Asfiled with the Securities and Exchange Commission on [___], 2022.

 

RegistrationStatement No. 333 -[____]

 

 

UNITEDSTATES

SECURITIESAND EXCHANGE COMMISSION

Washington,D.C. 20549

 

FORMS-1

 

RegistrationStatement under the Securities Act of 1933

 

KONAGOLD BEVERAGE, INC.

(Exactname of registrant as specified in its charter)

 

Delaware		2080		81-5175120
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

 

KonaGold Beverage, Inc.

746North Drive, Suite A

Melbourne,Florida 32934

(844)714-2224

(Address,including zip code, and telephone number, including area code,

ofregistrant’s principal executive offices)

 

RobertClark

Chairmanof the Board, Chief Executive Officer, and President

746North Drive, Suite A

Melbourne,Florida 32934

(844)714-2224

(Name,address, including zip code, and

telephonenumber, including area code, of agent for service)

 

Withcopy to:

RandolfW. Katz, Esq.

ClarkHill LLP

1055West Seventh Street, 24^th Floor

LosAngeles, California 90017

(213)417-5310

 

Approximatedate of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

 

Ifany of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under theSecurities Act of 1933, check the following box. ☒

 

Ifthis Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check thefollowing box and list the Securities Act registration statement number of the earlier effective registration statement for the sameoffering. ☐

 

Ifthis Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list theSecurities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

Ifthis Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list theSecurities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

Indicateby check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reportingcompany, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smallerreporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer	☐	Accelerated Filer	☐
Non-accelerated Filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

 

Ifan emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complyingwith any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒

 

TheRegistrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until theRegistrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effectivein accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as theCommission, acting pursuant to said Section 8(a), may determine.

 

 

 

Theinformation in this preliminary Prospectus is not complete and may be changed. These securities may not be sold until the registrationstatement filed with the Securities and Exchange Commission is effective. This preliminary Prospectus is subject to completion, is notan offer to sell securities, and it is not soliciting an offer to buy these securities, in any state where offers or sales are not permitted.

 

PRELIMINARY PROSPECTUS

SUBJECT TO COMPLETION

DATED [______] [_], 2022

 

KONAGOLD BEVERAGE, INC.

 

[●]Shares of Common Stock,

 

Pre-fundedWarrants to Purchase

 

[●]Shares of Common Stock and Warrants to Purchase

 

[●]Shares of Common Stock

 

Weare offering [●] shares of Common Stock, par value $0.00001 per share, and Warrants (“Common Stock Purchase Warrants”)to purchase [●] shares of Common Stock pursuant to this prospectus. Each whole Common Stock Purchase Warrant is exercisable to purchaseone share of Common Stock at an assumed exercise price of $[●], will be exercisable upon issuance and will expire [five]years from the date of issuance. The shares of Common Stock and Common Stock Purchase Warrants will be issued and sold to purchasersin the ratio of one-to-one. Common Stock Purchase Warrants will be issued in book-entry form pursuant to a Warrant agency agreement betweenus and Action Stock Transfer Corporation as Warrant agent. This prospectus also relates to the offering of the shares of Common Stockissuable upon exercise of Common Stock Purchase Warrants.

 

Weare also offering to certain purchasers whose purchase of shares of Common Stock in this offering would otherwise result in the purchaser,together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser,9.99%) of our outstanding shares of Common Stock immediately following the consummation of this offering, the opportunity to purchase,if any such purchaser so chooses, Pre-funded Warrants, in lieu of shares of Common Stock that would otherwise result in such purchaser’sbeneficial ownership exceeding 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of Common Stock. Each Pre-fundedWarrant will be exercisable for one share of Common Stock. The exercise price of each Pre-funded Warrant will be $0.00001 per share ofCommon Stock. The Pre-funded Warrants will be immediately exercisable and may be exercised at any time until all of the Pre-funded Warrantsare exercised in full. This offering also relates to the shares of Common Stock issuable upon exercise of any Pre-funded Warrants soldin this offering.

 

Theshares of Common Stock and the accompanying Common Stock Purchase Warrants will be sold in units (each, a “Common Stock Unit”)and the Pre-funded Warrants and the accompanying Common Stock Purchase Warrants will be sold in units (each, a “Pre-funded WarrantUnit” and, together with the Common Stock Units, the “Units”), with each Common Stock Unit consisting of one shareof Common Stock and one Common Stock Purchase Warrant to purchase one share of Common Stock and each Pre-funded Warrant Unit consistingof one Pre-funded Warrant and one Common Stock Purchase Warrant to purchase one share of Common Stock. For each Pre-funded Warrant Unitwe sell, the number of Common Stock Units we are offering will be decreased on a one-for-one basis. The shares of Common Stock, Pre-fundedWarrants, and Common Stock Purchase Warrants will be immediately separable on issuance. Each Common Stock Unit will be sold at a priceof $[●] per Common Stock Unit (assuming a public offering price of $[●] per share of Common Stock representing the closingprice of our Common Stock on the OTCQB of $[●] per share of Common Stock on [●], 2022, and giving effect to aSpecific Reverse Split ratio of [●]. The final public offering price of each Common Stock Unit and the exercise price ofeach Common Stock Purchase Warrant offered hereunder will be determined through negotiations between us and the lead underwriter in theoffering as well as by reference to the trading price of the shares of Common Stock on the OTCQB. The purchase price of each Pre-fundedWarrant Unit will be equal to the price at which each Common Stock Unit is sold to the public in this offering, minus $0.00001, and theexercise price of each Pre-funded Warrant will be $0.00001 per share of Common Stock.

 

OnAugust [●], 2022, our board of directors (our “Board”) approved an Amendment to our Certificate of Incorporationto effect one or more reverse splits (the “Reverse Split”) of our outstanding shares of Common Stock and a concurrent reductionin our authorized capital (our “Charter Amendment”). We filed our Proxy Statement on Schedule 14A for a Special Meeting ofour stockholders to obtain approval of our Charter Amendment and, more specifically, to grant our Board authorization, in its sole discretion,to effectuate one or more Reverse Splits during the succeeding 12 months at a specific ratio within a range from [one-for-250 to one-for-1,500],and the timing of any such Reverse Splits. Our Board has effected such Reverse Split at a ratio of [●] (the “SpecificReverse Split”) in connection with this offering and our intended listing of our shares of Common Stock on the Nasdaq Capital Market(“Nasdaq”); however, we cannot guarantee that the Specific Reverse Split will be sufficient for Nasdaq to approve our initiallisting application.

 

OurCommon Stock is quoted on the OTCQB under the symbol “KGKG.” We have applied to list our shares of Common Stock on Nasdaqunder the trading symbol “KGKG”. The successful listing of our shares of Common Stock on Nasdaq is a condition of this offering.We are an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”)and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.However, we have elected not to take advantage of the extended transition period allowed for emerging growth companies for complyingwith new or revised accounting guidance as allowed by Section 107 of the JOBS Act and Section 7(a)(2)(B) of the Securities Act. The [CommonStock Purchase Warrants] and the Pre-funded Warrants will not be listed on any national securities exchange or other nationally recognizedtrading system.

 

Investingin our securities involves a high degree of risk. See “Risk Factors” beginning on page 10.

 

Per Common Stock Unit (2)

Per Pre-funded Warrant Unit (2)

Total

Public offering price

Underwriting discounts and commissions (1)

Proceeds, before expenses, to us (3)

 

(1)	The underwriters will receive compensation in the form of reimbursement of expenses, in addition to the underwriting discount and commissions. See “Underwriting” for additional information regarding total underwriter compensation.
(2)	The public offering price and underwriting discounts and commissions correspond to an assumed public offering price per Common Stock Unit of $[●], an assumed public offering price per Pre-funded Warrant Unit of  $[●].
(3)	The amount of the offering proceeds to us presented in this table does not give effect to any exercise of the Pre-funded Warrants or the Warrants being issued in this offering.

 

Wehave granted the underwriters the right to purchase up to an additional [●] shares of Common Stock and/or Common Stock PurchaseWarrants to cover over-allotments, if any assuming an initial public offering price of $[●] per Unit. The underwriters can exercisethis right at any time within [45] days after the date of this prospectus. In addition, we will issue to the underwriters Warrants topurchase a number of shares of Common Stock equal to an aggregate of [5.0]% of the shares of Common Stock and/or Pre-funded Warrantssold in the offering. The exercise price of the underwriters’ Warrants is equal to [100]% of the offering price of the shares ofCommon Stock and/or Pre-funded Warrants offered hereby. The underwriters’ Warrants are exercisable beginning [six] months fromthe effective date of the offering, from time to time, in whole or in part, within [five] years commencing from the effective date ofthe offering.

 

Theunderwriters expect to deliver the securities against payment on or about , 2022.

 

TheSecurities and Exchange Commission has not approved or disapproved of these securities or passed upon the adequacy or accuracy of thisprospectus. Any representation to the contrary is a criminal offense.

 

[●]

 

Prospectusdated __________, 2022

 

 

TABLEOF CONTENTS 

 

ABOUT THIS PROSPECTUS	1
PROSPECTUS SUMMARY	2
RISK FACTORS	6
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS	21
MARKET, INDUSTRY AND OTHER DATA	21
USE OF PROCEEDS	22
DIVIDEND POLICY	22
CAPITALIZATION	23
DILUTION	24
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25
BUSINESS	39
MANAGEMENT	45
EXECUTIVE COMPENSATION	47
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS	50
PRINCIPAL STOCKHOLDERS	51
DESCRIPTION OF SHARE CAPITAL	54
SHARES ELIGIBLE FOR FUTURE SALE	59
TAXATION	60
UNDERWRITING	64
LEGAL MATTERS	69
EXPERTS	69
WHERE YOU CAN FIND MORE INFORMATION	69
INDEX TO FINANCIAL STATEMENTS	F-1

 

 

ABOUTTHIS PROSPECTUS

 

Thisprospectus is part of a Registration Statement on Form S-1 that we filed with the SEC.

 

Youshould read this prospectus and the related registration statement carefully. This prospectus and registration statement contain importantinformation you should consider when making your investment decision. See “Where You Can Find More Information” in this prospectus.

 

Neitherwe nor the underwriters have authorized anyone to provide you with information other than that contained in this prospectus or in anyfree writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for and can provideno assurance as to the reliability of, any other information that others may give to you. The information contained in this prospectusor any free writing prospectus is accurate only as of the date of this prospectus or such free writing prospectus, regardless of thetime of delivery of this prospectus or any free writing prospectus.

 

Weare offering to sell, and seeking offers to buy, securities only in jurisdictions where offers and sales are permitted. Neither we northe underwriters have taken any action to permit a public offering of our securities or the possession or distribution of this prospectusin any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves aboutand to observe any restrictions relating to this offering and the distribution of this prospectus.

 

Exceptas noted information contained in this prospectus gives effect to a proposed 1-for-[●] Reverse Split (the “SpecificReverse Split”).

 

Exceptas otherwise indicated, references in this prospectus to “KGKG,” the “Company,” “we,” “us”and “our” refer to Kona Gold Beverage, Inc. and its consolidated subsidiaries.

 

 

PROSPECTUSSUMMARY

 

Thissummary highlights certain information contained elsewhere in this prospectus. This summary does not contain all of the information thatmay be important to you. You should read and carefully consider the following summary together with the entire prospectus, especiallythe “Risk Factors” section of this prospectus and our consolidated financial statements and the notes thereto appearing elsewherein this prospectus before deciding to invest in our securities. For more information on our business refer to the “Business”section of this prospectus. Some of the statements in this prospectus constitute forward-looking statements that involve risks and uncertainties.Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors,including those discussed in the “Risk Factors” and other sections of this prospectus. See “Cautionary Note RegardingForward-Looking Statements.”

 

CompanyOverview

 

Weare a lifestyle company that specializes in developing hemp and cannabidiol (“CBD”) products in the functional beverage andfitness markets. Focusing on the hemp energy drink, CBD energy water, and CBD water markets, we believe that we have positioned ourselvesas a premium lifestyle brand. We are currently selling products through resellers, our website, and distributors that span across 12states. Our products are available in a wide variety of stores, including convenience and grocery stores, smoke shops, and gift shops.We also distribute premium beverages and snacks to over 1,700 grocery stores, convenience stores, smoke shops, vape shops, and specialtystores located in Florida and South Carolina. In addition to distributing our own beverage products, we also distribute other products,including alkaline waters, beverages for kids, energy drinks, fruit-flavored sodas, low-carb lemonade, healthy aloe juice drinks, snacks,and a variety of CBD-infused products, all of which complement our current product offerings.

 

CorporateInformation

 

Wewere 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 PhaserTekin exchange for shares of common stock of CTA, resulting in PhaserTek becoming a wholly-owned subsidiary of CTA. In accordance with theterms 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 stateof incorporation, UE Nevada formed Union Equity, Inc. in the State of Delaware (“UE Delaware”) in 2004. Pursuant to Articlesof Merger, in December 2004, UE Nevada merged with and into UE Delaware, the surviving company. In July 2015, we changed our name toKona Gold Solutions, Inc. In October 2020, we changed our name to Kona Gold Beverage, Inc.

 

Wehave 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 DistributionLLC (“Gold Leaf”), a Florida limited liability company formed in January 2019.

 

Konafocuses on creating great-tasting and healthy hemp-infused energy drinks in the functional beverage market for those who lead an activelifestyle. Kona is a proud member of the Hemp Industries Association (“HIA”) and strives to promote the benefits of hempseed in our products. The hemp seed in our energy drinks contains all 20 amino acids that are already found in the human body. For thoseleading a healthy lifestyle, hemp seed protein is considered to be a complete protein and is compatible with a variety of diets, includingvegan and Kosher.

 

HighDratefocuses on the development and marketing of CBD-infused energy waters available in a variety of great-tasting flavors. HighDrate’sCBD-infused energy waters are geared to the fitness and wellness markets. Our CBD-infused energy waters are powered by the patented technologyof Alkame Holdings Inc.’s wholly-owned subsidiary, Alkame Water Inc. (“Alkame”), which provides premium oxygenatedalkaline water with natural antioxidants. All of our waters are infused with CBD.

 

Sand S focuses on the development and marketing of Ooh La Lemin, which is a better-for-you lemonade that is available in still and sparklingand has no added sugar, is low in carbs, and has only 15 or 10 calories, respectively. Ooh La Lemin lemonade is available in four flavors:(i) Original Lemonade, (ii) Blue Raspberry Lemonade, (iii) Peach Lemonade, and (iv) Strawberry Lemonade. Ooh La Lemin Sparkling is availablein six flavors: (i) Original Lemonade, (ii) Cucumber Watermelon Lemonade, (iii) Blue Raspberry, (iv) Pineapple Mango, (v) Citrus Splash,and (vi) Huckleberry.

 

GoldLeaf focuses on the distribution of premium beverages and snacks, such as alkaline waters, beverages for kids, energy drinks, fruit-flavoredsodas, low-carb lemonade, healthy aloe juice drinks, snack products, as well as a variety of CBD-infused products, in key markets. Thesemarkets include over 1,700 accounts in grocery stores, convenience stores, smoke shops, vape shops, and specialty stores located in Floridaand South Carolina.

 

Implicationsof Being an Emerging Growth Company and a Smaller Reporting Company

 

Wequalify as an “emerging growth company,” as defined in the JOBS Act, enacted in April 2012. For so long as we remain an emerginggrowth company, we are permitted and intend to rely on certain exemptions from various public company reporting requirements, includingthe option to present only two years of audited financial statements and only two years of related “Management’s Discussionand Analysis of Financial Condition and Results of Operations” in this Prospectus, not being required to have our internal controlover financial reporting audited by our independent registered public accounting firm pursuant to Section 404(b) of the Sarbanes-OxleyAct of 2002, as amended (the “SOX Act”) reduced disclosure obligations regarding executive compensation in our periodic reportsand proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any goldenparachute payments not previously approved. In particular, in this Prospectus, we have provided only two years of audited financial statementsand have not included all of the executive compensation related information that would be required if were not an emerging growth company.Accordingly, the information contained herein may be different than the information you receive from other public companies in whichyou hold stock.

 

Wemay take advantage of these provisions until the earliest to occur of (1) the last day of the fiscal year (a) following the fifth anniversaryof the closing of this offering, (b) in which we have total annual gross revenues of at least $1.07 billion, or (c) in which we are deemedto be a “large accelerated filer,” under the rules of the SEC, which means the market value of our equity securities thatis held by non-affiliates exceeds $700 million as of the prior June 30^th, and (2) the date on which we have issued more than$1.0 billion in non-convertible debt during the prior three-year period.

 

 

Inaddition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying withnew or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standardsuntil those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this extendedtransition period. As a result, we will comply with new or revised accounting pronouncements as of public company effective dates.

 

Weare also a “smaller reporting company,” meaning that the market value of our stock held by non-affiliates is less than $700million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smallerreporting company if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenuewas less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates isless than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continueto rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smallerreporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Reportson Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executivecompensation.

 

IntellectualProperty

 

Wehave three trademarks that are registered with the U.S. Patent and Trademark Office (“USPTO”) for use in the Beverages Segment.One is for use of “Kona Gold Hemp Energy Drinks” in the Beverages Segment. The second trademark is for the use of “HighDrate”in the Beverages Segment. The third trademark is for the use of “OOH LA LEMIN” in the Beverages Segment. We have also appliedfor a trademark for “Storm” to use in the Beverages Segment. We do not have any patents.

 

RecentDevelopments

 

InJanuary 2020, the World Health Organization (the “WHO”) announced a global health emergency because of a new strain of coronavirus(“COVID-19”) that originated in Wuhan, China and generated significant risks to the international community as the virusspread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapidincrease 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 our consumer demand, sales,and financial performance will depend on certain developments, including, among other things, the duration and spread of the outbreakand the impact on our consumers and employees, all of which are uncertain and cannot be predicted. To date, COVID-19 has adversely impactednew product launches by Kona and HighDrate, Gold Leaf’s distribution of new product lines, and the commencement of new distributioncontracts. Management is actively monitoring this situation and potential impacts on our financial condition, liquidity, and resultsof operations. See “Risk Factors” for additional information regarding certain risks associated with the COVID-19 pandemic.However, we acquired S and S during the COVID-19 pandemic and increased our product variety due to the acquisition.

 

RiskFactors

 

	●	Our ability to implement our business strategy is subject to numerous risks that you should be aware of before making an investment decision. These risks are described more fully in the section entitled “Risk Factors” in this prospectus. These risks include, among others:
	●	we have incurred significant losses since inception and anticipate that we will continue to incur losses for the foreseeable future;

 

 

	●	we will require substantial additional funding, which may not be available to us on acceptable terms, or at all, and, if not available, may require us to delay, scale back, or cease our product development programs or operations;
	●	our business is subject to product and price competition;
	●	our sales materially vary in their timing and volume;
	●	we may have occasional difficulties in the delivery our products in a timely manner in sufficient volumes;
	●	we may not necessarily recognize product trends;
	●	we may have difficulties in expanding our business network and managing our growth;
	●	our ability to develop and market product enhancements and new products may be stressed;
	●	we may not be able to match the timing of product enhancements, activities of, and acquisitions by competitors;
	●	we will need to hire additional qualified employees, who may not be readily available;
	●	we need to control costs as we attempt to expand our products and sales; and.
	●	COVID-19 pandemic may materially and adversely affect our business and financial results.

 

OurCorporate Information

 

Ourprincipal executive office is located at 746 North Drive, Suite A, Melbourne, Florida 32934. We also have a warehouse in Greer, SouthCarolina that serves as the main distribution center for Gold Leaf and Kona Gold, and a warehouse in Conway, South Carolina that servesas a secondary distribution center for Gold Leaf. Our telephone number is (844) 714-2224. We maintain the following website addresses:websites www.konagoldbeverage.com, www.konagoldhemp.com, www.highdrateme.com, www.drinklemin.com, and www.goldleafdist.com.

 

 

TheOffering

 

Shares of Common Stock offered by us		[●] shares, assuming no sale of Pre-funded Warrants.
Pre-funded Warrants offered by us		We are also offering to certain purchasers whose purchase of shares of Common Stock in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of Common Stock immediately following the consummation of this offering, the opportunity to purchase, if such purchasers so choose, Pre-funded Warrants, in lieu of shares of Common Stock that would otherwise result in any such purchaser’s beneficial ownership exceeding 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding shares of Common Stock. Each Pre-funded Warrant will be exercisable for one share of Common Stock. The purchase price of each Pre-funded Warrant will equal the price at which the shares of Common Stock are being sold to the public in this offering, minus $0.00001, and the exercise price of each Pre-funded Warrant will be $0.00001 per share. The Pre-funded Warrants will be exercisable immediately and may be exercised at any time until all of the Pre-funded Warrants are exercised in full. This offering also relates to the shares of Common Stock issuable upon exercise of any Pre-funded Warrants sold in this offering. For each Pre-funded Warrant we sell, the number of shares of Common Stock we are offering will be decreased on a one-for-one basis. For additional information, see “Description of Share Capital — Pre-funded Warrants to be Issued as Part of this Offering” on page 57 of this prospectus.
Common Stock Purchase Warrants offered by us		CommonStock Purchase Warrants to purchase an aggregate of [●] shares of Common Stock. Each Common Stock Purchase Warrant willhave an assumed exercise price of $[●] per share, will be immediately exercisable and will expire on the [fifth] anniversary ofthe original issuance date. The shares of Common Stock and Pre-funded Warrants, and the Common Stock Purchase Warrants will be issuedseparately and will be immediately separable upon issuance. This prospectus also relates to the offering of the shares of Common Stockissuable upon exercise of the Common Stock Purchase Warrants. For additional information, see “Description of Share Capital —Common Stock Purchase Warrants to be Issued as Part of this Offering” on page 58 of this prospectus.
Over-allotment option		We have granted the underwriters a [45]-day option to purchase up to [●] additional shares of Common Stock and/or Common Stock Purchase Warrants at the public offering price, less underwriting discounts and commissions on the same terms as set forth in this prospectus.
Common Stock Units		The shares of Common Stock and accompanying Common Stock Purchase Warrants will be sold in Units, with each Unit consisting of one share of Common Stock and one Warrant to purchase one share of Common Stock. Each Common Stock Unit will be sold at a price of $[●] per Unit (assuming a public offering price of $[●] per share of Common Stock, representing the closing price of our Common Stock on the OTCQB of $[●] per share of Common Stock on [●], 2022, and giving effect to the Specific Reverse Split ratio of 1-for-[●]). The Common Stock Units will be separable immediately upon issuance.
Pre-funded Warrant Units		The Pre-funded Warrants and accompanying Common Stock Purchase Warrants will be sold in Units, with each Unit consisting of one Pre-funded Warrant and one Common Stock Purchase Warrant to purchase one share of Common Stock. The assumed purchase price of each Pre-funded Warrant Unit will equal the price at which a Common Stock Unit is being sold to the public in this offering, minus $0.00001. The Pre-funded Warrant Units will be separable immediately upon issuance. For each Pre-funded Warrant Unit we sell, the number of Common Stock Units we are offering will be decreased on a one-for-one basis.
Shares of Common Stock to be outstanding after this offering		[●] shares ([●] shares if the over-allotment option is exercised in full) (assuming none of the Warrants issued in this offering is exercised and no sale of any Pre-funded Warrants).
Use of proceeds		We estimate that the net proceeds to us from the sale of securities in this offering will be approximately $[●] million, or $[●] million if the underwriters exercise their over-allotment option in full, assuming an initial public offering price of $[●] per share and related Common Stock Purchase Warrants as set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds of this offering to fund our ongoing research and development activities, and for working capital and general corporate purposes. See “Use of Proceeds.”
Proposed Nasdaq trading symbol		“KGKG”
[No Listing of Warrants]		We do not intend to apply for listing of the Pre-funded Warrants [or Common Stock Purchase Warrants] on any national securities exchange or trading system.
Risk factors		See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should consider carefully before investing in our shares of Common Stock.

 

Thenumber of shares of Common Stock to be outstanding after this offering is based on [●] shares of Common Stock outstandingas of [●], 2022, after giving effect to the Specific Reverse Split and excludes:

 

	●	[●] shares of Common Stock issuable upon the exercise of outstanding options to issue shares of Common Stock, as of [●], 2022, at a weighted-average exercise price of $[●] per share;
	●	[●] shares of Common Stock issuable upon the exercise of outstanding Common Stock Warrants, as of [●], 2022, at a weighted-average exercise price of[●] per share; and
	●	[●] shares of Common Stock issuable upon the exercise of outstanding convertible debentures, as of [●], 2022, at a weighted-average conversion price of $[●] per share.

 

Unlessotherwise indicated, all information in this prospectus reflects or assumes: (i) no exercise of the Common Stock Purchase Warrants orWarrants issued to the underwriters; and (ii) no exercise by the underwriters of their option to purchase up to an additional [●]shares of Common Stock and/or Pre-funded Warrants in this offering.

 

 

RISKFACTORS

 

Investingin our securities involves a high degree of risk. You should carefully consider and evaluate all of the information contained in thisProspectus and in the documents that we incorporate by reference into this Prospectus before you decide to purchase our securities. Inparticular, you should carefully consider and evaluate the risks and uncertainties described under the heading “Risk Factors”in this Prospectus. Any of the risks and uncertainties set forth in this Prospectus, as updated by annual, quarterly, and other reportsand documents that we file with the SEC and incorporate by reference into this Prospectus could materially and adversely affect our business,results of operations, and financial condition, which in turn could materially and adversely affect the value of our securities. As aresult, you could lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks anduncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a numberof factors, including the risks described below. See “Cautionary Note Regarding Forward-Looking Statements.”

 

Wehave a limited operating history on which to judge our new business prospects and management.

 

Wecommenced operations in the beverage industry in 2015. Accordingly, we have only a limited operating history upon which to have to basean evaluation of our business and prospects. Operating results for future periods are subject to numerous uncertainties and we cannotassure you that we will achieve or sustain profitability. Our prospects must be considered in light of the risks encountered by companiesin the early stage of development, particularly companies in new and rapid evolving markets. We cannot assure you that we will successfullyaddress any of these risks.

 

Wehave incurred losses in recent years and may never achieve or maintain profitability.

 

Wehave had losses for several years and had an accumulated deficit of $21,250,260 at June 30, 2022, which included our net loss of $4,950,087for the six months ended June 30, 2022, as compared to an accumulated deficit of $11,472,975, which included net loss of $2,192,939for six months ended June 30, 2021 and our net loss of $7,020,127 for the year ended December 31, 2021. We have implemented several initiativesintended 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 havehad, and any future losses may continue to have, an adverse effect on our working capital. If we fail to generate revenue and becomeprofitable, or if we are unable to fund our continuing losses, our stockholders could lose all or part of their investment.

 

Ourrecurring losses and significant accumulated deficit have raised substantial doubt regarding our ability to continue as a going concern.

 

Wehave experienced recurring operating losses over the last two years and have a significant accumulated deficit. We expect to continueto generate operating losses and consume significant cash resources for the foreseeable future. Without additional financing, these conditionsraise substantial doubt about our ability to continue as a going concern, meaning that we may be unable to continue operations for theforeseeable future or realize assets and discharge liabilities in the ordinary course of operations. If we seek additional financingto fund our business activities in the future and there remains doubt about our ability to continue as a going concern, investors orother financing sources may be unwilling to provide additional funding on commercially reasonable terms or at all. If we are unable toobtain sufficient funding, our business, prospects, financial condition, and results of operations will be materially and adversely affectedand 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 assetsand may receive less than the value at which those assets are carried on our financial statements, and it is likely that our stockholderswill lose all or a part of their investment.

 

 

Wedo not have sufficient working capital to fund our planned operations, and, as a result, we may need to raise additional capital in thefuture, which may not be available when needed, on acceptable terms or at all.

 

Wehave limited capital resources. To date, we have financed our operations entirely through equity investments by our management and otherinvestors, the incurrence of debt, salary deferments, and stock issuance deferments, and we expect to continue to do so in the foreseeablefuture. During the year ended December 31, 2021 and the six months ended June 30, 2022 (an 18-month period), we relied on aggregate ofapproximately $5.25 million from incurrence of debt, salary deferments, and stock issuance deferments, to fund our operations. On July28, 2022, we sold and issued an additional $595,000 debenture. We believe our current cash resources will fund three months   ofour financial obligations and operations. Taking into account our planned activities and sources of capital, we believe that we willrequire approximately $[●] million to fund our financial obligations and operations for the next 12 months in excess of whatwe anticipate that we will generate from our operations. However, our estimates of our operating revenues and expenses and working capitalrequirements could be incorrect, and we may use our cash resources faster than we anticipate. Further, some or all of our ongoing orplanned investments may not be successful and could further deplete our capital without immediate, or any, cash returns.

 

Untilwe can generate sufficient revenues to finance our cash requirements from our operations, which we may never do, we may need to increaseour liquidity and capital resources by one or more measures, which may include, among others, reducing operating expenses, restructuringour balance sheet by negotiating with creditors and vendors, entering into strategic partnerships or alliances, or raising additionalfinancing through the issuance of debt, equity, or convertible securities. Further, even if our near-term liquidity expectations provecorrect, we may still seek to raise capital through one or more of these financing alternatives. However, we may not be able to obtaincapital when needed or desired, on terms acceptable to us or at all.

 

Inadequateworking capital would have a material adverse effect on our business and operations and could cause us to fail to execute our businessplan, fail to take advantage of future opportunities, or fail to respond to competitive pressures or customer requirements. A lack ofsufficient 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 significantdilution, and the new equity or debt securities may have rights, preferences, and privileges that are superior to those of our existingstockholders. We may incur substantial costs in pursuing any future capital-raising transactions, including investment banking, legaland accounting fees, printing and distribution expenses, and other similar costs, which would reduce the benefit of the capital receivedfrom the transaction.

 

TheCOVID-19 pandemic could have a material adverse impact on our business, results of operations, and financial condition.

 

InDecember 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In January 2020, the WHO declared the COVID-19outbreak a “Public Health Emergency of International Concern.” This worldwide outbreak has resulted in the implementationof significant governmental measures, including lockdowns, closures, quarantines, and travel bans intended to control the spread of thevirus. Companies are also taking precautions, such as requiring employees to work remotely, imposing travel restrictions, and temporarilyclosing businesses and facilities. These restrictions continued in fiscal year 2021 with continued outbreaks, and future prevention andmitigation measures, have had an adverse impact on global economic conditions and subsequent adverse impact on consumer confidence andspending, and adversely affect the supply of, as well as the demand for, our products. Uncertainties regarding the economic impact ofCOVID-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 distributionof 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, resultingin the commencement of distribution contracts.

 

Ourco-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 negativelyaffect the price and availability of our ingredients and/or packaging materials and impact our supply chain. If the disruptions causedby COVID-19 continue for an extended period of time, our ability to meet the demands of our consumers may be materially impacted. Todate, we have not experienced any reduction in the available supply of our products; however, we have been impacted by transportationand logistical delays. Additionally, at times during the COVID-19 pandemic, many of our employees, including members of our managementteam, have been working remotely as a result of the closure of our offices and warehouses in compliance with local and state regulationsin 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 theCOVID-19 outbreak and government-mandated closures, those occurrences may negatively impact our business, financial condition, and cashflow. The extent to which the COVID-19 pandemic will further impact our business will depend on future developments and, given the uncertaintyaround 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.

 

Theextent 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 continuesfor a prolonged period, it could have a material adverse effect on our business, results of operations, financial condition, and cashflow and adversely impact the quoted price of our Common Stock on the over-the-counter market.

 

Wesell our products in highly competitive markets, which results in pressure on our profit margins and limits our ability to maintain orincrease the market share of our products.

 

Thebeverage business is a highly competitive and risky business, and is subject to significant competition and pricing pressures. We competewith many national, regional, and local businesses, many of which have more resources than we do. We could experience increased competitionfrom existing or new companies in the energy and beverage market, which could create increasing pressures to grow our business. Competitorscould offer products with prices that may match or are lower than the prices we offer. While we believe that the products we offer aregenerally competitive with those offered by other companies, continued pricing pressure or improvements in research and shifts in consumerpreferences away from hemp-based beverages could adversely impact our consumer base or pricing structure and could have a material andadverse effect on our business, financial condition, results of operations, and cash flow.

 

Ourfuture growth is largely dependent upon our ability to expand successfully into new markets and new distribution channels, as well asto attract new consumers to our products.

 

Ourbusiness 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 locationsthroughout the United States, including having our products offered in national retail stores such as Costco, Walmart, and Target. Wecannot provide any assurance that our products will be offered in any such national chain. Failure to expand our distribution networkto include distributors with reach into national retail stores will have an adverse effect on our growth, which, in turn, could adverselyaffect our business, financial condition, results of operations, and cash flow.

 

 

Changesin consumer preferences and perceptions may lessen the demand for our products, which would reduce sales and harm our business.

 

Webelieve we are highly dependent upon positive consumer perceptions of the safety and quality of our products, as well as similar productsdistributed by other companies. Consumer perception of CBD or hemp products in particular can be substantially influenced by scientificresearch findings, national media attention, and other publicity about product use. Adverse publicity from these sources regarding thesafety, quality, or efficacy of our products could harm our reputation and results of operations. If consumer preferences and perceptionsof our products change, the resulting demand for our products could decrease, which could adversely affect our business, financial condition,and results of operations.

 

Increasesin our costs materially affect our operating results.

 

Ourprincipal beverage products contain hemp, CBD, and ginseng. Increases in costs of these, or other ingredients in our products paid byour co-packers, with respect to our Company, or our suppliers, with respect to our Distribution Subsidiary, and the costs of which arepassed on to us, could have a material adverse effect on our profit margins, as well as on our business, financial condition, and operatingresults. Further, other factors, such as inflation, increased food costs, increased labor and employee benefit costs, and increased energycosts may adversely affect our operating costs and we may not be able to pass along any such increased costs to our consumers. Increasesin costs could adversely affect our profitability and operating results.

 

Wedo not have long-term contracts with any of our co-packers or our suppliers, and as a result they could seek to increase prices significantlyor fail to deliver.

 

Wedo not rely on written contracts or long-term arrangements with our co-packers or our suppliers. Although we have not experienced significantproblems with our co-packers or our suppliers, as applicable, our co-packers or suppliers may implement significant price increases ormay 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 suchlicenses that are necessary to comply with federal law. We may not be able to obtain terms as favorable as those received from our currentco-packers and suppliers, which in turn would increase our costs. In addition, it is possible that the substitute co-packers and suppliersmay not have the necessary materials to meet our demand.

 

Wemust monitor our inventory and product mix against forecasted demand on a continuous basis. If we underestimate demand, we risk havinginadequate 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 manageour supply chain effectively, our operating costs could increase and our profit margins could decrease, which could have a material adverseeffect on our financial condition, operating results, and cash flow.

 

Byvirtue of the size of our operations, we may suffer from inflation-driven cost pressure and margin uncertainty and periodic shortagesof raw materials and packaging.

 

Becauseof the size of our operations and the type of relationships that we have with our co-packers and suppliers, we are increasingly vulnerableto potentially unmanageable increases in the prices that we are charged, which increases we may not be able to pass on, directly or indirectly,in full to our customers, if at all. Further, by virtue of the supply chain issues that have arisen since the inception of the COVID-19pandemic, we may not always be able to obtain raw materials or packaging materials for our products on the schedules that we require.This inflation-driven cost and margin uncertainty, coupled with raw materials and packaging materials issues could adversely affect ourprofitability and operating results.

 

Anyprolonged disruption in the operations of any of our co-packing facilities could harm our business.

 

Allof our distribution is managed domestically. Any prolonged disruption in the operations of any of these facilities, whether due to technicalor labor difficulties, destruction or damage to the facility, real estate issues, or other reasons, could result in increased costs andreduced revenues and our profitability and prospects could be harmed.

 

Wemay not be able to manage our co-packing capabilities effectively, which may adversely affect our results of operations.

 

Wemust accurately forecast demand for all of our products in order to ensure that we have enough products available to meet the needs ofour consumers. Our forecasts are based on multiple assumptions that may cause our estimates to be inaccurate and affect our ability toensure that we have sufficient co-packing capacity to meet the demand for our products, which could prevent us from meeting increasedconsumer 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.

 

Ifthe 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 contaminantsthat affect the safety or quality of our products or are otherwise rumored to have adverse effects, for any reason, we may sustain thecosts of, and possible litigation resulting from, a product recall and need to find alternative ingredients, to delay production, orto discard or otherwise dispose of products, which could materially adversely affect our business, financial condition, and results ofoperations. In addition, even if product liability claims against us are not successful or are not fully pursued, these claims couldbe costly and time-consuming and could require our management to spend their time defending claims, rather than operating our business.

 

 

Ourbusiness depends, in part, on the sufficiency and effectiveness of our marketing.

 

Dueto the competitive nature of our industry, we must effectively and efficiently promote and market our products through advertisementsto sustain and improve our competitive position in our market. Marketing investments may be costly. In addition, we may, from time totime, change our marketing strategies and spending. We may also change our marketing strategies and spending in response to actions byour consumers, competitors, and other companies that produce and/or distribute beverage products. The sufficiency and effectiveness ofour marketing are important to our ability to retain and improve our market share and margins. If our marketing is not successful orif 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.

 

Lossof key personnel or our inability to attract and retain new qualified personnel could hurt our business and inhibit our ability to operateand grow successfully.

 

Wehave benefited substantially from the leadership and performance of our senior management, as well as other key employees. Our abilityto grow our brand successfully hinges on our ability to retain our current management and key employees, and to attract and retain qualifiedpersonnel 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 seniormanagement or key employees could prevent or delay the implementation and completion of our strategic objectives or divert management’sattention to seeking qualified replacements. If we are unable to attract or retain key personnel, our profitability and growth potentialcould be harmed.

 

Wemay not be able to protect our intellectual property adequately, which could harm the value of our brands and branded products and adverselyaffect our business.

 

Wedepend in large part on our brands and branded products and believe that they are very important to our business, as well as on our proprietaryhemp-infused processes. We rely on a combination of trademarks, trade secrets, and similar intellectual property rights to protect ourbrands and branded products. The success of our business depends on our continued ability to use our existing trademarks in order toincrease brand awareness and further develop our branded products in domestic markets. We own three trademarks that are registered withthe USPTO and have another trademark registration pending in the United States. We may not be able to protect our trademarks adequatelyand our use of trademarks may result in liability for trademark infringement, trademark dilution, or unfair competition. We may fromtime to time be required to institute litigation to enforce our trademarks or other intellectual property rights, or to protect our tradesecrets. 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 protectionof our intellectual property rights for any reason could have a material adverse effect on our business, results of operations, and financialcondition.

 

Wemay be subject to product liability claims or regulatory actions if our products are alleged to have caused significant loss or injury.

 

Wemay be subject to product liability claims, regulatory action, and litigation if our products are alleged to have caused loss or injuryor failed to include adequate instructions for use or failed to include adequate warnings concerning possible side effects or interactionswith other substances. Previously unknown adverse reactions resulting from consumption of CBD products alone or in combination with medicationsor other substances could also occur. In addition, the sale of any ingested product involves a risk of injury due to tampering by unauthorizedthird 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 inincreased costs and could adversely affect our reputation and goodwill with our consumers generally. There can be no assurance that wewill 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 sufficientinsurance coverage on reasonable terms or otherwise to protect against potential product liability claims could result in us becomingsubject to significant liabilities that are uninsured and also could adversely affect our commercial arrangements with third parties.

 

Ourannual and quarterly financial results are subject to significant fluctuations due to a variety of factors, many of which are beyondour control, which makes our results difficult to predict and could cause our results to fall short of expectations.

 

Ouroperating results can vary significantly from quarter-to-quarter and year-to-year depending on various factors, many of which are beyondour control. As a result, comparing our operating results on a period-to-period basis may not be meaningful, and you should not relyon 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 demandfor our products. We anticipate that fluctuations in operating results will continue in the future; thus, our historical operating resultsmay not be useful to you in predicting our future operating results.

 

Wemay require additional capital to finance our operations in the future, but that capital may not be available when it is needed and couldbe dilutive to existing stockholders.

 

Wemay require additional capital for future operations. We plan to finance anticipated ongoing expenses and capital requirements with fundsgenerated 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 capitalmay 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 ourcontrol, and on our financial performance. Accordingly, we cannot assure you that we will be able to raise additional capital successfullyat all or on terms that are acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effecton our liquidity, financial condition, results of operations, and prospects. Further, if we raise capital by issuing stock, the holdingsof our existing stockholders will be diluted.

 

Ifwe raise capital by issuing debt securities, such debt securities would rank senior to our shares of Common Stock, $0.00001 par valueper share (our “Common Stock”), upon our bankruptcy or liquidation. In addition, we may raise capital by issuing equity securitiesthat may be senior to our Common Stock for the purposes of dividend and liquidating distributions, which may adversely affect the marketprice of our Common Stock. Finally, upon bankruptcy or liquidation, holders of our debt securities and shares of our preferred stockand our lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our CommonStock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our Common Stock,or both.

 

Thesuccess of our new and existing products is uncertain.

 

Wehave committed, and expect to continue to commit, significant resources and capital to develop and market existing product enhancementsand 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 competitionwith offerings by new and existing competitors. In addition, new products and enhancements may pose a variety of technical challengesand require us to attract additional qualified employees. The failure to develop and market these new products or enhancements successfullycould seriously harm our business, financial condition, and results of operations.

 

Ourbusiness is dependent upon market acceptance by consumers.

 

Weare substantially dependent on market acceptance of our products by consumers, our ability to change with consumer tastes, and to meetconsumer 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 influencedby 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 newproduct 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 financialresources that may be required to bring new products to market. The inability to respond quickly to market changes could have an impacton our expected growth potential and the growth potential of the market for CBD and hemp beverages. Even if this market develops, wemay not succeed in our plan to become a category leader. Although we believe that our products in the United States are gaining betterconsumer acceptance, we cannot predict the future growth rate and size of this market.

 

Ifwe are able to expand our operations, we may be unable to manage our future growth successfully.

 

Ifwe are able to expand our operations in the United States, as planned, we may experience periods of rapid growth, which will requireadditional 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 failureto expand these areas and implement appropriate procedures and controls in an efficient manner and at a pace consistent with our businessobjectives and such growth could have a material adverse effect on our business and results of operations.

 

Anyfuture litigation, or settlements resulting from legal proceedings relating to our business operations, could have a material adverseimpact on our results of operations, and financial condition, and liquidity.

 

Fromtime to time, we may be subject to allegations, and may be party to legal claims and regulatory proceedings, relating to our businessoperations. Such allegations, claims, and proceedings may be brought by third parties, including our consumers, employees, governmentalor regulatory bodies, or competitors. Defending against such claims and proceedings, regardless of their merits or outcomes, is costlyand time consuming and may divert management’s attention and personnel resources from our normal business operations, and the outcomeof many of these claims and proceedings cannot be predicted. If any of these claims or proceedings were to be determined adversely tous, a judgment, a fine, or a settlement involving a payment of a material sum of money were to occur, or injunctive relief were issuedagainst us, our business, financial condition and results of operations could be materially adversely affected. Our reputation couldalso be affected and such adverse litigation results or publicity may also negatively impact our business, financial condition, and resultsof operations.

 

 

Premiumsfor our insurance coverage may not continue to be commercially justifiable, and our insurance coverage may have limitations and otherexclusions and may not be sufficient to cover our potential liabilities.

 

Wehave insurance to protect our assets, operations, and employees. While we believe our insurance coverage addresses all material risksto which we are exposed and is adequate and customary in our current state of operations, such insurance is subject to coverage limitsand exclusions and may not be available for the risks and hazards to which we are exposed. No assurance can be given that such insurancewill be adequate to cover our liabilities or will be generally available in the future or, if available, that premiums will be commerciallyjustifiable. 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 assurancethat 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 suchinsurance, or if we were to incur substantial liability that was not covered by insurance or was in excess of policy limits, we may beprevented from entering into certain business sectors, our growth may be inhibited, and we may be exposed to additional risk and financialliabilities, which could have a material adverse effect on our business, results of operations, and financial condition.

 

RisksRelated to the Regulation of Our Business and Products

 

Weand our co-packers and suppliers are subject to extensive governmental regulation and may be subject to enforcement if we are not incompliance with applicable requirements.

 

Weand our co-packers and suppliers are subject to a broad range of federal, state, and local laws and regulations that govern, among otherissues, the testing, development, production, distribution, marketing, and post-market reporting of foods, including those that containCBD. 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 requirementsof the Federal Food, Drug, and Cosmetic Act (“FDCA”) and regulations promulgated thereunder by the FDA. The statute and regulationsgovern, among other things, the production, composition, ingredients, packaging, labeling, and safety of beverages. The FDA requiresthat 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 subjectto periodic inspection by federal, state, and local authorities. If we cannot successfully contract with co-packers for our productsand 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 ourproducts, could result in their inability to continue to co-pack for us, or could result in a recall of our products that have alreadybeen distributed. If the FDA or other regulatory authority determines that we or they have not complied with the applicable regulatoryrequirements, our business, financial condition, and results of operations may be materially adversely impacted. If we do not complywith labeling requirements, including making unlawful claims about our products, we could be subject to public warning letters and possiblefurther enforcement actions (which other companies distributing CBD products have faced).

 

Failureby 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, recallsor seizures, warning letters, restrictions on the production or marketing of our products, or refusals to permit the import or exportof products, as well as potential criminal sanctions, any or all of which could result in increased operating costs resulting in a materialeffect on our operating results and business.

 

TheFDA has stated that it interprets the FDCA to prohibit the sale of food products that contain CBD. The FDA is currently evaluating apotential 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 withCBD, which could adversely impact our business, financial condition, and results of operations or cause us to halt product sales altogether.

 

Althoughhemp and CBD are no longer controlled substances subject to regulation by the U.S. Drug Enforcement Agency (the “DEA”), theFDA has stated publicly that it is nonetheless unlawful under the FDCA to introduce food containing CBD into interstate commerce. TheFDCA prohibits the introduction or delivery for introduction into interstate commerce of any food that contains an approved drug or adrug for which substantial clinical investigations have been instituted and made public, unless a statutory exemption applies. The FDAhas publicly stated its conclusion that none of the statutory exceptions has been met for CBD.

 

OnMay 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 informationas it considers policy options related to the regulation of these products, particularly in light of the changes to the legal statusof hemp enacted in the Agriculture Improvement Act of 2018 (the “2018 Farm Bill”). The FDA has also formed an internal workinggroup to evaluate the potential pathways to market for CBD products, which could include seeking statutory changes from Congress or promulgatingnew regulations. If legislative action is necessary, such legislative changes could take years to finalize and may not include provisionsthat 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 therapeuticclaims, the agency has recently issued warning letters to companies that market CBD products without such claims. There is an unquantifiablerisk that the FDA could take enforcement action against us, our co-packers, or our suppliers, or those marketing similar products tous, 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 forCBD 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 businessplan in the event that our CBD products become subject to new restrictions. In addition, violations of these laws, or allegations ofsuch violations, could disrupt our business and result in a material adverse effect on our operations. It is also possible that regulationsmay 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 andprocedures, when and if promulgated, could have on our activities in the hemp and CBD industry. The constant evolution of laws and regulationsmay require us to incur substantial costs associated with legal and compliance fees and ultimately require us to alter our business plan.

 

 

Ourproducts 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 thereis still significant uncertainty regarding the legal status of hemp and hemp-based products under U.S. law.

 

Ourproducts 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 thatthe CBD contained in our products and the hemp from which it is derived meet the definition of “hemp,” we believe that ourCBD products and the hemp from which they are derived are not Schedule I controlled substances under the CSA. However, there is a riskthat we could be subject to enforcement action, including prosecution, if any of our products are determined not to meet the definitionof “hemp” and to constitute “marijuana” under the CSA based on THC levels or other violations, which would havea negative impact on our business and operations.

 

Inaddition, the 2018 Farm Bill contained provisions that require the USDA, among other things, to promulgate a new regulatory frameworkthat will govern the growth and cultivation of hemp, where hemp grown in compliance with the framework would be permitted in interstatecommerce throughout the United States. On October 31, 2019, the USDA issued an interim final rule (“IFR”) establishing theregulations necessary for domestic hemp production, including provisions for the USDA to approve plans submitted by states and NativeAmerican tribes for the monitoring and regulation of hemp production at the state level. Effective March 22, 2021, The USDA issued thefinal rule, which creates the U.S. Domestic Hemp Production Program. The program provides requirements for maintaining records aboutthe land where hemp is produced, testing the levels of total delta-9 tetrahydrocannabinol, disposing of non-compliant plants, licensinghemp producers, and ensuring compliance under the new program. The Agricultural Marketing Service (AMS), has been delegated authorityto administer the U.S. Domestic Hemp Production Program. While the 2018 Farm Bill requires state and tribal plans to meet certain basicrequirements 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 resourcesto 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.

 

Withinthe United States, we and our co-packers and suppliers face a variety of state and local restrictions on the cultivation of hemp, andif 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.

 

Thegrowth 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 Actof 2014 (the “2014 Farm Bill”) to allow for the limited growth and cultivation of industrial hemp under federal law. Thisstatute allowed institutions of higher education and state departments of agriculture to grow and cultivate industrial hemp for agriculturalor other academic research purposes, or for hemp to be grown under the auspices of a state agricultural pilot program, in states wheresuch growth and cultivation is legal under state law. While the 2014 Farm Bill will be repealed after October 31, 2020, and althoughthe 2018 Farm Bill created a pathway under which hemp and its derivatives, including CBD, would no longer be a Schedule I controlledsubstance under the CSA and would be protected from interference in interstate commerce, the USDA only recently issued the IFR that containsthe regulatory framework that will govern the growth and cultivation of hemp, and, currently, several states continue to operate underthe 2014 Farm Bill. Alongside the current federal regulatory developments, state and local authorities have enacted their own restrictionson the cultivation or sale of hemp or hemp-derived CBD, including laws that ban the cultivation or possession of hemp or any other plantof 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 regulationsthat prohibit or limit the sale of such products at any time. In the event of a change in federal or state laws and regulations thatare adverse to our CBD products, we may be restricted or limited with respect to sale or distribution of those products, which couldadversely impact our intended business plan with respect to such products.

 

TheUSDA has only recently issued the IFR and started accepting state and tribal hemp production plans for review, and it remains to be seenwhich 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 priceand on a timely basis. If our current co-packers and suppliers were to face increased regulation or be unable to continue to supply ourbusiness, we may be unable to fulfill orders for our products or find a suitable replacement co-packers and suppliers in a timely fashionor with comparable pricing. If our current co-packers or suppliers or any future co-packers or suppliers fail to comply with the applicableregulatory requirements, our business may suffer.

 

Changesin 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, andresults of operations.

 

Inaddition to the legal framework applicable to hemp and CBD, the production and marketing of food products is highly regulated, and weand our co-packers and suppliers are subject to a variety of federal and state laws and regulations applicable to food. These laws andregulations 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 violationsof, 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 ordeceptive advertising, including under the auspices of the FTC and state consumer protection statutes.

 

Theregulatory environment in which we operate could change significantly and adversely in the future. The laws and regulations that applyto our products and business may change in the future and we may incur (directly or indirectly through our co-packers or suppliers) materialcosts to comply with current or future laws and regulations or any required product recalls. Any change in production, labeling, or marketingrequirements for our products may lead to an increase in costs or interruptions in our production or raw material supply, either or bothof which could adversely affect our operations and financial condition. For example, recent federal and state attention to the sale ofCBD-containing products, and specifically food products that contain CBD, could result in standards or requirements that mandate changesto our current product ingredients, labeling, or marketing. New or revised government laws and regulations could significantly limitour 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, aswell as potential criminal sanctions.

 

 

Anysuch 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.

 

Governmentscrutiny, warnings, and public perception could increase our costs of production and increase our legal and regulatory expenses, andif 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 agriculturalagencies. The FDA Food Safety Modernization Act of 2011 provides direct recall authority to the FDA for food products and includes anumber 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 withapplicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls, or seizures, as well as potentialcriminal sanctions, which could in turn have a material adverse effect on our business, financial condition, and results of operations.

 

Weoperate in a highly regulated environment with constantly evolving legal and regulatory frameworks. Consequently, we are subject to heightenedrisk of legal claims, government investigations, or regulatory enforcement actions. Although we have implemented policies and proceduresdesigned 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 andprocedures could lead to violations, unintentional or otherwise, of laws and regulations. Legal claims, government investigations, orregulatory enforcement actions arising out of our failure or alleged failure to comply with applicable laws and regulations could subjectus to civil and criminal penalties that could materially and adversely affect our product sales, reputation, financial condition, andoperating results. In addition, the costs and other effects of defending potential and pending litigation and administrative actionsagainst us may be difficult to determine and could materially adversely affect our business, financial condition, and results of operations.

 

Becausethere has been limited study on the effects of CBD, future nonclinical and clinical research studies and analysis of such studies bythird parties, including government agencies, may lead to conclusions that dispute or conflict with our understandings and beliefs regardingthe benefits, viability, safety, dosing, and social acceptance of CBD.

 

Researchin the United States and internationally regarding the benefits, viability, safety, and dosing of isolated cannabinoids (such as CBDor 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.

 

Futureresearch and clinical trials may draw opposing conclusions to statements contained in current articles, reports, and studies regardingCBD or could reach different or negative conclusions regarding the medical benefits, viability, safety, dosing, or other facts and perceptionsrelated to CBD, which could adversely affect acceptance of CBD in foods and the demand for such products. Future research may also causeregulatory authorities to change how they enforce regulatory restrictions applicable to hemp and CBD. We cannot predict any negativeresearch and clinical trial findings in the future that may have a material adverse impact on our business, financial condition, andresults of operation.

 

Negativepublicity from being in the hemp and CBD space could have a material adverse effect on our business, financial condition, and resultsof operations.

 

Hempand marijuana are both varieties of the plant, Cannabis sativa L., except that hemp, as defined by federal law for exemption from ScheduleI 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 isconsidered to be marijuana, which is legal for medical and recreational use under certain state laws, but which is not legal under federallaw. The similarities between these plants can cause confusion, and our activities with hemp may be incorrectly perceived that we areinvolved 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 businessesremain opposed to the cultivation and sale of cannabis and cannabis-derived products. Any negative publicity resulting from an incorrectperception that we operate in the marijuana space could result in a loss of current or future business. It could also adversely affectthe public’s perception of us or our Common Stock and could lead to reluctance by new parties to do business with or to investin us. We cannot assure you that additional business partners, including, but not limited to, financial institutions and distributorsand resellers, will not attempt to end or curtail their relationships with us. Any such negative press or impacts to our business relationshipscould have a material adverse effect on our business, financial condition, and results of operations.

 

Ourability to deduct certain business expenses for income tax purposes is subject to uncertainty.

 

Section280E of the Internal Revenue Code of 1986, as amended (the “Code”), prohibits the deduction of certain otherwise ordinarybusiness 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 costsof trades or businesses that are subject to Section 280E of the Code are not permitted to be deducted. Although the 2018 Farm Bill createda pathway under which hemp and its derivatives, including CBD, would no longer be a Schedule I controlled substance under the CSA, untilthe USDA implements regulations pursuant to the 2018 Farm Bill, we believe our ability to deduct certain ordinary business expenses requirescompliance with the 2014 Farm Bill. We do not believe that Section 280E of the Code currently forbids our deduction of otherwise ordinarybusiness expenses because we believe that we are in compliance with the 2014 Farm Bill and/or the products we sell are from co-packersand suppliers that are compliant with the 2014 Farm Bill. However, until the USDA promulgates regulations under the 2018 Farm Bill, governmentallydetermined non-compliance with the 2014 Farm Bill by us, our co-packers, or their suppliers may have a material adverse tax effect onus.

 

 

RisksRelated to an Investment in Our Common Stock

 

Thereis currently a limited public market for our Common Stock; a trading market for our Common Stock may never develop; and our Common Stockprices may be volatile and could decline substantially.

 

Althoughour Common Stock is quoted on the OTCQB, an over-the-counter quotation system maintained by the OTCM, under the symbol “KGKG,”there is a limited public market for our Common Stock. In the over-the-counter market, our stockholders may find it more difficult toobtain accurate quotations as to the market value of their shares of our Common Stock and may find fewer buyers to purchase their stockand fewer market makers to support its price than if our Common Stock were listed on a national securities exchange, such as the NasdaqStock Market. As a result of these and other factors, investors may be unable to resell shares of our Common Stock at or above the priceat which they purchased them, at or near quoted bid prices, or at all. Further, an inactive market may also impair our ability to raisecapital by selling additional equity in the future, and may impair our ability to enter into strategic partnerships or acquire companiesor products by using shares of our Common Stock as currency.

 

Weintend to list shares of our Common Stock on the Nasdaq Stock Market; but, we do not now, and may not in the future, meet its initiallisting standards, i.e., bid or closing price and stockholders’ equity. We expect, but can give no assurance, that, as aresult of the Specific Reverse Split, we will meet the bid or closing price standard. Further, we expect, but can give no assurance that,as a result of this offering, we will meet the stockholders’ equity standard. We believe that we currently meet the other initiallisting standards, but can give no assurance that we will continue to meet each of them. Should we fail to satisfy the initial listingstandards of the Nasdaq Stock Market, or if our Common Stock is otherwise rejected for listing and remains quoted on the OTCQB, the quotedprice of our Common Stock could suffer and the trading market for our Common Stock may become less liquid and our Common Stock pricemay be subject to increased volatility.

 

Therefore,an active, liquid, and orderly trading market for our Common Stock may not be sustained, which could significantly depress the publicprice of our Common Stock and/or result in significant volatility, which could affect your ability to sell your shares of our CommonStock. Even if an active trading market for our Common Stock were to be sustained, the market price of our Common Stock may be highlyvolatile and subject to wide fluctuations. Our financial performance, government regulatory action, tax laws, interest rates, and marketconditions in general could have a significant impact on the future market price of our Common Stock.

 

Weare not subject to the rules of Nasdaq or any other national securities exchange requiring the adoption of certain corporate governancemeasures and, as a result, our stockholders do not have the same protections.

 

Becauseour Common Stock is quoted on the OTCQB, we are not subject to the rules of a national securities exchange, such as the New York StockExchange, the NYSE-American, or the Nasdaq Stock Market. National securities exchanges generally require more rigorous measures relatingto corporate governance that are designed to enhance the integrity of corporate management. The requirements of the OTCQB afford ourstockholders fewer corporate governance protections than those of a national securities exchange. Until we comply with such greater corporategovernance measures, even though such compliance is not required by the OTCM for quotations of shares of our Common Stock on the OTCQB,our stockholders will have fewer protections, such as those related to director independence, stockholder approval rights, and governancemeasures that are designed to provide oversight of a corporation’s management by its board of directors.

 

OurCommon Stock is currently subject to the “penny stock” rules; accordingly, it could adversely affect the market price ofour Common Stock and increase your transaction costs to sell those shares.

 

TheSEC has adopted Rule 3a51-1, which defines a “penny stock” as any equity security that has a market price of less than $5.00per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. Because the price of our Common Stockis 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. Forany transaction involving a penny stock, unless exempt, Rule 15g-9 requires that a broker-dealer must make a special written determinationthat the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receiptof a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and datedcopy 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 inthe market value of our Common Stock.

 

Ourstock price has been extremely volatile, which could cause the value of an investment in our Common Stock to decline.

 

Themarket price of our Common Stock has been extremely volatile and could be subject to significant fluctuations due to changes in sentimentin the market regarding our operations or business prospects, among other factors. The public price of our Common Stock following thedate of this prospectus also could be subject to wide fluctuations in response to the risk factors described in this prospectus and othersbeyond 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 or management; and
	●	sales or expected sales of shares of our Common Stock by us, and our officers, directors, and significant stockholders.

 

 

Inaddition, the stock market in general has experienced extreme price and volume fluctuations that often have been unrelated or disproportionateto the operating performance of those companies. Securities class action litigation has often been instituted against companies followingperiods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted againstus, could result in very substantial costs, divert our management’s attention and resources and harm our business, operating results,and financial condition.

 

Becausewe are a “smaller reporting company,” we will not be required to comply with certain disclosure requirements that are applicableto other public companies and we cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies willmake our Common Stock less attractive to investors.

 

Weare a “smaller reporting company,” as defined in Item 10(f)(1) of Regulation S-K. As a smaller reporting company, we areeligible 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.

 

Wewill 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 publiccommon equity float or public float of more than $700 million. We also would not be eligible for status as smaller reporting companyif we become an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smallerreporting company.

 

Salesby our stockholders of a substantial number of shares of our Common Stock in the public market could adversely affect the market priceof our Common Stock.

 

Asubstantial portion of the total outstanding shares of our Common Stock may be sold into the market at any time. Some of these sharesare owned by our executive officers and directors, and we believe that such holders have no current intention to sell a significant numberof 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, suchsales could cause the market price of our Common Stock to drop significantly, even if our business were doing well.

 

Requirementsassociated with being a reporting public company will require significant company resources and management attention.

 

Fromand after December 31, 2020, we became subject to the reporting requirements of the Exchange Act and the other rules and regulationsof the SEC relating to public companies. We are working with independent legal, accounting, and financial advisors to identify thoseareas in which changes should be made to our financial and management control systems to manage our growth and our obligations as anSEC reporting company. These areas include corporate governance, internal control, internal audit, disclosure controls, and proceduresand financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas, includingour internal control over financial reporting. However, we cannot provide assurances that these and other measures we may take will besufficient to allow us to satisfy our obligations as an SEC reporting company on a timely basis. Further, while we remain an emerginggrowth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independentregistered public accounting firm.

 

Inaddition, 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’sattention to these matters will have on our business and operations.

 

Ourmanagement constitutes some of our largest stockholders, which will allow them to exert significant control over our business and affairsand have actual or potential interests that may depart from those of investors.

 

Asof September [●], 2022, members of our management team beneficially owned approximately [●]% of our Common Stock.As a result, management has the virtual unfettered ability to control substantially all matters submitted to our stockholders for approvalincluding (i) election of our Board; (ii) removal of any of our directors; (iii) amendment of our Amended and Restated Certificate ofIncorporation (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 combinationinvolving us.

 

Inaddition, management’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting toobtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stockprice.

 

Anyinvestors will own a minority percentage of our Common Stock and will have minority voting rights.

 

 

Ourpreferred stock may have rights senior to those of our Common Stock, which could adversely affect holders of our Common Stock.

 

OurA&R Certificate of Incorporation gives our Board the authority to issue one or more additional series of our preferred stock withouta vote or any action by our stockholders. Our Board also has the authority to determine the terms of those various series of our preferredstock, including price, preferences, and voting rights. The rights granted to holders of shares of our preferred stock in the futuremay adversely affect the rights of holders of shares of our Common Stock. Any such authorized series of preferred stock may have a liquidationpreference – a pre-set distribution in the event of a liquidation of our Company – that would reduce the amount availablefor distribution to the holders of shares of our Common Stock or may have dividend rights superior to those provided to the holders ofshares of our Common Stock, which could reduce the amount of available for distribution as dividends to holders of shares of our CommonStock. In addition, an authorized series of our preferred stock may have voting rights that are superior to the voting right of the holdersof shares of our Common Stock.

 

Wedo not expect to pay any cash dividends in the foreseeable future.

 

Weintend to retain our future earnings, if any, in order to reinvest in the development and growth of our business and, therefore, do notintend to pay dividends on our Common Stock for the foreseeable future. Any future determination to pay dividends will be at the discretionof our Board and will depend on our financial condition, results of operations, capital requirements, and such other factors as our Boarddeems relevant. Accordingly, investors may need to sell their shares of our Common Stock to realize a return on their investment, andthey may not be able to sell such shares at or above the price paid for them.

 

Wecan 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.

 

OurA&R Certificate of Incorporation authorizes 2,500,000,000 shares of our Common Stock, of which 1,781,156,866 are issued and outstandingas of the date of this prospectus; 1,200,000 shares of our Series B Preferred Stock, of which 488,000 shares are issued and outstandingas of the date of this prospectus; 250 shares of our Series C Preferred Stock, of which no shares are issued and outstanding as of thedate of this prospectus; and 500,000 shares of our Series D Preferred Stock, of which 500,000 shares are issued and outstanding as ofthe date of this prospectus, for an aggregate of 988,000 issued and outstanding shares of our preferred stock as of the date of thisprospectus, which shares of issued and outstanding shares of our preferred stock are convertible into an aggregate of 500,488,000 sharesof our Common Stock. Although our Board intends to utilize its reasonable business judgment to fulfill its fiduciary obligations to ourthen-existing stockholders in connection with any future issuance of our capital stock, the future issuance of additional shares of ourCommon Stock or preferred stock convertible into shares of our Common Stock would cause immediate, and potentially substantial, dilutionto our existing stockholders, which could also have a material effect on the market value of the shares. In addition, the exercise priceof any convertible debt securities or the conversion price of any convertible equity securities we may sell and issue in the future couldbe 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 occurrenceof 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 withoutoffering the holders of shares of our Common Stock, or the purchasers in this offering, the right to purchase their proportionate shareof such offered shares. Therefore, any additional sales of our capital stock by us could dilute an existing stockholder’s ownershipinterest in us.

 

Weare an emerging growth company and a smaller reporting company, and we cannot be certain if the reduced reporting requirements applicableto emerging growth companies and smaller reporting companies will make our Common Stock less attractive to investors.

 

Weare an emerging growth company, as defined in the JOBS Act, enacted in April 2012. For as long as we continue to be an emerging growthcompany, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that arenot emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of theSOX 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 goldenparachute payments not previously approved. We could be an emerging growth company for up to five years following the year in which wecomplete this offering, although circumstances could cause us to lose that status earlier. We will remain an emerging growth companyuntil the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of this offering, (b) inwhich 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, whichrequires the market value of our Common Stock that is held by non-affiliates to exceed $700 million as of the prior June 30^th,and (2) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.

 

Underthe JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standardsapply to private companies. We have irrevocably elected to “opt out” of this exemption and, therefore, we will adopt newor revised accounting standards at the time public companies adopt the new or revised accounting standards and, therefore, we will adoptnew or revised accounting standards at the time private companies adopt the new or revised accounting standards.

 

Evenafter we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which wouldallow us to continue to take advantage of many of the same exemptions from disclosure requirements, including not being required to complywith the auditor attestation requirements of Section 404 of the SOX, and reduced disclosure obligations regarding executive compensationin this annual report and our periodic reports and proxy statements, to the extent we are required to make such filings. We cannot predictif investors will find our Common Stock less attractive because we may rely on these exemptions. If some investors find our Common Stockless attractive as a result, there may be a less active trading market for our Common Stock and our stock price may be more volatile.

 

Provisionsin our A&R Certificate of Incorporation and A&R Bylaws and Delaware law may discourage a takeover attempt even if a takeovermight be beneficial to our stockholders.

 

Provisionscontained 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 couldmake it more difficult for stockholders to effect certain corporate actions. For example, our A&R Certificate of Incorporation authorizesour Board to determine the rights, preferences, privileges, and restrictions of unissued series of our preferred stock without any voteor action by our stockholders. Thus, our Board can authorize and issue shares of our preferred stock with voting or conversion rightsthat could dilute the voting power of holders of other series of our capital stock. These rights may have the effect of delaying or deterringa change of control of us. Additionally, our A&R Certificate of Incorporation and/or A&R Bylaws establish limitations on theremoval of directors and on the ability of our stockholders to call special meetings and include advance notice requirements for nominationsfor 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 Stateof Delaware (the “DGCL”), which prohibits an “interested stockholder” owning in excess of 15% of our outstandingvoting stock from merging or combining with us for a period of three years after the date of the transaction in which such stockholderacquired 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&RBylaws and Delaware Law.” These provisions could limit the price that certain investors might be willing to pay in the future forshares of our Common Stock.

 

Claimsfor indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against usand may reduce the amount of money available to us.

 

OurA&R Certificate of Incorporation provides that we will indemnify our directors and officers, in each case to the fullest extent permittedby 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.

 

Wepreviously 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 violatedSection 5 of the Securities Act.

 

Theshares of common stock of Branded Legacy that we distributed to our stockholders were not registered under the Securities Act, and wemay not have fully complied with SEC Legal Bulletin No. 4, which requires a company to satisfy five conditions in connection with thespin-off. As a result, we may have violated Section 5 of the Securities Act in that we did not file a registration statement with theSEC and have the same declared effective by the SEC prior to distributing the shares of Branded Legacy common stock. In addition, itis 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.

 

RisksRelated to Our Securities and this Offering

 

Ourshare price is likely to be volatile and the market price of our shares of Common Stock after this offering may drop below the priceyou pay.

 

Youshould consider an investment in our securities as risky and invest only if you can withstand a significant loss and wide fluctuationsin the market value of your investment. You may be unable to sell your securities at or above the initial public offering price due tofluctuations in the market price of our shares of Common Stock arising from changes in our operating performance or prospects.. Someof the factors that may cause the market price of our shares of Common Stock to fluctuate or decrease below the price paid in this offeringinclude:

 

	●	regulatory developments or enforcement in the United States with respect to our products;
	●	competition from existing products or new products that may emerge;
	●	changes in estimates or recommendations by securities analysts, if any cover our shares of Common Stock;
	●	fluctuations in the valuation of companies perceived by investors to be comparable to us;
	●	litigation;
	●	future sales of our shares of Common Stock;
	●	share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
	●	additions or departures of key personnel;
	●	economic and other external factors or other disasters or crises;
	●	general market conditions and market conditions for beverage stocks;
	●	overall fluctuations in U.S. equity markets; and
	●	other factors that may be unanticipated or out of our control.

 

 

Inaddition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class actionlitigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantialcosts defending the lawsuit and divert the time and attention of our management, which could seriously harm our business.

 

Substantialfuture sales of our shares of Common Stock, or the perception that these sales could occur, may cause the price of our shares of CommonStock to drop significantly, even if our business is performing well.

 

Alarge volume of sales of our shares of Common Stock could decrease the prevailing market price of our shares of Common Stock and couldimpair our ability to raise additional capital through the sale of equity securities in the future. Even if a substantial number of salesof our shares of Common Stock does not occur, the mere perception of the possibility of these sales could depress the market price ofour shares of Common Stock and have a negative effect on our ability to raise capital in the future.

 

Whilethe shares of our Common Stock are currently quoted on the OTCQB, regulations and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act and the related rules and regulations implemented by the SEC, or Nasdaq, will increase legaland financial compliance costs and will make some compliance activities more time consuming. We are currently evaluating these rules,and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. We intend to invest resourcesto comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative expensesand may divert management’s time and attention from our other business activities. If our efforts to comply with new laws, regulationsand standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatoryauthorities may initiate legal proceedings against us and our business may be harmed. In connection with this offering, we will increaseour directors’ and officers’ insurance coverage which will increase our insurance cost. In the future, it may be more expensiveor more difficult for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incursubstantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualifiedmembers of our Board, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

Underthe corporate governance standards of Nasdaq, a majority of our Board and each member of our audit committee must be an independent directorno later than the first anniversary of the completion of this offering. We may encounter difficulty in attracting qualified persons toserve on our Board and the audit committee, and our Board and management may be required to divert significant time and attention andresources away from our business to identify qualified directors. If we fail to attract and retain the required number of independentdirectors, we may be subject to the delisting of our shares of Common Stock from Nasdaq.

 

Weare an “emerging growth company,” and any decision on our part to comply only with certain reduced reporting and disclosurerequirements applicable to emerging growth companies could make our shares of Common Stock less attractive to investors.

 

Weare an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an “emerging growthcompany,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public companiesthat are not “emerging growth companies,” including, but not limited to, not being required to have our independent registeredpublic accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section404”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptionsfrom the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachutepayments not previously approved. We could be an “emerging growth company” for up to five years following the completionof this offering, although, if we have more than $1.07 billion in annual revenue, if the market value of our shares of Common Stock heldby non-affiliates exceeds $700 million as of June 30 of any year, or we issue more than $1.0 billion of non-convertible debt over a three-yearperiod before the end of that five-year period, we would cease to be an “emerging growth company” as of the following December31. Investors could find our shares of Common Stock less attractive if we choose to rely on these exemptions. If some investors findour shares of Common Stock less attractive as a result of any choices to reduce future disclosure, there may be a less active tradingmarket for our shares of Common Stock and our share price may be more volatile. We have elected not to take advantage of the extendedtransition period allowed for emerging growth companies for complying with new or revised accounting guidance as allowed by Section 107of the JOBS Act and Section 7(a)(2)(B) of the Securities Act.

 

Ifwe fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financialresults or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harmour business and the trading price of our shares of Common Stock.

 

Effectiveinternal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosurecontrols and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encounteredin their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connectionwith Section 404 or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internalcontrols over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes toour financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investorsto lose confidence in our reported financial information, which could have a negative effect on the trading price of our shares of CommonStock.

 

 

Wewill be required to disclose changes made in our internal controls and procedures on a quarterly basis and our management will be requiredto assess the effectiveness of these controls annually. However, for as long as we are an “emerging growth company” underthe JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal controlsover financial reporting pursuant to Section 404. We could be an “emerging growth company” for up to five years followingthis offering. An independent assessment of the effectiveness of our internal controls could detect problems that our management’sassessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and requireus to incur the expense of remediation. We have elected not to take advantage of the extended transition period allowed for emerginggrowth companies for complying with new or revised accounting guidance as allowed by Section 107 of the JOBS Act and Section 7(a)(2)(B)of the Securities Act.

 

Thereis no public market for the Pre-funded Warrants or the Common Stock Purchase Warrants being offered by us in this offering.

 

Thereis no current public trading market for the Pre-funded Warrants or the Common Stock Purchase Warrants and we do not expect a market todevelop. In addition, we do not intend to apply to list the Pre-funded Warrants [or the Common Stock Purchase Warrants] on the NasdaqStock Market or other nationally recognized trading system, including the QTCQB. Without an active market, the liquidity of the Pre-fundedWarrants and [the Common Stock Purchase Warrants] will be limited, which may adversely affect their value.

 

Holdersof Pre-funded Warrants or Common Stock Purchase Warrants purchased in this offering will have no rights as common stockholders untilsuch holders exercise their Pre-funded Warrants or Common Stock Purchase Warrants and acquire our shares of Common Stock.

 

Untilholders of Pre-funded Warrants or Common Stock Purchase Warrants acquire our shares of Common Stock upon exercise thereof, such holderswill have no rights with respect to our shares of Common Stock underlying the Pre-funded Warrants and Common Stock Purchase Warrants.Upon exercise of the Pre-funded Warrants or Common Stock Purchase Warrants, the holders will be entitled to exercise the rights of acommon stockholder only as to matters for which the record date occurs after the exercise date.

 

ThePre-funded Warrants and the Common Stock Purchase Warrants are speculative in nature.

 

ThePre-funded Warrants and the Common Stock Purchase Warrants do not confer any rights of share of Common Stock ownership on their holders,such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of Common Stock at afixed price for a limited period of time. Following this offering, the market value of the Pre-funded Warrants and the Common Stock PurchaseWarrants, if any, is uncertain and there can be no assurance that the market value of the Pre-funded Warrants and the Common Stock PurchaseWarrants will equal or exceed their imputed offering price. The Pre-funded Warrants [and the Common Stock Purchase Warrants] will notbe listed or quoted for trading on any market or exchange. There can be no assurance that the market price of the shares of Common Stockwill ever equal or exceed the exercise price of the Pre-funded Warrants or the Common Stock Purchase Warrants, respectively, and consequently,it may not ever be profitable for holders of the Pre-funded Warrants and the Common Stock Purchase Warrants to exercise them.

 

Ourmanagement team will have broad discretion to use the net proceeds from this offering and its investment of these proceeds may not yielda favorable return. They may invest the proceeds of this offering in ways with which investors disagree.

 

Ourmanagement team will have broad discretion in the application of the net proceeds from this offering and could spend or invest the proceedsin ways with which our stockholders disagree. Accordingly, investors will need to rely on our management team’s judgment with respectto the use of these proceeds. We intend to use the proceeds from this offering in the manner described under “Use of Proceeds.”The failure by management to apply these funds effectively could negatively affect our ability to operate and grow our business.

 

Wecannot specify with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering. In addition,the amount, allocation and timing of our actual expenditures will depend upon numerous factors, including milestone payments receivedfrom our strategic partnerships and royalties received on sale of our approved product and any future approved product.

 

Accordingly,we will have broad discretion in using these proceeds. Until the net proceeds are used, they may be placed in investments that do notproduce significant income or that may lose value.

 

Investorsin this offering will pay a much higher price than the book value of our shares of Common Stock and therefore you will incur immediateand substantial dilution of your investment.

 

Theinitial public offering price will be substantially higher than the net tangible book value per share of Common Stock based on the totalvalue of our tangible assets less our total liabilities immediately following this offering. Therefore, if you purchase securities inthis offering, you will experience immediate and substantial dilution of approximately $[●] per share, representing the differencebetween our pro forma as adjusted net tangible book value per share after giving effect to this offering at an assumed initial publicoffering price of $[●] per security. As at [●], 2022, and giving effect to the Specific Reverse Split, we have issued[●] outstanding stock options and [●] outstanding Warrants to acquire shares of Common Stock. To the extent theseoutstanding options and Warrants are ultimately exercised, you will experience further dilution. See “Dilution.”

 

Anactive trading market for our shares of Common Stock may never develop or be sustained.

 

Wehave applied to list our shares of Common Stock on Nasdaq. However, there has been a limited public trading market on the QTCQB. We cannotassure you that an active trading market for our shares of Common Stock will develop on Nasdaq or elsewhere or, if developed, that anymarket will be sustained. Accordingly, we cannot assure you of the likelihood that an active trading market for our shares of CommonStock will develop or be maintained, the liquidity of any trading market, your ability to sell your shares of our shares of Common Stockwhen desired, or the prices that you may obtain for your shares of Common Stock.

 

 

Wecannot assure you that the market price of our shares of Common Stock will remain high enough to have the intended effect of complyingwith Nasdaq’s minimum price requirement.

 

Inconnection with this offering and the intended uplisting of our shares of Common Stock to Nasdaq, we have effected the Specific ReverseSplit at a ratio that currently achieves the requisite increase in the market price of our shares of Common Stock to allow us to obtainNasdaq approval of our initial listing application. However, there can be no assurance that the market price of our shares of CommonStock following the Specific Reverse Split will remain at the level required for continuing compliance with that requirement. It is notuncommon for the market price of a company’s shares of Common Stock to decline in the period following a Reverse Split. If themarket price of our shares of Common Stock declines following the effectuation of the Specific Reverse Split, the percentage declinemay be greater than would occur in the absence of a Reverse Split. In any event, other factors unrelated to the number of shares of CommonStock outstanding, such as negative financial or operational results, could adversely affect the market price of our shares of CommonStock and thus jeopardize our ability to meet or maintain the Nasdaq’s minimum price requirement. If we are unable to satisfy theserequirements or standards, we would not be able to meet the initial listing application standards, which could cause us to terminatethe offering. We can provide no assurance that any such action taken by us would allow our shares of Common Stock to be listed, stabilizethe market price, or improve the liquidity of our Common Stock, prevent our Common Stock from dropping below the minimum bid price requirement,or prevent future non-compliance with the listing requirements.

 

Wemight be unable to list our shares of Common Stock on Nasdaq, or the OTCQB may delist our Common Stock, which could limit investors’ability to make transactions in our Common Stock and subject us to additional trading restrictions.

 

Wehave applied to apply to list our shares of Common Stock on Nasdaq. In order to make a final determination of compliance with its listingcriteria, Nasdaq may look to the first trading day’s activity and, particularly, the last bid price on such day. In the event thetrading price for our shares of Common Stock drops below Nasdaq’s minimum bid or closing price requirements, Nasdaq could rescindour initial listing approval. If we fail to list the shares of Common Stock on Nasdaq, the liquidity for our shares of Common Stock wouldbe significantly impaired, which may substantially decrease the trading price of our shares of Common Stock.

 

Inaddition, in the future, our Common Stock may fail to meet the continued listing requirements to be listed on Nasdaq. If Nasdaq delistsour shares of Common Stock from trading on its exchange, we could face significant material adverse consequences, including:

 

	●	a limited availability of market quotations for our securities;
	●	a determination that our shares of Common Stock is a “penny stock” which will require brokers trading in our shares of Common Stock to adhere to more stringent rules and possibly resulting in a reduced level of trading activity in the secondary trading market for our shares of Common Stock;
	●	a limited amount of news and analyst coverage for our Company; and
	●	a decreased ability to issue additional securities or obtain additional financing in the future.

 

Salesof a substantial number of our shares of Common Stock by our existing stockholders in the public market could cause our share price tofall.

 

Ifour existing stockholders sell, or indicate an intention to sell, substantial amounts of our shares of Common Stock in the public marketafter the lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our shares of CommonStock could decline. Based on the number of shares of Common Stock outstanding as of , 2022, upon the closing of this offering, we willhave outstanding a total of shares of Common Stock, assuming none of the Warrants issued in this offering are exercised and no sale ofany Pre-funded Warrants. Of these shares, only the shares of Common Stock sold in this offering by us, plus any shares sold upon exerciseof the underwriters’ option to purchase additional shares, will be freely tradable without restriction in the public market immediatelyfollowing this offering, unless purchased by our affiliates. In connection with this offering, our officers, directors and significantstockholders have agreed to be subject to a contractual lock-up with the underwriters, which will expire 90 days after the date of thisprospectus. The representatives, however, may, in their sole discretion, permit our officers, directors and other stockholders who aresubject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

 

Sharesof Common Stock that are either subject to outstanding options or are reserved for future issuance under our Equity Incentive Plan willbecome eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, any relevant lock-upagreements, and Rule 144 under the Securities Act of 1933, as amended, (the “Securities Act”). Additionally, shares of CommonStock that are issuable upon the exercise of outstanding Warrants to purchase shares of our Common Stock, and warrants to purchase sharesof our Common Stock that may be granted in connection with the closing of this offering, will become eligible for sale in the publicmarket to the extent permitted by the lock-up agreements and Rule 144 under the Securities Act, if the resale of which shares of CommonStock is not otherwise registered under the Securities Act. If these additional shares of Common Stock are sold, or if it is perceivedthat they will be sold, in the public market, the trading price of our shares of Common Stock could decline.

 

Wedo not expect to pay dividends in the future. As a result, any return on investment may be limited to the value of our Common Stock.

 

Wedo not anticipate paying cash dividends on our Common Stock in the foreseeable future. The payment of dividends on our Common Stock willdepend on our earnings, financial condition and other business and economic factors as our Board may consider relevant. If we do notpay dividends, our shares of Common Stock may be less valuable because a return on an investment in our shares of Common Stock will onlyoccur if our stock price appreciates.

 

 

CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS

 

ThisProspectus includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statementsother than statements of historical facts contained in this Prospectus, including statements regarding our future financial position,business strategy and plans, objectives of management for future operations, and statements related to the expected effects on our businesson our business from the COVID-19 pandemic, and other similar matters, are forward-looking statements. The words “believe,”“may,” “estimate,” “continue,” “anticipate,” “intend,” “should,”“plan,” “expect,” and similar expressions, as they relate to us, are intended to identify forward-looking statements.We have based these forward-looking statements largely on our current expectations and projections about future events and financialtrends that we believe may affect our financial condition, results of operations, business strategy, and financial needs. These forward-lookingstatements are subject to a number of risks, uncertainties, and assumptions described in “Risk Factors” and elsewhere inthis Prospectus.

 

Othersections of this Prospectus may include additional factors that could adversely affect our business and financial performance. Moreover,we operate in a highly regulated, very competitive, and rapidly changing environment. New risk factors emerge from time to time and itis not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extentto which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-lookingstatements.

 

Weundertake no obligation to update publicly or revise any forward-looking statements. You should not rely upon forward-looking statementsas predictions of future events or performance. We cannot assure you that the events and circumstances reflected in the forward-lookingstatements will be achieved or will occur. Although we believe that the expectations reflected in the forward-looking statements arereasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We have an ongoing obligation to continuallydisclose material future changes in our Company and its operations.

 

MARKET,INDUSTRY AND OTHER DATA

 

Unlessotherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including ourmarket position, market opportunity and market size, is based on information from various sources such as industry publications, on assumptionsthat we have made based on such data and other similar sources and on our knowledge of the markets for our products. These data involvea number of assumptions and limitations.

 

Inaddition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operateis necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the sectionentitled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materiallyfrom those expressed in the estimates made by the independent parties and by us.

 

 

USEOF PROCEEDS

 

Weestimate that the net proceeds from this offering will be approximately $[●] million, based upon an assumed initial public offeringprice of $[●] per Common Stock Unit, without deducting underwriting discounts and commissions and estimated offering expenses payableby us and assuming none of the Warrants issued in this offering are exercised. If the underwriters exercise their over-allotment optionto purchase additional shares and/or Pre-funded Warrants from us in full, we estimate that the gross proceeds will be approximately $[●]million without deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

A$1.00 increase or decrease in the assumed initial public offering price of $[●] per Common Stock Unit would increase or decreasethe net proceeds to us from this offering by approximately $[●] million, assuming the number of Common Stock Units and/or Pre-fundedWarrant Units offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwritingdiscounts and commissions and estimated offering expenses payable by us. An increase or decrease of [●] in the number of securitiesoffered by us would increase or decrease the net proceeds to us from this offering by approximately $[●] million, assuming the assumedinitial public offering price remains the same and after deducting the underwriting discounts and commissions and estimated offeringexpenses payable by us.

 

Weare undertaking this offering in order to increase our liquidity and raise capital to broaden the market for our products, develop lineextensions of our products, and increase our distribution operations, as well as for additional capital, capital expenditures and othergeneral corporate purposes. We have not specifically allocated the proceeds to those purposes as of the date of this prospectus. Theprecise amount and timing of the application of proceeds from the sale of securities will depend on our funding requirements and theavailability and cost of other funds at the time of sale. Allocation of proceeds of a particular series of securities, or the principalreason for the offering if no allocation has been made, will be described in the applicable prospectus supplement or in any related freewriting prospectus.

 

DIVIDENDPOLICY

 

Wehave never paid any dividends on our shares of Common Stock or any of our other securities. We currently intend to retain any futureearnings to finance the continued growth and development of our business and do not anticipate that we will declare or pay any cash dividendsin the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our Board and will be dependentupon our financial condition, results of operations, capital requirements, restrictions under any future indebtedness, and other factorsthe Board deems relevant from time to time.

 

 

CAPITALIZATION

 

Thefollowing table sets forth our cash as well as capitalization as of June 30, 2022 after giving effect to the Specific Reverse Split:

 

	●	on an actual basis;
	●	on an as adjusted basis to give effect to the sale of securities offered hereby at the assumed combined offering price of $[●] per security, ($[●] per security), without deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The assumed offering price may not be the final price of the Offering and will be adjusted based on the actual initial public offering price and other terms of our initial public offering determined at pricing; and

 

Youshould read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”included elsewhere in this prospectus, and our financial statements and related notes thereto.

 

		As of [June 30, 2022]
		Actual				Pro forma as adjusted (1)
		(In thousands, except share data)
CURRENT ASSETS
Cash		$	6,188
Accounts receivable (net)			24,943
Inventory (net)			1,189,913
NON-CURRENT ASSETS			1,384,894
Total Assets			2,565,772
CURRENT LIABILITIES			4,202,818
NON-CURRENT LIABILITIES			1,354,234
Total Liabilities			5,557,052
STOCKHOLDERS’ DEFICIT
Preferred Stock (5,700,250 shares authorized, 988,000 issued and outstanding)			10
Common Stock (2,500,000,000 shares authorized, 1,709,122,945 issued and outstanding)			17,091
Common Stock Issuable (170,000 shares)			1,386,497
Additional paid-in capital		$	16,855,382
Accumulated deficit		$	(21,250,260	)			)
Total stockholders’ deficit		$	(2,991,280	)
Total liabilities and stockholders’ deficit		$	(2,565,772	)

 

(1)

Pro-forma as adjusted does not give effect to the impact of Common Stock Purchase Warrants or the Underwriter’s over-allotment option.

 

Each$1.00 increase (decrease) in the assumed combined public offering price of $[●] per Common Stock Unit ($[●]), would increase(decrease) the pro forma amount of cash and cash equivalents, total stockholders’ equity and total capitalization by approximately$[●] million, assuming the number of Common Stock Units offered by us, as set forth on the cover page of this prospectus, remainsthe same and without deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Wemay also increase or decrease the number of securities we are offering. Each increase (decrease) of [●] securities in the numberof securities offered by us would increase (decrease) the pro forma amount of cash and cash equivalents, total stockholders’ equityand total capitalization by approximately $[●], assuming that the assumed public offering price remains the same, and without deductingthe estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma information discussedabove is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determinedat pricing.

 

 

	●	The number of shares of Common Stock to be outstanding after this offering is based on an aggregate of [●] shares outstanding as of [September [●], 2022] after giving effect to the Specific Reverse Split. The table above excludes:
	●	[●] shares of Common Stock issuable upon the exercise of outstanding options to issue shares of Common Stock, as of [September [●], 2022], at a weighted-average exercise price of $3.05 per share;
	●	[●] shares of Common Stock issuable upon the exercise of outstanding share of Common Stock Warrants, as of [September [●], 2022], at a weighted-average exercise price of $[●] per share.

 

For additional information regardingour capital structure, see “Description of Share Capital.”

 

DILUTION

 

Investors purchasing Common StockUnits and/or Pre-funded Warrant Units in this offering will experience immediate and substantial dilution in the as adjusted net tangiblebook value of their shares of Common Stock. Dilution in as adjusted net tangible book value represents the difference between the assumedpublic offering price per Unit and the as adjusted net tangible book value per share of Common Stock immediately after the offering.

 

The historical net tangible bookvalue of our shares of Common Stock as of [June 30, 2022] was $[●] or $[●] per share after giving effect to the Specific ReverseSplit. Historical net tangible book value per share of Common Stock represents our total tangible assets (total assets, less intangibleassets) fewer total liabilities divided by the number of shares of Common Stock outstanding as of that date after giving effect to theSpecific Reverse Split.

 

After giving effect to the saleof Common Stock Units in this offering (assuming no Pre-funded Warrant Units are sold in this offering and excluding the shares of CommonStock issuable upon the exercise of the Common Stock Purchase Warrants being offered in this offering) at the assumed offering price of$[●] per Common Stock Unit ($[●] per Common Stock Unit) (which is based on $[●] per share of Common Stock which is theclosing price of our shares of Common Stock on the OTCQB on [September [●], 2022], giving effect to a Reverse Splits ratio of one-for-[●]),and without deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our net tangiblebook value as of[June 30, 2022 would have been $[●], or $[●] per share. The assumed offering price may not be the final priceof the Offering and will be adjusted based on the actual initial public offering price and other terms of our initial public offeringdetermined at pricing. This amount represents an immediate increase in net tangible book value of $[●] per share to our existingstockholders and an immediate dilution in net tangible book value of approximately $[●] per share to new investors purchasing ourshares of Common Stock in this offering. We determine dilution by subtracting the net tangible book value per share after the offeringfrom the amount of cash that a new investor paid for a Common Stock Unit.

 

The following table illustratesthis dilution on a per share basis after giving effect to the Specific Reverse Split:

 

Assumed offering price per Common Stock Unit(1)		$
Historical net tangible book value per share as of June 30, 2022]		$
Increase in net tangible book value per share attributable to Investors		$
Net tangible book value per share after the offering		$
Dilution per share to new investors		$

 

(1)

The assumed offering price may not be the final price of the offering and will be adjusted based on the actual initial public offering price and other terms of our initial public offering determined at pricing.

 

If the underwriters exercisetheir option to purchase [●] additional shares of Common Stock and/or Common Stock Purchase Warrants, the as adjusted net tangiblebook value of our shares of Common Stock after this offering would be $[●] or $[●] per share representing an immediate increasein net tangible book value of approximately $[●] per share to existing stockholders and an immediate dilution of $[●] per shareto the investors in this offering, without deducting the underwriting discount and estimated offering expenses payable by us.

 

The number of shares of CommonStock to be outstanding after this offering is based on [●] shares of Common Stock outstanding as of September [●], 2022 aftergiving effect to the Specific Reverse Split, and excludes:

 

	●	[●] shares of Common Stock issuable upon the exercise of outstanding options to issue shares of Common Stock, as of September [●], 2022, at a weighted-average exercise price of $[●] per share;
	●	[●] shares of Common Stock issuable upon the exercise of outstanding share of Common Stock Warrants, as of September [●], 2022 at a weighted-average exercise price of $[●] per share.

 

The above discussion reflectsthe one-for-[●] Specific Reverse Split of our issued and outstanding shares of Common Stock, options and Warrants and the correspondingadjustment of all stock option and Warrant exercise prices per share.

 

To the extent that outstandingoptions or Warrants are exercised, you may experience further dilution. In addition, we may choose to raise additional capital due tomarket conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. Tothe extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securitiesmay result in further dilution to our stockholders.

 

 

MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the resultsof operations and financial condition for the years ended December 31, 2021 and 2020 should be read in conjunction with the financialstatements and related notes and the other financial information that are included elsewhere in this Annual Report. This discussion includesforward-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 inherentlysubject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control and manyof which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual resultsand 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 fromthose anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the “RiskFactors,” “Cautionary Note Regarding Forward-Looking Statements,” and “Description of Business” sectionsin 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 andour representatives may from time to time make written or oral statements that are “forward-looking,” including statementscontained in this Annual Report and other filings with the SEC, reports to our stockholders, and news releases. All statements that expressexpectations, estimates, forecasts, or projections are forward-looking statements. In addition, other written or oral statements whichconstitute 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-lookingstatements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions, which are difficultto predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by suchforward-looking statements.

 

We undertake no obligation to update or revise anyof the forward-looking statements after the date of this Annual Reports to confirm forward-looking statements to actual results. Importantfactors on which such statements are based are assumptions concerning uncertainties, including, but not limited to, uncertainties associatedwith 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 conjunctionwith the financial statements and the notes thereto which are included in this Annual Report. This discussion contains forward-lookingstatements that involve risks, uncertainties, and assumptions. Our actual results may differ substantially from those anticipated in anyforward-looking statements included in this discussion as a result of various factors.

 

Results of Operations

 

Overview

 

Our business has grown rapidly since inception in2015, and we anticipate that our business will continue to grow significantly. In the year ended December 31, 2021, the Company saw anincrease in growth compared to fiscal year 2020, as distribution by our current distributors and new distributors, who were, and whoseclients were, affected by COVID-19 had resumed and saw fewer COVID-19 pandemic-related distribution impacts. The Company acquired S andS in early 2021, which increased our product variety, resulting in the commencement of new distribution contracts. In the prior fiscalyear 2020, the Company had unforeseen delays in signing more favorable agreements with larger, reputable tier 1 and mid-size distributorsand grocery chains and we were additionally impacted by the COVID-19 pandemic during the fiscal year. The COVID-19 pandemic delayed ourlaunch 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 toonline consumers, to resellers, and to distributors, Product sales to resellers include sales to convenience stores, grocery stores, andsmoke and gift shops that complement our current product offering. Product sales to distributors include our energy drinks, our HighDrateCBD-infused energy waters, and our apparel, such as t-shirts and hats. In early 2021, we broadened our product line to include Ooh LaLemin lemonade. We also distribute our products and other companies’ products at retail. In late 2021, we expanded our distributionoperations with the addition of a second distribution center.

 

We have experienced and expect to continue to experiencesubstantial growth in our operations as we seek to expand through additional products and acquisitions that complement our current productofferings. 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 impactsfor fiscal year 2022. Based on those expectations, we now anticipate signing more favorable agreements with larger, reputable tier 1 andmid-size distributors, big box stores, and grocery chains. The following is a more detailed discussion of our financial condition andresults of operations for the period presented.

 

Year ended December 31, 2021 compared to Yearended 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 theyear 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 ourfinancial condition and results of operations for the period presented, along with prior periods.

 

Revenue

 

The following table presents our net revenues, byrevenue source, and the period-over-period percentage change, for the period presented:

 

		Year Ended December 31,
		2021				2020
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 productlines for the period presented:

 

		Year Ended December 31,
		2021				2020
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 reportednet revenues of approximately $2.5 million, which is an increase of approximately $1.6 million, or approximately 172%, compared to netrevenues of approximately $910,200 for the year ended December 31, 2020. An increase of approximately $536,300 of our revenue is attributableto increased product sales, while our retail revenue increased in net revenue by approximately $1.1 million. We attribute the increasein 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 distributionimpacts. Additionally, we broadened our product line to include Ooh La Lemin lemonade through an acquisition in early 2021, which resultedin signing more favorable agreements with larger, reputable tier 1 and mid-size distributors and grocery chains. The significant increasein our retail revenue is attributed to customers, who had been, and whose clients had been, affected by COVID-19. We also saw here thatretail 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 seconddistribution hub. We expect that our product revenue will increase in fiscal year 2022 compared to fiscal year 2021, we anticipate asthe Company anticipates signing more favorable agreements with larger, reputable tier 1 and mid-size distributors, big box stores, andgrocery chains. In addition, we anticipate that our retail revenue will continue to increase as we broaden our customer base with increaseddistribution to additional grocery and convenience chains.

 

Cost of Revenues

 

Cost of revenues consists primarily of expenses associatedwith products sold to distributors and resellers, including product and shipping costs. Costs also include credit card fees, fees incurredfor sales that occur on Amazon.com, and other transaction fees related to the processing of consumer transactions. Typically, we expectthat the cost of revenues will increase as a direct correlation to increases in sales. Thus, our cost of revenues increases on an absolutebasis 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 December31, 2021, we reported cost of revenues of approximately $2.14 million, which is an increase of approximately $1.5 million, or approximately228%, compared to approximately $654,200 for the year ended December 31, 2020. This increase is attributed to an increase in sales inboth our products and retail distribution in 2021, compared to the prior year period. The cost of revenues increase was larger than theincrease in revenues. This is primarily attributed to increased costs in obtaining our ingredients for our products, for production ofour 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, andincreased costs of shipping our products. We continue to seek alternative methods to reduce costs for production and the cost of shippingour 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 officeand administrative expenses related to maintaining our facilities. Selling, general and administrative expenses increased in the yearended 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 drivenby increased operating expenses associated with our acquisition of Sand S, advertising and marketing, travel expenses, and licensing andfiling 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 operationsand continue to incur additional corporate-related expenses associated with our status as a fully registered issuer with the SEC underthe Securities Exchange Act of 1934, SG&A expenses will continue to increase.

 

Impairment of Goodwill

 

Impairment of goodwill for the year ended December31, 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, 2021was $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 therecording 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 loansof $212,648 during the year ended December 31, 2021, all of which did not exist in the prior year period. Additionally, we realized thechange in the fair value of derivative liability of $910,866, and the change in interest expense of $563,419, as compared to the prioryear period.

 

Net Loss

 

We incurred a net loss of approximately $7.0 millionfor 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, offsetby increased SG&A expenses, the impairment of goodwill charge associated with our 2021 acquisition, and the increase in other expenses,as discussed above.

 

Three Months ended June 30, 2022 compared toThree Months ended June 30, 2021

 

Overview

 

As reflected in the accompanying financial statements,during the three months ended June 30, 2022, we incurred a net loss of approximately $1,388,525, compared to a net loss of approximately$373,214 for the three months ended June 30, 2021.

 

 

The following is a more detailed discussion of ourfinancial condition and results of operations for the period presented, along with prior periods.

 

Revenue

 

The following table presents our net revenues, byrevenue source, and the period-over-period percentage change, for the period presented:

 

		Three Months Ended June 30,
		2022				2021
Revenue Source		Revenue				Revenue				% Change
Distributors		$	219,790			$	414,937				(47	)%
Amazon and Walmart Marketplace			44,565				39,256				14	%
Online Sales			13,709				21,843				(37	)%
Retail			927,614				328,848				182	%
Shipping			4,420				5,725				(23	)%
Sales Returns and Allowances			(36,700	)			(19,800	)			85	%
Net Revenues		$	1,173,398			$	790,809				48	%

 

The following table presents our net revenues by productlines for the periods presented:

 

		Three Months Ended June 30,
		2022				2021
Product Line		Revenue				Revenue				% Change
Hemp Energy Drinks		$	50,792			$	113,434				(55	)%
CBD Energy Waters			17,249				31,682				(46	)%
Lemonade Drinks			209,976				329,893				(36	)%
Apparel			47				1,027				(95	)%
Retail			927,614				328,848				182	%
Shipping			4,420				5,725				(23	)%
Sales returns and allowance			(36,700	)			(19,800	)			85	%
Net Revenues		$	1,173,398			$	790,809				48	%

 

During the three months ended June 30,2022, we reported net revenues of approximately $1,173,398, which is an increase of approximately $382,589, or approximately 48%, comparedto net revenues of approximately $790,809 for the three months ended June 30, 2021. An increase of approximately $598,881 of our revenueis attributable to increased retail revenue, while our product sales decreased in net revenue by approximately $216,292. We attributethe significant increase in retail revenue to attaining a larger percentage of the territory in which the Company distributes, includingthe addition of a third distribution hub in late fiscal 2021 and the hiring of additional employees to service this territory. We attributethe decrease in product sales to certain delays in production of a new product line and existing product lines, as well as to a change-overin our customer mix from the prior period due to a non-repetitive, regional, one-off customer relationship in the prior period and adifferent regional customer imposing slotting fees in the current period (which fees we declined to pay). We anticipate that the rolloutof our drink products with a national retailer will commence late in the third quarter. Additionally, the Company experienced delaysin the rebranding of our hemp product line and the subsequent production. We expect that our product revenue will increase in the remainingfiscal year 2022 compared to fiscal year 2021, and we do not anticipate further delays. Additionally, the Company hired additional salespersonnel to lead sales efforts as the Company expands into new territories and the Company anticipates signing more favorable agreementswith larger, reputable tier 1 and mid-size distributors, big box stores, and grocery chains. In addition, we anticipate that our retailrevenue 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 associatedwith products sold to distributors and resellers, including product and shipping costs. Costs also include credit card fees, fees incurredfor sales that occur on Amazon.com, and other transaction fees related to the processing of consumer transactions. Typically, we expectthat the cost of revenues will increase as a direct correlation to increases in sales. Thus, our cost of revenues increases on an absolutebasis 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 threemonths ended June 30, 2022, we reported cost of revenues of approximately $885,517, which is an increase of approximately $198,811,or approximately 29%, compared to approximately $686,706 for the three months ended June 30, 2021. This increase is attributed toan increase in sales in both our products and retail distribution in 2022, compared to the prior year period. The cost of revenues increasewas less than the increase in revenues. This is primarily attributed to increased costs in the prior period in obtaining our ingredientsfor our products, for production of our products, and for shipping our products. We expect that we will continue to see an increasedcost of revenues in the remaining fiscal year 2022, primarily due to an anticipated increase in revenues. In addition, as the cost ofshipping 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 methodsto 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 officeand administrative expenses related to maintaining our facilities. Selling, general and administrative expenses increased in the threemonths ended June 30, 2022, to approximately $1,031,515 from approximately $644,052, an increase of approximately $387,463 over the sameperiod last year. The increase was driven by increased operating expenses associated with hiring additional sales employees, advertisingand marketing, travel expenses, legal and accounting fees, rent related to an additional distribution warehouse, vehicle and shippingexpenses, and partially offset by lower professional fees. We expect that, as we expand our business operations, SG&A expenses willcontinue to increase.

 

We expect that as we expand our business operationsand continue to incur additional corporate-related expenses associated with our status as a fully registered issuer with the SEC underthe Securities Exchange Act of 1934, SG&A expenses will continue to increase.

 

Other Income and Expenses

 

Other expense for the three months ended June 30,2022 was approximately $644,891, as compared to other income of approximately $166,735 for the three months ended June 30, 2021. The changewas attributable to the increase in interest expense of approximately $91,503 related to increased debt levels and debt amortization,the decrease in the change in the fair value of derivative liabilities of approximately $19,497, a loss on debt extinguishment of approximately$326,230, and financing costs of $286,000, which did not occur in the prior year period, all of which changes are non-cash expenses.

 

Net Loss

 

We incurred a net loss of approximately $1,388,525for the three months ended June 30, 2022, an increase of approximately $1,015,311 compared to the prior year period in which we incurreda net loss of approximately $373,214. The three month net loss is primarily due to increased gross profit offset by increased SG&Aexpenses and the increase in other expenses, as discussed above.

 

Six Months ended June 30, 2022 compared to SixMonths ended June 30, 2021

 

Overview

 

As reflected in the accompanying financialstatements, during the six months ended June 30, 2022, we incurred a net loss of approximately $4,950,087 and used cash in operationsof approximately $1,619,355, compared to a net loss of approximately $2,192,939 and used cash in operations of approximately $875,555for the six months ended June 30, 2021. As of June 30, 2022, we had a stockholders’ deficit of approximately $2,991,280.

 

The following is a more detailed discussion of ourfinancial condition and results of operations for the period presented, along with prior periods.

 

 

Revenue

 

The following table presents our net revenues, byrevenue source, and the period-over-period percentage change, for the period presented:

 

		Six Months Ended June 30,
		2022				2021
Revenue Source		Revenue				Revenue				% Change
Distributors		$	413,107			$	672,873				(39	)%
Amazon and Walmart Marketplace			80,089				77,759				3	%
Online Sales			22,316				40,047				(44	)%
Retail			1,719,015				509,130				238	%
Shipping			5,802				10,588				(45	)%
Sales Returns and Allowances			(71,800	)			(57,417	)			25	%
Net Revenues		$	2,168,529			$	1,252,980				73	%

 

The following table presents our net revenues by productlines for the periods presented:

 

		Six Months Ended June 30,
		2022				2021
Product Line		Revenue				Revenue				% Change
Hemp Energy Drinks		$	118,574			$	201,926				(41	)%
CBD Energy Waters			41,588				51,762				(20	)%
Lemonade Drinks			354,238				535,733				(34	)%
Apparel			112				1,258				(91	)%
Retail			1,719,015				509,139				238	%
Shipping			5,802				10,588				(25	)%
Sales returns and allowance			(71,800	)			(57,417	)			25	%
Net Revenues		$	2,168,529			$	1,252,980				73	%

 

During the six months ended June 30, 2022, we reportednet revenues of approximately $2,168,529, which is an increase of approximately $915,549, or approximately 73%, compared to net revenuesof approximately $1,252,980 for the six months ended June 30, 2021. An increase of approximately $1,209,999 of our revenue is attributableto increased retail revenue, while our product sales decreased in net revenue by approximately $294,450. We attribute the significantincrease in retail revenue to attaining a larger percentage of the territory in which the Company distributes, including the additionof a third distribution hub in late fiscal 2021 and the hiring of additional employees to service this territory. We attribute the decreasein product sales to certain delays in production of a new product line and existing product lines, as well as to a change-over in ourcustomer mix from the prior period due to a non-repetitive, regional, one-off customer relationship in the prior period and a differentregional customer imposing slotting fees in the current period (which fees we declined to pay). We anticipate that the rollout of ourdrink products with a national retailer will commence late in the third quarter. Additionally, the Company experienced delays in the rebrandingof our hemp product line and the subsequent production. We expect that our product revenue will increase in the remaining fiscal year2022 compared to fiscal year 2021, and we do not anticipate further delays. Additionally, the Company hired additional sales personnelto lead sales efforts as the Company expands into new territories and the Company anticipates signing more favorable agreements with larger,reputable tier 1 and mid-size distributors, big box stores, and grocery chains. In addition, we anticipate that our retail revenue willcontinue 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 associatedwith products sold to distributors and resellers, including product and shipping costs. Costs also include credit card fees, fees incurredfor sales that occur on Amazon.com, and other transaction fees related to the processing of consumer transactions. Typically, we expectthat the cost of revenues will increase as a direct correlation to increases in sales. Thus, our cost of revenues increases on an absolutebasis 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 six months endedJune 30, 2022, we reported cost of revenues of approximately $1,735,393, which is an increase of approximately $734,822, or approximately73%, compared to approximately $1,000,571 for the six months ended June 30, 2021. This increase is attributed to an increase in salesin both our products and retail distribution in 2022, compared to the prior year period. The cost of revenues increase was comparableto the increase in revenues for the same period. We expect that we will continue to see an increased cost of revenues in the remainingfiscal year 2022, primarily due to an anticipated increase in revenues. In addition, as the cost of shipping our products continues toremain elevated, we also anticipate increased costs for obtaining our ingredients for our products, increased costs for production ofour products, and increased costs of shipping our products. We continue to seek alternative methods to reduce costs for production andthe cost of shipping our products in fiscal year 2022.

 

 

Selling, General and Administrative Expenses

 

SG&A expenses consist primarily of professionalfees, salaries and wages, advertising, rent, travel expenses, sponsorships, and general office and administrative expenses related tomaintaining our facilities. Selling, general and administrative expenses increased in the six months ended June 30, 2022, to approximately$1,970,851 from approximately $1,212,732, an increase of approximately $939,336 over the same period last year. The increase was drivenby increased operating expenses associated with hiring additional sales employees, advertising and marketing, travel expenses, legal andaccounting fees, rent related to an additional distribution warehouse, vehicle and shipping expenses, and partially offset by lower professionalfees. We expect that, as we expand our business operations, SG&A expenses will continue to increase.

 

We expect that as we expand our business operationsand continue to incur additional corporate-related expenses associated with our status as a fully registered issuer with the SEC underthe Securities Exchange Act of 1934, SG&A expenses will continue to increase.

 

Other Income and Expenses

 

Other expense for the six months ended June 30, 2022was approximately $3,412,372, as compared to other expense of approximately $1,232,616 for the six months ended June 30, 2021. The changewas attributable to the decrease in interest expense of approximately $608,512 related to our debt levels and debt amortization, the increasein the change in the fair value of derivative liabilities of approximately $1,546,631, a loss on debt extinguishment of approximately$873,040, and financing costs of $286,000, which did not occur in the prior year period, all of which changes are non-cash expenses.

 

Net Loss

 

We incurred a net loss of approximately $4,950,087for the six months ended June 30, 2022, an increase of approximately $2,757,148 compared to the prior year period in which we incurreda net loss of approximately $2,192,939. This net loss is primarily due to increase in gross profit, offset by increased SG&A expensesand the increase in other expenses, as discussed above.

 

Liquidity and Capital Resources

 

Going Concern

 

We have incurred operating losses since inceptionand have negative cash flow from operations since inception. As of June 30, 2022, we had a stockholders’ deficit of approximately$2,991,280 and we incurred a net loss of approximately $4,950,087 during the six months ended June 30, 2022. We also utilized cash inoperations of approximately $1,619,355 during the six months ended June 30, 2022. As a result, our continuation as a going concern isdependent 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 preparedon 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 continueoperations until we begin generating positive cash flow. Refer to auditors going concern.

 

There is no assurance that we will ever be profitableor 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. Theissuance 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 weare 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 stockholderswould lose some or all of their investment. The consolidated financial statements do not include any adjustments to reflect the possiblefuture effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result shouldwe be unable to continue as a going concern.

 

 

Notes Payable with Related Parties

 

Notes payable with related parties consists of thefollowing at June 30, 2022 and December 31, 2021:

 

		June 30, 2022				December 31, 2021
Note payable – related party (a)		$	1,352,651			$	1,352,651
Note payable – related party (b)			200,000				-
Note payable – related party (c)			125,500				125,500
Note payable – related party (d)			50,500				53,500
Total notes payable – related parties			1,728,651				1,531,651
Notes payable – related parties, current portion			(1,728,651	)			(6,000	)
Notes payable – related parties, net of current portion		$	-			$	1,525,651

 

	(a)	On April 4, 2019, the Company entered into an unsecured Line of Credit Agreement with Robert Clark. Mr. Clark is the Company’s President, Chief Executive Officer, Secretary, and Chairman of the Board. The agreement established a revolving line of credit in the amount of up to $1,500,000. Advances under this line of credit bear interest at the rate of 3.75 percent per annum. The line of credit matures on April 4, 2023, at which time all outstanding principal amounts and accrued interest are due and payable. At June 30, 2022 and December 31, 2021, outstanding principal was $1,352,651 and $1,352,651, respectively.
	(b)	On May 6, 2022, the Company entered into an unsecured Line of Credit Agreement with Robert Clark. Mr. Clark is the Company’s President, Chief Executive Officer, Secretary, and Chairman of the Board. The agreement established a revolving line of credit in the amount of up to $300,000. Advances under this line of credit bear interest at the rate of 3.75 percent per annum. The line of credit matures on May 6, 2023, at which time all outstanding principal amounts and accrued interest are due and payable. At June 30, 2022, the outstanding principal was $200,000.
	(c)	On August 29, 2019, the Company entered into a unsecured Line of Credit Agreement with Robert Clark. Mr. Clark is the Company’s President, Chief Executive Officer, Secretary, and Chairman of the Board. The agreement established a revolving line of credit in the amount of up to $200,000. Advances under this line of credit bear interest at the rate of 3.75 percent per annum. The line of credit matures on August 29, 2023, at which time all outstanding principal amounts and accrued interest are due and payable. At June 30, 2022 and December 31, 2021, outstanding principal was $125,500 and $125,500, respectively.
	(d)	On February 19, 2019, the Company issued an unsecured Standard Promissory Note in Favor of Robert Clark, as lender, in the original principal amount of $70,000. Mr. Clark is the Company’s President, Chief Executive Officer, Secretary, and Chairman of the Board. The note bears no interest. Principal payments of $500 per month commenced in March 2019, with final payment due in March 2021. On March 15, 2022, the Company issued an Amendment to the original issued Standard Promissory Note in Favor of Robert Clark for the remaining outstanding principal of $58,000. Principal payment of $500 per month, with final payment due in March 2023. The outstanding principal balance of this note at December 31, 2021 was $53,500. During the six months ended June 30, 2022, the Company made principal payments of $3,000, leaving an outstanding principal balance of $50,500 at June 30, 2022.

 

At December 31, 2021, accrued interest on notes payableto related parties was $95,873. During the six months ended June 30, 2022, the Company added $27,033 of additional accrued interest, leavingan accrued interest balance on the notes payable to related parties of $122,906 at June 30, 2022. Accrued interest in included in accountspayable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets.

 

 

Notes Payable

 

Notes payable consists of the following at June 30,2022 and December 31, 2021:

 

		June 30, 2022				December 31, 2021
Note payable (a)		$	30,193			$	33,312
Note payable (b)			39,389				-
Note payable (c)			250,000				-
Less debt discount (c)			(99,031	)			-
Total notes payable, net			220,551				33,312
Notes payable, current portion			(198,332	)			(7,974	)
Notes payable, net of current portion		$	22,219			$	25,338

 

	(a)	On August 21, 2021, the Company financed the purchase of a vehicle for $34,763, after making a down payment of $20,000. The loan term is for 60 months, annual interest rate of 5.44%, with monthly principal and interest payments of $665, and secured by the purchased vehicle. At December 31, 2021, the loan balance was $33,312. During the six months ended June 30, 2022, the Company made principal payments of $3,119, leaving a loan balance of $30,193 at June 30, 2022, of which $7,974 was recorded as the current portion of loan payable on the accompanying Condensed Consolidated Balance Sheet.
	(b)	In April 2021, the Company entered into a Line of Credit Agreement with Wells Fargo Bank. The Line of Credit is personally guaranteed by Robert Clark, the Company’s President, Chief Executive Officer, Secretary, and Chairman of the Board. The agreement established a revolving line of credit in the amount of up to $42,000. Advances under this line of credit bear interest at the rate of 11.50 percent per annum. The line of credit matures in 2023, at which time all outstanding principal amounts and accrued interest are due and payable. At June 30, 2022, the outstanding principal was $39,389, which was recorded as the current portion of loan payable on the accompanying Condensed Consolidated Balance Sheet.
	(c)	On March 25, 2022, the Company entered into a secured debenture with an otherwise unaffiliated individual in the principal amount of $250,000. The secured note payable matures on March 24, 2023, and bears interest at the rate of 0.97 percent per annum. The secured debenture is secured by nine (9) identified motor vehicles of the Company. In connection with the issuance of the debenture, the Company issued to the lender 25 million shares of the Company’s common stock at a price of $0.004 per share. The Company determined the fair value of the 25 million shares was $135,000, which was recorded as a debt discount against the secured debenture. As of June 30, 2022, the outstanding balance of the secured debentures amounted to $250,000 and the unamortized debt discount was $99,031, which was recorded as the current portion of loan payable on the accompanying Condensed Consolidated Balance Sheets.

 

At December 31, 2021, there was no accrued intereston the notes payable. During the six months ended June 30, 2022, the Company added $651 of additional accrued interest, leaving an accruedinterest balance on the notes payable of $651 at June 30, 2022. Accrued interest in included in accounts payable and accrued expensesin the accompanying Condensed Consolidated Balance Sheets.

 

Secured Convertible Debentures

 

Secured debentures that are payable to an otherwiseunaffiliated third party consists of the following as of June 30, 2022 and December 31, 2021:

 

		June 30, 2022				December 31, 2021
YA II PN, Ltd.		$	900,000			$	3,000,000
Less debt discount			(815,270	)			(2,150,067	)
Secured debentures, net		$	84,730			$	849,933

 

 

During the year ended December 31, 2021, the Companyissued 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 ourcommon stock at a conversion price of $0.03 per share or a per share amount equivalent to the weighted average (among the principal ofthe debentures) of 76.7% of the lowest VWAP of the Company’s common stock during the 15 trading days immediately preceding the conversiondate, whichever is lower. As the ultimate determination of shares to be issued upon conversion of these debentures can exceed the currentnumber of available authorized shares, we determined that the conversion features of these convertible debentures are not considered indexedto our Company’s own capital stock and characterized the fair value of the conversion features as derivative liability. In connectionwith the issuances of the debentures, the Company granted to the Selling Stockholder warrants to purchase up to 170 million shares ofthe Company’s common stock. The warrants are exercisable at $0.03 per share. Twenty million of the warrants will expire on May 14,2023, 50 million of the warrants will expire on February 10, 2024, and 100,000,000 of the warrants will expire on August 20, 2024. Asa result of these issuances and grants, we incurred the following (a) derivative liability of $3,982,000 related to the conversion featureof the debentures; (b) relative fair value of the warrants granted of $1,581,000; and (c) and original issue discounts of $195,000 ofthe 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 financingcosts. The debt discount is being amortized to interest expense over the term of the corresponding debentures. As of December 31, 2021,the unamortized debt discount was $2,150,067.

 

On May 5, 2022, the Companyissued similar debentures to the Selling Stockholder in the aggregate amount of $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’scommon stock at a conversion price of $0.03 per share or 80% of the lowest daily volume weighted average price (“VWAP”) ofCommon Stock during the 10 trading days immediately preceding the conversion date. As the ultimate determination of shares of common stockto be issued upon conversion of these debentures can exceed the current number of available authorized shares, the Company determinedthat the conversion features of these debentures are not considered indexed to the Company’s own stock and characterized the fairvalue of the conversion features as a derivative liability (see Note 10). In connection with the issuances of these debentures, the Companyalso granted to the selling stockholder warrants to purchase up to 8,333,333 shares of common stock. The warrants are exercisable at $0.03per share and will expire in three years from their grant date. As a result of these issuances, the Company incurred the following (a)derivative liability of $546,000 related to the conversion feature of the debentures; (b) relative fair value of the warrants grantedof $81,000; and (c) and original issue discount of $25,000 for a total of $674,000, of which, $500,000 was accounted as debt discountand the remaining $152,000 as financing costs. The debt discount is being amortized to interest expense over the term of the correspondingdebentures. During the year ended December 31, 2021, the Company amortized debt discount of $443,793 to interest expense.

 

During the six months endedJune 30, 2022, the Selling Stockholder converted principal of $2,600,000 and accrued interest of $137,128, or a total $2,737,128, into678,413,399 shares of common stock with a fair value of $5,859,165. The Company followed the general extinguishment model to record theconversions and settlement of the debt. The debt and accrued interest totaled $2,737,128, the related unamortized debt discount totaled$790,270, and the shares issued were measured at their respective fair value upon conversion which amounted to $5,859,165. In addition,the bifurcated conversion option derivatives, after a final mark-up to $3,639,000, were also removed. As a result, the Company recordeda loss on extinguishment of debt of $873,040.

 

As of December 31, 2021, the outstandingbalance of the secured debentures amounted to $3,000,000, with an unamortized debt discount of $2,150,067, or a net balance of $849,933.As of June 30, 2022, the outstanding balance of the secured debentures amounted to $900,000, with an unamortized debt discount of $849,933,or a net balance of $84,730. During the six months ended June 30, 2022, the Company amortized debt discount of $444,793 tointerest expense.

 

As of June 30, 2022, 161,707,234 shares of commonstock were potentially issuable under the conversion terms of the two partially converted outstanding debentures.

 

At December 31, 2021, accrued interest on the convertiblenotes payable was $54,110. During the six months ended June 30, 2022, the Company added $77,785 of additional accrued interest, and converted$137,128 of accrued interest into common stock, leaving an accrued interest balance on the convertible notes payable of $4,767 at June30, 2022. Accrued interest in included in accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets.

 

 

Cash Flows

 

In summary, our use of cash has been as follows:

 

		For the Six Months Ended June 30, 2022
Net cash used in operating activities		$	(1,619,356	)
Net cash used in investing activities		$	(24,168	)
Net cash provided by financing activities		$	945,886

 

Operating Activities

 

Cash provided by or used in operating activities primarilyconsists of net income adjusted for certain non-cash items, including depreciation, amortization, financing costs, changes in allowancefor doubtful accounts, loss on extinguishment of debt, and the change in the fair value of our derivative liabilities, stock-based compensation,and the effect of changes in working capital and other activities. Cash used in operating activities for the six months ended June 30,2022 was approximately $1,619,355 and consisted of a net loss of approximately $4,950,087, adjustments for non-cash items, depreciation,amortization, financing costs, loss on extinguishment of debt, loss on the change in fair value of derivative liabilities, and stock basedcompensation, which in the aggregate total approximately $3,464,684, and approximately $113,952 used in working capital and other activities.

 

Investing Activities

 

Cash used in investing activities for six months endedJune 30, 2022 was approximately $24,168 and was attributable to capital expenditures.

 

Financing Activities

 

Cash provided by financing activities for six monthsended June 30, 2022 was approximately $945,886 and was comprised of proceeds from a notes payable of $964,389, offset by payment on ourline of credit to related party of $3,000, payments of our acquisition obligations of $8,586, payment of our note payable of $3,119, andpayment of finance lease obligations of $3,798.

 

Off-Balance Sheet Arrangements

 

None.

 

Critical Accounting Policies

 

Our discussion and analysis of results of operationsand financial condition are based upon our consolidated financial statements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation of our consolidated financial statements requires us to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assetsand 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 variousother assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgmentsabout the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

 

The accounting policies that we follow are set forthin Note 2, Summary of Significant Accounting Policies, of our consolidated financial statements for the period ended June 30, 2022.These accounting policies conform to accounting principles generally accepted in the United States, and have been consistently appliedin the preparation of the consolidated financial statements.

 

 

Revenue Recognition and Deferred Revenue

 

We sell our products, whichincludes 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 risksand 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 surroundingcustomer acceptance, and when collectability is reasonably assured. Sales are made to customers under terms allowing certain limited rightsof return. Amounts billed to customers in sales transactions related to shipping and handling, represent revenues earned for the goodsprovided 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 purchasedfor resale from several other beverage manufacturers, to convenience stores, grocery stores, and smoke and gift shops. In evaluating thetiming of the transfer of control of products to customers, we consider several indicators, including significant risks and rewards ofproducts, our right to payment, and the legal title of the products. We recognize revenue from product sales to resellers when productsthat do not require further services by us are shipped or delivered, when there are no uncertainties surrounding customer acceptance andwhen collectability is reasonably assured. Cash received by us prior to shipment is recorded as deferred revenue. Sales are made to customersunder 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 ofproducts sold.

 

We recognize revenue in accordance with ASU No. 2014-09,Revenue from Contracts with Customers (Topic 606) (“ASC Topic 606”). The underlying principle of ASC Topic 606 is torecognize revenue to depict the transfer of goods or services to a customer at the amount expected to be collected. To apply these principles,ASC Topic 606 outlines a five-step model that requires entities to exercise judgment when considering the terms of contract(s), whichincludes:

 

	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 whenperformance obligations under the terms of a contract are satisfied, which occurs typically upon the transfer of control, including therisks and rewards of ownership. With respect to us, performance is deemed to occur upon shipment or delivery of products to our customersbased on the written contract terms, which is also when control is transferred.

 

Our revenue earned is recognized when we satisfy asingle performance obligation by transferring control of our products to a customer. We have determined that disaggregated revenue bynet sales by revenue source would be meaningful and allow investors to understand our business activities, historical performance, orfuture prospects. Disaggregated sales by revenue source, which includes sales to distributors, online sales, sales through Amazon, anddistribution sales. This is the same information used by our Chief Operating Decision Maker for evaluating the financial performance ofour operations and making resource decisions. We also sell merchandise and apparel that comprises approximately 1% of our gross annualsales, and solely exists to promote our beverages. Merchandise and apparel sales are included with the gross sales for our one operatingsegment.

 

 

During the prior year, the Company consolidated andrestructured its operations. The Company now operates in one segment for the manufacture and distribution of our products and those ofotherwise unrelated beverage products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chiefoperating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisionsabout allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approachto segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosuresabout products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All materialoperating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in economiccharacteristics; nature of products and services; and procurement, manufacturing, and distribution processes. Since the Company operatesin one segment, all financial information required by “Segment Reporting” can be found in the accompanying 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-employeeservices are acquired. We measure the cost of employee and non-employee services received in exchange for an award of equity instrumentsbased on the grant-date fair value of the award. Fair value for restricted stock awards is valued using the closing price of our CommonStock on the date of grant. For our three and six months ending June 30, 2022, we recognized $85,000 of stock-based compensation expense.We recognized no stock-based compensation during the prior year period. See Note 13, Share-Based Compensation, of our consolidatedfinancial statements for the six months ended June 30, 2022, for an additional description of our stock-based compensation that had amaterial effect on our consolidated financial statements.

 

Emerging Growth Company Status

 

On April 5, 2012, the JOBS Act, was enacted. The JOBSAct provides that, among other things, an “emerging growth company” can take advantage of an extended transition period forcomplying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accountingstandards until those standards would otherwise apply to private companies. As an emerging growth company, we have irrevocably electedto take “opt out” of taking advantage of the extended transition period afforded by the JOBS Act for the implementation ofnew or revised accounting standards and, as a result, we will comply with new or revised accounting standards on the relevant dates onwhich 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 exemptionsand 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 firmrotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditordiscussion and analysis).

 

We will remain an emerging growth company until theearlier to occur of (1) the last day of our fiscal year (a) following the fifth anniversary of the completion of this offering, (b) inwhich 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 ofthe 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 theprior 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 resultof this offering is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscalyear. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliatesis less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and themarket value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we ceaseto be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smallerreporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of auditedfinancial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduceddisclosure obligations regarding executive compensation.

 

Recently Issued Accounting Pronouncements

 

See Note 2, Summary of Significant Accounting Policiesto our consolidated financial statements for the period ended June 30, 2022 for a discussion of recent accounting pronouncements.

 

 

BUSINESS

 

Corporate Overview – Formation, CorporateChanges and Material Mergers and Acquisitions

 

We were originally incorporated as Class-ique TalentAgency, Inc. (“CTA”), under the laws of the State of Nevada in March 1997. In October 2001, CTA entered into an Agreementand 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 changedits 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 withand into UE Delaware, the surviving company. In July 2015, we changed our name to Kona Gold Solutions, Inc. In October 2020, we changedour 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”), aFlorida limited liability company formed in January 2018; (iii) S and S Beverage, Inc., (“S and S”), a Wisconsin corporationformed in June 2018 that we acquired in February 2021; and (iv) Gold Leaf Distribution LLC (“Gold Leaf”), a Florida limitedliability company formed in January 2019.

 

	●	Kona focuses on creating great tasting and healthy hemp-infused energy drinks in thefunctional beverage market for those who lead an active lifestyle. Kona is a proud member of the HIA and strives to promote the benefitsof 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 that is a better-for-you a lemonade and 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 developingpremier hemp and CBD products in the functional beverage and fitness markets. Focusing on the hemp energy drink, CBD energy water, andCBD water markets, we believe that we have positioned ourselves as a premium lifestyle brand.

 

We currently sell Kona, HighDrate, and S and S productsthrough resellers, our websites, and distributors that span across 12 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 productspurchased for resale from several other beverage manufacturers. These premium beverages and snacks are available in more than 1,700 grocerystores, convenience stores, smoke shops, vape shops, and specialty stores.

 

Product Lines

 

Within our Company, we market five distinct productlines: hemp-infused energy drinks, CBD-infused energy water, CBD-infused high-alkaline water, low carb and low-calorie lemonade, and apparelwith our trademark logo.

 

Our hemp-infused energy drink is available in bothregular and sugar-free options. These energy drinks are infused with organic hemp protein powder and contain essential vitamins and ingredientsthat give consumers a natural energy boost. Hemp protein contains no gluten and is compatible with a variety of diets, including veganand Kosher. Our hemp energy drinks are available in eight flavors: classic hemp, platinum hemp, sugar-free hemp, cherry vanilla, bubblegum, candy apple, cotton candy, and pink grapefruit.

 

HighDrate’s CBD-infused energy water is greattasting, sugar-free, and powered by Alkame’s patented technology, which uses its advanced water treatment to create a premium oxygenatedalkaline 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 caffeineand 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, tropicalcoconut, Georgia peach, sour apple, and blue island punch.

 

 

S and S focuses on the development and marketing ofOoh La Lemin, which is a better-for-you lemonade that is available in still and sparkling and has no added sugar, is low in carbs, andhas only 15 or 10 calories, respectively. Ooh La Lemin lemonade is available in four flavors: (i) Original Lemonade, (ii) Blue RaspberryLemonade, (iii) Peach Lemonade, and (iv) Strawberry Lemonade. Ooh La Lemin Sparkling is available in six flavors: (i) Original Lemonade,(ii) Cucumber Watermelon Lemonade, (iii) Blue Raspberry, (iv) Pineapple Mango, (v) Citrus Splash, and (vi) Huckleberry.

 

We also sell branded apparel. We use only high-qualitytextiles and specialty inks and foils, which provide consumers with a premium fit and feel. We currently offer shirts, tanks, hats, andtowels for sale. Revenues generated from sales of our apparel historically has represented approximately less than 1% of our gross annualsales.

 

Distributors and Resellers

 

Our markets include over 1,700 accounts in grocerystores, convenience stores, smoke shops, vape shops, and specialty stores located in Florida and South Carolina. In addition to distributingthe 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, snack products, and a variety of CBD-infused products,all of which complement the Company’s current product offerings.

 

We sell our products primarily to beverage distributorsand 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 theirneeds of providing their minds and bodies with a focused boost and quick recovery. Our beverages support consumers that lead a healthylifestyle 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 helpconsumers stay hydrated, revitalized, aided in stamina, and allow for faster recovery. Hemp protein contains no gluten and is compatiblewith a variety of diets, including vegan and Kosher. The hemp seed protein contained in our energy drinks is a great protein that containsall 20 amino acids found in the human body.

 

We also distribute premium beverages and snacks inkey markets through our wholly-owned subsidiary, Gold Leaf. Gold Leaf distributes our products as well as products purchased for resalefrom several other beverage manufacturers. The distributed products include alkaline waters, beverages for kids, energy drinks, fruitflavored sodas, low-carb lemonade, healthy aloe juice drinks, snack products, and a variety of CBD-infused products, all of which complementour current product offerings.

 

Industry Overview

 

Our distributors and resellers and consumers spanacross several industries, including energy drinks, hemp or CBD drinks, health and fitness, and apparel.

 

Energy Drinks

 

The energy drink industry continues grow every yearwith an estimated $14 billion in sales in the United States in 2021, and sales are expected to reach $53 billion globally. The energydrink 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 ofconsumers in the overall beverage industry. The rise of “Red Bull” and “Monster,” which accounted for 40 percentof the energy drink sales in the United States in 2020, has resulted in the energy drink industry rivaling the coffee industry. Energydrinks have an average of 200 mg of caffeine, which is equivalent to about two cups of coffee. The liquid and dry coffee industry accountedfor approximately $102.5 billion in sales in 2019, which grew from $4.1 billion dollars in 2003. Starbucks Corporation was the sales leaderof the coffee industry with approximately 40% of the market share in 2018, followed by Dunkin’ Brands Inc. with 40% of the marketshare in 2019.

 

Hemp or CBD Drinks

 

The HIA reported that the 2018 Farm Bill poised torestore industrial hemp to nationwide legal production for the first time since World War II, offering vast opportunities for the industryand investment in a market expected to triple in four years. With the removal of hemp from federal prohibition under the CSA, the totalhemp industry is expected to grow 16.8% from 2022 through 2030. Hemp Business Journal estimates that the hemp-derived CBD market willgrow to a $16.75 billion market by 2030. The U.S. hemp market, which includes CBD, textiles, and hemp seed, is expected to lead the globalmarket in 2022, representing approximately 32% of the global market. This growth is fueled by the public’s growing demand for CBDproducts. 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 foodand beverages, saw consumer awareness drive trends to health and wellness, plant-based, and clean-label products in 2021. We believe thatconscious consumerism will continue to drive these trends in 2022. We believe that consumers are making food and beverage choices basedon their personal definition of health. Further, we believe that consumers are looking for healthy alternatives to obtain relief frompain and anxiety, and that CBD has become a viable option because it balances the mind and body. Women have traditionally been early adaptersof health and wellness trends and CBD-infused products, food, and beverages have been recognized by women to have a connection betweenhappiness 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 Monsterand Rockstar can be found on men’s and women’s apparel around the world; however, the biggest apparel companies not affiliatedwith 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 principalareas of competition are pricing, packaging, and developing new products and flavors, as well as highly intensive promoting and marketingstrategies. Our products compete with a wide range of drinks produced by a relatively large number of companies, many of which have substantiallygreater financial, marketing, and distribution resources than we do. Important factors affecting our ability to compete successfully includebrand and product image, taste and flavor of products, trade and consumer promotions, rapid and effective development of new and uniquecutting-edge products, attractive and different packaging, brand exposure, and marketing, as well as pricing. We also rely on our beveragedistributors to allocate more attention to our products than those of our competitors, provide stable and reliable distribution, and secureadequate 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 havea material adverse effect on our business and results of operations.

 

Our energy products have entered an already crowdedmarket, and we aware of both our strengths and shortcomings as we compete in the energy drink market. Our energy products are part ofniche 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 beveragemarket 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%. Combinedwith the THC-infused beverage market, the CBD Beverage Market is expected to reach $1.4 billion in the United States alone by 2025. TheAlkaline Water Company, Inc. (NASDAQ and TSXV: WTER), HEXO Corp. (NASDAQ and TSX: HEXO), Tilray, Inc. (NASDAQ and TSX: TLRY), and CanopyGrowth Corporation (NYSE: CGC; TSX: WEED) are prominent players in the CBD beverage market.

 

We compete not only for consumer preference, but alsofor maximum marketing and sales efforts by multi-brand licensed bottlers, brokers, and distributors and resellers, many of which havea principal affiliation with competing companies and brands. Our products compete with all liquid refreshments and in many cases withproducts of much larger and, in many cases better financed competitors. Our energy drinks compete directly with Red Bull, Monster, andRockstar. We also compete with smaller companies.

 

Co-Packing

 

We do not directly produce our hemp-infused energydrinks, Storm CBD-infused waters, HighDrate CBD-infused energy waters, or Ooh La Lemin, but instead outsource the production of our productswith our specifications to third-party bottlers and co-packers. We use co-packers to produce our beverage products. The co-packers areresponsible for the production and packaging of the finished products, including the procurement of all required ingredients and packagingmaterials. We have partnered with multiple co-packers in the United States to provide fulfillment of our products from quality, low-costsources. 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-packer’swarehouse.

 

Our ability to estimate demand for our products isimprecise, particularly with new products, and may be less precise during periods of rapid growth, particularly in new markets. If wematerially underestimate demand for our products, are unable to secure sufficient ingredients or raw materials, including, but not limitedto, aluminum cans, plastic bottles, caps, labels, flavors, juice concentrates, coffee, tea, dietary ingredients, other ingredients, andcertain sweeteners, are unable to procure adequate packing arrangements, or are unable adequately or timely to ship our products, we mightnot be able to satisfy demand on a short-term basis. That short-term supply inability may also result in a longer-term reduction in ordersfor our products.

 

Raw Materials and Suppliers

 

The raw materials used in the production of our productsare 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 outsideof 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 ontheir third-party suppliers to supply certain of the flavors and concentrates that are used in our beverages. We are also dependent onthese co-packers to negotiate arrangements with their existing suppliers that would enable us to obtain access to certain of such concentratesor flavor formulas under certain extraordinary circumstances. Additionally, in a limited number of cases, our co-packers may have contractualrestrictions 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 distributorsmay also limit our ability to enter into agreements with alternative distributors. We believe that a satisfactory supply of co-packerswill continue to be available at competitive prices, although there can be no assurance in this regard. With respect to Gold Leaf’soperations, we continually endeavor to contract with additional beverage vendors to ensure we have adequate inventory. We believe thata 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 wouldresolve them with the specific co-packer involved or engage a new co-packer for our products.

 

Distribution

 

Distribution patterns in the energy drink and waterindustries are such that large buying groups dictate what products are used in their channels. Working with these large buying groupscould open large distribution channels that could potentially supply our product offerings in several market segments. We have distributionagreements with each distributor with which we partner that distributes our products. Our distribution agreements are for a one-year termand typically automatically renews unless the distributor or we terminate the agreement. We ship product directly from our distributioncenter 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 segmentswith a multi-tiered, multi-channel approach. We have leveraged our products with direct sales and a distribution strategy using establishedbeverage distributors. We are pursuing direct-ship opportunities, such as grocery stores and convenient stores, which would allow us toship product to one location where the direct-ship store could then self-distribute our product to its multiple retail locations. We alsocontinue to focus on our online presence by selling our products on popular e-commerce websites, such as Amazon.com, where we ship bulkproduct to its warehouse and Amazon handles all product fulfillment. Finally, we operate three e-commerce websites, where we sell directlyto 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 beverageproducts is to focus on developing brand awareness through image enhancing programs and product samplings. We use our branded vehiclesand other promotional vehicles at events, where we offer samples of our products to consumers. We utilize “push-pull” methodsto 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 withprize 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, socialmedia (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 thebeverage industry is differentiation, making our brands and products visually appealing and distinctive from other beverages on the shelvesof 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 visibilityand 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 inour over-all market awareness plans. Our announcements of distribution partnerships have assisted in identifying new partners to distributeour products. We believe that announcing these partnerships in industry specific media help expand market awareness of our products. Featurearticles and product reviews have also helped launch and support brand awareness. We include our products in industry specific buyingguides, which has assisted in creating new relationship with distributors and retail outlets. Finally, we focus on creating products thatwe believe taste great and use attractive branding with our labels and other materials to catch consumers’ attention either in personat a retail store or online on a website.

 

Pricing Strategy

 

We strive to set the pricing of products at levelsthat 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 drinkand water markets in 2022, with the groundwork that we laid out in 2020 and 2021. We believe that tradeshows will play a major role increating market awareness of our brands. Currently, our energy drinks are available for sale on Amazon.com, Inc.’s website, thelargest internet-based retailer in the United States.

 

Our sales and marketing strategy for all our beveragesis to focus our efforts on developing brand awareness through image enhancing programs and product sampling. We use our branded vehiclesand other promotional vehicles at events where we offer samples of our products to consumers. We utilize “push-pull” methodsto 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 withprize 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, socialmedia (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 thebeverage industry is differentiation, making our brands and products visually appealing and distinctive from other beverages on the shelvesof 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 propertythrough, among other things, a combination of trade secrets, know-how, and trademarks. We have taken measures to protect our trade secretsand know-how, to the extent possible. We have three trademarks. One is for use of “Kona Gold Hemp Energy Drinks” registeredin the Company’s name. The second trademark is for the use of “HighDrate” registered in the Company’s name. Thethird 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 UnitedStates of many of our products are subject to various U.S. federal and state regulations, including, but not limited to: the FDCA; theOccupational Safety and Health Act; various environmental statutes; the Safe Drinking Water and Toxic Enforcement Act of 1986 (“CaliforniaProposition 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 UnitedStates, including products containing CBD, is complex, multi-faceted, and currently undergoing significant change. The FDA, the FTC, theUSDA, 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-marketreporting 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 containingCBD are evolving, and we continue to monitor those developments. However, we cannot predict the timing, scope, or terms of any new orrevised state, federal or local regulations relating to animal foods containing CBD.

 

 

Regulation of Hemp and CBD

 

Historically, the DEA regulated CBD, pursuant to theCSA, which establishes a framework of controls over certain substances, depending on whether they are classified in one of five risk-basedschedules. 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 undermedical 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 partof the plant; and every compound mixture, salt, derivative, mixture, or preparation of the plant, its seeds, or its resin (with afew exceptions, such as mature stalks of the plant and seeds incapable of germination). Pursuant to this definition, the DEA interpretedCBD 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 Billto allow for the limited growth and cultivation of industrial hemp, which was defined as including all parts of the cannabis plant, whethergrowing or not, with a delta-9 THC concentration of not more than 0.3% on a dry weight basis. This statute also allowed, as permittedby state law, the growing and cultivating of industrial hemp under the auspices of a state agricultural pilot program and by institutionsof higher education and state departments of agriculture.

 

In December 2018, Congress enacted the 2018 Farm Billto allow more broadly for the production of hemp pursuant to state and tribal plans overseen by the USDA. The 2018 Farm Bill amended thestatutory definition of “marijuana” under the CSA specifically to exclude “hemp”, which is defined as any partof 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 asCBD 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 cannabisor cannabis-derived compounds, such as CBD, pursuant to the FDCA.

 

Under the 2018 Farm Bill framework, states and NativeAmerican tribes may submit to the USDA, through the relevant state department of agriculture, a plan under which the state or Native Americantribe will monitor and regulate the production of industrial hemp. For those states that do not have an approved state plan, the productionof 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 governingcommercial 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 timebeing. Pursuant to the 2018 Farm Bill, the 2014 Farm Bill will remain effective until October 31, 2020 (one year after the date of publicationof the IFR). In addition, no state or Native American tribe may prohibit the transportation or shipment of hemp or hemp products producedin accordance with the 2018 Farm Bill through the state or territory, as applicable. The USDA has interpreted this provision also to applyto interstate transportation of hemp that complies with the 2014 Farm Bill through October 31, 2020. Effective March 22, 2021, The USDAissued the final rule, which creates the U.S. Domestic Hemp Production Program. The program provides requirements for maintaining recordsabout the land where hemp is produced, testing the levels of total delta-9 tetrahydrocannabinol, disposing of non-compliant plants, licensinghemp producers, and ensuring compliance under the new program. The Agricultural Marketing Service (AMS), has been delegated authorityto administer the U.S. Domestic Hemp Production Program.

 

FDA Regulation of Foods

 

The FDA regulates foods under the FDCA and its implementingregulations. The FDCA defines “food” as articles used for food or drink for people or animals, which includes products thatare intended primarily for nutritional use, taste, or aroma and the components of such products. The FDA also imposes certain requirementson foods relating to their composition, production, labeling, and marketing. Among other items, the facilities in which our products andingredients 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 premarketapproval 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 foodadditive regulation, unless it is generally recognized as safe (“GRAS”) under the conditions of its intended use. A food maybe adulterated if it uses an ingredient that is neither GRAS nor an approved food additive, and that food may not be legally marketedin the United States. The FDA has confirmed that the use of cannabis or cannabis-derived compounds in food products is subject to thesefood additive requirements. At this time, there are no approved food additive petitions or regulations for any cannabis-derived food additiveand, while the FDA has issued a “no questions” response to certain GRAS notifications for hemp seed products, these GRAS determinationsdo not encompass hemp and CBD products more generally.

 

Additionally, the FDCA prohibits the introductionor delivery for introduction into interstate commerce of any food that contains an approved drug for which substantial clinical investigationshave been instituted and made public (unless certain exceptions apply). Under this prohibition, the FDA has stated that foods that containCBD are adulterated because CBD is an active ingredient in an FDA-approved drug that was the subject of substantial clinical investigationsbefore it was marketed as a food, and that none of the exceptions applies.

 

Although the FDA has stated that it interprets theFDCA to prohibit the introduction or delivery for introduction into interstate commerce of any food into which CBD has been added andhas taken enforcement action against marketers of certain CBD products (some in collaboration with the FTC), the FDA is in the processof evaluating its regulatory approach to products containing cannabis and cannabis-derived compounds. The FDA has formed an internal workinggroup 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 extensivediscussion 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 biggestconcern 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 reportto Congress that was required under the 2018 Farm Bill in which the agency announced that it is currently evaluating a risk-based enforcementpolicy for CBD to provide more clarity to the industry and the public while the agency takes potential steps to establish a clear regulatorypathway. Although it is unclear whether or when the FDA will ultimately issue such an enforcement policy, the agency reemphasized thatit will continue to take action against unlawful CBD products that pose a risk of harm to the public, including products with therapeuticclaims; products that include contaminants such as heavy metals, THC, and other harmful substances; products associated withfalse statements, such as omitted ingredients and incorrect statements about the amount of CBD; and products marketed to vulnerablepopulations, such as infants and children.

 

The labeling of foods is regulated by both the FDAand state regulatory authorities. FDA regulations require proper identification of the product, a net quantity statement, a statementof the name and place of business of the producer or distributor, and proper listing of all of the ingredients in order of predominanceby weight. The FDA may classify some of our products differently than we do and may impose more stringent regulations, which could leadto possible enforcement action.

 

 

Under the FDCA, the FDA may require the recall ofa food product if there is a reasonable probability that the product is adulterated or misbranded, and the use of or exposure to the productwill cause serious adverse health consequences or death. In addition, food producers may voluntarily recall or withdraw their productsfrom the market. If the FDA believes that our products are adulterated, misbranded, or otherwise marketed in violation of the FDCA, theagency 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 Statesat the federal, state, and municipal level in respect of each of the subject areas. Public health officials and health advocates are increasinglyfocused on the public health consequences associated with obesity, especially as it affects children, and are seeking legislative changeto 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 servingsize information and nutrition labeling on food and beverage products, including requirements to disclose the amount of added sugars insuch products. In December 2018, the USDA promulgated regulations requiring that, by January 1, 2022, the labels of certain bioengineeredfoods must include a disclosure that the food is bioengineered. We may incur significant costs to alter our existing packaging materialsto comply with these and other new regulations. Additionally, these new regulations may impact, reduce, or otherwise affect the purchaseand consumption of our products by consumers.

 

Proposals to limit or restrict the sale and/or advertisingof energy drinks to minors or persons below a specified age, to restrict the venues in which energy drinks can be sold, or to restrictthe use of the Supplemental Nutrition Assistance Program (formerly food stamps) to purchase energy drinks have been raised or enactedin certain states, counties, and municipalities throughout the United States. Any such limitations or restrictions could adversely affectour 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 ourbusiness, financial condition, and results of operations.

 

Environmental Compliance

 

Our facilities in the United States are subject tofederal, state, and local environmental laws and regulations. Compliance with these provisions has not had, nor do we expect such compliancewill have, any material adverse effect upon our capital expenditures, net income, or competitive position. We believe that we are notsubject to any material costs for compliance with any environmental laws.

 

Insurance

 

Our products are subject to risks. While we have plannedfor these contingencies and have purchased insurance to address potential liabilities associated with product production, there can beno 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 criticalto our continued success. As of September 1, 2022, we employed a total of 26 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 humancapital strategies.

 

Many of our employees, including members of our managementteam, 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, theseemployees have returned to our offices, and we are once again fully operational. Our warehouses operated as normal.

 

 

MANAGEMENT

 

Directors and Executive Officers

 

All directors hold office for a one (1)-year periodand have been duly elected and qualified. Directors are elected at the annual meetings to serve for one-year terms or until his or hersuccessor has been elected and qualified, or until his or her death, resignation, or removal. Each of our executive officers is appointedby 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		45		Chief Executive Officer, President, Chairman of our Board, and Secretary		August 12, 2015
Lori Radcliffe		49		Chief Financial Officer		October 7, 2019
Christopher Selinger		51		Vice President of Sales		September 1, 2018
William Jeffrey Outlaw		52		Independent Director		September 9, 2019
Matthew Crystal		51		Independent Director		July 26, 2018

 

Business Experience

 

The following is a brief overview of the businessexperience of each of our directors and executive officers during at least the past five years, including their principal occupationsor employment during the period, the name and principal business of the organization by which they were employed, and certain of theirother 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 asElev8 Brands, Inc.) from 2012 through 2015. Mr. Clark obtained a Bachelor of Science degree from the School of Business at the Universityof Central Florida in 2003. We believe that Mr. Clark’s background in product development and design, along with more than 12 yearsof management experience, allows him to have a great understanding of all levels within a company and successfully bring new productsto market qualifies him to serve on our Board.

 

Lori Radcliffe, Chief Financial Officer

 

Lori Radcliffe has served as our Chief Financial Officersince October 2019. Ms. Radcliffe has worked in the accounting field since 2007, most recently as a Senior Accountant at Berman HopkinsWright & Laham, CPA’s and Associates from 2015 through 2019. Ms. Radcliffe obtained her Bachelor of Science in Business Administrationin 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 Presidentof Sales since September 2018. Prior to joining us, Mr. Selinger served as the Southeast Operations Manager of Southeast Beverage Companyfrom 2015 to 2017 and as the Southeast Regional Sales Manager at Calypso Brands (King Juice Company, Inc.) from 2009 to 2015. Mr. Selingerobtained his Associate of Science degree in 1991 from Midland Technical College. We believe that Mr. Selinger’s background in growingCalypso Brands into a national brand gives him a great understanding of all levels within a company such as ours and the methods successfullyto bring new products to market.

 

Matthew Crystal, Independent Director

 

Matthew Crystal has served as one of our independentdirectors since July 26, 2018. Mr. Crystal is also a member of our Audit Committee, Compensation Committee, and Governance and NominatingCommittee. He has over 20 years of experience in direct response marketing, copywriting, and web development and specializes in technicaltraining, marketing, presenting, and architectural marketing. Mr. Crystal is the co-founder, and since 2014, has been the Vice Presidentof Operations and is currently the Chief Operations Officer of Elite Marketing Pro, LLC, a global community of over 50,000 active smallbusiness entrepreneurs in more than 100 countries. Mr. Crystal graduated from Florida State University in 1994 with a Bachelor of Sciencedegree. 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 independentdirector of our Board since September 9, 2019. Mr. Outlaw also serves as a member of our Audit Committee Compensation Committee, and Governanceand Nominating Committee. He has served as President of Calypso Brands at King Juice Company, Inc. since 2013. Mr. Outlaw has over 26years of experience in the beverage industry, including both on the supplier and the distributor sides of the business, specializing indirect store delivery strategy routes to market. His experience includes financial marketing, sales experience in 35 countries and theUnited States, business development, and product development. His prior executive experience includes serving as general manager, executivevice president, and chief executive officer at Calypso Brands brings significant experience in the beverage industry, which qualifieshim to serve as a director.

 

Director Qualifications

 

We believe that our directors should have the highestprofessional and personal ethics and values, consistent with our longstanding values and standards. They should be committed to enhancingstockholder 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 potentialdirector candidates, our Board also considers the candidate’s character, judgement, diversity, age, and skills, including businessliteracy 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 beeninvolved 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 ourdirectors or executive officers.

 

None of our directors or executive officers was selectedto 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, eachof whom meets the independent director requirements of The Nasdaq Stock Market LLC and the SEC. Both independent directors serve on theAudit 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 responsibilitiesdescribed below. During our fiscal year ended December 31, 2020, our Board acted by unanimous written consent six times, but did not haveany formal Board meetings.

 

Audit Committee

 

On July 8, 2020, our Board adopted an audit committeecharter (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 financialexpert.” During our fiscal year ended December 31, 2020, our Audit Committee did not formally meet.

 

The Audit Committee Charter requires that each memberof the Audit Committee meet the independence requirements of The Nasdaq Stock Market LLC and the SEC and requires that the Audit Committeehave at least one member that qualifies as an “audit committee financial expert.” We intend to identify potential new directorsthat can serve as Audit Committee members and satisfy these requirements. In addition to the enumerated responsibilities of the AuditCommittee in the Audit Committee Charter, the primary function of the Audit Committee is to assist our Board in its general oversightof our accounting and financial reporting processes, audits of our financial statements, and internal control and audit functions. TheAudit 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 acharter (the “Compensation Committee Charter”) to govern the Compensation Committee. Currently, Messrs. Crystal, Outlaw, andClark (Chairman) serve as members of the Compensation Committee. Messrs. Crystal and Outlaw each meet the independence requirements ofThe Nasdaq Stock Market LLC and the SEC, qualify as a “non-employee director” within the meaning of Rule 16b-3 under the ExchangeAct, and qualify as an outside director within the meaning of Section 162(m) of the Code. In addition to the enumerated responsibilitiesof the Compensation Committee in the Compensation Committee Charter, the primary function of the Compensation Committee is to overseethe compensation of our executives, produce an annual report on executive compensation for inclusion in our proxy statement, if and whenrequired by applicable laws or regulations, and advise our Board on the adoption of policies that govern our compensation programs. TheCompensation 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 acharter (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 Charterrequires that each member of the Nominating Committee meets the independence requirements of Nasdaq and the SEC; however, currently onlyMessrs. Crystal and Outlaw qualify as independent. In addition to the enumerated responsibilities of the Nominating Committee in the NominatingCommittee Charter, the primary function of the Nominating Committee is to determine the slate of director nominees for election to theBoard , to identify and recommend candidates to fill vacancies occurring between annual stockholder meetings, to review our policies andprograms that relate to matters of corporate responsibility, including public issues of significance to us and our stockholders, and anyother 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 memberof the board of directors or compensation committee (or other committee performing equivalent functions) of any entity that has one ormore executive officers serving on our Board or Compensation Committee.

 

Code of Ethics

 

On July 8, 2020, our Board approved and adopted aCode of Ethics and Business Conduct for Directors, Senior Officers, and Employees (the “Code of Ethics”) that applies to allof our directors, officers, and employees, including our principal executive officer and principal financial officer. The Code of Ethicsaddresses 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 isavailable on our website at https://konagoldhemp.com/media/pubco/Kona-Gold-Solutions-Code-of-Ethics-and-Business-Conduct.pdf.

 

EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table provides certain summary informationconcerning compensation awarded to, earned by, or paid to the following “named executive officers,” for our 2021 and 2020fiscal 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 disclosurewould have been required but for the fact that the individual was not serving as an executive officer as of the end of our 2021 fiscalyear.

 

Name and Principal Position		Fiscal Year			Salary ($)				Bonus ($)				Stock Awards ($)				Options Awards ($)				All Other Compensation ($)				Total ($)
Robert Clark, CEO, President,		2021			$	350,000			$	-			$	-			$	-			$	-			$	350,000	(3)
Chairman, and Secretary (1)		2020			$	350,000	(3)		$	-			$	-			$	-			$	-			$	350,000	(3)
Lori Radcliffe, CFO (2)		2021			$	122,500			$	-			$