KONA GOLD BEVERAGE, INC. The following discussion and analysis of the results of operations and financial condition for the years endedDecember 31, 2022 and 2021 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 theSEC , 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. 28 Results of Operations Our business has grown rapidly since inception in 2015, and we anticipate that our business will continue to grow significantly. For the year endedDecember 31, 2022 , the Company saw an increase in growth compared to the same period of the prior year period, as this was mostly attributable to increased retail revenue. Our. The Company acquiredS and S Beverage, Inc. ("S and S"), in early 2021, which increased our product variety, resulting in the commencement of
new distribution contracts. 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 Kona 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 sparkling and still lemonade. We also distribute our products and other companies' products at retail. We have experienced and expect to continue to experience substantial growth in our operations as we seek to expand through additional products and acquisitions that complement our current product offerings. We expect that revenue will continue to increase in fiscal year 2023 compared to fiscal year 2022, as distribution by our current distributors, who were, and whose clients were, affected by COVID-19 in fiscal year 2021 has resumed and we do not expect to see COVID-19 pandemic-related distribution impacts for fiscal year 2023. 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. Impact of Inflation Recent inflationary trends have led to a moderate increase in some of the costs to produce and ship our products. To date, we have not passed the increases in those costs to our consumers. Continued prolonged periods of inflationary pressure on some or all of those costs could have a material adverse effect on our profit margins from sales of those products or could require us to increase prices for those products, which could reduce consumer demand for those products.
Year ended
Overview As reflected in the accompanying financial statements, during the year endedDecember 31, 2022 , we incurred a net loss of approximately$7.3 million and used cash in operations of approximately$2.5 million , compared to a net loss of approximately$7.0 million and use of cash in operations of approximately$2.7 million for the year endedDecember 31, 2021 . As ofDecember 31, 2022 , we had a stockholders' deficit of approximately$3.8 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,
2022 2021
Revenue Source Revenue Revenue % Change
Distributors $ 805,480 $ 895,850 (10 )%
Amazon 128,756 154,240 (17 )%
Online Sales 22,647 68,073 (67 )%
Retail 3,609,419 1,420,747 154 %
Shipping 11,484 17,305 (34 )%
Sales Returns and Allowances (134,750 ) (77,479 ) 74 %
Net Revenues $ 4,443,036 $ 2,478,736 79 %
29
The following table presents our net revenues by product lines for the period
presented:
Year Ended December 31,
2022 2021
Product Line Revenue Revenue % Change
Hemp Energy Drinks $ 168,146 $ 362,096 (54 )%
CBD Energy Waters 59,250 133,110 (55 )%
Lemonade Drinks 729,306 621,331 17 %
Apparel 181 1,626 (89 )%
Retail 3,609,419 1,420,747 154 %
Shipping 11,484 17,305 (34 )%Sales returns and allowance (134,750 ) (77,479 ) 74 % Net Revenues
$ 4,443,036 $ 2,478,736 79 % During the year endedDecember 31, 2022 , we reported net revenues of$4.4 million , which is an increase of$1.96 million , or 79%, compared to net revenues of$2.5 million for the year endedDecember 31, 2021 . An increase of$2.2 million of our revenue is attributable to increased retail revenue, while our product sales decreased in net revenue by$224,371 . We attribute the significant increase in retail revenue to attaining a larger percentage of the territories in which we distribute, including the addition of additional distribution to larger grocery and convenience store chains. We attribute the decrease in product sales to certain delays in the rollout of existing product lines in a national retailer, as well as to a change-over in our customer mix from the prior period due to a non-repetitive, regional, one-off customer relationship in the prior period and a different regional customer imposing slotting fees in the prior period, which we declined to pay in the current year. We anticipate that the rollout of our drink products with a national retailer that commenced late in fiscal year 2022 will continue in fiscal year 2023. Additionally, the Company experienced delays in the rebranding of our hemp product line and the subsequent production. We expect that our product revenue will increase in fiscal year 2023 compared to fiscal year 2022, and we do not anticipate further delays. Further, the Company hired additional sales personnel to lead sales efforts as the Company began to expand into new territories late in the fiscal year 2022, and the Company signed several new large distributors late in fiscal year 2022. The Company anticipates continuing 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 endedDecember 31, 2022 , we reported cost of revenues of approximately$3.5 million , which is an increase of approximately$1.3 million , or approximately 61%, compared to approximately$2.1 million for the year endedDecember 31, 2021 . An increase of$1.6 million of our cost of revenues is attributable to an increase in our retail distribution in 2022, while our cost of revenues for product sales decreased$328,477 , compared to the prior year period. The cost of revenues increase was smaller than the increase in revenues. This is primarily attributed to a decrease costs in obtaining our ingredients for our products, for production of our products, and for shipping our products from the prior year period. We expect that we will continue, to see an increased cost of revenues in fiscal year 2023, primarily due to an anticipated increase in revenues. In addition, as the cost of shipping our products continues to remain elevated, we also anticipate increased costs for obtaining our ingredients for our products, increased costs for production of our products, and increased costs of shipping our products. We continue to seek alternative methods to reduce costs for production and the cost of shipping our products in fiscal year 2023. 30
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,
corporate-related expenses, 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,
corporate-related expenses, and general office and administrative expenses
related to maintaining our facilities. Selling, general and administrative
expenses increased in the year ended December 31, 2022 , to $4.1 million from
$3.4 million , an increase of $764,458 over the same period last year. The
increase was driven by increased operating expenses associated with wages
related to hiring additional sales personal, travel expenses, insurance
expenses, and legal and accounting fees related to corporate expenses, partially
offset by lower professional fees and regional customer imposing slotting fees
in the prior period, which we declined to pay in the current year. 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
Impairment ofGoodwill Impairment of goodwill for the year endedDecember 31, 2021 was$1.3 million . InDecember 2021 , we determined that our goodwill asset was impaired and recorded an impairment charge accordingly. No similar activity occurred during the current year period. Other Income and Expenses Other expense for the year endedDecember 31, 2022 was$4.2 million , as compared to other expense of$2.6 million for the year endedDecember 31, 2021 . The change in balance was due to the increase in interest expense of$58,273 , the increase in the change in value of derivative liabilities of$2.1 million , the increase in loss on extinguishment of debt of$249,831 , offset by the decrease in financing costs of$1.0 million , and decreased other expense of$22,262 , as compared to the same period last year. In addition, for the year endedDecember 31, 2021 , the company recorded a gain on forgiveness of PPP loans of$212,648 , which did not occur in the same period of the current year. Net Loss We incurred a net loss of approximately$7.3 million for the year endedDecember 31, 2022 , an increase of approximately$292,898 compared to the previous year endingDecember 31, 2021 , in which we incurred a net loss of approximately$7.0 million . This net loss is primarily due to our increase in gross profit, offset by increased SG&A expenses and the increase in other expenses, as discussed above.
Liquidity and Capital Resources
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. We have incurred operating losses since inception and have negative cash flow from operations since inception. As ofDecember 31, 2022 , we had a stockholders' deficit of approximately$3.8 million and we incurred a net loss of approximately$7.3 million during the year endedDecember 31, 2022 . We also utilized cash in operations of approximately$2.5 million during the year endedDecember 31, 2022 . As a result, our continuation as a going concern is dependent on our ability to obtain additional financing until we can generate sufficient cash flow from operations to meet our obligations. 31
Subsequent toDecember 31, 2022 , the Company received proceeds of$760,000 on the sale of notes, including the draw of$200,000 from the issuance of$200,000 line of credit onMarch 7, 2023 , the draw of$85,000 from the issuance of$85,000 line of credit onMarch 9, 2023 , the issuance of a$475,000 debenture onMarch 13, 2023 , and the entry into an equity line of credit of up to$5,000,000 onMarch 30, 2023 (that, as of the Date of this Annual Report, the Company has not utilized). There is no assurance that we will ever be profitable or that, notwithstanding the recent financing activities disclosed above, any further debt or equity financing will be available to us in the amounts, on terms, and at times deemed acceptable to us, if at all. We continue to seek additional financing. 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.
Notes Payable - Related Parties
Notes payable with related parties consists of the following atDecember 31, 2022 and 2021: December 31, 2022 December 31, 2021 Note payable - related party (a) $ 1,352,651 $ 1,352,651 Note payable - related party (b) 260,000 - Note payable - related party (c) 125,500 125,500 Note payable - related party (d) 47,500 53,500 Total notes payable - related parties 1,785,651 1,531,651 Notes payable - related parties, current portion (1,785,651 ) (6,000 ) Notes payable - related parties, net of current portion $
- $ 1,525,651
(a) On
Agreement with
Executive Officer, Secretary, and Chairman of the Board. The agreement
established a revolving line of credit in the amount of up to
Advances under this line of credit bear interest at the rate of 3.75 percent
per annum. The line of credit matures on
outstanding principal amounts and accrued interest are due and payable. At
December 31, 2022 and 2021, outstanding principal was$1,352,651 and$1,352,651 , respectively. (b) OnMay 6, 2022 , the Company entered into an unsecured Line of Credit
Agreement with
Executive Officer, Secretary, and Chairman of the Board. The agreement
established a revolving line of credit in the amount of up to
Advances under this line of credit bear interest at the rate of 3.75 percent
per annum. The line of credit matures on
outstanding principal amounts and accrued interest are due and payable. At
(c) On
Agreement with
Executive Officer, Secretary, and Chairman of the Board. The agreement
established a revolving line of credit in the amount of up to
Advances under this line of credit bear interest at the rate of 3.75 percent
per annum. The line of credit matures on
outstanding principal amounts and accrued interest are due and payable.
and $125,500 , respectively.
32
(d) On
Note in Favor of
of
Secretary, and Chairman of the Board. The note bears no interest. Principal
payments of
in March 2021 . On March 15, 2022 , the Company issued an Amendment to the
original issued Standard Promissory Note in Favor of Robert Clark for the
remaining outstanding principal of $58,000 . Principal payment of $500 per
month, with final payment due in
balance of this note at
outstanding principal balance of $47,500 at December 31, 2022 .
AtDecember 31, 2021 , accrued interest on notes payable to related parties was$95,873 . During the year endedDecember 31, 2022 , the Company added$58,086 of additional accrued interest, leaving an accrued interest balance on the notes payable to related parties of$153,959 atDecember 31, 2022 . Accrued interest is included in accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets. Notes Payable
Notes payable consists of the following at
December 31, 2022 December 31, 2021
Note payable (a) $ 26,994 $ 33,312
Note payable (b) 44,550 -
Note payable (c) 40,103 -
Note payable (d) 250,000 -
Note payable (e) 247,263 -
Note payable (f) 206,625 -
Note payable (g) 172,500 -
Total notes payable 988,035 33,312
Less debt discount (e) (218,481 ) -
Total notes payable, net 769,554 33,312Notes payable, current portion (712,499 ) (7,974 ) Notes payable, net of current portion $ 57,055 $
25,338
(a) On
months, annual interest rate of 5.44%, with monthly principal and interest
payments of
2021, the loan balance was
the Company made principal payments of
portion of loan payable on the accompanying Consolidated Balance Sheet.
(b) On
interest rate of 9.44%, with monthly principal and interest payments of
31, 2022, the Company made principal payments of
balance of
current portion of loan payable on the accompanying Consolidated Balance
Sheet.
(c) In
Clark, the Company's President, Chief Executive Officer, Secretary, and
Chairman of the Board. The agreement established a revolving line of credit
in the amount of up to
interest at the rate of 11.50 percent per annum. The line of credit matures
in 2023, at which time all outstanding principal amounts and accrued
interest are due and payable. At
principal was
payable on the accompanying Consolidated Balance Sheet.
33
(d) On
otherwise unaffiliated individual in the principal amount of
secured note payable matures on
rate of 0.97 percent per annum. The secured debenture is secured by nine (9)
identified motor vehicles of the Company. In connection with the issuance of
the debenture, the Company issued to the lender 25 million shares of the
Company's common stock at a price of
determined the fair value of the 25 million shares was
recorded as a debt discount against the secured debenture. As of December
31, 2022, the outstanding balance of the secured debentures amounted to
as the current portion of loan payable on the accompanying Consolidated
Balance Sheets.
(e) On
bearing advance agreement with an unaffiliated third party for the purchase
of future receipts/revenues. Under the agreements, the Company received a
lump sum payment of
right to collect a fix sum of future receipts/revenue of
collected by the Company. In accordance with the agreement, the Company
agreed to sell, assign and transfer to the Purchaser of all the Company's
payments, receipts, settlements and funds paid to or received by or for the
account of the Company from time to time on and after the date hereof in
payment or settlement of the Company's existing and future accounts, payment
intangibles, credit, debit and/or stored value card transactions, contract
rights and other entitlements arising from or relating to the payment of
monies from the Company's customers and/or other payors or obligors. The
loan is payable in weekly payments of
described above, and is guaranteed by
Executive Officer. Upon execution of the advance and receipt of funds, the
Company recorded the difference of $90,000 between the cash collected and
the face amount of the note as a note discount and will amortize the notediscount as interest expense over the life of the advance. As of December
31, 2022, the outstanding balance of the secured debentures amounted to
as the current portion of loan payable on the accompanying Consolidated
Balance Sheets.
(f) On
bearing advance agreement with an unaffiliated third party for the purchase
of future receipts/revenues. Under the agreements, the Company received a
lump sum payment of
a secured right to collect a fix sum of future receipts/revenue of
to be collected by the Company. In accordance with the agreement, the
Company agreed to sell, assign and transfer to the Purchaser of all the
Company's payments, receipts, settlements and funds paid to or received by
or for the account of the Company from time to time on and after the date
hereof in payment or settlement of the Company's existing and future
accounts, payment intangibles, credit, debit and/or stored value card
transactions, contract rights and other entitlements arising from or
relating to the payment of monies from the Company's customers and/or other
payors or obligors. The loan is payable in daily payments of
secured by these assets described above, and is guaranteed by
the Company's Chief Executive Officer. Upon execution of the advance and
receipt of funds, the Company recorded the difference of
cash collected and the face amount of the note as a note discount, and will
amortize the note discount as interest expense over the life of the advance.
As of
amounted to
was recorded as the current portion of loan payable on the accompanying
Consolidated Balance Sheets.
(g) On
advance agreement with an unaffiliated third party for the purchase of
future receipts/revenues. Under the agreements, the Company received a lump
sum payment of
to collect a fix sum of future receipts/revenue of
by the Company. In accordance with the agreement, the Company agreed to
sell, assign and transfer to the Purchaser of all the Company's payments,
receipts, settlements and funds paid to or received by or for the account of
the Company from time to time on and after the date hereof in payment or
settlement of the Company's existing and future accounts, payment
intangibles, credit, debit and/or stored value card transactions, contract
rights and other entitlements arising from or relating to the payment of
monies from the Company's customers and/or other payors or obligors. The
loan is payable in weekly payments of
described above, and is guaranteed by
Executive Officer. Upon execution of the advance and receipt of funds, the
Company recorded the difference of $73,500 between the cash collected and
the face amount of the note as a note discount and will amortize the notediscount as interest expense over the life of the advance. As of December
31, 2022, the outstanding balance of the secured debentures amounted to
as the current portion of loan payable on the accompanying Consolidated
Balance Sheets.
34
At December 31, 2021 , there was no accrued interest on the notes payable. During
the year ended December 31, 2022 , the Company added $1,874 of additional accrued
interest, leaving $1,874 of accrued interest balance on the notes payable at
December 31, 2022 . Accrued interest in included in accounts payable and accrued
expenses in the accompanying Condensed Consolidated Balance Sheets.
Secured Convertible Debentures
OnJuly 28, 2022 , the Company issued senior secured debentures to an otherwise unaffiliated third-party investor (the "Investor") in the aggregate of$595,000 . The debentures bear interest at a rate of 10% per annum, mature onJuly 28, 2023 , and are convertible into shares of our common stock at a conversion price of$0.0045 per share. If the Company issues subsequent equity instruments at an effective price per share that is lower than the conversion price of$0.0045 per shares, then the conversion price shall be reduced, at the option of the Holder, to a price equal to the Weighted Average Price (as defined), provided, further, that if the conversion price is equal to or less than$0.003 , then the conversion price shall be reduced at the option of the Holder to a price equal to the lower price. The senior secured debentures are secured by all of the Company's assets and the assets of each of its subsidiaries pursuant to the Security Agreement. The security interest granted to the Investor under the Security Agreement is subordinate to the continuing security interest that remains in effect pursuant to the previous grant of a security interest in connection with a still-outstanding debenture to an earlier investor all tangible and intangible assets. In connection with the issuances of the debentures, the Company granted to the Selling Stockholder warrants to purchase up to 100 million shares of the Company's common stock, which expire onJuly 28, 2027 . The warrants are exercisable at$0.0045 per share. As a result of these issuances and grants, we incurred the following (a) relative fair value of the warrants granted of$223,000 ; and (b) original issue discounts of$92,325 of the debentures for a total of$315,325 which was allocated as debt discount. The debt discount is being amortized to interest expense over the term of the corresponding debentures. As ofDecember 31, 2022 , the unamortized debt discount was$183,940 .
AtDecember 31, 2021 , accrued interest on the convertible notes payable was$54,110 . During the year endedDecember 31, 2022 , the Company added$129,602 of additional accrued interest, and converted$157,956 of accrued interest into common stock, leaving an accrued interest balance on the convertible notes payable of$25,756 atDecember 31, 2022 . Cash Flows
In summary, our use of cash has been as follows:
For the Year
Ended December
31, 2022
Net cash used in operating activities $ (2,499,518 )
Net cash used in investing activities $ (44,418 )
Net cash provided by financing activities $ 1,879,899 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 endedDecember 31, 2022 was approximately$2.5 million and consisted of a net loss of approximately$7.3 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 intangible assets, loss on extinguishment of debt, loss on change in fair value of derivative liabilities, and depreciation, and amortization which in the aggregate total approximately$4.4 million , and approximately$450,000 provided by changes in our working capital accounts and other activities. 35 Investing Activities
Cash used in investing activities for year ended
Financing Activities
Cash provided by financing activities for year ended
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 inthe 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 endedDecember 31, 2022 . These accounting policies conform to accounting principles generally accepted inthe United States , and have been consistently applied in the preparation of the consolidated financial statements. Leases OnJanuary 1, 2019 , we adopted theFinancial 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 afterDecember 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 toJanuary 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. 36
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 11, Lease Liabilities, to our consolidated financial
statements for the year ended
Revenue Recognition and Deferred Revenue
We sell our products, which includes our hemp-infused energy drinks, CBD-infused energy water, low carb and low-calorie lemonade, and apparel with our trademark logo, 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. OnJanuary 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.
37
The Company operates in one segment for the manufacture and distribution of its 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 ofDecember 31, 2022 , we had approximately$859,179 of product in inventory, net of a reserve for obsolescence of$80,000 , which was an increase of approximately$284,368 , compared to$574,811 of product in inventory, net of a reserve for obsolescence of$150,000 atDecember 31, 2021 . 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 endedDecember 31, 2022 , for an additional description of our inventory that had a material effect on our consolidated financial statements.
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 selectedDecember 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 selectedDecember 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 endedDecember 31, 2022 , for an additional description of intangible assets that had a material effect on our consolidated financial statements. 38
Emerging Growth Company Status
OnApril 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 thePublic 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 theSEC , 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
© Edgar Online, source
