to hemp and CBD, the production and marketing of food products is highly regulated, and we and our co-packers and suppliers are subject to a variety of federal and state laws and regulations applicable to food. These laws and regulations apply to many aspects of our business, including the co-packing, packaging, labeling, distribution, advertising, sale, quality, and safety of our products. We could incur costs, including fines, penalties, and third-party claims, in the event of any violations of, or liabilities under, such requirements, including any competitor or consumer challenges relating to compliance with such requirements. For example, in connection with the marketing and advertising of our products, we could be the target of claims relating to false or deceptive advertising, including under the auspices of the FTC and state consumer protection statutes.
The regulatory environment in which we operate could change significantly and adversely in the future. The laws and regulations that apply to our products and business may change in the future and we may incur (directly or indirectly through our co-packers or suppliers) material costs to comply with current or future laws and regulations or any required product recalls. Any change in production, labeling, or marketing requirements for our products may lead to an increase in costs or interruptions in our production or raw material supply, either or both of which could adversely affect our operations and financial condition. For example, recent federal and state attention to the sale of CBD-containing products, and specifically food products that contain CBD, could result in standards or requirements that mandate changes to our current product ingredients, labeling, or marketing. New or revised government laws and regulations could significantly limit our ability to operate our business as it is currently being conducted, result in additional compliance costs, and, in the event of noncompliance, could lead to administrative or civil remedies, including fines, injunctions, withdrawals, recalls, or seizures and confiscations, as well as potential criminal sanctions.
Any such changes or actions by the FDA or other regulatory agencies could have a material adverse effect on our co-packers, our suppliers, and our business, financial condition, and results of operations.
Government scrutiny, warnings, and public perception could increase our costs of production and increase our legal and regulatory expenses, and if we are unable to comply with the applicable requirements for marketing beverages, we could face substantial civil and criminal penalties.
Producing, processing, labeling, packaging, storing, and distributing food products are activities that are subject to extensive federal, state, and local regulation. In the United States, these operations are regulated by the FDA and various state and local public health and agricultural agencies. The FDA Food Safety Modernization Act of 2011 provides direct recall authority to the FDA for food products and includes a number of other provisions that are designed to enhance food safety, including increased inspections by the FDA of domestic food facilities. Compliance with government regulation can be costly or may otherwise adversely affect our business. Moreover, failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls, or seizures, as well as potential criminal sanctions, which could in turn have a material adverse effect on our business, financial condition, and results of operations.
We operate in a highly regulated environment with constantly evolving legal and regulatory frameworks. Consequently, we are subject to heightened risk of legal claims, government investigations, or regulatory enforcement actions. Although we have implemented policies and procedures designed to ensure compliance with existing laws and regulations, there can be no assurance that our employees, temporary workers, contractors, or agents might not violate our policies and procedures. Moreover, a failure to maintain effective regulatory compliance policies and procedures could lead to violations, unintentional or otherwise, of laws and regulations. Legal claims, government investigations, or regulatory enforcement actions arising out of our failure or alleged failure to comply with applicable laws and regulations could subject us to civil and criminal penalties that could materially and adversely affect our product sales, reputation, financial condition, and operating results. In addition, the costs and other effects of defending potential and pending litigation and administrative actions against us may be difficult to determine and could materially adversely affect our business, financial condition, and results of operations.
Because there has been limited study on the effects of CBD, future nonclinical and clinical research studies and analysis of such studies by third parties, including government agencies, may lead to conclusions that dispute or conflict with our understandings and beliefs regarding the benefits, viability, safety, dosing, and social acceptance of CBD.
Research in the United States and internationally regarding the benefits, viability, safety, and dosing of isolated cannabinoids (such as CBD or THC) remains in relatively early stages. There have been few clinical trials on the benefits of CBD conducted on humans or animals, including studies focused on the consumption of CBD in foods.
Future research and clinical trials may draw opposing conclusions to statements contained in current articles, reports, and studies regarding CBD or could reach different or negative conclusions regarding the medical benefits, viability, safety, dosing, or other facts and perceptions related to CBD, which could adversely affect acceptance of CBD in foods and the demand for such products. Future research may also cause regulatory authorities to change how they enforce regulatory restrictions applicable to hemp and CBD. We cannot predict any negative research and clinical trial findings in the future that may have a material adverse impact on our business, financial condition, and results of operation.
Negative publicity from being in the hemp and CBD space could have a material adverse effect on our business, financial condition, and results of operations.
Hemp and marijuana are both varieties of the plant, Cannabis sativa L., except that hemp, as defined by federal law for exemption from Schedule I of the CSA, has a delta-9 THC concentration of not more than 0.3% on a dry weight basis. The same plant with a higher THC content is considered to be marijuana, which is legal for medical and recreational use under certain state laws, but which is not legal under federal law. The similarities between these plants can cause confusion, and our activities with hemp may be incorrectly perceived that we are involved in federally illegal marijuana activities.
Further, despite growing support for the cannabis industry and the legalization of marijuana in certain U.S. states, many individuals and businesses remain opposed to the cultivation and sale of cannabis and cannabis-derived products. Any negative publicity resulting from an incorrect perception that we operate in the marijuana space could result in a loss of current or future business. It could also adversely affect the public’s perception of us or our Common Stock and could lead to reluctance by new parties to do business with or to invest in us. We cannot assure you that additional business partners, including, but not limited to, financial institutions and distributors and resellers, will not attempt to end or curtail their relationships with us. Any such negative press or impacts to our business relationships could have a material adverse effect on our business, financial condition, and results of operations.
Our ability to deduct certain business expenses for income tax purposes is subject to uncertainty.
Section 280E of the Internal Revenue Code of 1986, as amended (the “Code”), prohibits the deduction of certain otherwise ordinary business expenses from carrying on any trade or business that consists of “trafficking” Schedule I or II controlled substances, as defined by the CSA. Under existing Internal Revenue Service guidance, the bulk of operating costs and general administrative costs of trades or businesses that are subject to Section 280E of the Code are not permitted to be deducted. Although the 2018 Farm Bill created a pathway under which hemp and its derivatives, including CBD, would no longer be a Schedule I controlled substance under the CSA, until the USDA implements regulations pursuant to the 2018 Farm Bill, we believe our ability to deduct certain ordinary business expenses requires compliance with the 2014 Farm Bill. We do not believe that Section 280E of the Code currently forbids our deduction of otherwise ordinary business expenses because we believe that we are in compliance with the 2014 Farm Bill and/or the products we sell are from co-packers and suppliers that are compliant with the 2014 Farm Bill. However, until the USDA promulgates regulations under the 2018 Farm Bill, governmentally determined non-compliance with the 2014 Farm Bill by us, our co-packers, or their suppliers may have a material adverse tax effect on us.
Risks Related to an Investment in Our Common Stock
There is currently a limited public market for our Common Stock; a trading market for our Common Stock may never develop; and our Common Stock prices may be volatile and could decline substantially.
Although from April 15, 2020 to March 14, 2022, our Common Stock was quoted on the OTCQB® Venture Market, an over-the-counter quotation system maintained by the OTC Markets Group Inc. (the “OTCM”), under the symbol “KGKG,” and, is currently quoted on the Pink® Open Market, there has been no material public market for our Common Stock. In the over-the-counter market, our stockholders may find it more difficult to obtain accurate quotations as to the market value of their shares of our Common Stock and may find fewer buyers to purchase their stock and fewer market makers to support its price than if our Common Stock were listed on a national securities exchange, such as the New York Stock Exchange, the NYSE American, or the Nasdaq Stock Market. As a result of these and other factors, investors may be unable to resell shares of our Common Stock at or above the price at which they purchased them, at or near quoted bid prices, or at all. Further, an inactive market may also impair our ability to raise capital by selling additional equity in the future, and may impair our ability to enter into strategic partnerships or acquire companies or products by using shares of our Common Stock as currency.
We intend to list shares of our Common Stock on a national securities exchange in the future; but, we do not now, and may not in the future, meet the initial listing standards of any national securities exchange, which often provides a more widely-traded and liquid market. Some, but not all, of the factors that may delay or prevent the listing of shares of our Common Stock on a national securities exchange include the following: our stockholders’ equity may be insufficient; the market value of our outstanding Common Stock may be too low; our net income from operations may be too low or not sustained for the requisite period of time; our Common Stock may not be sufficiently widely held; we may not be able to secure market makers for our Common Stock; and we may fail to meet other rules and requirements mandated by the several exchanges and markets to have our Common Stock listed. Should we fail to satisfy the initial listing standards of the national securities exchanges, or if our Common Stock is otherwise rejected for listing, and remains quoted on the Pink® Open Market or again is quoted on the OTCQB® Venture Market, the quoted price of our Common Stock could suffer and the trading market for our Common Stock may become less liquid and our Common Stock price may be subject to increased volatility.
Therefore, an active, liquid, and orderly trading market for our Common Stock may not initially develop or be sustained, which could significantly depress the public price of our Common Stock and/or result in significant volatility, which could affect your ability to sell your shares of our Common Stock. Even if an active trading market were to develop for our Common Stock, the market price of our Common Stock may be highly volatile and subject to wide fluctuations. Our financial performance, government regulatory action, tax laws, interest rates, and market conditions in general could have a significant impact on the future market price of our Common Stock.
We are not subject to the rules of a national securities exchange requiring the adoption of certain corporate governance measures and, as a result, our stockholders do not have the same protections.
Because our Common Stock was quoted on the OTCQB® Venture Market from April 15, 2020 to March 14, 2022, and currently, is quoted on the Pink® Open Market, we are not subject to the rules of a national securities exchange, such as the New York Stock Exchange, the NYSE-American, or the Nasdaq Stock Market. National securities exchanges generally require more rigorous measures relating to corporate governance that are designed to enhance the integrity of corporate management. The requirements of the OTCQB® Venture Market and the Pink® Open Market afford our stockholders fewer corporate governance protections than those of a national securities exchange. Until we comply with such greater corporate governance measures, even though such compliance is not required by the OTCM for quotations of shares of our Common Stock on the OTCQB® Venture Market or the Pink® Open Market, our stockholders will have fewer protections, such as those related to director independence, stockholder approval rights, and governance measures that are designed to provide oversight of a corporation’s management by its board of directors.
Our Common Stock is currently subject to the “penny stock” rules; accordingly, it could adversely affect the market price of our Common Stock and increase your transaction costs to sell those shares.
The SEC has adopted Rule 3a51-1, which defines a “penny stock” as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. Because the price of our Common Stock is less than $5.00 (and we do not meet any of the alternative exemptive criteria), our Common Stock is deemed to be a penny stock. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires that a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our Common Stock and cause a decline in the market value of our Common Stock.
Our stock price has been extremely volatile, which could cause the value of an investment in our Common Stock to decline.
The market price of our Common Stock has been extremely volatile and could be subject to significant fluctuations due to changes in sentiment in the market regarding our operations or business prospects, among other factors. The public price of our Common Stock following the date of this annual report also could be subject to wide fluctuations in response to the risk factors described in this annual report and others beyond our control, including:
● the number of shares of our Common Stock publicly owned and available for trading;
● industry trends and the business success of our competitors;
● actual or anticipated fluctuations in our quarterly financial and operating results and operating results that vary from the expectations of our management or of securities analysts and investors;
● our failure to meet the expectations of the investment community and changes in investment community recommendations or estimates of our future operating results;
● announcements of strategic developments, acquisitions, dispositions, financings, product developments, and other materials events by us or our competitors;
● regulatory and legislative developments related to our industry;
● litigation;
● general market conditions;
● other domestic macroeconomic factors unrelated to our performance;
● additions or departure of key personnel, including any major change in our Board of Directors (our “Board”) or management; and
● sales or expected sales of shares of our Common Stock by us, and our officers, directors, and significant stockholders.
In addition, the stock market in general has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of those companies. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources and harm our business, operating results, and financial condition.
Because we are a “smaller reporting company,” we will not be required to comply with certain disclosure requirements that are applicable to other public companies and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make our Common Stock less attractive to investors.
We are a “smaller reporting company,” as defined in Item 10(f)(1) of Regulation S-K. As a smaller reporting company, we are eligible for exemptions from various reporting requirements applicable to other public companies that are not smaller reporting companies, including, but not limited to:
● reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements, and registration statements;
● not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002; and
● reduced disclosure obligations for our annual and quarterly reports, proxy statements, and registration
statements.
We will remain a smaller reporting company until the end of the fiscal year in which (1) we have a public common equity float of more than $250 million, or (2) we have annual revenues for the most recently completed fiscal year of more than $100 million plus we have any public common equity float or public float of more than $700 million. We also would not be eligible for status as smaller reporting company if we become an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company.
Sales by our stockholders of a substantial number of shares of our Common Stock in the public market could adversely affect the market price of our Common Stock.
A substantial portion of the total outstanding shares of our Common Stock may be sold into the market at any time. Some of these shares are owned by our executive officers and directors, and we believe that such holders have no current intention to sell a significant number of shares of our stock. If all of the major stockholders were to decide to sell large amounts of stock over a short period of time, such sales could cause the market price of our Common Stock to drop significantly, even if our business were doing well.
Requirements associated with being a reporting public company will require significant company resources and management attention.
From and after December 31, 2020, we became subject to the reporting requirements of the Exchange Act and the other rules and regulations of the SEC relating to public companies. We are working with independent legal, accounting, and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as an SEC reporting company. These areas include corporate governance, internal control, internal audit, disclosure controls, and procedures and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas, including our internal control over financial reporting. However, we cannot provide assurances that these and other measures we may take will be sufficient to allow us to satisfy our obligations as an SEC reporting company on a timely basis. Further, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm.
In addition, compliance with reporting and other requirements applicable to SEC reporting companies will create additional costs for us, will require the time and attention of management, and will require the hiring of additional personnel and legal, audit, and other professionals. We cannot predict or estimate the amount of the additional costs we may incur, the timing of such costs, or the impact that our management’s attention to these matters will have on our business and operations.
Our management constitutes some of our largest stockholders, which will allow them to exert significant control over our business and affairs and have actual or potential interests that may depart from those of investors.
As of April 8, 2022, members of our management team beneficially owned approximately 33.12% of our Common Stock. As a result, management has the virtual unfettered ability to control substantially all matters submitted to our stockholders for approval including (i) election of our Board; (ii) removal of any of our directors; (iii) amendment of our Amended and Restated Certificate of Incorporation (our “A&R Certificate of Incorporation”) or our Amended and Restated Bylaws (our “A&R Bylaws”); and (iii) adoption of measures that could delay or prevent a change in control or impede a merger, takeover, or other business combination involving us.
In addition, management’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
Any investors will own a minority percentage of our Common Stock and will have minority voting rights.
Our preferred stock may have rights senior to those of our Common Stock, which could adversely affect holders of our Common Stock.
Our A&R Certificate of Incorporation gives our Board the authority to issue one or more additional series of our preferred stock without a vote or any action by our stockholders. Our Board also has the authority to determine the terms of those various series of our preferred stock, including price, preferences, and voting rights. The rights granted to holders of shares of our preferred stock in the future may adversely affect the rights of holders of shares of our Common Stock. Any such authorized series of preferred stock may have a liquidation preference - a pre-set distribution in the event of a liquidation of our Company - that would reduce the amount available for distribution to the holders of shares of our Common Stock or may have dividend rights superior to those provided to the holders of shares of our Common Stock, which could reduce the amount of available for distribution as dividends to holders of shares of our Common Stock. In addition, an authorized series of our preferred stock may have voting rights that are superior to the voting right of the holders of shares of our Common Stock.
We do not expect to pay any cash dividends in the foreseeable future.
We intend to retain our future earnings, if any, in order to reinvest in the development and growth of our business and, therefore, do not intend to pay dividends on our Common Stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board and will depend on our financial condition, results of operations, capital requirements, and such other factors as our Board deems relevant. Accordingly, investors may need to sell their shares of our Common Stock to realize a return on their investment, and they may not be able to sell such shares at or above the price paid for them.
We can sell additional shares of our Common Stock without approval of our stockholders and without offering shares to existing stockholders, which would result in dilution of existing stockholders’ interests in us and could depress our stock price.
Our A&R Certificate of Incorporation authorizes 2,500,000,000 shares of our Common Stock, of which 1,482,788,393 are issued and outstanding as of April 8, 2022; 1,200,000 shares of our Series B Preferred Stock, of which 488,000 shares are issued and outstanding as of April 8, 2022; 250 shares of our Series C Preferred Stock, of which no shares are issued and outstanding as of April 8, 2022; and 500,000 shares of our Series D Preferred Stock, of which 500,000 shares are issued and outstanding as of April 8, 2022, for an aggregate of 988,000 issued and outstanding shares of our preferred stock as of April 8, 2022, which shares of issued and outstanding shares of our preferred stock are convertible into an aggregate of 500,488,000 shares of our Common Stock. Although our Board intends to utilize its reasonable business judgment to fulfill its fiduciary obligations to our then-existing stockholders in connection with any future issuance of our capital stock, the future issuance of additional shares of our Common Stock or preferred stock convertible into shares of our Common Stock would cause immediate, and potentially substantial, dilution to our existing stockholders, which could also have a material effect on the market value of the shares. In addition, the exercise price of any convertible debt securities or the conversion price of any convertible equity securities we may sell and issue in the future could be significantly lower than the market price of our Common Stock on the respective issuance, exercise, or conversion date. Alternatively, we could issue equity securities at a significant discount to the market price of our Common Stock on the issuance date, the occurrence of any of such events could have a material adverse effect on the market price of our Common Stock.
Further, shares of our Common Stock do not have preemptive rights, which means that we can sell shares of our Common Stock to other persons without offering the holders of shares of our Common Stock, or the purchasers in this offering, the right to purchase their proportionate share of such offered shares. Therefore, any additional sales of our capital stock by us could dilute an existing stockholder’s ownership interest in us.
We are an emerging growth company and a smaller reporting company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies and smaller reporting companies will make our Common Stock less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act, enacted in April 2012. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the SOX Act, reduced disclosure obligations regarding executive compensation in this annual report and our periodic reports and proxy statements, and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years following the year in which we complete this offering, although circumstances could cause us to lose that status earlier. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which requires the market value of our Common Stock that is held by non-affiliates to exceed $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected to “opt out” of this exemption and, therefore, we will adopt new or revised accounting standards at the time public companies adopt the new or revised accounting standards and, therefore, we will adopt new or revised accounting standards at the time private companies adopt the new or revised accounting standards.
Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to continue to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the SOX, and reduced disclosure obligations regarding executive compensation in this annual report and our periodic reports and proxy statements, to the extent we are required to make such filings. We cannot predict if investors will find our Common Stock less attractive because we may rely on these exemptions. If some investors find our Common Stock less attractive as a result, there may be a less active trading market for our Common Stock and our stock price may be more volatile.
Provisions in our A&R Certificate of Incorporation and A&R Bylaws and Delaware law may discourage a takeover attempt even if a takeover might be beneficial to our stockholders.
Provisions contained in our A&R Certificate of Incorporation and A&R Bylaws could make it more difficult for a third party to acquire us. Provisions in our A&R Certificate of Incorporation and A&R Bylaws impose various procedural and other requirements, which could make it more difficult for stockholders to effect certain corporate actions. For example, our A&R Certificate of Incorporation authorizes our Board to determine the rights, preferences, privileges, and restrictions of unissued series of our preferred stock without any vote or action by our stockholders. Thus, our Board can authorize and issue shares of our preferred stock with voting or conversion rights that could dilute the voting power of holders of other series of our capital stock. These rights may have the effect of delaying or deterring a change of control of us. Additionally, our A&R Certificate of Incorporation and/or A&R Bylaws establish limitations on the removal of directors and on the ability of our stockholders to call special meetings and include advance notice requirements for nominations for election to our Board and for proposing matters that can be acted upon at stockholder meetings.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”), which prohibits an “interested stockholder” owning in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which such stockholder acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
See “Description of Securities - Anti-Takeover Effects of Provisions of Our A&R Certificate of Incorporation, Our A&R Bylaws and Delaware Law.” These provisions could limit the price that certain investors might be willing to pay in the future for shares of our Common Stock.
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.
Our A&R Certificate of Incorporation provides that we will indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law. In addition, as permitted by Section 145 of the DGCL, our A&R Certificate of Incorporation provides that:
● We will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful.
● We may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law.
● We are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification.
● The rights conferred in our A&R Certificate of Incorporation are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees, and agents and to obtain insurance to indemnify such persons.
● We may not retroactively amend our A&R Certificate of Incorporation or indemnification agreement, if any, to reduce our indemnification obligations to directors, officers, employees, and agents.
We previously effected a dividend distribution of common stock of Elev8 Hemp, as our wholly-owned subsidiary, and Branded Legacy, Inc., formerly known as Elev8 Brands, Inc. and, prior to that, known as PLAD, Inc. (“Branded Legacy”), which may have violated Section 5 of the Securities Act.
The shares of common stock of Branded Legacy that we distributed to our stockholders were not registered under the Securities Act, and we may not have fully complied with SEC Legal Bulletin No. 4, which requires a company to satisfy five conditions in connection with the spin-off. As a result, we may have violated Section 5 of the Securities Act in that we did not file a registration statement with the SEC and have the same declared effective by the SEC prior to distributing the shares of Branded Legacy common stock. In addition, it is possible that the SEC could commence an enforcement action against us. For additional information regarding the dividend distribution, see “Management’s Discussion and Analysis and Results of Operations - Liquidity and Capital Resources” for additional information.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
We currently lease 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.
Through our subsidiary, Gold Leaf, we also lease 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. Beginning in April 2022, our monthly rent includes monthly base payments of $10,200, plus applicable monthly CAM fees (Common Area Maintenance). Gold Leaf leases an additional 10,000 square foot distribution hub in Conway, South Carolina. The lease is for a 62-month that commenced in October 2021. Our monthly rent is approximately $7,261. We believe our office space, warehouse space, and distribution facilities are sufficient to meet our current needs.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
We may be subject to legal proceedings and claims which arise in the ordinary course of our business. Although occasional adverse decisions or settlements may occur, we believe that the final disposition of such matters should not have a material adverse effect on our financial position, results of operations, or liquidity.
As of the date of this Annual Report, we were not a party to any legal proceedings that could have a material adverse effect on our business, financial condition, or operating results. Further, to our knowledge, no other proceedings have been initiated or threatened against us.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Recent Sales of Unregistered Securities
On March 25, 2022, we issued a secured debenture in the principal amount of $250,000, which matures on March 24, 2023, and bears interest at the rate of 0.97 percent per annum. The debenture is secured by 9 identified motor vehicles of Gold Leaf.
Market Information
As of April 8, 2022, our Common Stock is quoted on the Pink® Open Market under the symbol “KGKG.” From April 15, 2020 to March 14, 2022, our Common Stock was quoted on the OTCQB® Venture Market.
The table below sets forth the high and low closing prices of our Common Stock during the periods indicated, as reported by the OTCM. The market quotations reflect inter-dealer prices, without retail mark-up, markdown, or commissions and may not reflect actual transactions.
Price Range Price Range Price Range
High Low High Low High Low
First Quarter $ 0.0100 $ 0.0033 $ 0.0523 $ 0.0260 $ 0.0710 $ 0.0260
Second Quarter (1) $ 0.0211 $ 0.0085 $ 0.0337 $ 0.0231 $ 0.0257 $ 0.0505
Third Quarter $
$ 0.0245 $ 0.0150 $ 0.0441 $ 0.0225
Fourth Quarter $
$ 0.0168 $ 0.0052 $ 0.0340 $ 0.0159
(1) Seecond quarter through April 8, 2022.
Holders
On April 8, 2022 there were approximately 96 holders of record of our Common Stock. This does not include an indeterminate number of persons who hold our Common Stock in brokerage accounts and otherwise in “street name.” As of such date, 1,482,788,393 shares of our Common Stock were issued and outstanding.
Dividends
We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our Common Stock for the foreseeable future. Any future determination related to dividend policy will made at the discretion of our Board.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations and financial condition for the years ended December 31, 2021 and 2020 should be read in conjunction with the financial statements and related notes and the other financial information that are included elsewhere in this Annual Report. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. We disclaim any obligation to update forward-looking statements. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” and “Description of Business” sections in this Annual Report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. We and our representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this Annual Report and other filings with the SEC, reports to our stockholders, and news releases. All statements that express expectations, estimates, forecasts, or projections are forward-looking statements. In addition, other written or oral statements which constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “project,” “forecast,” “may,” “should,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by such forward-looking statements.
We undertake no obligation to update or revise any of the forward-looking statements after the date of this Annual Reports to confirm forward-looking statements to actual results. Important factors on which such statements are based are assumptions concerning uncertainties, including, but not limited to, uncertainties associated with the following:
● Inadequate capital and barriers to raising the additional capital or to obtaining the financing needed to implement our business plans;
● Our failure to earn revenues or profits;
● Volatility or decline of our stock price;
● Potential fluctuation in our financial results;
● Rapid and significant changes in markets;
● Litigation with or legal claims and allegations by outside parties;
● Impacts from the COVID-19 pandemic; and
● Insufficient revenues to cover operating costs.
The following discussion should be read in conjunction with the financial statements and the notes thereto which are included in this Annual Report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ substantially from those anticipated in any forward-looking statements included in this discussion as a result of various factors.
Results of Operations
Overview
Our business has grown rapidly since inception in 2015, and we anticipate that our business will continue to grow significantly. In the year ended December 31, 2021, the Company saw an increase in growth compared to fiscal year 2020, as distribution by our current distributors and new distributors, who were, and whose clients were, affected by COVID-19 had resumed and saw fewer COVID-19 pandemic-related distribution impacts. The Company acquired S and S in early 2021, which increased our product variety, resulting in the commencement of new distribution contracts. In the prior fiscal year 2020, the Company had unforeseen delays in signing more favorable agreements with larger, reputable tier 1 and mid-size distributors and grocery chains and we were additionally impacted by the COVID-19 pandemic during the fiscal year. The COVID-19 pandemic delayed our launch of a variety of new products during most of the 2020 fiscal year - drinks and non-drink line broadening items.
We derive our revenue from sales of our products to online consumers, to resellers, and to distributors, Product sales to resellers include sales to convenience stores, grocery stores, and smoke and gift shops that complement our current product offering. Product sales to distributors include our energy drinks, our HighDrate CBD-infused energy waters, and our apparel, such as t-shirts and hats. In early 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 addition of a second distribution center.
We have experienced and expect to continue to experience substantial growth in our operations as we seek to expand through additional products and acquisitions that complement our current product offerings. We expect that revenue will increase in fiscal year 2022 compared to fiscal year 2021, as distribution by our current distributors, who were, and whose clients were, affected by COVID-19 has resumed and we expect to see fewer COVID-19 pandemic-related distribution impacts for fiscal year 2022. Based on those expectations, we now anticipate signing more favorable agreements with larger, reputable tier 1 and mid-size distributors, big box stores, and grocery chains. The following is a more detailed discussion of our financial condition and results of operations for the period presented.
Year ended December 31, 2021 compared to Year ended December 31, 2020
Overview
As reflected in the accompanying financial statements, during the year ended December 31, 2021, we incurred a net loss of approximately $7.0 million and used cash in operations of approximately $2.7 million, compared to a net loss of approximately $3.1 million and use of cash in operations of approximately $1.4 million for the year ended December 31, 2020. As of December 31, 2021, we had a stockholders’ deficit of approximately $4.1 million.
The following is a more detailed discussion of our financial condition and results of operations for the period presented, along with prior periods.
Revenue
The following table presents our net revenues, by revenue source, and the period-over-period percentage change, for the period presented:
Year Ended December 31,
Revenue Source Revenue Revenue % Change
Distributors $ 895,850 $ 438,745 104 %
Amazon 154,240 87,965 75 %
Online Sales 68,073 55,190 23 %
Retail 1,420,747 332,371 327 %
Shipping 17,305 24,663 (30 )%
Sales Returns and Allowances (77,479 ) (28,707 ) 170 %
Net Revenues $ 2,478,736 $ 910,227 172 %
The following table presents our revenues by product lines for the period presented:
Year Ended December 31,
Product Line Revenue Revenue % Change
Hemp Energy Drinks $ 362,096 $ 384,300 (6 )%
CBD Energy Waters 133,110 195,050 (32 )%
Lemonade Drinks 621,331 - 100 %
Apparel 1,626 2,550 (36 )%
Retail 1,420,747 332,371 327 %
Shipping 17,305 24,663 (30 )%
Sales returns and allowance (77,479 ) (28,707 ) 170 %
Net Revenues $ 2, 478,736 $ 910,227 172 %
During the year ended December 31, 2021, we reported net revenues of approximately $2.5 million, which is an increase of approximately $1.6 million, or approximately 172%, compared to net revenues of approximately $910,200 for the year ended December 31, 2020. An increase of approximately $536,300 of our revenue is attributable to increased product sales, while our retail revenue increased in net revenue by approximately $1.1 million. We attribute the increase in sales of our products to our current distributors and new distributors, who had been, and whose clients had been, affected by COVID-19. We saw that those distributors had resumed a more normalized business practice and we and they saw fewer COVID-19 pandemic-related distribution impacts. Additionally, we broadened our product line to include Ooh La Lemin lemonade through an acquisition in early 2021, which resulted in signing more favorable agreements with larger, reputable tier 1 and mid-size distributors and grocery chains. The significant increase in our retail revenue is attributed to customers, who had been, and whose clients had been, affected by COVID-19. We also saw here that retail sales and distribution had resumed a more normalized practice and we and they saw fewer COVID-19 pandemic-related impacts. Additionally, the Company attributes the increase to our retail revenue to an increase in the Company’s sales team and the addition of a second distribution hub. We expect that our product revenue will increase in fiscal year 2022 compared to fiscal year 2021, we anticipate as the Company anticipates signing more favorable agreements with larger, reputable tier 1 and mid-size distributors, big box stores, and grocery chains. In addition, we anticipate that our retail revenue will continue to increase as we broaden our customer base with increased distribution to additional grocery and convenience chains.
Cost of Revenues
Cost of revenues consists primarily of expenses associated with products sold to distributors and resellers, including product and shipping costs. Costs also include credit card fees, fees incurred for sales that occur on Amazon.com, and other transaction fees related to the processing of consumer transactions. Typically, we expect that the cost of revenues will increase as a direct correlation to increases in sales. Thus, our cost of revenues increases on an absolute basis versus on a percentage of sales basis. At the same time, when sales increase, thereby increasing our orders with our co-packers, our cost of products decreases because of the volume discounts we receive from our co-packers.
During the year ended December 31, 2021, we reported cost of revenues of approximately $2.14 million, which is an increase of approximately $1.5 million, or approximately 228%, compared to approximately $654,200 for the year ended December 31, 2020. This increase is attributed to an increase in sales in both our products and retail distribution in 2021, compared to the prior year period. The cost of revenues increase was larger than the increase in revenues. This is primarily attributed to increased costs in obtaining our ingredients for our products, for production of our products, and for shipping our products. We expect that we will continue, to see an increased cost of revenues in fiscal year 2022, primarily due to an anticipated increase in revenues. In addition, as the cost of shipping our products continues to remain elevated, we also anticipate increased costs for obtaining our ingredients for our products, increased costs for production of our products, and increased costs of shipping our products. We continue to seek alternative methods to reduce costs for production and the cost of shipping our products in fiscal year 2022.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses (“SG&A”) expenses consist primarily of professional fees, salaries and wages, advertising, rent, travel expenses, sponsorships, and general office and administrative expenses related to maintaining our facilities.
Selling, General and Administrative Expenses (“SG&A”) expenses consist primarily of professional fees, salaries and wages, advertising, rent, travel expenses, sponsorships, and general office and administrative expenses related to maintaining our facilities. Selling, general and administrative expenses increased in the year ended December 31, 2021, to $3.4 million from $2.6 million, an increase of $769,055 over the same period last year. The increase was driven by increased operating expenses associated with our acquisition of S&S, advertising and marketing, travel expenses, and licensing and filing fees, partially offset by lower legal settlements and stock compensation. We expect that as we expand our business operations, SG&A expenses will continue to increase.
We expect that as we expand our business operations and continue to incur additional corporate-related expenses associated with our status as a fully registered issuer with the SEC under the Securities Exchange Act of 1934, SG&A expenses will continue to increase.
Impairment of Goodwill
Impairment of goodwill for the year ended December 31, 2021 was $1.3 million. In December 2021, we determined that our goodwill asset was impaired and recorded an impairment charge accordingly. (See Note 5 to the accompanying consolidated financial statements). No similar activity occurred during the current year period.
Other Income and Expenses
Other expense for the year ended December 31, 2021 was $2.6 million, as compared to other expense of $766,821 for the year ended December 31, 2020. The change in balance was due to the recording of financing costs of $1,335,000, a loss on extinguishment of debt of $1,056,732, offset by a gain on forgiveness of PPP loans of $212,648 during the year ended December 31, 2021, all of which did not exist in the prior year period. Additionally, we realized the change in the fair value of derivative liability of $910,866, and the change in interest expense of $563,419, as compared to the prior year period.
Net Loss
We incurred a net loss of approximately $7.0 million for the year ended December 31, 2021, an increase of approximately $3.9 million compared to the previous year ending December 31, 2020, in which we incurred a net loss of approximately $3.1 million. This net loss is primarily due to our increase in gross profit, offset by increased SG&A expenses, the impairment of goodwill charge associated with our 2021 acquisition, and the increase in other expenses, as discussed above.
Liquidity and Capital Resources
Going Concern
We have incurred operating losses since inception and have negative cash flow from operations since inception. As of December 31, 2021, we had a stockholders’ deficit of approximately $4.1 million and we incurred a net loss of approximately $7.0 million during the year ended December 31, 2021. We also utilized cash in operations of approximately $2.7 million during the year ended December 31, 2021. 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.
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.
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 December 31, 2021 and 2020, the line of credit had an outstanding principal balance of $0 and $398,470, respectively, and accrued interest of $0 and $32,102, respectively.
Line of Credit - Related Party
Line of credit with related party consists of the following at December 31, 2021 and 2020:
December 31,
December 31,
Line of credit to related party $ 1,352,651 $ 1,369,651
Line of credit to related party 125,500 125,500
Total $ 1,478,151 $ 1,495,151
(a) On April 4, 2019, Kona entered into a Line of Credit Agreement with Robert Clark. The agreement established a revolving line of credit in the amount of up to $1,500,000. Advances under this line of credit bear interest at the rate of 3.75 percent per annum. The line of credit matures on April 4, 2023, at which time all outstanding principal amounts and accrued interest are due and payable. At December 31, 2021 and December 31, 2020, outstanding principal was $1,352,651 and $1,369,651, respectively.
(b) On August 29, 2019, Gold Leaf entered into a Line of Credit Agreement with Robert Clark. 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 December 31, 2021 and December 31, 2020, outstanding principal was $125,500 and $125,500, respectively.
At December 31, 2020, accrued interest on the notes payable to related parties was $39,942. During the year ended December 31, 2021, the Company added $55,930 of additional accrued interest, leaving an accrued interest on the notes payable to related parties balance of $95,873 at December 31, 2021.
Loan Payable
On August 21, 2021, the Company financed the purchase of a vehicle for $34,762, 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 $1,994, and secured by the purchased vehicle. During the twelve months ended December 31, 2021, the Company made principal payments of $1,450, leaving a loan balance of $33,312 at December 31, 2021, of which $7,974 was recorded as the current portion of loan payable on the accompanying balance sheet.
Notes Payable - Related Party
Notes payable to related parties consists of the following at December 31, 2021 and 2020:
December 31,
December 31,
Notes payable to related party (a) $ - $ 8,500
Notes payable to related party (b) 53,500 59,500
Total loans payable 53,500 68,000
Notes payable to related party, current portion (6,000 ) (12,000 )
Notes payable to related party, net of current portion $ 47,500 $ 56,000
(a) On October 31, 2018, Kona Gold LLC issued a Standard Promissory Note in favor of Robert Clark, as lender, in the original principal amount of $20,000. 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 February 2019, with the final payment due in April 2021. At December 31, 2020 the balance of this note was $8,500. At December 31, 2021, this note had been paid in full.
(b) On February 19, 2019, Gold Leaf issued a Standard Promissory Note in favor of Robert Clark, as lender, in the original principal amount of $70,000. 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, 2021, Gold Leaf issued an Amendment to the original issued Standard Promissory Note in Favor of Robert Clark for the remaining outstanding principle of $58,000. Principal payment of $500 per month, with final payment due in March 2022. The outstanding principal balance of this note at December 31, 2021 and December 31, 2020 was $53,500 and $59,500, respectively.
Convertible Secured Debentures
During the year ended December 31, 2021, we 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, we granted to the Selling Stockholder warrants to purchase up to 150 million shares of our common stock. The warrants are exercisable at $0.03 per share. Fifty million o f 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 to 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. During the year ended December 31, 2021, we amortized debt discount of $775,000 to interest expense.
Secured Debenture
On March 25, 2022, we issued a secured debenture in the principal amount of $250,000, which matures on March 24, 2023, and bears interest at the rate of 0.97 percent per annum. The debenture is secured by 9 identified motor vehicles of Gold Leaf.
Cash Flows
In summary, our use of cash has been as follows:
For the Year Ended December 31,
Net cash used in operating activities $ (2,730,596 )
Net cash used in investing activities $ (198,382 )
Net cash provided by financing activities $ 3,519,635
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 compensation, interest expense related to the Warrant issued in the Private Placement, and the effect of changes in working capital and other activities. Cash used in operating activities for the year ended December 31, 2021 was approximately $2.7 million and consisted of a net loss of approximately $7.0 million, adjustments for non-cash items, including adjustments related to the issuance of shares of our Common Stock for services, financing costs related to the convertible debt, amortization of debt discount, impairment of goodwill, loss on extinguishment of debt, gain on change in fair value of derivative liabilities, gain on the extinguishment of PPP loan, and depreciation, which in the aggregate total approximately $4,455,363, and approximately $165,822 used in working capital and other activities.
Investing Activities
Cash used in investing activities for year ended December 31, 2021 was approximately $198,382 and was attributable to capital expenditures and changes in intellectual property.
Financing Activities
Cash provided by financing activities for year ended December 31, 2021 was approximately $3.5 million and was due to changes in convertible debt of approximately $4.3 million, changes in PPP note payable of $117,487, and changes in note payable for acquisition of approximately $463,932, and approximately $415,470 was used to pay lines of credit, approximately $7,499 was used to pay finance lease obligations, and approximately $15,951 was used to pay note payables.
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 year ended December 31, 2021. 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.
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 14, Lease Liabilities, to our consolidated financial statements for the year ended December 31, 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 adopted 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.
During the year, the Company consolidated and restructured its operations. The Company now operates in one segment for the manufacture and distribution of our products and those of otherwise unrelated beverage products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements.
Our revenue earned is recognized when we satisfy a single performance obligation by transferring control of our products to a customer. We have determined that disaggregated revenue by net sales by revenue source would be meaningful and allow investors to understand our business activities, historical performance, or future prospects. Disaggregated sales by revenue source, which includes sales to distributors, online sales, sales through Amazon, and distribution sales. This is the same information used by our Chief Operating Decision Maker for evaluating the financial performance of our operations and making resource decisions. We also sell merchandise and apparel that comprises approximately 1% of our gross annual sales, and solely exists to promote our beverages. Merchandise and apparel sales are included with the gross sales for our one operating segment.
Accounts Receivable and Allowance for Doubtful Account Receivable
Accounts receivable are recorded at net realizable value. We determine provisions for uncollectible accounts, sales returns, and claims based upon factors including the credit risk and activity of specific distributors 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. In the opinion of management, a provision was deemed necessary for uncollectible accounts.
Inventory
The cost of inventory using the standard cost method, which approximates actual cost based on a first-in, first-out method. Our inventories are valued at the lower of cost or net realizable value. Our inventory consists almost entirely of finished and unfinished goods, and freight, which include CBD energy waters, CBD waters, hemp energy drinks, lemonade drinks, cans for production, merchandise and apparel, and other beverage and non-beverage products that complement the Company’s current product offering. We periodically evaluate and adjust inventories for obsolescence. The shelf life of all beverage inventory is two and one-half years, and as of December 31, 2021, we had approximately $574,800 of product in inventory, net of a reserve for obsolescence of $150,000, which was a decrease of approximately $85,700, compared to approximately $660,500 and no reserve for obsolescence 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 Inventory, of our consolidated financial statements for the year ended December 31, 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 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 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 Goodwill and Intangible Assets, of our consolidated financial statements for the year ended December 31, 2021, for an additional description of intangible assets that had a material effect on our consolidated 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 2021 and 2020 fiscal years, we recognized stock-based compensation expense of approximately $213,800, and $476,000, respectively. See Note 16, Share-Based Compensation, of our consolidated financial statements for the year ended December 31, 2021 for an additional description of our stock-based compensation that had a material effect on our consolidated financial statements.
Emerging Growth Company Status
On April 5, 2012, the JOBS Act, was enacted. The JOBS Act provides that, among other things, an “emerging growth company” can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. As an emerging growth company, we have irrevocably elected to take “opt out” of taking advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth public companies on a case-by-case basis.
We intend to rely on certain of the other exemptions and reduced reporting requirements provided by the JOBS Act. As an emerging growth company, we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b), and (ii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis).
We will remain an emerging growth company until the earlier to occur of (1) the last day of our fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenues of at least $1.07 billion, or (c) in which we are deemed to be a “large accelerated filer” under the rules of the SEC, which means the market value of our common shares that is held by non-affiliates exceeds $700 million as of the last day of our second quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
We are also a “smaller reporting company” meaning that the market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
Recently Issued Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies to our consolidated financial statements for the year ended December 31, 2021 for a discussion of recent accounting pronouncements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, the Company is not required to provide the information required by this Item 7A.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements of Kona Gold Beverage, Inc.
Report of Independent Registered Public Accounting Firm (PCAOB ID NO: 572)
Report of Independent Registered Public Accounting Firm (PCAOB ID NO:504)
Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020
Consolidated Statements of Loss for the year ended December 31, 2021 and 2020
Consolidated Statements of Stockholders’ Deficit for the year ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the year ended December 31, 2021 and 2020
Notes to the Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Kona Gold Beverage, Inc
Melbourne, Florida
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Kona Beverage, Inc. and Subsidiaries (the “Company”) as of December 31, 2021, the related consolidated statements of operations, shareholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has experienced recurring operating losses and negative operating cash flows since inception, and has a stockholders’ deficit as of December 31, 2021. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
We have served as the Company’s auditor since 2021.
/s/Weinberg & Company, P.A.
Weinberg & Company, P.A.
Los Angeles, California
April 13, 2022
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of Kona Gold Beverage, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Kona Gold Beverage, Inc. as of December 31, 2020, the related statements of operations, stockholders’ equity (deficit), and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 19 to the financial statements, the Company’s significant operating losses raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S BF Borgers CPA PC
BF Borgers CPA PC
We have served as the Company’s auditor from 2018 to 2022
Lakewood, CO
April 14, 2021
Kona Gold Beverage, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEET
December 31,
December 31,
ASSETS
CURRENT ASSETS
Cash $ 703,825 $ 113,168
Accounts receivable, net of allowance for doubtful accounts of $11,926 and $3,967, respectively 15,993 -
Inventory, net of reserve for obsolescence of $150,000 and $0, respectively 574,811 660,504
Prepaids 278,707 -
Other current assets 30,373 20,448
Total current assets 1,603,709 794,120
NON-CURRENT ASSETS
Property, plant and equipment, net 348,037 167,872
Right-of-use asset, net 966,955 912,993
Intangible property, net 75,955 69,488
Deposits 15,125 6,500
Total assets $ 3,009,781 $ 1,950,973
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 541,123 $ 309,692
Amounts owed to customers - 10,508
Accrued compensation 329,583 257,500
Current loan payable 7,974 -
Current note payable - related party 6,000 12,000
Current acquisition obligations 60,000 -
Current lease liabilities 213,837 149,407
Convertible debt, net of discount of $2,150,067 and $0, respectively 849,933 900,000
Derivative liability 2,121,000 361,152
Total current liabilities 4,129,450 2,000,259
NON-CURRENT LIABILITIES
Line of credit - 398,470
Line of credit - related party 1,478,151 1,495,151
Loan payable, net of current 25,338 -
Note payable - related party, net of current 47,500 56,000
Acquisition obligations 615,317 -
PPP notes payable - 95,161
Lease liabilities, net of current 838,883 763,586
Total liabilities 7,134,639 4,808,627
COMMITMENTS AND CONTINGENCIES
-
STOCKHOLDERS’ DEFICIT
Preferred Stock Series A, $.00001 par value, 4,000,000 shares authorized, 0 and 0 issued, and outstanding, respectively - -
Preferred Stock Series B, $.00001 par value, 1,200,000 shares authorized, 488,000 issued and outstanding, respectively
Preferred Stock Series C, $.00001 par value, 250 shares authorized, 0 and 140 issued, and outstanding, respectively - -
Preferred Stock Series D, $.00001 par value, 500,000 shares
authorized, 500,000 issued, and outstanding, respectively
Preferred stock value
Common Stock, $.00001 par value, 2,500,000,000 authorized, 1,004,709,546 and 786,308,041, issued and outstanding, respectively 10,047 7,863
Common stock issuable (170,000,000 and 170,000,000 shares) 1,386,497 1,386,497
Additional paid-in capital 10,778,761 5,028,012
Accumulated deficit (16,300,173 ) (9,280,036 )
Total stockholders’ deficit (4,124,858 ) (2,857,654 )
Total liabilities and stockholders’ deficit $ 3,009,781 $ 1,950,973
See notes to consolidated financial statements
Kona Gold Beverage, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
December 31,
REVENUES, NET $ 2,478,736 $ 910,227
COST OF REVENUES 2,143,359 654,177
Gross profit 335,377 256,050
OPERATING EXPENSES
Selling, general and administrative expenses 3,383,879 2,614,824
Impairment of goodwill 1,337,287 -
Loss from operations (4,385,789 ) (2,358,774 )
Other income / (expense)
Interest expense (982,378 ) (418,959 )
Financing costs (1,335,000 ) -
Change in the fair value of derivative liability 549,714 (361,152 )
Loss on extinguishment of debt (1,056,732 ) -
Gain on forgiveness of SBA PPP loan 212,648 -
EIDL advance - 7,000
Other income (expense) (22,600 ) 6,290
Net Loss $ (7,020,137 ) $ (3,125,595 )
NET LOSS PER COMMON SHARES:
Basic and diluted $ (0.01 ) $ (0.00 )
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic and diluted 875,322,747 775,469,306
See notes to consolidated financial statements
Kona Gold Beverage, Inc. and Subsidiary
STATEMENTS OF STOCKHOLDERS’ DEFICIT
Common Stock Preferred Stock
Common Shares Additional
Total
$.00001 Par $.00001 Par
Issuable
Paid Accumulated Stockholders’
Shares Amount Shares Amount
Shares
Amount
in Capital Deficit Deficit
Balance December 31, 2019 763,967,603 $ 7,639 4,988,000 $ 50
170,000,000
$ 1,386,497
$ 4,155,777 $ (6,154,441 ) $ (604,478 )
Common Stock Issued for Compensation 10,000,000
475,900
476,000
Common Stock Issued for Sponsorship Agreements 85,000
2,577
2,578
Warrants related to convertible
debenture
281,565
281,565
Common Stock Conversion to Preferred Stock (140 ) (0 )
-
Preferred Stock Conversion to Common Stock 4,000,000 (4,000,000 ) (40 )
-
-
-
-
Accrued Common Stock Issues for Compensation
-
-
Common Stock Issued for Conversion of Convertible Debt and Accrued Interest 8,255,438
112,191
112,274
Net loss
(3,125,595 ) (3,125,595 )
Balance December 31, 2020 786,308,041 $ 7,863 988,140 $ 10
170,000,000
$ 1,386,497
$ 5,028,012 $ (9,280,036 ) $ (2,857,654 )
Balance 786,308,041 $ 7,863 988,140 $ 10
170,000,000
$ 1,386,497
$ 5,028,012 $ (9,280,036 ) $ (2,857,654 )
Common Stock Issued for Compensation 8,100,000
213,719
213,800
Common Stock issued for acquisition 9,000,000
242,910
243,000
Warrants related to convertible
debenture
1,583,000
1,583,000
Preferred Stock Conversion to Common Stock (140 ) (0 )
-
-
-
-
Common Stock Issued for Conversion of Convertible Debt and Accrued Interest 201,301,365 2,013
-
-
3,711,120
3,713,133
Net loss
(7,020,137 ) (7,020,137 )
Balance December 31, 2021 1,004,709,546 $ 10,047 988,000 $ 10
170,000,000
$ 1,386,497
$ 10,778,761 $ (16,300,173 ) $ (4,124,858 )
Ending balance 1,004,709,546 $ 10,047 988,000 $ 10
170,000,000
1,386,497
$ 10,778,761 $ (16,300,173 ) $ (4,124,858 )
See notes to consolidated financial statements
Kona Gold Beverage, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
CASH USED IN OPERATING ACTIVITIES:
Net loss $ (7,020,137 ) $ (3,125,595 )
Adjustments to reconcile net loss to net cash provided by operations:
Depreciation and amortization 58,713 40,206
Right-of-use asset amortization 291,697 -
Amortization of debt discount 774,496 -
Increase in inventory reserve 150,000 -
Impairment of goodwill 1,337,287 -
Financing costs 1,335,000 -
Loss on extinguishment of debt 1,056,732 -
Gain on change in fair value of derivative liabilities (549,714 ) -
Gain on forgiveness of PPP loan (212,648 ) -
Interest expense related to warrants on convertible debt - 281,565
Common stock issued for sponsorship - 2,578
Common stock issued for compensation 213,800
476,002
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 16,768 73,581
Decrease (increase) in inventory 185,339 26,418
Decrease (increase) in prepaids (278,707 ) -
Decrease (increase) in other current assets (9,925 ) (2,109 )
Decrease (increase) in right-of-use asset - (580,820 )
Decrease (increase) in deposits (8,625 ) -
Increase (decrease) in accounts payable and accrued expenses 66,186 263,576
Increase (decrease) in amounts due to customer (10,508 ) -
Increase (decrease) in accrued compensation 72,083 257,500
Increase (decrease) in derivative liability - 361,152
Increase (decrease) in lease liability (198,433 ) 555,822
Net cash used in operating activities (2,730,596 ) (1,370,124 )
CASH USED IN INVESTING ACTIVITIES:
Purchase of purchase property, plant and equipment (194,792 ) (59,541 )
Changes in intellectual property (3,590 ) 8,175
Net cash used in investing activities (198,382 ) (51,366 )
CASH PROVIDED BY FINANCING ACTIVITIES:
Repayment of note payable - related party (14,500 ) (12,000 )
Changes in line of credit - related party (17,000 ) 403,000
Changes in line of credit (398,470 ) -
Payment of acquisition obligations (463,932 ) -
Repayment of loan payable (1,451 ) -
Principal repayments of finance lease obligation (7,499 ) -
Proceeds from convertible debentures payable, net of expenses 4,305,000 1,012,274
Proceeds from PPP notes payable 117,487 95,161
Net cash provided by financing activities 3,519,635 1,498,435
Net cash increase for period 590,657 76,945
Cash at beginning of period 113,168 36,223
Cash at end of period $ 703,825 $ 113,168
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 22,600 $ -
Cash paid for interest $ 120,740 $ 35,877
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for acquisition of S&S $ 243,000 $ -
Recording of right of use asset and lease liability $ 345,659 $ -
Fair value of derivative liability created upon issuance of convertible debenture and warrants $ 3,982,000 $ -
Common shares issued on conversion of debentures and accrued interest $ 3,713,133 $ 112,274
Issuance of loan payable for vehicle purchase $ 34,763 $ -
See notes to consolidated financial statements
Kona Gold Beverage, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND LIQUIDITY
The Company was formerly known as Kona Gold Solutions, Inc., and in October 2020, changed its name to Kona Gold Beverage, Inc., a Delaware corporation (“Kona Gold,” the “Company,” “we,” “us,” or “our”). The Company owns and operates a line of premier CBD lifestyle brand products. As of December 31, 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”), and Gold Leaf Distribution LLC, a Florida limited liability company (“Gold Leaf”). In January 2021, the Company acquired all of the capital stock of S and S Beverage, Inc. The Company is primarily focused on product development in the functional beverage sector. Kona Gold creates hemp-infused energy drinks, which includes hemp energy drinks, CBD energy water, and also sells Kona Gold merchandise and apparel, which promotes the Company’s beverages. HighDrate focuses on the development and marketing of CBD-infused energy waters geared to the fitness and wellness markets. Gold Leaf focuses on the distribution of premium beverages and snacks in key markets.
The Company currently sells its products through resellers, the Company’s websites, and distributors that span across nine states. The Company’s products are available in wide variety of stores, including convenience and grocery stores, smoke shops, and gift shops.
As used herein, the terms “Kona Gold,” the “Company,” “we,” “us,” or “our, refer to Kona Gold individually or, as the context requires, collectively with its subsidiaries on a consolidated basis.
Effects of COVID-19
In January 2020, the WHO announced a global health emergency because of a new strain of coronavirus (known as COVID-19) that originated in Wuhan, China and generated significant risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in global exposure. The COVID-19 pandemic is disrupting businesses and affecting production and sales across a range of industries, as well as causing volatility in the financial markets. The extent of the impact of the COVID-19 pandemic on the Company’s consumer demand, sales, and financial performance will depend on certain developments, including, among other things, the duration and spread of the outbreak and the impact on the Company’s consumers and employees, all of which are uncertain and cannot be predicted. Management is actively monitoring this situation and potential impacts on our financial condition, liquidity, and results of operations.
Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, during the year ended December 31, 2021, the Company recorded a net loss of $7,020,137 and used cash in operations of $2,730,596 and had a stockholders’ deficit of $4,124,858 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. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At December 31, 2021, the Company had cash on hand in the amount of $703,825. 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.
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 financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for reserves of uncollectible accounts receivable, assumptions used in valuing inventories at net realizable value, impairment testing of recorded long-term tangible and intangible assets, the valuation allowance for deferred tax assets, accruals for potential liabilities, assumptions made in valuing stock instruments issued for services, and assumptions used in valuing warrant liabilities, and assumptions used in the determination of the Company’s liquidity.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications did not affect revenue or net loss. The Company reclassified its accrued stock compensation, previously reflected as a liability, to common shares issuable, a component of stockholders’ equity. The reclassification was recorded after the Company concluded its accrued stock compensation had a fixed and determinable price with no cash payment provision (see Note 16).
Accounts Receivable
Accounts receivable are generally recorded at the invoiced amounts net of an allowance for expected losses. The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding.
The allowance for accounts receivable is established through a provision reducing the carrying value of receivables. At December 31, 2021 and 2020, the allowance was $11,926 and $3,967, respectively.
Inventory
Inventory is stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. 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, cans for production, and merchandise and apparel. The Company periodically evaluates and adjusts inventories for obsolescence. During the year ended December 31, 2021, management recorded a reserve for slow moving and potentially obsolete inventory of $150,000. The shelf life of all beverage inventory is two years, and at December 31, 2021 and 2020, all inventory was current, as reflected in the accompanying Consolidated Balance Sheets.
Property and Equipment
Property and equipment is stated at cost. Expenditures for major renewals and improvements that extend the useful lives of property and equipment or increase production capacity are capitalized, and expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is calculated using accelerated and straight-line methods over the estimated useful lives of the assets as follows:
SCHEDULE OF ESTIMATED USEFUL LIVES OF ASSET
Property and Equipment Type
Years of Depreciation
Furniture and fixtures
Machinery and equipment
Vehicles
Computer equipment
5-7
Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. For the years ended December 31, 2021 and 2020, the Company determined there were no indicators of impairment of its property and equipment.
Goodwill and Intangible Assets
Acquisitions and Business Combinations
The Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and separately identified intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from, acquired technology, trade-marks and trade names, useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is the period needed to gather all information necessary to make the purchase price allocation, not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Goodwill
In accordance with FASB ASC Topic No. 350, Intangibles-Goodwill and Other, the Company reviews the recoverability of the carrying value of goodwill at least annually or whenever events or circumstances indicate a potential impairment. The Company’s impairment testing is performed annually at December 31 (its fiscal year end). Recoverability of goodwill is determined by comparing the fair value of Company’s reporting unit to the carrying value of the underlying net assets in the reporting units. If the fair value of a reporting unit is determined to be less than the carrying value of its net assets, goodwill is deemed impaired and an impairment loss is recognized to the extent that the carrying value of goodwill exceeds the difference between the fair value of the reporting unit and the fair value of its other assets and liabilities. During the year ended December 31, 2021, management determined there were indications of impairment, and recorded a charge of approximately $1,337,287 on the accompanying consolidated statements of operations, leaving no remaining goodwill balance at December 31, 2021.
Intangible Assets with Finite Useful Lives
We have certain finite lived intangible assets that were initially recorded at their fair value at the time of acquisition. These intangible assets consist of developed technology. Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful life of ten years.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (“ASC 606”). The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which include (1) identifying the contract or agreement with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied.
Revenue and costs of sales are recognized when control of the products transfers to our customer, which generally occurs upon shipment from our facilities. The Company’s performance obligations are satisfied at that time. The Company does not have any significant contracts with customers requiring performance beyond delivery, and contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than a promised service to the customer.
All of the Company’s products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them.
The Company does not allow for returns, except for damaged products when the damage occurred pre-fulfillment. Damaged product returns have historically been insignificant. Because of this, the stand-alone nature of our products, and our assessment of performance obligations and transaction pricing for our sales contracts, we do not currently maintain a contract asset or liability balance for obligations. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.
Sales are made to customers under terms allowing certain limited rights of return. The Company records an allowance and return for each quarter for 3% of total sales. The Company recorded sales return, and allowance at the year ending December 31, 2021 and 2020 of approximately $77,479 and $28,707, respectively, which is included in the revenues, net of sales returns and allowances in the accompanying Consolidated Statements of Loss.
The following table presents our net revenues, by revenue source, and the period-over-period percentage change, for the period presented:
SCHEDULE OF NET REVENUES BY REVENUE
Year Ended December 31,
Revenue Source Revenue Revenue % Change
Distributors $ 895,850 $ 438,745 104 %
Amazon 154,240 87,965 75 %
Online Sales 68,073 55,190 23 %
Retail
1,420,747 332,371 327 %
Shipping 17,305 24,663 (30 )%
Sales Returns and Allowances (77,479 ) (28,707 ) 170 %
Net Revenues $ 2,478,736 $ 910,227 172 %
The following table presents our net revenues by product lines for the period presented:
Year Ended December 31,
Product Line Revenue Revenue
% Change
Hemp Energy Drinks $ 362,096 $ 384,300
(6 )%
CBD Energy Waters 133,110 195,050
(32 )%
Lemonade Drinks 621,331 -
%
Apparel 1,626 2,550
(36 )%
Retail 1,420,747 332,371
%
Shipping 17,305 24,663
(30 )%
Sales returns and allowance (77,479 ) (28,707 )
%
Net Revenues $ 2,478,736 $ 910,227
%
Cost of Sales
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.
Delivery and Handling Expense
Shipping and handling costs are comprised of purchasing and receiving, inspection, warehousing, transfer freight, and other costs associated with product distribution after manufacture and are included as part of operating expenses.
Advertising Costs
Advertising costs are expensed as incurred and are included in selling and marketing expense. Advertising costs aggregated $164,052 and $36,935 for the years ended December 31, 2021 and 2020, respectively.
Stock Compensation Expense
The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on the straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered.
The fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.
Income Taxes
The Company uses an asset and liability approach for accounting and reporting for income taxes that allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense.
Loss per Common Share
Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net income applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive.
For the years ended December 31, 2021 and 2020, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have had an anti-dilutive effect. The potentially dilutive securities consisted of the following:
SCHEDULE OF POTENTIAL DILUTIVE SECURITIES
December 31, 2021 December 31, 2020
Warrants 170,000,000 20,000,000
Common stock equivalent of Series B Convertible Preferred Stock 488,000 488,000
Common stock equivalent of Series C Convertible Preferred Stock -
Common stock equivalent of Series D Convertible Preferred Stock 500,000,000 500,000,000
Common stock issuable 170,000,000 170,000,000
Restricted common stock 8,100,000 10,085,140
Common stock on convertible debentures and accrued interest 766,027,250 33,700,481
Total 1,614,615,250 734,273,761
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.
Segments
During the year, the Company consolidated and restructured its operations. The Company now operates in one segment for the manufacture and distribution of our products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements.
Concentrations
The Company’s cash balances on deposit with banks are guaranteed 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.
Gross sales. During the year ended December 31, 2021, the Company reported no customers that accounted for 10% of gross sales. During the year ended December 31, 2020, the Company reported no customers that accounted for 10% of gross sales.
Accounts receivable. As of December 31, 2021, the Company had accounts receivable from two customers that comprised 60% of its gross accounts receivable. As of December 31, 2020, the Company had accounts receivable from four customers that comprised 76% 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 currently relies on a few key co-packers, which in turn rely on a few key suppliers. The Company continually endeavors to have back-up co-packers, which co-packers would in turn depend on their third-party suppliers to supply certain of the flavors and concentrates that are used in the Company’s beverages. The Company is also dependent on these co-packers to negotiate arrangements with their existing suppliers that would enable the Company to obtain access to certain of such concentrates or flavor formulas under certain extraordinary circumstances. Additionally, in a limited number of cases, the Company’s co-packers may have contractual restrictions with their suppliers or the Company’s co-packers may need to obtain regulatory approvals and licenses that may limit the co-packers’ ability to enter into agreements with alternative suppliers. Contractual restrictions in the agreements the Company has with certain distributors may also limit the Company’s ability to enter into agreements with alternative distributors. The Company believes that a satisfactory supply of co-packers will continue to be available at competitive prices, although there can be no assurance in this regard. With respect to Gold Leaf’s operations, the Company continually endeavors to contract with additional beverage vendors to ensure the Company has adequate inventory. The Company believes that a satisfactory supply of vendors will continue to be available at competitive prices, although there can be no assurance in this regard.
Purchases from vendors. During the year ended December 31, 2021, the Company’s largest three vendors accounted for approximately 13%, 11%, and 10% of all purchases, respectively. During the year ended December 31, 2020, the Company did not purchase in excess of 10% of its purchases from any single vendor.
Accounts payable. 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. As of December 31, 2020, three vendors accounted for more than 10% of the total accounts payable. The Company’s largest three vendors accounted for 29%, 19%, and 10% of the total accounts payable, respectively.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.
In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40).” ASU 2020-06 reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion models. The diluted net income per share calculation for convertible instruments will require the Company to use the if-converted method. For contracts in an entity’s own equity, the type of contracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective January 1, 2024, for the Company and the provisions of this update can be adopted using either the modified retrospective method or a fully retrospective method. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. Effective January 1, 2021, the Company early adopted ASU 2020-06 and that adoption did not have an impact on our financial statements and related disclosures.
Other recent accounting pronouncements issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
NOTE 3 - INVENTORY
Inventory is valued at the lower of cost (first-in, first-out) or net realizable value, and net of reserves is comprised of the following:
SCHEDULE OF INVENTORY
December 31, 2021
December 31, 2020
Raw materials $ 70,592 $ 38,705
Finished goods, net 504,219 621,799
Total $ 574,811 $ 660,504
At December 31, 2021 and 2020, inventory presented above is net of a reserve for slow moving and potentially obsolete inventory of $150,000 and $0, respectively.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property and equipment is comprised of the following:
SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT
December 31, 2021
December 31, 2020
Furniture and Fixtures $ 75,070 $ 57,879
Computers and Software 29,196 16,638
Machinery & Equipment 108,799 79,951
Vehicles 239,093 68,135
Total cost 452,158 222,603
Accumulated depreciation (104,121 ) (54,731 )
Property, plant and equipment, net $ 348,037 $ 167,872
Depreciation for the years ended December 31, 2021 and 2020, was approximately $49,390 and $34,075 respectively, and is included in selling, general and administrative expenses in the accompanying Consolidated Statements of Loss. During the year ended December 31, 2021, the Company entered into a loan to purchase a vehicle for $54,763, for which the Company made a down payment of $20,000 and financed $34,763 (see Note 9).
NOTE 5 - ACQUISITION OF S AND S BEVERAGE, INC.
On January 21, 2021, the Company entered into an Agreement and Plan of Merger with S and S and its shareholders and acquired all of the capital stock of S and S. In consideration thereof, the Company issued to them an aggregate of nine million restricted shares of Kona Gold Beverage, Inc.’s common stock (the “Acquisition Stock”) of a fair value of $243,000. The Company did not grant them any registration rights in respect of the shares of Acquisition Stock. The Company 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’s legacy shareholders) and approximately $89,249 was allocated and paid to the five S and S legacy shareholders on a pro rata basis. The Company paid approximately $400,000 of the Aggregate Acquisition Payments at the closing 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 $2.00 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. During the year ended December 31, 2021, the Company paid $63,932 of the remaining Aggregate Acquisition Payments, leaving an acquisition obligation balance of $675,317 at December 31, 2021.
The Company utilized the acquisition method of accounting for the S and S acquisition in accordance with ASC 805, Business Combinations. The Company allocated the purchase price to acquired tangible assets, identifiable intangible assets, and assumed liabilities at their estimated fair values as of the date of acquisition. The fair value of the intangible assets was estimated using the income approach, pursuant to which after-tax cash flows are discounted to present value based on projections and other available financial data. The cash flows were based on estimates used to value the acquisition, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model, as well as the weighted average cost of capital. The valuation assumptions took into consideration the Company’s estimates of customer attrition and revenue growth projections. The excess of the purchase price paid by the Company over the estimated fair value of identified tangible and intangible assets has been recorded as goodwill. The acquisition was intended to augment and diversify the Company’s business. Key factors that contributed to the recorded goodwill and intangible assets in the aggregate were the opportunity to generate future revenues and synergies within the business. The goodwill will not be amortized but will be tested annually for impairment.
The following table summarizes the assets acquired, liabilities assumed and purchase price allocation:
SCHEDULE OF ASSET ACQUIRED LIABILITIES AND PURCHASE PRICE
Fair Value
Consideration paid:
Acquired obligations $ 340,000
Note payable - acquisition 1,050,000
Common stock (9,000,000 shares of common stock at $0.27 per share) 243,000
Total consideration paid $ 1,633,000
Purchase price allocation
Acquired assets 296,000
Goodwill 1,337,000
Total purchase price $ 1,633,000
During the year ended December 31, 2021, management determined there were indications of impairment, and recorded a charge of approximately $1.3 million, leaving no remaining goodwill balance at December 31, 2021.
The following unaudited pro forma statements of operations present the Company’s pro forma results of operations after giving effect to the purchase of S and S based on the historical financial statements of the Company and S and S. The unaudited pro forma statements of operations for the year ended December 31, 2021 and 2020 give effect to the transaction as if it had occurred on January 1, 2020.
SCHEDULE OF PROFORMA STATEMENT OF OPERATIONS
Years ended December 31,
(Proforma,
unaudited) (Proforma,
unaudited)
Revenues $ 2,518,750 $ 1,253,199
Loss from operations $ (4,388,618 ) $ (2,962,038 )
Net loss $ (7,022,966 ) $ (3,727,484 )
Pursuant to the provisions of ASC 805, the following results of operations of S and S subsequent to the acquisition are as follows:
January 22 to
December 31, 2021
Revenues $ 620,000
Direct cost of revenues 316,000
Selling, general and administrative expense 431,200
Net loss $ (127,200 )
These amounts were included in the accompanying Consolidated Statement of Operations.
NOTE 6 - INTANGIBLE ASSETS
Intangible asset consisted of the following:
SCHEDULE OF INTANGIBLE ASSET
December 31, 2021 December 31, 2020
Intangible Assets
Trademarks $ 85,340 $ 81,750
Website development 12,200 -
Accumulated amortization (21,585 ) (12,262 )
Total Intangible Assets, net of amortization $ 75,955 $ 69,488
During the year ended December 31, 2021 and 2020, the Company capitalized costs of $3,590 pertaining to trademarks, and acquired website development as part of its acquisition of S and S (see Note 5). During the year ended December 31, 2021 and 2020, the Company recorded amortization expense of $9,323 and $8,175, respectively. The following table summarizes the amortization expense to be recorded in future periods for intangible assets that are subject to amortization:
SCHEDULE OF ESTIMATED FUTURE AMORTIZATION EXPENSE
Year Ending Amortization
$ 9,754
9,754
9,754
9,754
9,754
Thereafter 27,185
Total $ 75,955
NOTE 7 - LINE OF CREDIT
On May 5, 2018, Kona Gold LLC 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 at December 31, 2020. 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 December 31, 2020, the line of credit had an outstanding principal balance of $398,470, respectively, and accrued interest $32,102. The line of credit was paid off during the year ending December 31, 2021.
NOTE 8 - LINES OF CREDIT - RELATED PARTY
Line of credit with related party consists of the following at December 31, 2021 and 2020:
SCHEDULE OF LINE OF CREDIT WITH RELATED PARTY
December 31, 2021 December 31, 2020
Line of credit to related party $ 1,352,651 $ 1,369,651
Line of credit to related party 125,500 125,500
Total $ 1,478,151 $ 1,495,151
(c) On April 4, 2019, Kona entered into a Line of Credit Agreement with Robert Clark. Robert Clark is the Board Chairman, CEO and majority shareholder. The agreement established a revolving line of credit in the amount of up to $1,500,000. Advances under this line of credit bear interest at the rate of 3.75 percent per annum. The line of credit matures on April 4, 2023, at which time all outstanding principal amounts and accrued interest are due and payable. At December 31, 2021 and December 31, 2020, outstanding principal was $1,352,651 and $1,369,651, respectively.
(d) On August 29, 2019, Gold Leaf entered into a Line of Credit Agreement with Robert Clark. Robert Clark is the Board Chairman, CEO and majority shareholder. 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 December 31, 2021 and December 31, 2020, outstanding principal was $125,500 and $125,500, respectively.
At December 31, 2020, accrued interest on the lines of credit to related parties was $39,942. During the year ended December 31, 2021, the Company added $55,930 of additional accrued interest, leaving an accrued interest balance on the lines of credit to related parties of $95,873 at December 31, 2021. Accrued interest in included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.
NOTE 9 - LOAN PAYABLE
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 sixty months, annual interest rate of 5.44%, with monthly principal and interest payments of $1,994, and secured by the purchased vehicle. During the twelve months ended December 31, 2021, the Company made principal payments of $1,450, leaving a loan balance of $33,312 at December 31, 2021, of which $7,974 was recorded as the current portion of loan payable on the accompanying consolidated balance sheet.
NOTE 10 - NOTES PAYABLE - RELATED PARTY
Notes payable to related party consists of the following at December 31, 2021 and 2020:
SCHEDULE OF NOTES PAYABLE RELATED PARTY
December 31, 2021 December 31, 2020
Notes payable to related party (a) $ - $ 8,500
Notes payable to related party (b) 53,500 59,500
Total loans payable 53,500 68,000
Notes payable to related party, current portion (6,000 ) (12,000 )
Notes payable to related party, net of current portion $ 47,500 $ 56,000
(a) On October 31, 2018, Kona issued a Standard Promissory Note in favor of Robert Clark, as lender, in the original principal amount of $20,000. 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 February 2019, with the final payment due in April 2021. At December 31, 2020 the balance of this note was $8,500. At December 31, 2021, this note had been paid in full.
(b) On February 19, 2019, Gold Leaf issued a Standard Promissory Note in Favor of Robert Clark, as lender, in the original principal amount of $70,000. Robert Clark is the Board Chairman, CEO and majority shareholder. 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, 2021, Gold Leaf issued an Amendment to the original issued Standard Promissory Note in Favor of Robert Clark for the remaining outstanding principle of $58,000. Principal payment of $500 per month, with final payment due in March 2022. The outstanding principal balance of this note at December 31, 2021 and December 31, 2020 was $53,500 and $59,500, respectively.
NOTE 11 - CONVERTIBLE SECURED DEBENTURES
Secured debentures that are payable to an otherwise unaffiliated third party consists of the following as of December 31, 2021 and December 31, 2020:
SCHEDULE OF SECURED DEBENTURES PAYABLE TO RELATED PARTY
December 31, 2021 December 31, 2020
YA II PN, Ltd. $ 3,000,000 $ 900,000
Less debt discount (2,150,067 ) -
Secured note payable, net $ 849,933 $ 900,000
2020 Securities Purchase Agreement
From May to December 2020, the Company completed the 2020 Private Placement of the 2020 Debentures and the 2020 Warrant pursuant to the 2020 SPA. The Warrant (the “2020 Warrant”) is exercisable for up to 20,000,000 shares of Common Stock (the “2020 Warrant Shares”), with a three-year life, and an exercise price of $5.00 per share. The 2020 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 2020 Debentures were convertible at the lower of (i) the fixed conversion price, which is $0.05 per share, subject to adjustment (the “2020 Fixed Conversion Price”), or (ii) 80% of the lowest daily volume weighted average price (“VWAP”) of the Company’s common stock during the 15 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, 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 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.
As part of the terms of the Placement, the Company was required to a registration statement with the SEC registering for resale the Conversion Shares and the Warrant Shares. The Company complied with this requirement in accordance with the terms of the agreement.
As a result of this offering, the Company issued the 2020 Debentures with an initial principal balance of one million dollars in exchange for cash, net of direct fees and expenses. As previously discussed, the 2020 Debentures were secured by all tangible and intangible assets of the Company, bore interest at a rate of 8% per annum, matured in one year and were secured by the Company’s assets. The 2020 Debentures were also convertible to shares of the Company’s Common Stock at a conversion price of $0.05 per share or 80% of the lowest 15 daily volume weighted average price (VWAP), whichever is lower. As the ultimate determination of shares to be issued upon conversion of 2020 Debentures could exceed the current number of available authorized shares, the Company determined that the conversion features of the 2020 Debentures were not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as derivative liabilities. Accordingly, the conversion features of the 2020 Debentures were separated from the host contracts (i.e. the 2020 Debentures) and characterized as derivative liability to be re-measured at the end of every reporting period with the change in value reported in the statement of operations (see Note 14). In connection with the issuance of the 2020 Debentures, the Company also granted to the Selling Stockholder warrants to purchase up to 20 million shares of common stock. The warrants are exercisable at $0.05 per share and will expire in three years from their grant date.
During the year ended December 31, 2020, the Selling Stockholder converted $100,000 of the principal of the 2020 Debentures and the corresponding accrued interest into 8,255,348 shares of common stock. As of December 31, 2020, the outstanding balance of the 2020 Debentures amounted to $900,000.
Securities Purchase Agreement
During the year ended December 31, 2021, the Company issued similar debentures to the Selling Stockholder in the aggregate amount of $4,500,000. The debentures bear interest at a rate of 8% per annum, secured by all of the tangible and intangible assets of the Company and are also convertible into shares of the Company’s common stock at a conversion price of $0.03 per share or a per-share amount equivalent to the weighted average (of the outstanding principal of the debentures at January 1, 2021) 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 of December 31, 2021, the weighted percentage was 75%.) As the ultimate determination of shares of common stock to be issued upon conversion of these debentures can exceed the current number of available authorized shares, the Company determined that the conversion features of these debentures are not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as a derivative liability (see Note 14). In connection with the issuances of these debentures, the Company also granted to the selling stockholder warrants to purchase up to 150 million 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 $3,982,000 to 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 discount of $195,000 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. During the year ended December 31, 2021, the Company amortized debt discount of $775,000 to interest expense.
During the year ended December 31, 2021, the Selling Stockholder converted certain of the remaining balance of the 2020 Debentures and certain of the debentures that were issued in with an aggregate principal of $2,400,000 and accrued interest of $82,000, or a total $2,484,401 into 201,301,365 shares of common stock with a fair value of $3,713,133. The Company followed the general extinguishment model to record the conversion and settlement of the debt. The debt and accrued interest totaled $2,484,401, the related unamortized debt discount totaled $1,500,000, and the shares issued were measured at their respective fair value upon conversion which amounted to $3,713,133. In addition, the bifurcated conversion option derivatives, after a final mark-up to $1,672,000, were also removed. As a result, the Company recorded a loss on extinguishment of debt of $1,056,732.
As of December 31, 2021, outstanding balance of the debentures issued in 2021 amounted to $3,000,000 and unamortized debt discount of $2,150,067, or a net balance of $849,933.
As of December 31, 2021, 766,027,250 shares of common stock were potentially issuable under the conversion terms of the outstanding debentures.
NOTE 12 - PAYCHECK PROTECTION PROGRAM LOAN
On May 4, 2020, the Company was granted a loan (the “2020 PPP Loan”) from Wells Fargo Bank, N.A., in the aggregate amount of $95,161, pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. At December 31, 2020, the 2020 PPP Loan balance was $95,161. In January 2021, the Company was granted an additional loan (the “2021 PPP Loan”) from Wells Fargo Bank, N.A., in the aggregate amount of $117,487, pursuant to the PPP. During the year ended December 31, 2021, the Company was notified that its PPP loan forgiveness application was approved for both loans. The Company recorded the loan forgiveness as a gain on forgiveness of debt of $212,648, which is included in other income, leaving no remaining balance owed at December 31, 2021.
NOTE 13 - 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 years 2020 and 2021, the Company issued convertible debentures, which if converted into common stock, can potentially exceed the current number of available authorized shares of the Company (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 December 31, 2021, and 2020, 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 December 31, 2021 Issued During 2021
At December 31, 2020
Stock Price $ 0.0052 $ 0.011 - 0.049 $ 0.0340
Exercise Price $ 0.0039 $ 0.008 - 0.021 $ 0.0332
Expected Life (Years) 0.74 1.00 1.00
Volatility 95 % 119-121 % 105 %
Dividend Yield 0 % 0 % 0 %
Risk-Free Interest Rate 0.39 % 0.15 - 0.15 % 2.30 %
Fair value:
Conversion feature $ 2,121,000 $ 3,982,000 $ 361,152
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 to estimate the future volatility for its common stock. The expected life of the conversion feature of the notes was based on the remaining term of the notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future.
The derivative liability balance was $361,152 at December 31, 2020. During the year ended December 31, 2021, the Company recognized derivative liabilities of $3,982,000 upon issuance of additional secured convertible debentures (see Note 11). The derivative liability balance was decreased by $550,152, representing the change in the fair value of the derivative liability from the respective prior period recorded as a component of other expenses, and a reduction of $1,672,000 recorded as a component of the loss on extinguishment of debt included in other expenses in the accompanying consolidated statements of operations, leaving a derivative liability balance of $2,121,000 at December 31, 2021.
NOTE 14 - LEASE LIABILITIES
The Company determines whether a contract is, or contains, a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. The Company leases its office and warehouse locations, and certain warehouse equipment. Leases with an initial term of 12 months or less are not included on the balance sheets.
Operating Leases
The Company leases approximately 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 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. In October 2021, the Company recognized an operating lease right of use (“ROU”) asset and lease liability of $345,649, related to the Conway, South Carolina operating lease utilizing a present value rate of 10%.
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 years ended December 31, 2021 and 2020, lease costs totaled $291,697 and $119,392, respectively.
Our ROU asset balance was $912,993 as of December 31, 2020. During the year ended December 31, 2021, the Company added $345,659 of operating leases and recorded amortization of ROU assets of $291,697 related to its leases, resulting in an ROU asset balance of $966,955 as of December 31, 2021.
As of December 31, 2020, lease liabilities totaled $912,993, comprised of finance lease liabilities of $32,980 and operating lease liabilities of $880,013. During the year ended December 31, 2021, the Company added $345,659 of operating leases, and made payments of $7,499 against its finance lease liability and $198,433 against its operating lease liability. 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. At December 31, 2021, the current portion of lease liabilities was $213,837, leaving a long-term lease liabilities balance of $838,883.
As of December 31, 2021, the weighted average remaining lease terms for operating lease and finance lease are 4.51 years and 3.25 years, respectively. As of December 31, 2021, 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
$ 307,808
282,347
262,715
261,083
2026 and thereafter 198,219
Total payments 1,312,172
Less: Amount representing interest (259,452 )
Present value of net minimum lease payments 1,052,720
Less: Current portion (213,837 )
Non-current portion $ 838,883
NOTE 15 - STOCKHOLDERS’ EQUITY
Preferred Stock
The Company’s issued and outstanding preferred stock, par value $0.00001 per share, at December 31, 2021 and 2020 was 988,000 and 988,140, 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 $0.00001 per share (the “Series A Preferred Stock”), of which no shares were authorized, issued or outstanding at December 31, 2021 and December 31, 2020. Each share of Series A Preferred Stock, when outstanding, could have been converted into one share of the Common Stock.
Series B Preferred Stock
The Company had authorized 1,200,000 shares of Series B Preferred Stock, par value of $0.00001 per share (the “Series B Preferred Stock”), of which 488,000 and 488,000 were issued and outstanding at December 31, 2021 and December 31, 2020, respectively. Each share of Series B Preferred Stock may be converted into one share of the Common Stock.
Series C Preferred Stock
On July 8, 2020, the Company reduced the authorized number of Series C Preferred Stock from 3,300,000 to 250 shares, par value $0.00001 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.
At December 31, 2021 and 2020, the Company had authorized 250 shares, respectively, of Series C Preferred Stock of which 140, shares, respectively, were issued and outstanding at 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 December 31, 2021, no shares of Series C Preferred Stock were issued and outstanding.
Series D Preferred Stock
The Company had authorized 500,000 shares of Series D Preferred Stock, par value of $0.00001 per share (the “Series D Preferred Stock”), of which 500,000 shares were issued and outstanding at December 31, 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 has authorized 2,500,000,000 shares of the Common Stock, respectively, of which 1,004,709,546 shares were issued and outstanding at December 31, 2021, and 786,308,041 were issued and outstanding at December 31, 2020.
Equity Transactions
During the year ended December 31, 2021, the Company issued an aggregate of 201,301,365 shares of Common Stock with a fair value of $3,713,133 upon the conversion of $2,484,401 of principal and accrued interest on its convertible secured debentures (see Note 11).
During the year ended December 31, 2021, the Company issued 9,000,000 shares of its Common Stock with a fair value of $243,000 for the acquisition of S and S Beverage, Inc. (See Note 5).
During the year ended December 31, 2020, the Company issued an aggregate of 8,255,438 shares of Common Stock upon the conversion of $112,274 of principal and accrued interest on its convertible secured debentures (see Note 11).
NOTE 16 - SHARE BASED COMPENSATION
Employee Shares
During 2021 the Company issued an aggregate of 8,000,000 shares of Common Stock to William J Stineman pursuant to that certain Employment Agreement by and between Mr. Stineman and the Company. The per-share fair market value of the shares was $0.0265 based on the closing price of the Common Stock as reported by the OTCM on the date of issuance, for a total value of $212,000.
During 2021 the Company issued 100,000 shares of Common Stock 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 $0.018 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.
On July 10, 2020, the Company issued an aggregate of 4,000,000 shares of Common Stock upon the conversion of an aggregate of 4,000,000 shares of our Series A Preferred Stock by Robert Clark and Joseph Thornburg. The shares of our Common Stock were converted in terms of the agreement.
The Company issued 5,000,000 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 $0.0637 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 5,000,000 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 $0.0315 based on the closing price of the Common Stock as reported by the OTCM on the date of issuance.
For other equity issuances during year ended December 31, 2021 and the year ended December 31, 2020, please see Note 17, Sponsorships.
Common Stock Issuable
On August 12, 2015, the Company entered into an Employment Agreement with Robert Clark (the “Clark Employment Agreement”). On December 1, 2016, the Company entered into an Amendment to Employment Agreement (the “Clark Amendment”; and, together with the Clark Employment Agreement, the “Amended Clark Employment Agreement”). Pursuant to the terms of the Amendment Clark Employment Agreement, the Company agreed to issue, among other securities, 200,000,000 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 120,000,000 shares of the Common Stock were issued to Mr. Clark, as follows: (i) on October 28, 2015, the Company issued 30,000,000 of such shares; (ii) on March 2, 2016, the Company issued 40,000,000 of such, and (iii) on Mary 16, 2016, the Company issued 50,000,000 of such shares. On April 19, 2018, (i) 40,000,000 shares were cancelled and returned to the Company, and on July 31, 2019, (ii) an additional 50,000,000 shares were cancelled and returned to the Company. Accordingly, as of December 31, 2019, the Company owed to Mr. Clark an aggregate of 170,000,000 shares to be reissued to him upon his request pursuant to the terms of the oral agreement with him which were valued at $1,386,497 based on their fair value at the date of grant. During the year ended December 31, 2021, the Company reclassified its accrued stock compensation, previously reflected as a liability, to common shares issuable, a component of stockholders’ equity. The reclassification was recorded after the Company concluded its accrued stock compensation had a fixed and determinable price with no cash payment provision
Restricted common stock
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 value of the award, and is recognized as an expense 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 years ended December 31, 2021 and 2020, were 8,100,000 and 10,085,140 shares of the Common Stock, respectively. There were no cancelled or forfeited restricted common stock for the years ended December 31, 2021 and 2020.
For the years ended December 31, 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 EXPENSES
Years Ended December 31,
Employee stock awards $ 213,800 $ 476,002
Non-employee stock awards - 2,578
Total stock-based compensation expense $ 213,800 $ 478,580
Summary of Warrants
A summary of warrants for the years ended December 31, 2021 and 2020, is as follows:
SCHEDULE OF SUMMARY OF WARRANTS
Weighted
Number Average
of Exercise
Warrants Price
Balance outstanding, December 31, 2019 - $ -
Warrants granted 20,000,000 0.05
Warrants exercised - -
Warrants expired or forfeited - -
Balance outstanding, December 31, 2020 20,000,000 0.05
Warrants granted 150,000,000 0.03
Warrants exercised - -
Warrants expired or forfeited - -
Balance outstanding, December 31, 2021 170,000,000 $ 0.03
Balance exercisable, December 31, 2021 170,000,000 $ 0.03
Information relating to outstanding warrants at December 31, 2021, summarized by exercise price, is as follows:
SCHEDULE OF OUTSTANDING WARRANTS
Outstanding Exercisable
Exercise Price Per Share Shares Life
(Years)
Weighted
Average
Exercise Price
Shares Weighted
Average
Exercise Price
$ 0.03 150,000,000 2.46 $ 0.03 150,000,000 $ 0.03
$ 0.05 20,000,000 1.37 $ 0.05 20,000,000 $ 0.05
170,000,000 2.33 $ 0.03 170,000,000 $ 0.03
In connection with the May 2020 Securities Purchase Agreement (see Note 11), the Company granted a Warrant to purchase up to an aggregate of 50 million shares of the Common Stock. The Warrant has a three-year term and is immediately exercisable at an exercise price of $0.05 per share, subject to adjustment.
Based on the fair market value of $0.0059 per share on December 31, 2021, there was no intrinsic value attributed to both the outstanding and exercisable warrants at December 31, 2021.
In connection with the issuance of 2021 convertible secured debentures in 2021 (see Note 11), the Company granted warrants with a relative fair value of $1,581,000 to purchase up to an aggregate of 150 million shares of the Common Stock. Each warrant has a three-year term from issuance and is immediately exercisable at an exercise price of $0.03 per share, subject to adjustment.
The fair value of each warrant on the date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
SCHEDULE OF WEIGHTED AVERAGE ASSUMPTIONS OF WARRANT
Exercise Price $ 0.05 $ 0.05
Stock Price $ 0.016 $ 0.02
Risk-free interest rate 0.53 % 1.65 %
Expected volatility 214 % 171 %
Expected life (in years) 3.0 3.0
Expected dividend yield 0 % 0 %
Warrants and rights outstanding, measurement input
NOTE 17 - 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 262,500 shares of Common Stock. At the date of issuance, the shares of Common Stock had a fair market value of $0.131 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 85,000 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 $0.0315 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. At December 31, 2021, the Company did not extend the sponsorship agreement with Ryan Dodd.
NOTE 18 - INCOME TAXES
At December 31, 2021, the Company had available Federal and state net operating loss carryforwards to reduce future taxable income. The amounts available were approximately $10,206,000 for Federal and state purposes. The carryforwards expire in various amounts through 2041. Given the Company’s history of net operating losses, management has determined that it is more likely than not that the Company will not be able to realize the tax benefit of the carryforwards. Accordingly, the Company has not recognized a deferred tax asset for this benefit. Section 382 generally limits the use of NOLs and credits following an ownership change, which occurs when one or more 5 percent shareholders increase their ownership, in aggregate, by more than 50 percentage points over the lowest percentage of stock owned by such shareholders at any time during the “testing period” (generally three years).
Effective January 1, 2007, the Company adopted FASB guidelines that address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. This guidance also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of December 31, 2021 and 2020, the Company did not have a liability for unrecognized tax benefits, and no adjustment was required at adoption.
The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2021, and 2020, the Company has not accrued interest or penalties related to uncertain tax positions. Additionally, tax years 2018 through 2021 remain open to examination by the major taxing jurisdictions to which the Company is subject.
Upon the attainment of taxable income by the Company, management will assess the likelihood of realizing the tax benefit associated with the use of the carryforwards and will recognize the appropriate deferred tax asset at that time.
The Company’s effective income tax rate differs from the amount computed by applying the federal statutory income tax rate to loss before income taxes as follows:
SCHEDULE OF FEDERAL STATUTORY INCOME TAX RATE
December 31, 2021 December 31, 2020
Income tax benefit at federal statutory rate (21.0 )% (21.0 )%
State income tax benefit, net of federal benefit (6.0 )% (6.0 )%
Change in valuation allowance 27.00 % 27.00 %
Income taxes at effective tax rate - % - %
The components of deferred taxes consist of the following at December 31, 2021 and 2020:
SCHEDULE OF DEFERRED TAXES
December 31, 2021
December 31, 2020
Net operating loss carryforwards $ 2,756,000 $ 1,415,000
Less: Valuation allowance (2,756,000 ) (1,415,000 )
Net deferred tax assets $ - $ -
NOTE 19 - SUBSEQUENT EVENTS
Subsequent to December 31, 2021, the Company issued an aggregate of 453,078,847 shares of Common Stock upon the conversion of $1,290,000 of principal, and $50,780 of accrued interest on its convertible secured debentures, at an average price of $0.0031 (see Note 11).
On March 25, 2022, the Company entered into a secured debenture with an otherwise unaffiliated 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 9 identified motor vehicles of the Company. In connection with the issuance of the debenture, the Company issued to the lender 25,000,000 shares of the Company’s common stock at a price of $0.004 per share.
The Company granted 1,000,000 shares of Common Stock on April 1, 2022 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 per-share fair market value of the shares was $0.0085 based on the closing price of the Common Stock as reported by the OTCM on the date of grant, for a total value of $8,500. On April 11, 2022, these shares were issued to Mr. Troy.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On December 7, 2021, Weinberg & Company, PA was engaged as our new independent registered public accounting firm, replacing BF Borgers CPA (“BF Borgers”).
During the fiscal years ended December 31, 2020 and 2019, and the subsequent interim periods through December 13, 2021 (the date of Borgers letter to the SEC attached as Exhibit 16.1 to our Current Report on Form 8-K in respect of our changing of independent registered pubic accounting firms), there were no disagreements (as defined in Item 304(a)(1)(iv) of Regulation S-K) with Borgers or reportable events as described under Item 304(a)(1)(v) of Regulation S-K) on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement , if not resolved to the satisfaction of the former accountant, would have caused it to make a reference to the subject matter of the disagreement in connection with its report.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
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 Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the year ended December 31, 2021. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of December 31, 2021.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our management, with the participation of our Chief Executive Officer and Chief Financial Officer and the oversight of our audit committee, has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2021. In assessing the effectiveness of our internal control over financial reporting, our management used the framework established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2021.
Auditor’s Report on Internal Control Over Financial Reporting
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the year ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
All directors hold office for a one (1)-year period and have been duly elected and qualified. Directors are elected at the annual meetings to serve for one-year terms or until his or her successor has been elected and qualified, or until his or her death, resignation, or removal. Each of our executive officers is appointed by and serves at the discretion of the Board.
Our directors and executive officers, their ages, positions held, and duration of such are as follows:
Name
Age
Position
Date First Elected or
Appointed
Robert Clark
Chief Executive Officer, President, Chairman of our Board, and Secretary
August 12, 2015
Lori Radcliffe
Chief Financial Officer
October 7, 2019
Christopher Selinger
Vice President of Sales
September 1, 2018
William Jeffrey Outlaw
Independent Director
September 9, 2019
Matthew Crystal
Independent Director
July 26, 2018
Business Experience
The following is a brief overview of the business experience of each of our directors and executive officers during at least the past five years, including their principal occupations or employment during the period, the name and principal business of the organization by which they were employed, and certain of their other directorships:
Robert Clark, Chief Executive Officer, President, Chairman of our Board, and Secretary
Robert Clark has served as our Chief Executive Officer, President, and the Secretary and the Chairman of the Board since August 2015. Since August 2015, Mr. Clark also serves as an Audit, Compensation, and Governance and Nominating Committee member. Prior to joining us, Mr. Clark was the President of Branded Legacy (formerly known as Elev8 Brands, Inc.) from 2012 through 2015. Mr. Clark obtained a Bachelor of Science degree from the School of Business at the University of Central Florida in 2003. We believe that Mr. Clark’s background in product development and design, along with more than 12 years of management experience, allows him to have a great understanding of all levels within a company and successfully bring new products to market qualifies him to serve on our Board.
Lori Radcliffe, Chief Financial Officer
Lori Radcliffe has served as our Chief Financial Officer since October 2019. Ms. Radcliffe has worked in the accounting field since 2007, most recently as a Senior Accountant at Berman Hopkins Wright & Laham, CPA’s and Associates from 2015 through 2019. Ms. Radcliffe obtained her Bachelor of Science in Business Administration in Accounting from the University of Central Florida in 2016 and her MS in Accounting from Liberty University in 2019.
Christopher Selinger, Vice President of Sales
Christopher Selinger has served as our Vice President of Sales since September 2018. Prior to joining us, Mr. Selinger served as the Southeast Operations Manager of Southeast Beverage Company from 2015 to 2017 and as the Southeast Regional Sales Manager at Calypso Brands (King Juice Company, Inc.) from 2009 to 2015. Mr. Selinger obtained his Associate of Science degree in 1991 from Midland Technical College. We believe that Mr. Selinger’s background in growing Calypso Brands into a national brand gives him a great understanding of all levels within a company such as ours and the methods successfully to bring new products to market.
Matthew Crystal, Independent Director
Matthew Crystal has served as one of our independent directors since July 26, 2018. Mr. Crystal is also a member of our Audit Committee, Compensation Committee, and Governance and Nominating Committee. He has over 20 years of experience in direct response marketing, copywriting, and web development and specializes in technical training, marketing, presenting, and architectural marketing. Mr. Crystal is the co-founder, and since 2014, has been the Vice President of Operations and is currently the Chief Operations Officer of Elite Marketing Pro, LLC, a global community of over 50,000 active small business entrepreneurs in more than 100 countries. Mr. Crystal graduated from Florida State University in 1994 with a Bachelor of Science degree. We believe that Mr. Crystal’s leadership and marketing experience qualifies him to serve as a director.
William Jeffrey Outlaw, Independent Director
William Jeffrey Outlaw has served as an independent director of our Board since September 9, 2019. Mr. Outlaw also serves as a member of our Audit Committee Compensation Committee, and Governance and Nominating Committee. He has served as President of Calypso Brands at King Juice Company, Inc. since 2013. Mr. Outlaw has over 26 years of experience in the beverage industry, including both on the supplier and the distributor sides of the business, specializing in direct store delivery strategy routes to market. His experience includes financial marketing, sales experience in 35 countries and the United States, business development, and product development. His prior executive experience includes serving as general manager, executive vice president, and chief executive officer at Calypso Brands brings significant experience in the beverage industry, which qualifies him to serve as a director.
Director Qualifications
We believe that our directors should have the highest professional and personal ethics and values, consistent with our longstanding values and standards. They should be committed to enhancing stockholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Their service on other boards of public companies should be limited to a number that permits them, given their individual circumstances, to perform responsibly all director duties for us. Each director must represent the interests of all stockholders. When considering potential director candidates, our Board also considers the candidate’s character, judgement, diversity, age, and skills, including business literacy and experience in the context of our needs and the needs of our Board.
Involvement in Certain Legal Proceedings
None of our director and executive officers has been involved in any of the following events during the past ten years:
(a) any petition under the federal bankruptcy laws or any state insolvency laws filed by or against, or an appointment of a receiver, fiscal agent, or similar officer by a court for the business or property of such person, or any partnership in which such person was a general partner at or within two years before the time of such filing, or any corporation or business association of which such person was an executive officer at or within two years before the time of such filing;
(b) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
(c) being subject to any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining such person from, or otherwise limiting, the following activities: (i) acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association, or insurance company, or engaging in or continuing any conduct or practice in connection with such activity; engaging in any type of business practice; or (ii) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws;
(d) being the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any federal or state authority barring, suspending, or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (c)(i) above, or to be associated with persons engaged in any such activity;
(e) being found by a court of competent jurisdiction (in a civil action), the SEC to have violated a federal or state securities or commodities law, and the judgment in such civil action or finding by the SEC has not been reversed, suspended, or vacated;
(f) being found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended, or vacated;
(g) being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended, or vacated, relating to an alleged violation of: (i) any federal or state securities or commodities law or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease- and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
(h) being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Family Relationships and Other Arrangements
There are no family relationships among any of our directors or executive officers.
None of our directors or executive officers was selected to serve in their respective roles pursuant to any arrangement or understanding between such director or executive officer and any person.
Committees of our Board
We have an Audit Committee, a Compensation Committee, and a Governance and Nominating Committee. Currently, we have two independent directors, Matthew Crystal and William Jeffrey Outlaw, each of whom meets the independent director requirements of The Nasdaq Stock Market LLC and the SEC. Both independent directors serve on the Audit Committee, Compensation Committee, and Governance and Nominating Committee. Robert Clark, our President, Chief Executive Officer, and Chairman of our Board, serves on the Audit, Compensation, and Governance and Nominating Committees. Each committee has the responsibilities described below. During our fiscal year ended December 31, 2020, our Board acted by unanimous written consent six times, but did not have any formal Board meetings.
Audit Committee
On July 8, 2020, our Board adopted an audit committee charter (the “Audit Committee Charter”) to govern the Audit Committee. Currently, Messrs. Crystal, Outlaw, and Clark (Chairman) serve on the Audit Committee. As of the date of this Annual Report, none of the members qualifies as an “audit committee financial expert.” During our fiscal year ended December 31, 2020, our Audit Committee did not formally meet.
The Audit Committee Charter requires that each member of the Audit Committee meet the independence requirements of The Nasdaq Stock Market LLC and the SEC and requires that the Audit Committee have at least one member that qualifies as an “audit committee financial expert.” We intend to identify potential new directors that can serve as Audit Committee members and satisfy these requirements. In addition to the enumerated responsibilities of the Audit Committee in the Audit Committee Charter, the primary function of the Audit Committee is to assist our Board in its general oversight of our accounting and financial reporting processes, audits of our financial statements, and internal control and audit functions. The Audit Committee Charter can be found online at https://konagoldhemp.com/media/pubco/Kona-Gold-Solutions-Audit-Committee-Charter.pdf.
Compensation Committee
On July 8, 2020, our Board approved and adopted a charter (the “Compensation Committee Charter”) to govern the Compensation Committee. Currently, Messrs. Crystal, Outlaw, and Clark (Chairman) serve as members of the Compensation Committee. Messrs. Crystal and Outlaw each meet the independence requirements of The Nasdaq Stock Market LLC and the SEC, qualify as a “non-employee director” within the meaning of Rule 16b-3 under the Exchange Act, and qualify as an outside director within the meaning of Section 162(m) of the Code. In addition to the enumerated responsibilities of the Compensation Committee in the Compensation Committee Charter, the primary function of the Compensation Committee is to oversee the compensation of our executives, produce an annual report on executive compensation for inclusion in our proxy statement, if and when required by applicable laws or regulations, and advise our Board on the adoption of policies that govern our compensation programs. The Compensation Committee Charter may be found online at https://konagoldhemp.com/media/pubco/Kona-Gold-Compensation-Committee-Charter.pdf. During our fiscal year ended December 31, 2020, our Compensation Committee did not formally meet.
Governance and Nominating Committee
On July 8, 2020, our Board approved and adopted a charter (the “Nominating Committee Charter”) to govern the Governance and Nominating Committee (the “Nominating Committee”). Currently, Messrs. Crystal, Outlaw, and Clark (Chairman) serve as members of the Nominating Committee. The Nominating Committee Charter requires that each member of the Nominating Committee meets the independence requirements of Nasdaq and the SEC; however, currently only Messrs. Crystal and Outlaw qualify as independent. In addition to the enumerated responsibilities of the Nominating Committee in the Nominating Committee Charter, the primary function of the Nominating Committee is to determine the slate of director nominees for election to the board of directors, to identify and recommend candidates to fill vacancies occurring between annual stockholder meetings, to review our policies and programs that relate to matters of corporate responsibility, including public issues of significance to us and our stockholders, and any other related matters required by federal securities laws. The charter of the Nominating Committee may be found online https://konagoldhemp.com/media/pubco/Kona-Gold-Solutions-Nominating-Committee-Charter.pdf. During our fiscal year ended December 31, 2020, our Governance and Nominating Committee did not formally meet.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board of directors or compensation committee (or other committee performing equivalent functions) of any entity that has one or more executive officers serving on our Board or Compensation Committee.
Code of Ethics
On July 8, 2020, our Board approved and adopted a Code of Ethics and Business Conduct for Directors, Senior Officers, and Employees (the “Code of Ethics”) that applies to all of our directors, officers, and employees, including our principal executive officer and principal financial officer. The Code of Ethics addresses such individuals’ conduct with respect to, among other things, conflicts of interests; compliance with applicable laws, rules, and regulations; full, fair, accurate, timely, and understandable disclosure by us; competition and fair dealing; corporate opportunities; confidentiality; protection and proper use of our assets; and reporting suspected illegal or unethical behavior. The Code of Ethics is available on our website at https://konagoldhemp.com/media/pubco/Kona-Gold-Solutions-Code-of-Ethics-and-Business-Conduct.pdf.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides certain summary information concerning compensation awarded to, earned by, or paid to the following “named executive officers,” for our 2021 and 2020 fiscal years:
(a) all individuals serving as our principal executive officer during our 2021 fiscal year;
(b) each of our two other most highly compensated executive officers who were serving as executive officers at the end of our 2021 fiscal year.
We did not have any individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer as of the end of our 2021 fiscal year.
Name and Principal
Position Fiscal Year Salary
($) Bonus
($) Stock
Awards
($) Options
Awards
($) All Other
Compensation
($) Total
($)
Robert Clark, CEO, President, $ 350,000 $ - $ - $ - $ - $ 350,000 (3)
Chairman, and Secretary (1) $ 350,000 (3) $ - $ - $ - $ - $ 350,000 (3)
Lori Radcliffe, CFO (2) $ 122,500 $ - $ - $ - $ - $ 122,500
$ 85,000 $ - $ - $ - $ - $ 85,000
Christopher Selinger, VP Sales $ 96,000 $ 1,437 $ - $ - $ - $ 97,437
$ 88,000 $ - $ - $ - $ - $ 88,000
(1) Appointed Chairman of our Board on August 12, 2016. Appointed Chief Executive Officer on August 12, 2015.
(2) Appointed Chief Financial Officer on October 7, 2019.
(3) Mr. Clark elected to forgo payment of $320,000 of his $350,000 base salary for the year ended December 31, 2019; thus, for that fiscal year, we paid him $30,000 in base salary. Mr. Clark elected to forgo payment of $257,500 of his $350,000 base salary for the year ended December 31, 2020; thus, for that fiscal year, we paid him $92,500 in base salary. Mr. Clark elected to forgo payment of $72,083 of his $350,000 base salary for the year ended December 31, 2021; thus, for that fiscal year, we paid him $277,917 in base salary.
Outstanding Equity Awards at Fiscal Year-End
The Company granted 5,000,000 shares of Common Stock on December 15, 2021 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 grant, the per-share fair market value of the shares was $0.0265 based on the closing price of the Common Stock as reported by the OTCM on the date of grant, for a total value of $132,5000. At December 31, 2021, these shares were not issued. On February 11, 2022, these shares were issued to Mr. Stineman.
Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide retirement or similar benefits for our directors or executive officers.
Resignation, Retirement, Other Termination, or Change in Control Arrangements
We have entered into an executive employment agreement with our Chief Executive Office, with our Chief Financial Officer, and with our Vice President of Sales. Other than these three agreements, each of which are discussed below, we have no contract, agreement, plan, or arrangement, whether written or unwritten, that provides for payments to our directors or executive officers at, following, or in connection with the resignation, retirement, or other termination of our directors or executive officers, or a change in control of our Company or a change in our directors’ or executive officers’ responsibilities following a change in control.
Robert Clark
On August 12, 2015, we entered into an Employment Agreement (the “Clark Employment Agreement”) with Robert Clark as our Chief Executive Officer, President, and Secretary, and Chairman of our Board. On December 1, 2016, we entered into an Amendment to Employment Agreement (the “Clark Amendment”; and, together with the Clark Employment Agreement, the “Amended Clark Employment Agreement”). The term of the Amended Clark Employment Agreement expired on July 12, 2020 and automatically renews for subsequent six-month terms unless terminated with cause by us. Pursuant the Amended Clark Employment Agreement, Mr. Clark is entitled to receive compensation equal to $350,000 per year for services provided to us. In addition, pursuant to the terms of the Amended Clark Employment Agreement, we agreed to issue 2,700,000 shares of our Series A Preferred Stock (our “Series A Preferred Stock”), 650,000 shares of our Series B Preferred Stock, 500,000 shares of our Series D Preferred Stock, and 200,000,000 shares of our Common Stock. Immediately, Mr. Clark decided to defer receipt of 80,000,000 shares of our Common Stock; thus, leaving 120,000,000 shares of our Common Stock to be issued to him. The 120,000,000 shares of our Common Stock were issued to Mr. Clark as follows: (i) on October 28, 2015, we issued 30,000,000 of such shares; (ii) on March 2, 2016, we issued 40,000,000 of such shares; and (iii) on May 16, 2016, we issued 50,000,000 of such shares. Mr. Clark later sold an aggregate of 12,900,000 of those shares and returned to us an aggregate of 90,000,000 of those shares, which resulted in (i) Mr. Clark remaining the record and beneficial owner of 17,100,000 of those shares of our Common Stock and (ii) subject to the July 2020 issuance to Mr. Clark of 140 shares of our Series C Preferred Stock (see below), our accruing and owing Mr. Clark an aggregate of 170,000,000 of those shares to be reissued to him upon his request pursuant to the terms of our oral agreement with him. In connection with the Amended Clark Employment Agreement, we also issued Mr. Clark 650,000 shares of our Series B Preferred Stock on December 6, 2017. In April 2019, Mr. Clark returned the 650,000 shares of our Series B Preferred Stock. During the year ended December 31, 2021, the Company reclassified its accrued stock compensation, previously reflected as a liability, to common shares issuable, a component of stockholders’ equity. The reclassification was recorded after the Company concluded its accrued stock compensation had a fixed and determinable price with no cash payment provision.
Mr. Clark declined his base salary compensation for our 2015, 2016, 2017, and 2018 fiscal years and declined all but $30,000 of his compensation for our 2019 fiscal year, elected to forgo payment of $257,500 of his $350,000 base salary for the year ended December 31, 2020, and elected to forgo payment of $72,083 of his $350,000 base salary for the year ended December 31, 2021. A total $329,583 of such compensation has been accrued.
Lori Radcliffe
On October 7, 2019, we entered into an Employment Agreement (the “Radcliffe Employment Agreement”) with Lori Radcliffe, as our Chief Financial Officer. The term of the Radcliffe Employment Agreement is two years and automatically renews for subsequent one-year terms unless terminated with cause by us. Pursuant to the Radcliffe Employment Agreement, Ms. Radcliffe is entitled to receive annual compensation of $80,000 for the first year and $100,000 for the second year for services provided to us. In addition, on January 27, 2020, we issued to Ms. Radcliffe 5,000,000 restricted shares of our Common Stock pursuant to the terms of the Radcliffe Employment Agreement. On September 1, 2021, we amended the Radcliffe Employment Agreement with Lori Radcliffe, whereas Ms. Radcliffe is entitled to receive annual compensation of $160,000 per year for services provided to us.
Christopher Selinger
On September 1, 2018, we entered into an Employment Agreement (the “Selinger Employment Agreement”) with Christopher Selinger, as our Vice President of Sales. The term of the Selinger Employment Agreement is two years and automatically renews for subsequent one-year terms unless terminated with cause by us. Pursuant to the Selinger Employment Agreement, Mr. Selinger is entitled to receive annual compensation of $65,000 with an increase to annual compensation of $72,000 after six months of employment. We also agreed to pay $1 commission per case of certain of our beverage drinks during the term of the Selinger Employment Agreement; however, effective January 1, 2019, we amended the Selinger Employment Agreement (the “Selinger Amendment”) to no longer pay this commission. In addition, on September 7, 2018, we issued to Mr. Selinger 10,000,000 shares of our Common Stock pursuant to the terms of the Selinger Employment Agreement. On June 1, 2020, we amended the Selinger Employment Agreement with Christopher Selinger, whereas Mr. Selinger is entitled to receive annual compensation of $96,000 per year for services provided to us.
Director Summary Compensation Table
For the fiscal year ended December 31, 2021, we did not pay or accrue any fees to our two non-employee directors, nor did we grant to either of them any stock awards, option awards, non-equity incentive plan compensation, nonqualified deferred compensation, or any other compensation. Robert Clark, our Chairman, did not receive any compensation for his services as a director. The compensation received by Mr. Clark as an employee is disclosed in the Summary Compensation Table above.
Narrative Discussion on Director Compensation
We have no formal plan for compensating our directors for their services in their capacity as directors. Our directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our Board. Our Board may award special renumeration to any director understanding any special services on their behalf other than services ordinarily required of a director.
William Jeffrey Outlaw
On September 8, 2019, we entered into an offer letter with William Jeffrey Outlaw as one of our Independent Directors (the “Outlaw Agreement”). In consideration for Mr. Outlaw’s services, we issued 10,000,000 restricted shares of our Common Stock to him. Mr. Outlaw will serve as a director until the date upon which he is not re-elected or his earlier removal or resignation.
Equity Incentive Plan
Currently, we have not adopted any equity incentive plan.
Golden Parachute Compensation
For a description of the terms of any agreement or understanding, whether written or unwritten, between any officer or director and us concerning any type of compensation, whether present, deferred, or contingent, that will be based on or otherwise will relate to an acquisition, merger, consolidation, sale, or other type of disposition of all or substantially all assets of our Company, see the disclosures including in this “Executive and Director Compensation” section.
Risk Assessment in Compensation Programs
During our 2021 and 2020 fiscal years, we paid limited compensation to our employees, including executive and non-executive officers. Due to the size and scope of our business, and the amount of compensation, we did not have any employee compensation policies and programs to determine whether our policies and programs create risks that are reasonably likely to have a material adverse effect on us.
Resignation, Retirement, Other Termination, or Change in Control Arrangements
We have no contract, agreement, plan, or arrangement, whether written or unwritten, that provides for payments to our directors or executive officers at, following, or in connection with the resignation, retirement, or other termination of our directors or executive officers, or a change in control of our company or a change in our directors’ or executive officers’ responsibilities following a change in control.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Common Stock
The following sets forth certain information, as of April 8, 2022, regarding the beneficial ownership of our Common Stock by (i) each of our directors, (ii) each of our named executive officers, (iii) our directors and executive officers as a group, and (iv) each person or entity who, to our knowledge, owns more than five percent of our Common Stock. The information reflects beneficial ownership, as determined in accordance with the SEC’s rules and generally includes voting or investment power with respect to our Common Stock, and is based on 1,482,788,393 shares of our Common Stock issued and outstanding as of April 8, 2022. Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power and the address for each person is 746 North Drive, Suite A, Melbourne, Florida 32934.
Name of Beneficial Owner Amount and
Nature of
Beneficial
Ownership (1) Percent
Owned
Robert Clark, CEO 687,750,000 (2) 31.94 %
Lori Radcliffe, CFO 5,000,000 *
Christopher Selinger, VP of Sales 10,000,000 * %
William Jeffrey Outlaw, Independent Director 10,000,000 * %
Matthew Crystal, Independent Director 500,000 *
All executive officers and directors as a group (5 persons) 713,250,000 (3) 33.12 %
Beneficial owner of more than 5%
YAII PN, Ltd. (4 ) 936,027,250 (5) 38.70 %
* Represents less than one percent.
As of April 8, 2022, there were, to our knowledge, no persons are beneficial owners of greater than five percent of our Common Stock.
(1) Securities convertible into shares of our Common Stock, currently or within 60 days, are deemed to be outstanding shares of our Common Stock for purposes of computing the percentage ownership of the person holding such convertible securities, but are not deemed outstanding for purposes of computing the percentage ownership of any other person.
(2) Includes 17,100,140 shares of our Common Stock held. Also includes: (i) 650,000 shares of our Common Stock issuable upon conversion of 650,000 shares of our Series B Preferred Stock that are not currently issued to Mr. Clark, (ii) 500,000,000 shares of our Common Stock issuable upon conversion of 500,000 shares of Series D Preferred Stock; and (iii) 169,999,860 shares of our Common Stock that are owed to Mr. Clark as common shares issuable, a component of stockholders’ equity, to be reissued to him upon his request pursuant to the terms of the oral agreement with him, but which shares are not currently issued and outstanding.
Pursuant to the Amended Clark Employment Agreement, we agreed to issue 2,700,000 shares of our Series A Preferred Stock, 650,000 shares of our Series B Preferred Stock, 500,000 shares of our Series D Preferred Stock, and 200,000,000 shares of our Common Stock. Immediately, Mr. Clark decided to defer receipt of 80,000,000 shares of our Common Stock; thus, leaving 120,000,000 shares of our Common Stock to be issued to him. The 120,000,000 shares of our Common Stock were issued to Mr. Clark as follows: (i) on October 28, 2015, we issued 30,000,000 of such shares; (ii) on March 2, 2016, we issued 40,000,000 of such shares; and (iii) on May 16, 2016, we issued 50,000,000 of such shares. Mr. Clark later sold an aggregate of 12,900,000 of those shares and returned to us an aggregate of 90,000,000 of those shares, which resulted in (i) Mr. Clark remaining the record and beneficial owner of 17,100,000 of those shares of our Common Stock and (ii) subject to the July 2020 issuance to Mr. Clark of 140 shares of our Series C Preferred Stock (see below), owing Mr. Clark an aggregate of 170,000,000 of those shares to be reissued to him upon his request pursuant to the terms of our oral agreement with him. In July 2020, we issued to Mr. Clark 140 shares of Series C Preferred Stock, which are convertible into 140 shares of our Common Stock; thus, we have accrued and still owe Mr. Clark 169,999,860 shares of our Common Stock. In July 2021 each share of the Mr. Clark’s 140 Series C Preferred Stock automatically converted into one share of Common Stock on the one-year anniversary of the issuance date.
In connection with the Amended Clark Employment Agreement, we also issued Mr. Clark 650,000 shares of our Series B Preferred Stock on December 6, 2017. In April 2019, Mr. Clark returned the 650,000 shares of our Series B Preferred Stock and these shares to be issued to Mr. Clark at a later date.
There is no written agreement between Mr. Clark and us regarding the terms of the deferment of these securities. However, we orally agreed to issue these deferred securities at such time as Mr. Clark requests such securities to be issued. Thus, the shares of our Common Stock owed to Mr. Clark could be issued within 60 days of the date of the annual report.
(3) Includes all of the shares beneficially owned by our executive officers and directors.
(4) YAII PN, Ltd. is a Cayman Island exempt company. YAII PN, Ltd. is managed by Yorkville Advisors Global, LP. Investment decisions for Yorkville Advisors Global, LP are made by Mark Angelo, its portfolio manager. The address of such holder is 1012 Springfield Avenue, Mountainside, NJ 07092.
(5) Includes (i) 20,000,000 shares of our Common Stock, which consists of the May 2020 Warrant Shares, (ii) 50,000,000 shares of our Common Stock, which consists of the 50,000,000 February 2021 Warrant Shares, and (iii) 866,027,250 shares of our Common Stock, which consists of the remaining shares of our common stock underlying the August 2021 Debentures and the 100,000,000 August 2021 Warrant Shares. Notwithstanding the number of shares of Common Stock and the percentage ownership thereof disclosed in this table, each of the debentures and the Warrants is subject to a “conversion blocker” and an “exercise blocker,” respectively, such that YAII PN, Ltd. cannot (i) convert any portion of any of the August 2021 Debentures into shares of our Common Stock and (ii) exercise any portion of the warrants into May 2020 Warrant Shares, February 2021 Warrant Shares, or August 2021 Warrant Shares, if such action would result in YAII PN, Ltd. and its affiliates holding more than 4.99% of the then-issued and outstanding shares of our Common Stock following such conversion or exercise, as applicable.
Series B Preferred Stock
The following sets forth certain information, as of April 8, 2022, regarding the beneficial ownership of our Series B Preferred Stock by (i) each of our directors, (ii) each of our named executive officers, (iii) our directors and executive officers as a group, and (iv) each person or entity who, to our knowledge, owns more than five percent of our Series B Preferred Stock. The information reflects beneficial ownership, as determined in accordance with the SEC’s rules and are based on 488,000 shares of our Series B Preferred Stock issued and outstanding as of April 8, 2022. Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power and the address for each person is 746 North Drive, Suite A, Melbourne, Florida 32934.
Name of Beneficial Owner Amount and
Nature of
Beneficial
Ownership Percentage
Beneficially Owned
Robert Clark, CEO 650,000 (1) 57.1 %
Lori Radcliffe, CFO - -
Christopher Selinger, VP of Sales - -
William Jeffrey Outlaw, Independent Director - -
Matthew Crystal, Independent Director - -
All executive officers and directors as a group (5 persons) 650,000 57.1 %
Beneficial owner of more than 5%
Steven Bauer (2) 66,000 13.5 %
Blake Bolin (3) 25,000 5.1 %
Roger A. Eagan Jr. (4) 80,000 16.4 %
Terry L. Landers (5) 150,000 30.7 %
Judith A. Wilt (6) 150,000 30.7 %
(1) These shares of Series B Preferred Stock were previously issued to Mr. Clark. However, Mr. Clark returned them to us with the understanding that the shares would be re-issued to him in the future; thus, the shares of Series B Preferred Stock may be issued to Mr. Clark within 60 days of the date of this annual report. See footnote (2) to the table above for our Common Stock for additional information.
(2) Mr. Bauer’s address is 7837 Penswood Street, Charlotte, North Carolina 28277.
(3) Mr. Bolin’s address is 1971 NE 7th Street, Ocala, Florida 34470.
(4) Mr. Eagan’s address is 7837 Penswood Street, Charlotte, North Carolina 28277.
(5) Mr. Landers’ address is 390 North Wickham Road, Suite F, Melbourne, Florida 32935.
(6) Ms. Wilt’s address is 390 North Wickham Road, Suite F, Melbourne, Florida 32935.
Series C Preferred Stock
The following sets forth certain information, as of April 8, 2022, regarding the beneficial ownership of our Series C Preferred Stock by (i) each of our directors, (ii) each of our named executive officers, (iii) our directors and executive officers as a group, and (iv) each person or entity who, to our knowledge, owns more than five percent of our Series C Preferred Stock. The information reflects beneficial ownership, as determined in accordance with the SEC’s rules of our Series C Preferred Stock issued and outstanding as of April 8, 2022. Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power and the address for each person is 746 North Drive, Suite A, Melbourne, Florida 32934.
Name of Beneficial Owner
Amount and
Nature of
Beneficial
Ownership
Percentage
Beneficially Owned
Robert Clark, CEO
-
- %
Lori Radcliffe, CFO
-
-
Christopher Selinger, VP of Sales
-
-
William Jeffrey Outlaw, Independent Director
-
-
Matthew Crystal, Independent Director
-
-
All executive officers and directors as a group (5 persons)
-
- %
Series D Preferred Stock
The following sets forth certain information, as of April 8, 2022, regarding the beneficial ownership of our Series D Preferred Stock by (i) each of our directors, (ii) each of our named executive officers, (iii) our directors and executive officers as a group, and (iv) each person or entity who, to our knowledge, owns more than five percent of our Series D Preferred Stock. The information reflects beneficial ownership, as determined in accordance with the SEC’s rules and are based on 500,000 shares of our Series D Preferred Stock issued and outstanding as of April 8, 2022. Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power and the address for each person is 746 North Drive, Suite A, Melbourne, Florida 32934.
Name of Beneficial Owner Amount and
Nature of
Beneficial
Ownership Percentage
Beneficially Owned
Robert Clark, CEO 500,000 100 %
Lori Radcliffe, CFO - -
Christopher Selinger, VP of Sales - -
William Jeffrey Outlaw, Independent Director - -
Matthew Crystal, Independent Director - -
All executive officers and directors as a group (5 persons) 500,000 100 %
Change in Control
We do not know of any arrangements that may, at a subsequent date, result in a change in control.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Related Party Transactions
We follow ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions. When and if we contemplate entering into a transaction in which any executive officer, director, nominee, or any family member of the foregoing would have a direct or indirect interest, regardless of the amount involved, the terms of such transaction are to be presented to our full Board (other than any interested director) for approval, and documented in the Board minutes.
Other than as disclosed below, we have had no related party transactions during the past two fiscal years.
Equity Issuances
During the 2021 fiscal year the Company issued an aggregate of 8,000,000 shares of Common Stock to William J Stineman pursuant to that certain Employment Agreement by and between Mr. Stineman and the Company. The per-share fair market value of the shares was $0.0265 based upon the closing price of the Common Stock as reported by the OTCM on the date of issuance, for a total value of $212,000.
During the 2021 fiscal year the Company issued 100,000 shares of Common Stock to John Torrence pursuant to performance award granted by the Company and Mr. Torrence. At the date of issuance, the per-share fair market value of the shares was $0.018 based upon the closing price of the Common Stock as reported by the OTCM on the date of issuance, for a total value of $1,800.
On July 10, 2020, the Company issued an aggregate of 4,000,000 shares of Common Stock upon the conversion of an aggregate of 4,000,000 shares of our Series A Preferred Stock by Robert Clark and Joseph Thornburg. The shares of our Common Stock were converted pursuant to the in terms of the Certificate of Designation of the Series A Preferred Stock.
On January 27, 2020, the Company issued 5,000,000 shares of Common Stock 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 $0.0637 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 5,000,000 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 $0.0315 based on the closing price of the Common Stock as reported by the OTCM on the date of issuance.
Notes Payable - Related Parties
We had the following outstanding notes payable during the period specified above:
Note (1) Issuance Date Original
Borrowing
Amount Interest Rate Maturity Date Largest
Outstanding
Balance since
January 1,
Outstanding
Balance as of
December 31,
Long-term Loan - Kona Gold October 31, 2018 $ 20,000 0 % April 4, 2022 $ 20,000 $ -
Line of Credit - Kona Gold April 4, 2019 $ 1,500,000 3.75 % April 4, 2023 $ 1,369,651 $ 1,352,651
Line of Credit - Gold Leaf August 29, 2019 $ 200,000 3.75 % August 29, 2022 $ 125,500 $ 125,500
Long-term Loan - Gold Leaf February 19, 2019 $ 70,000 0 % March 15, 2023 $ 70,000 $ 53,500
(1) Each of the note payables was issued by us in favor of Robert Clark, our President, Chief Executive Officer, Secretary, and Chairman of our Board.
Director Independence
Our Board is currently composed of three members - Messrs. Clark, Crystal, and Outlaw. Our Common Stock is not currently listed for trading on a national securities exchange and, as such, we are not subject to any director independence standards. However, we determined that two of our directors, Messrs. Crystal and Outlaw, qualify as independent directors. We determined that Mr. Clark, our Chairman and an executive officer, is not independent. We evaluated independence in accordance with the rules of The Nasdaq Stock Market LLC and the SEC and considered all relevant facts and circumstances in making this determination (including any relationships set forth in this annual report under the heading “Related Person Transactions”). Messrs. Clark, Crystal, and Outlaw serve on our Audit Committee, our Compensation Committee, and Governance and Nominating Committee.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Each year, the Board approves the annual audit engagement in advance. The Board also has established procedures to pre-approve all non-audit services provided by the Company’s independent registered public accounting firm. All fiscal 2021 and 2020 non-audit services listed below were pre-approved.
Audit and Audit-Related Fees: This category includes the audit of our annual financial statements and review of financial statements included in our annual and periodic reports that are filed with the SEC. This category also includes services performed for the preparation of responses to SEC correspondence, travel expenses for our auditors, on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements, and the preparation of an annual “management letter” on internal control and other matters.
Tax Fees: This category consists of professional services rendered by our independent auditors for tax compliance.
All Other Fees: This category consists of fees for services other than the services described above.
The following fees were billed to us by Berman Hopkins Wright & Laham LLP for tax fees and by our independent registered public accounting firm, BP Borgers CPA PC, which served as the Company’s auditor from fiscal years ending December 31, 2017 through December 31, 2020 and reviewed the Company’s quarterly financial statements for each of the first three fiscal quarters during fiscal 2021.
Description December 31, 2021 December 31, 2020
Audit fees $ 94,900 $ 77,600
Audit-related fees - -
Tax fees 10,400 17,400
All other fees - -
Total $ 105,300 $ 95,000
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
3.1 Amended and Restated Certificate of Incorporation is incorporated herein by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
3.2 Amended and Restated By-Laws is incorporated herein by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
3.3 Certificate of Designation of the Preferences, Rights, and Limitations of the Series B Preferred Stock is incorporated herein by reference to Exhibit 3.3 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
3.4 Certificate of Designation of the Preferences, Rights, and Limitations of the Series C Preferred Stock is incorporated herein by reference to Exhibit 3.4 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
3.5 Certificate of Designation of the Preferences, Rights, and Limitations of the Series D Preferred Stock is incorporated herein by reference to Exhibit 3.5 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
3.6 Certificate of Amendment to Amendment and Restated Certificate of Incorporation, is incorporated herein by reference to Exhibit 3.6 of Amendment No. 1 to the Company Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on October 26, 2020.
4.1 Form of Debenture is incorporated herein by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
4.2 Warrant is incorporated herein by reference to Exhibit 4.2 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
4.3 Form of Stand-alone Debenture is incorporated herein by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-1 (File No.333-239883), filed with the SEC on December 14, 2020.
4.4 Form of Secured Convertible Debenture of the registrant sold and issued to YAII PN, Ltd., on February 11, 2021 is incorporated herein by reference to Exhibit 4.4 of the Company’s Current Report on Form 8-K, filed with the SEC on February 18, 2021.
4.4a Form of Secured Convertible Debenture of the registrant sold and issued to YAII PN, Ltd., on February 11, 2021 is incorporated herein by reference to Exhibit 4.4a of the Company’s Quarterly Current Report on Form 10-Q, filed with the SEC on November 15, 2021.
4.5 Form of Warrant of the registrant granted to YAII PN, Ltd., on February 11, 2021 is incorporated herein by reference to Exhibit 4.3 of the Company’s Current Report on Form 8-K, filed with the SEC on February 18, 2021.
4.6 Form of Secured Convertible Debenture of the registrant sold and issued to YAII PN, Ltd., effective August 23, 2021 is incorporated herein by reference to Exhibit 4.6 of the Company’s Current Report on Form 8-K, filed with the SEC on August 23, 2021.
4.7 Form of Warrant of the registrant granted to YAII PN, Ltd., effective August 23, 2021 is incorporated herein by reference to Exhibit 4.7 of the Company’s Current Report on Form 8-K, filed with the SEC on August 23, 2021.
10.1 Securities Purchase Agreement by and between the Company and YAII PN, Ltd., dated May 14, 2020 is incorporated herein by reference to Exhibit 10.1 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.2 Registration Rights Agreement by and between the Company and YAII PN, Ltd., dated May 14, 2020 is incorporated herein by reference to Exhibit 10.2 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.3 Independent Contractor Agreement by and between Kona Gold LLC and OPTN Companies Inc., dated April 15, 2020 is incorporated herein by reference to Exhibit 10.3 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.4 Board of Directors Offer Letter between the Company and Matthew Crystal, dated July 24, 2018 is incorporated herein by reference to Exhibit 10.4 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.5 Board of Directors Offer Letter between the Company and William Jeffrey Outlaw, dated September 3, 2019 is incorporated herein by reference to Exhibit 10.5 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.6 Form of Distribution Agreement is incorporated herein by reference to Exhibit 10.6 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.7 Membership Interest Purchase Agreement by and among Elev8 Hemp LLC, PLAD, Inc., and the Company, dated October 10, 2016, is incorporated herein by reference to Exhibit 10.7 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.8 Securities Exchange and Settlement Agreement by and between Elev8 Brands, Inc., and the Company, dated March 6, 2018, is incorporated herein by reference to Exhibit 10.8 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.9 Securities Exchange and Settlement Agreement by and between Elev8 Brands, Inc., and the Company, dated November 26, 2019 is incorporated herein by reference to Exhibit 10.9 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.10 Employment Agreement by and between Christopher Selinger and the Company, dated September 1, 2018 is incorporated herein by reference to Exhibit 10.10 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.11 Lease Agreement by and between Kona Gold, LLC and Hay Investment Properties, Inc., dated June 1, 2018 is incorporated herein by reference to Exhibit 10.11 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.12 Triple Net Lease Agreement by and between Gold Leaf Distribution, LLC and 3090 S. Hwy 14, LLC, dated May 22, 2019 is incorporated herein by reference to Exhibit 10.12 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.13 Lease Modification Agreement by and between Gold Leaf Distribution, LLC and 3090 S. Hwy 14, LLC, dated April 21, 2020 is incorporated herein by reference to Exhibit 10.13 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.14 Line of Credit Agreement by and between Robert Clark and Gold Leaf Distribution, LLC, dated August 29, 2019 is incorporated herein by reference to Exhibit 10.14 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.15 Line of Credit Agreement by and between Robert Clark and Kona Gold, LLC, dated April 4, 2019 is incorporated herein by reference to Exhibit 10.15 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.16 Line of Credit Agreement by and between Matthew Nicoletti and Kona Gold, LLC, dated May 5, 2018 is incorporated herein by reference to Exhibit 10.16 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.17 Standard Promissory Note issued by Gold Leaf Distribution in favor of Robert Clark, dated February 19, 2019 is incorporated herein by reference to Exhibit 10.17 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.18 Standard Promissory Note issued by Kona Gold, LLC in favor of Robert Clark, dated January 15, 2019 is incorporated herein by reference to Exhibit 10.18 of Amendment No. 1 to the Company Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on October 26, 2020.
10.19 Employment Agreement by and between the Company and Robert Clark, dated August 12, 2015 is incorporated herein by reference to Exhibit 10.19 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.20 Employment Agreement by and between the Company and Lori Radcliffe, dated October 8, 2019 is incorporated herein by reference to Exhibit 10.20 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.20a Employment Agreement Amendment by and between the Company and Lori Radcliffe, dated September 14, 2021 is incorporated herein by reference to Exhibit 10.20a of the Company’s Registration Statement on Form S-1, filed with the SEC on September 22, 2021.
10.21 Amendment to Employment Agreement by and between the Company and Robert Clark, dated December 1, 2016 is incorporated herein by reference to Exhibit 10.21 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.22 Agreement by and between the Company and Ryan Dodd, dated May 1, 2019 is incorporated herein by reference to Exhibit 10.22 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.23 Amendment to Employment Agreement by and between Christopher Selinger and Kona Gold Solutions, Inc., dated May 1, 2020 is incorporated herein by reference to Exhibit 10.23of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.24 Amendment to Employment Agreement by and between Christopher Selinger and the Company, dated January 1, 2019 is incorporated herein by reference to Exhibit 10.24 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.25 Security Agreement by and between the Company and YAII PN, Ltd., dated May 14, 2020 is incorporated herein by reference to Exhibit 10.25 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.26 Line of Credit and Security Agreement Modification Agreement by and between Kona Gold LLC and Robert Clark, dated April 1, 2020 is incorporated herein by reference to Exhibit 10.26 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.27 Line of Credit and Security Agreement Modification Agreement by and between Gold Leaf Distribution LLC and Robert Clark, dated April 1, 2020 is incorporated herein by reference to Exhibit 10.27 of the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on July 16, 2020.
10.28 Terms of Oral Agreement between the Company and Robert Clark is incorporated herein by reference to Exhibit 10.28 of Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on October 26, 2020.
10.29 Waiver Agreement by and between the Company and YAII PN, Ltd., dated October 14, 2020, is incorporated herein by reference to Exhibit 10.29 of Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on October 26, 2020.
10.30 Paycheck Protection Promissory Note issued in favor of Wells Fargo Bank, N.A. dated May 4, 2020, is incorporated herein by reference to Exhibit 10.30 of Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on October 26, 2020.
10.31 Paycheck Protection Promissory Note issued in favor of Wells Fargo Bank, N.A. dated May 4, 2020, is incorporated herein by reference to Exhibit 10.31 of Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on October 26, 2020.
10.32 Securities Purchase Agreement by and between the Company and YAII PN, Ltd., dated November 30, 2020, is incorporated herein by reference to Exhibit 10.32 to the Company’s Registration Statement on Form S-1 (File No.: 333-239883), filed with the SEC on December 14, 2020.
10.33 Form of Securities Purchase Agreement between the registrant and YAII PN, Ltd., for a transaction that closed on February 11, 2021 is incorporated herein by reference to Exhibit 10.28 of the Company’s Current Report on Form 8-K, filed with the SEC on February 18, 2021.
10.34 Form of Registration Rights Agreement by and between the registrant and YAII PN, Ltd., for a transaction that closed on February 11, 2021 is incorporated herein by reference to Exhibit 10.29 of the Company’s Current Report on Form 8-K, filed with the SEC on February 18, 2021.
10.35 Form of Amended and Restated Security Agreement of the registrant and its subsidiaries in favor of YAII PN, Ltd., for a transaction that closed on February 11, 2021 is incorporated herein by reference to Exhibit 10.30 of the Company’s Current Report on Form 8-K, filed with the SEC on February 18, 2021.
10.36 Form of Intellectual Property Security Agreement of the registrant and its subsidiaries in favor of YAII PN, Ltd., for a transaction that closed on February 11, 2021 is incorporated herein by reference to Exhibit 10.31 of the Company’s Current Report on Form 8-K, filed with the SEC on February 18, 2021.
10.37 Form of Amended and Restated Global Guaranty Agreement of the registrant and its subsidiaries in favor of YAII PN, Ltd., for a transaction that closed on February 11, 2021 is incorporated herein by reference to Exhibit 10.32 of the Company’s Current Report on Form 8-K, filed with the SEC on February 18, 2021.
10.38 Form of Securities Purchase Agreement between the registrant and YAII PN, Ltd., for a transaction that closed and funded on August 23, 2021 is incorporated herein by reference to Exhibit 10.38 of the Company’s Current Report on Form 8-K, filed with the SEC on August 23, 2021.
10.39 Form of Registration Rights Agreement by and between the registrant and YAII PN, Ltd., for a transaction that closed and funded on August 23, 2021 is incorporated herein by reference to Exhibit 10.39 of the Company’s Current Report on Form 8-K, filed with the SEC on August 23, 2021.
10.40 Form of Second Amended and Restated Security Agreement of the registrant and its subsidiaries in favor of YAII PN, Ltd., for a transaction that closed and funded on August 23, 2021 is incorporated herein by reference to Exhibit 10.40 of the Company’s Current Report on Form 8-K, filed with the SEC on August 23, 2021.
10.41 Form of Intellectual Property Security Agreement of the registrant and its subsidiaries in favor of YAII PN, Ltd., for a transaction that closed and funded on August 23, 2021 is incorporated herein by reference to Exhibit 10.41 of the Company’s Current Report on Form 8-K, filed with the SEC on August 23, 2021.
10.42 Form of Second Amended and Restated Global Guaranty Agreement of the registrant and its subsidiaries in favor of YAII PN, Ltd., for a transaction that closed and funded on August 23, 2021 is incorporated herein by reference to Exhibit 10.42 of the Company’s Current Report on Form 8-K, filed with the SEC on August 23, 2021.
10.43 Agreement of Lease by and between Gold Leaf Distribution, LLC and RFMD-SC, LLC, dated August 30, 2021 is incorporated herein by reference to Exhibit 10.43 of the Company’s Registration Statement on Form S-1, filed with the SEC on September 22, 2021.
21.1 List of subsidiaries of the registrant is incorporated herein by reference to Exhibit 21.1 of the Company’s Annual Report on Form 10-K, filed with the SEC on April 15, 2021.
31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS* Inline XBRL Instance Document
101.SCH* Inline XBRL Taxonomy Extension Schema Document
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* 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
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*Filed herewith