KONA GOLD BEVERAGE, INC. - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number: 000-56230

KONA GOLD BEVERAGE, INC.

(Exact name of registrant as specified in its charter)

(844) 714-2224

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the issuer’s common stock, par value $0.0001 per share, outstanding as of November 14, 2022 was 1,841,368,987.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KONA GOLD BEVERAGE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements

KONA GOLD BEVERAGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

See notes to condensed consolidated financial statements

KONA GOLD BEVERAGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

For the Three Months Ended September 30, 2022

(Unaudited)

For the Nine Months Ended September 30, 2022

(Unaudited)

For the Three Months Ended September 30, 2021

(Unaudited)

For the Nine Months Ended September 30, 2021

(Unaudited)

See notes to condensed consolidated financial statements

KONA GOLD BEVERAGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2022 and 2021

(Unaudited)

See notes to condensed consolidated financial statements

KONA GOLD BEVERAGE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Nine Months Ended September 30, 2022 and 2021

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION AND LIQUIDITY

The accompanying interim condensed consolidated financial statements of Kona Gold Beverages, Inc. (the “Company”, “we”, “us”, or “our”), are unaudited, but in the opinion of management contain all adjustments, including normal recurring adjustments, necessary to present fairly our financial position at September 30, 2022, and the results of operations and cash flows for the nine months ended September 30, 2022, and 2021. The balance sheet as of December 31, 2021, is derived from the Company’s audited financial statements.

Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. We believe that the disclosures contained in these condensed financial statements are adequate to make the information presented herein not misleading. For further information, refer to the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the Securities and Exchange Commission on April 13, 2022.

The results of operations for the nine months ended September 30, 2022, are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2022.

Effects of COVID-19

In January 2020, the WHO announced a global health emergency because of a new strain of coronavirus (known as COVID-19) that originated in Wuhan, China and generated significant risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in global exposure. The COVID-19 pandemic is disrupting businesses and affecting production and sales across a range of industries, as well as causing volatility in the financial markets. The extent of the impact of the COVID-19 pandemic on the Company’s consumer demand, sales, and financial performance will depend on certain developments, including, among other things, the duration and spread of the outbreak and the impact on the Company’s consumers and employees, all of which are uncertain and cannot be predicted. Management is actively monitoring this situation and potential impacts on our financial condition, liquidity, and results of operations.

Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, during the nine months ended September 30, 2022, the Company recorded a net loss of $6,142,144 and used cash in operations of $2,148,583 and had a stockholders’ deficit of $3,349,654 as of that date. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date of the financial statements being issued. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. As a result, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern. The Company’s independent registered public accounting firm, in its report on the Company’s consolidated financial statements for the year ended December 31, 2021, has also expressed substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

At September 30, 2022, the Company had cash on hand in the amount of $270,793. Subsequent to September 30, 2022, the Company raised an additional $250,000 through the sale of a secured promissory note. The Company believes it has sufficient cash and working capital to sustain operations through December 31, 2022. The continuation of the Company as a going concern is dependent upon its ability to obtain necessary debt or equity financing to continue operations until it begins generating positive cash flow. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders, in case or equity financing.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements are unaudited and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. These unaudited consolidated financial statements have been prepared on the accrual basis of accounting and in accordance with generally accepted accounting principles (“GAAP”) in the United States.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for reserves of uncollectible accounts receivable, assumptions used in valuing inventories at net realizable value, impairment testing of recorded long-term tangible and intangible assets, the valuation allowance for deferred tax assets, accruals for potential liabilities, assumptions made in valuing stock instruments issued for services, and assumptions used in valuing warrant liabilities, and assumptions used in the determination of the Company’s liquidity.

Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (“ASC 606”). The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which include (1) identifying the contract or agreement with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied.

Revenue and costs of sales are recognized when control of the products transfers to our customer, which generally occurs upon shipment from our facilities. The Company’s performance obligations are satisfied at that time. The Company does not have any significant contracts with customers requiring performance beyond delivery, and contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than a promised service to the customer.

All of the Company’s products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them.

The Company does not allow for returns, except for damaged products when the damage occurred pre-fulfillment. Damaged product returns have historically been insignificant. Because of this, the stand-alone nature of our products, and our assessment of performance obligations and transaction pricing for our sales contracts, we do not currently maintain a contract asset or liability balance for obligations. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.

Sales are made to customers under terms allowing certain limited rights of return. The Company records an allowance and return for each quarter for 3% of total sales. The Company recorded sales return, and allowance for the three months ending September 30, 2022 and 2021 of $32,700 and $16,100, respectively, and the Company recorded sales return, and allowance for the nine months ending September 30, 2022 and 2021 of $104,500 and $43,459, respectively which is included in the revenues, net of sales returns and allowances in the accompanying Condensed Consolidated Statements of Operations.

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

SCHEDULE OF NET REVENUES BY REVENUE SOURCE

The following table presents our net revenues by product lines for the period presented:

Loss per Common Share

Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net income applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive.

For the period ended September 30, 2022 and 2021, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have had an anti-dilutive effect. The potentially dilutive securities consisted of the following:

SCHEDULE OF POTENTIAL DILUTIVE SECURITIES

Stock Compensation Expense

The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on the straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered.

The fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.

Advertising Costs

Advertising costs are expensed as incurred and are included in selling and marketing expense. Advertising costs for the nine months ended September 30, 2022 and 2021, were $118,807 and $45,700, respectively.

Concentrations

The Company’s cash balances on deposit with banks are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. Generally, the Company’s policy is to minimize borrowing costs by immediately applying cash receipts to borrowings against its credit facility. From time to time, however, the Company may be exposed to risk for the amounts of funds held in bank accounts in excess of the FDIC limit. To minimize the risk, the Company’s policy is to maintain cash balances with high quality financial institutions.

Gross sales. During the three months ended September 30, 2022, the Company reported no customers that accounted for more than 10% of gross sales. During the three months ended September 30, 2021, the Company reported one customer represented 12% of the Company’s gross sales. During the nine months ended September 30, 2022, the Company reported no customers that accounted for more than 10% of gross sales. During the nine months ended September 30, 2021, the Company reported one customer represented 13% of the Company’s gross sales.

Accounts receivable. As of September 30, 2022, the Company had six customers that accounted for 80% of its gross accounts receivable. As of December 31, 2021, the Company had accounts receivable from two customers that comprised 60% of its gross accounts receivable.

Co-Packers. The raw materials used in the production of the Company’s products are obtained by the Company’s co-packers and consist primarily of materials such as the flavors, caffeine, sugars or sucralose, taurine, vitamins, CBD, and hemp seed protein contained in its beverages, the bottles in which its beverages are packaged, and the labeling on the outside of its beverages. These principal raw materials are subject to price and availability fluctuations. The Company currently relies on a few key co-packers, which in turn rely on a few key suppliers. The Company continually endeavors to have back-up co-packers, which co-packers would in turn depend on their third-party suppliers to supply certain of the flavors and concentrates that are used in the Company’s beverages. The Company is also dependent on these co-packers to negotiate arrangements with their existing suppliers that would enable the Company to obtain access to certain of such concentrates or flavor formulas under certain extraordinary circumstances. Additionally, in a limited number of cases, the Company’s co-packers may have contractual restrictions with their suppliers or the Company’s co-packers may need to obtain regulatory approvals and licenses that may limit the co-packers’ ability to enter into agreements with alternative suppliers. Contractual restrictions in the agreements the Company has with certain distributors may also limit the Company’s ability to enter into agreements with alternative distributors. The Company believes that a satisfactory supply of co-packers will continue to be available at competitive prices, although there can be no assurance in this regard. The Company continually endeavors to contract with additional beverage vendors to ensure the Company has adequate inventory. The Company believes that a satisfactory supply of vendors will continue to be available at competitive prices, although there can be no assurance in this regard.

Purchases from vendors. During the nine months ended September 30, 2022, the Company’s one vendor accounted for 33% of all purchases, respectively. During the nine months ended September 30, 2021, the Company’s largest three vendors accounted for 17%, 14%, and 11% of all purchases, respectively.

Accounts payable. As of September 30, 2022, two vendors accounted for more than 49% the total accounts payable. The Company’s largest two vendors accounted for 26% and 23% of the total accounts payable, respectively. As of December 31, 2021, four vendors accounted for more than 10% the total accounts payable. The Company’s largest four vendors accounted for 20%, 14%, 12%, and 11% of the total accounts payable, respectively.

Fair Value of Financial Instruments

The Company uses various inputs in determining the fair value of its financial assets and liabilities and measures these assets on a recurring basis. Financial assets recorded at fair value are categorized by the level of subjectivity associated with the inputs used to measure their fair value. Accounting Standards Codification Section 820 defines the following levels of subjectivity associated with the inputs:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

Level 3—Unobservable inputs based on the Company’s assumptions.

The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, short-term bank loans, accounts payable, notes payable and other payables, approximate their fair values because of the short maturity of these instruments. The carrying values of capital lease obligations and long-term financing obligations approximate their fair values because interest rates on these obligations are based on prevailing market interest rates.

Segments

The Company operates in one segment for the manufacture and distribution of our products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in economic characteristics, nature of products and services, and procurement, manufacturing, and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.

Other recent accounting pronouncements issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

NOTE 3 – INVENTORY

Inventory is valued at the lower of cost (first-in, first-out) or net realizable value, and net of reserves is comprised of the following:

SCHEDULE OF INVENTORY

At September 30, 2022 and December 31, 2021, inventory presented above is net of a reserve for slow moving and potentially obsolete inventory of $150,000 and $150,000, respectively.

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT

Property and equipment is comprised of the following:

SCHEDULE OF PROPERTY AND EQUIPMENT

Depreciation expense is included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Loss. For the nine months ended September 30, 2022 and 2021, depreciation expense was $67,018 and $32,755, respectively.

NOTE 5 – ACQUISITION OF S AND S BEVERAGE, INC.

On January 21, 2021, the Company entered into an Agreement and Plan of Merger with S and S Beverage, Inc. (“S and S”) and its shareholders and acquired all of the capital stock of S and S. In consideration thereof, the Company issued to them an aggregate of nine million restricted shares of Kona Gold Beverage, Inc.’s common stock (the “Acquisition Stock”). The Company did not grant them any registration rights in respect of the shares of Acquisition Stock. The Company also agreed to pay an aggregate of $1,050,000 (the “Aggregate Acquisition Payments”), the majority of which is allocated to certain creditors of S and S (including one of the S and S’s legacy shareholders) and $89,249 was allocated and paid to the five S and S legacy shareholders on a pro rata basis. The Company paid $400,000 of the Aggregate Acquisition Payments at the closing of the transaction. The remaining Aggregate Acquisition Payments are scheduled to be paid in monthly installments, in arrears on the tenth calendar day of each month, commencing on March 10, 2021, at a rate equivalent to $2.00 per case of Lemin Superior Lemonade (the product line of S and S that we have now branded as Ooh La Lemin) that we sell until the Aggregate Acquisition Payments have been paid in full. The acquisition obligation balance was $675,317 at December 31, 2021. During the nine months ended September 30, 2022, the Company paid $11,446 of the remaining Aggregate Acquisition Payments, leaving an acquisition obligation balance of $663,871 at September 30, 2022, which is currently due.

Proforma information for the three- and nine-month period ended September 30, 2021 has been omitted as the operations of S and S prior to the acquisition were de minimis.

NOTE 6 – INTANGIBLE ASSETS

Intangible asset consisted of the following:

SCHEDULE OF INTANGIBLE ASSET

During the nine months ended September 30, 2022, the Company recorded amortization expense of $7,316. The following table summarizes the amortization expense to be recorded in future periods for intangible assets that are subject to amortization:

SCHEDULE OF ESTIMATED FUTURE AMORTIZATION EXPENSE

NOTE 7 – NOTES PAYABLE – RELATED PARTIES

Notes payable with related parties consists of the following at September 30, 2022 and December 31, 2021:

SCHEDULE OF NOTES PAYABLE RELATED PARTY

At December 31, 2021, accrued interest on notes payable to related parties was $95,873. During the nine months ended September 30, 2022, the Company added $31,035 of additional accrued interest, leaving an accrued interest balance on the notes payable to related parties of $126,908 at September 30, 2022. Accrued interest is included in accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets.

NOTE 8 – NOTES PAYABLE

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

SCHEDULE OF NOTES PAYABLE

At December 31, 2021, there was no accrued interest on the notes payable. During the nine months ended September 30, 2022, the Company added $1,262 of additional accrued interest, leaving $1,262 of accrued interest balance on the notes payable at September 30, 2022. Accrued interest in included in accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets.

NOTE 9 – SECURED CONVERTIBLE DEBENTURES

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

SCHEDULE OF SECURED DEBENTURES PAYABLE TO RELATED PARTY

YA II PN, Ltd.

During the year ended December 31, 2021, the Company issued secured debentures to an otherwise unaffiliated third-party investor (the “Selling Stockholder”) in the aggregate of $4,500,000. The debentures are secured by all tangible and intangible assets of the Company and are also convertible into shares of our common stock at a conversion price of $0.03 per share or a per share amount equivalent to the weighted average (among the principal of the debentures) of 76.7% of the lowest VWAP of the Company’s common stock during the 15 trading days immediately preceding the conversion date, whichever is lower. As the ultimate determination of shares to be issued upon conversion of these debentures can exceed the current number of available authorized shares, we determined that the conversion features of these convertible debentures are not considered indexed to our Company’s own capital stock and characterized the fair value of the conversion features as derivative liability. In connection with the issuances of the debentures, the Company granted to the Selling Stockholder warrants to purchase up to 150 million shares of the Company’s common stock. The warrants are exercisable at $0.03 per share, Twenty million of the warrants will expire on May 14, 2023, fifty million of the warrants will expire on February 10, 2024 and 100,000,0000 of the warrants will expire on August 20, 2024. As a result of these issuances and grants, we incurred the following (a) derivative liability of $3,982,000 related to the conversion feature of the debentures; (b) relative fair value of the warrants granted of $1,581,000; and (c) and original issue discounts of $195,000 of the debentures for a total of $5,758,000, of which, $4,423,000 was accounted as debt discount and the remaining $1,335,000 as financing costs. The debt discount is being amortized to interest expense over the term of the corresponding debentures.

As of December 31, 2021, the outstanding balance of the secured debentures amounted to $3,000,000, with an unamortized debt discount of $2,150,067, or a net balance of $849,933.

During the nine months ended September 30, 2022, the note holder converted principal of $3,000,000 and accrued interest of $140,876, or a total $3,140,876, into 775,748,690 shares of the Company’s common stock with a fair value of $6,469,848. The Company followed the general extinguishment model to record the conversions and settlement of the debt. As such, the Company removed the debt and accrued interest totaled $3,140,876, the related unamortized debt discount totaled $1,784,879 at the date of conversion. In addition, the Company revalued the derivative related to the bifurcated conversion option to its fair value of $3,972,000 at the date of the conversion and removed that amount. As a result, the Company recorded a loss on extinguishment of debt of $1,141,850.

On May 5, 2022, the Company issued 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’s common stock at a conversion price of $0.03 per share or 80% of the lowest daily volume weighted average price (“VWAP”) of the Company’s common stock during the 10 trading days immediately preceding the conversion date. As the ultimate determination of shares of common stock to be issued upon conversion of these debentures can exceed the current number of available authorized shares, the Company determined that the conversion features of these debentures are not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as a derivative liability (see Note 10). In connection with the issuances of these debentures, the Company also granted to the selling stockholder warrants to purchase up to 8,333,333 shares of common stock. The warrants are exercisable at $0.03 per share and will expire in three years from their grant date. As a result of these issuances, the Company incurred the following (a) derivative liability of $680,000 related to the conversion feature of the debentures; (b) relative fair value of the warrants granted of $81,000; and (c) and original issue discount of $25,000 for a total of $786,000, of which, $500,000 was accounted as debt discount and the remaining $286,000 as financing costs. The debt discount is being amortized to interest expense over the term of the corresponding debentures. During the nine months ended September 30, 2022, the Company amortized debt discount of $198,335 to interest expense.

As of September 30, 2022, the outstanding balance of the secured debentures amounted to $500,000, with an unamortized debt discount of $301,645, or a net balance of $198,355. During the nine months ended September 30, 2022, the Company amortized debt discount of $563,542 to interest expense on the YA II PN, Ltd. loans.

As of September 30, 2022, 124,958,049 shares of common stock were potentially issuable under the conversion terms of the outstanding debentures.

Mast Hill

On July 28, 2022, the Company issued senior secured debentures to an otherwise unaffiliated third-party investor (the “Investor”) in the aggregate of $595,000. The debentures bear interest at a rate of 10% per annum, mature on July 28, 2023, and are convertible into shares of our common stock at a conversion price of $0.0045 per share. If the Company issues subsequent equity instruments at an effective price per share that is lower than the conversion price of $0.0045 per shares, then the conversion price shall be reduced, at the option of the Holder, to a price equal to the Weighted Average Price (as defined), provided, further, that if the conversion price is equal to or less than $0.003, then the conversion price shall be reduced at the option of the Holder to a price equal to the lower price. The senior secured debentures are secured by all of the Company’s assets and the assets of each of its subsidiaries pursuant to the Security Agreement. The security interest granted to the Investor under the Security Agreement is subordinate to the continuing security interest that remains in effect pursuant to the previous grant of a security interest in connection with a still-outstanding debenture to an earlier investor all tangible and intangible assets. In connection with the issuances of the debentures, the Company granted to the Selling Stockholder warrants to purchase up to 100 million shares of the Company’s common stock, which expire on July 28, 2027. The warrants are exercisable at $0.0045 per share. As a result of these issuances and grants, we incurred the following (a) relative fair value of the warrants granted of $223,000; and (b) original issue discounts of $92,325 of the debentures for a total of $315,325 which was allocated as debt discount. The debt discount is being amortized to interest expense over the term of the corresponding debentures. As of September 30, 2022, the unamortized debt discount was $262,771.

As of September 30, 2022, 147,745,854 shares of common stock were potentially issuable under the conversion terms of the outstanding debentures.

At December 31, 2021, accrued interest on the convertible notes payable was $54,110. During the nine months ended September 30, 2022, the Company added $109,854 of additional accrued interest, and converted $140,876 of accrued interest into common stock, leaving an accrued interest balance on the convertible notes payable of $23,088 at September 30, 2022. Accrued interest is included in accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets.

NOTE 10 – DERIVATIVE LIABILITY

The FASB has issued authoritative guidance whereby instruments which do not have fixed settlement provisions are deemed to be derivative instruments. During fiscal year 2021, the Company issued convertible debentures, which, if converted into common stock, can potentially exceed the current number of available authorized shares of the Company (see Note 11). Since the number of shares is not explicitly limited, the Company is unable to conclude that enough authorized and unissued shares are available to settle the conversion option. In accordance with the FASB authoritative guidance, the conversion features have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

As of September 30, 2022 and December 31, 2021, the derivative liabilities were valued using the Binomial pricing model and/or Black Scholes pricing model with the following assumptions:

SCHEDULE OF DERIVATIVE LIABILITY

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the conversion feature of the notes was based on the remaining term of the notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future.

As discussed in Note 8, during the period, the Company converted $3,000,000 of convertible notes. At issuance it was determined that the conversion feature of these notes contained a conversion feature that resulted in a derivative liability, the fair value of which was $2,121,000 at December 31, 2021. These convertible notes were converted to common shares during the period. As such, prior to conversion the Company revalued the derivatives to their fair value at the date of extinguishment of $3,972,000, resulting in change in fair value of $1,851,000. The Company removed the fair value of derivative of $3,972,000 at date of extinguishment, which has been included in the net loss on extinguishment.

In addition, during the nine months ended September 30, 2022, the Company recognized derivative liabilities of $680,000 upon issuance of additional secured convertible debentures (See note above). The remaining derivative liabilities were revalued at $352,000 at September 30, 2022.

NOTE 11 – LEASE LIABILITIES

The Company determines whether a contract is, or contains, a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. The Company leases its office and warehouse locations, and certain warehouse equipment. Leases with an initial term of 12 months or less are not included on the balance sheets.

Operating Leases

The Company leases approximately 4,500 square feet of corporate office and warehouse space located at 746 North Drive, Suite A, Melbourne, Florida 32934. The lease is for a five-year term and expires on May 31, 2023. The initial monthly base rent was approximately $3,994, plus state taxes. The monthly base rent increases annually by 3 percent.

The Company leases a 30,000 square foot warehouse and main distribution hub in Greer, South Carolina. The lease is for a 63-month term that commenced in May 2019 and expires on August 1, 2026. Beginning in April 2020, the Company’s monthly rent includes monthly base payments of $10,200, plus applicable monthly CAM fees (“Common Area Maintenance”). The monthly base rent increases annually by 2 percent.

The Company leases a 10,000 square foot distribution hub in Conway, South Carolina. The lease is for a 62-month term that commenced in October 2021 and expires in November 2026. The Company’s monthly rent is approximately $7,261 plus applicable monthly CAM fees (Common Area Maintenance). The monthly base rent increases annually by 1.5 percent.

Finance Leases

On March 17, 2020, the Company entered into a lease agreement for equipment. The finance lease is for a 62-month term that commenced in April 2020 and expires in March 2025. The agreement includes monthly payments of $676.

During the nine months ended September 30, 2022 and 2021, lease costs totaled $152,841 and $93,569, respectively.

Our ROU asset balance was $966,955 as of December 31, 2021. During the nine months ended September 30, 2022, the Company recorded reduction of ROU assets of $143,320 related to its leases, resulting in an ROU asset balance of $823,635 as of September 30, 2022.

As of December 31, 2021, lease liabilities totaled $1,052,720, comprised of finance lease liabilities of $25,481 and operating lease liabilities of $1,027,239. During the nine months ended September 30, 2022, the Company made payments of $3,798 against its finance lease liability and $153,890 against its operating lease liability. As of September 30, 2022, lease liabilities totaled $895,032, comprised of finance lease liabilities of $19,753 and operating lease liabilities of $875,279. At September 30, 2022, the current portion of lease liabilities was $217,166, leaving a long-term lease liabilities balance of $677,866.

As of September 30, 2022, the weighted average remaining lease terms for operating lease and finance lease are 3.87 years and 2.50 years, respectively. As of September 30, 2022, the weighted average discount rate for operating lease is 10.00% and 2.09% for finance lease.

Future minimum lease payments under the leases are as follows:

SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS

NOTE 12 – STOCKHOLDERS’ EQUITY

Preferred Stock

The Company’s issued and outstanding preferred stock, par value $0.00001 per share, at September 30, 2022 and December 31, 2021 was 988,000 and 988,000, respectively. The Board, without further stockholder approval, may issue preferred stock in one or more series from time to time and fix or alter the designations, relative rights, priorities, preferences, qualifications, limitations, and restrictions of the shares of each series.

Series A Preferred Stock

The Company had authorized 4,000,000 shares of Series A Preferred Stock, par value of $0.00001 per share (the “Series A Preferred Stock”), of which no shares were issued or outstanding at September 30, 2022 and December 31, 2021, respectively. Each share of Series A Preferred Stock, when outstanding, could have been converted into one share of Common Stock.

Series B Preferred Stock

The Company had authorized 1,200,000 shares of Series B Preferred Stock, par value of $0.00001 per share (the “Series B Preferred Stock”), of which 488,000 were issued and outstanding at September 30, 2022 and December 31, 2021, respectively. Each share of Series B Preferred Stock may be converted into one share of Common Stock.

Series C Preferred Stock

On July 8, 2020, the Company reduced the authorized number of Series C Preferred Stock from 3,300,000 to 250 shares, par value $0.00001 per share (the “Series C Preferred Stock”), by filing a Certificate of Designation of the Preferences, Rights, and Limitations of the Series C Preferred Stock with the Secretary of State of the State of Delaware. The Company also amended the terms of the Series C Preferred Stock. The holders of shares of the Series Preferred C Stock are now entitled to 2,000,000 votes for every share of our Series Preferred C Stock held. The holders of the Series Preferred C Stock are not entitled to receive dividends. Upon any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, before any distribution or payment will be made to the holders of any stock ranking junior to the Series C Preferred Stock, the holders of the Series C Preferred Stock will be entitled to be paid out of the Company’s assets an amount equal to $1.00 in the aggregate for all issued and outstanding shares of the Series C Preferred Stock (as adjusted for any stock dividends, combinations, splits, recapitalizations, and the like with respect to such shares) (the “Preference Value”). After the payment of the full applicable Preference Value of each share of the Series C Preferred Stock, our remaining assets legally available for distribution, if any, will be distributed ratably to the holders of the Common Stock. The Series C Preferred Stock has conversion rights, whereby each share of the Series C Preferred Stock automatically converts into one share of Common Stock on the one-year anniversary of the issuance date.

The Company has authorized 250 shares, of Series C Preferred Stock of which 140 shares were issued and outstanding December 31, 2020. In July 2021, each share of the Series C Preferred Stock automatically converted into one share of Common Stock on the one-year anniversary of the issuance date. At September 30, 2022 and December 31, 2021, no shares of Series C Preferred Stock were issued and outstanding.

Series D Preferred Stock

The Company had authorized 500,000 shares of Series D Preferred Stock, par value of $0.00001 per share (the “Series D Preferred Stock”), of which 500,000 shares were issued and outstanding at September 30, 2022 and December 31, 2021, respectively. Each share of the Series D Preferred Stock may be converted into 1,000 shares of Common Stock.

Common Stock

The Company has authorized 2,500,000,000 shares of the Common Stock, respectively, of which 1,806,458,236 shares were issued and outstanding at September 30, 2022, and 1,004,709,546 were issued and outstanding at December 31, 2021.

Equity Transactions

On April 1, 2022, the Company granted 1,000,000 shares of Common Stock to Peter Troy pursuant to that certain Employment Agreement dated October 1, 2021, by and between Mr. Troy and the Company. At the date of grant, the fair market value of the shares was $0.0085 per share based on the closing price of the Common Stock, for a total value of $8,500.

During the nine months ended September 30, 2022, the Company issued an aggregate of 775,748,690 shares of Common Stock with a fair value of $6,496,848 upon the conversion of $3,000,000 of principal, and $140,876 of accrued interest on its secured convertible debentures, at an average price of $0.0040 (see Note 9).

During the nine months ended September 30, 2022, and in connection with the issuance of the debenture, the Company issued to the lender 25,000,000 shares of the Company’s common stock at a price of $0.0040 per share (see Note 8). The fair value of the 25,000,000 shares issued was $135,000 and recorded as a debt discount in the accompanying condensed consolidated balance sheet.

During the nine months ended September 30, 2021, the Company issued an aggregate of 84,660,068 shares of Common Stock with a fair value of $1,529,635 upon the conversion of $1,500,000 of principal, and $29,635 of accrued interest on its secured convertible debentures, at an average price of $0.0181.

During the nine months ended September 30, 2021, the Company issued 9,000,000 shares of its Common Stock with a fair value of $270,900 for the acquisition of S and S.

Common Stock Issuable

On August 12, 2015, the Company entered into an Employment Agreement with Robert Clark (the “Clark Employment Agreement”). On December 1, 2016, the Company entered into an Amendment to Employment Agreement (the “Clark Amendment” and, together with the Clark Employment Agreement, the “Amended Clark Employment Agreement”). Pursuant to the terms of the Amendment Clark Employment Agreement, the Company agreed to issue, among other securities, 200,000,000 shares of the Common Stock. Immediately, Mr. Clark decided to defer receipt of 80,000,000 of such shares; thus leaving 120,000,000 shares of the Common Stock to be issued to him.

The 120,000,000 shares of the Common Stock were issued to Mr. Clark, as follows: (i) on October 28, 2015, the Company issued 30,000,000 of such shares; (ii) on March 2, 2016, the Company issued 40,000,000 of such, and (iii) on May 16, 2016, the Company issued 50,000,000 of such shares. On April 19, 2018, (i) 40,000,000 shares were cancelled and returned to the Company, and on July 31, 2019, (ii) an additional 50,000,000 shares were cancelled and returned to the Company. Accordingly, as of December 31, 2019, the Company owed to Mr. Clark an aggregate of 169,999,860 shares to be reissued to him upon his request pursuant to the terms of the oral agreement with him which were valued at $1,386,497 based on their fair value at the date of grant. The common shares issuable balance at September 30, 2022 and December 31, 2021 were $1,386,497.

Summary of Warrants

A summary of warrants for the nine months ended September 30, 2022, is as follows:

SCHEDULE OF SUMMARY OF WARRANTS

Information relating to outstanding warrants at September 30, 2022, summarized by exercise price, is as follows:

SCHEDULE OF OUTSTANDING WARRANTS

Based on the fair market value of $0.0060 per share on September 30, 2022, the intrinsic value attributable to both the outstanding and exercisable warrants is $150,000 at September 30, 2022.

In connection with the issuance of senior convertible secured debentures on July 28, 2022 (see Note 9), the Company granted warrants with a relative fair value of $223,000 to purchase up to an aggregate of 100,000,000 shares of the Common Stock. Each warrant has a five-year term from issuance and is immediately exercisable at an exercise price of $0.0045 per share, subject to adjustment. The relative fair value of these warrants at grant date was $223,000, which was determined using a Black-Scholes-Merton option pricing model with the following assumptions: fair value of our stock price of $0.0060 per share, the expected term of three years, volatility of 133%, dividend rate of 0%, and risk-free interest rate of 2.81%.

In connection with the issuance of convertible secured debentures on May 2, 2022 (see Note 9), the Company granted warrants with a relative fair value of $81,000 to purchase up to an aggregate of 8,333,333 shares of the Common Stock. Each warrant has a three-year term from issuance and is immediately exercisable at an exercise price of $0.03 per share, subject to adjustment. The relative fair value of these warrants at grant date was $81,000, which was determined using a Black-Scholes-Merton option pricing model with the following assumptions: fair value of our stock price of $0.0180 per share, the expected term of three years, volatility of 132%, dividend rate of 0%, and risk-free interest rate of 2.16%.

NOTE 13 – SUBSEQUENT EVENTS

Subsequent to September 30, 2022, the Company issued an aggregate of 34,910,751 shares of Common Stock to YA II PN, Ltd. upon the conversion of $100,000 of principal, and $15,205 of accrued interest on its secured convertible debentures, at an average price of $0.0033 (see Note 9).

On November 2, 2022, the Company entered into a secured non-interest bearing advance agreement with an unaffiliated third party for the purchase of future receipts/revenues. Under the agreements, the Company received a lump sum payment of $168,000 after fees, and in return, the lender receives a secured right to collect a fix sum of future receipts/revenue of $241,500 to be collected by the Company. In accordance with the agreement, the Company agreed to sell, assign and transfer to the Purchaser of all the Company’s payments, receipts, settlements and funds paid to or received by or for the account of the Company from time to time on and after the date hereof in payment or settlement of the Company’s existing and future accounts, payment intangibles, credit, debit and/or stored value card transactions, contract rights and other entitlements arising from or relating to the payment of monies from the Company’s customers and/or other payors or obligors. The loan is payable in daily payments of $1,725, is secured by these assets described above, and is guaranteed by Robert Clark, the Company’s Chief Executive Officer. Upon execution of the advance and receipt of funds, the Company recorded the difference of $73,500 between the cash collected and the face amount of the note as a note discount, and will amortize the note discount as interest expense over the life of the advance.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the results of operations and financial condition for the three and nine months ended September 30, 2022 and 2021 should be read in conjunction with the financial statements and related notes and the other financial information that are included elsewhere in this Quarterly Report. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. We disclaim any obligation to update forward-looking statements. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” and “Description of Business” sections in this Quarterly Report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. We and our representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this Quarterly Report and other filings with the SEC, reports to our stockholders, and news releases. All statements that express expectations, estimates, forecasts, or projections are forward-looking statements. In addition, other written or oral statements which constitute forward-looking statements may be made by us or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” “project,” “forecast,” “may,” “should,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by such forward-looking statements.

We undertake no obligation to update or revise any of the forward-looking statements after the date of this Quarterly Report to confirm forward-looking statements to actual results. Important factors on which such statements are based are assumptions concerning uncertainties, including, but not limited to, uncertainties associated with the following:

The following discussion should be read in conjunction with the financial statements and the notes thereto which are included in this Quarterly Report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ substantially from those anticipated in any forward-looking statements included in this discussion as a result of various factors.

Results of Operations

Overview

Our business has grown rapidly since inception in 2015, and we anticipate that our business will continue to grow significantly. In the three months ended September 30, 2022, the Company saw an increase in growth compared to the same period of the prior year period, as distribution by our current distributors and new distributors, who were, and whose clients were, affected by COVID-19 had resumed and saw fewer COVID-19 pandemic-related distribution impacts. The Company acquired S and S Beverage, Inc. (“S and S”), in early 2021, which increased our product variety, resulting in the commencement of new distribution contracts.

We derive our revenue from sales of our products to online consumers, to resellers, and to distributors, Product sales to resellers include sales to convenience stores, grocery stores, and smoke and gift shops that complement our current product offering. Product sales to distributors include four energy drinks, our HighDrate CBD-infused energy waters, and our apparel, such as t-shirts and hats. In early 2021, we broadened our product line to include Ooh La Lemin lemonade. We also distribute our products and other companies’ products at retail. In late 2021, we expanded our distribution operations with the addition of a second distribution center.

We have experienced and expect to continue to experience substantial growth in our operations as we seek to expand through additional products and acquisitions that complement our current product offerings. We expect that revenue will continue to increase in fiscal year 2022 compared to fiscal year 2021, as distribution by our current distributors, who were, and whose clients were, affected by COVID-19 has resumed and we expect to see fewer COVID-19 pandemic-related distribution impacts for fiscal year 2022. Based on those expectations, we now anticipate signing more favorable agreements with larger, reputable tier 1 and mid-size distributors, big box stores, and grocery chains. The following is a more detailed discussion of our financial condition and results of operations for the period presented.

Impact of Inflation

Recent inflationary trends have led to a moderate increase in some of the costs to produce and ship our products. To date, we have not passed the increases in those costs to our consumers. Continued prolonged periods of inflationary pressure on some or all of those costs could have a material adverse effect on our profit margins from sales of those products or could require us to increase prices for those products, which could reduce consumer demand for those products.

Three Months ended September 30, 2022 compared to Three Months ended September 30, 2021

Overview

As reflected in the accompanying financial statements, during the three months ended September 30, 2022, we incurred a net loss of $1,192,057 and used cash in operations of $2,148,583, compared to a net loss of $2,230,715 and used cash in operations of $1,586,677 for the three months ended September 30, 2021. As of September 30, 2022, we had a stockholders’ deficit of $3,349,654.

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

Revenue

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

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

During the three months ended September 30, 2022, we reported net revenues of $1,130,546, which is an increase of $585,171, or 107%, compared to net revenues of $545,375 for the three months ended September 30, 2021. An increase of $550,302 of our revenue is attributable to increased retail revenue, while our product sales increased in net revenue by $34,869. We attribute the significant increase in retail revenue to attaining a larger percentage of the territory in which the Company distributes, including the addition of a third distribution hub in late fiscal 2021 and the hiring of additional employees to service this territory. We attribute the increase in product sales from the prior period to the signing of new agreements in new territories, the commencing of an anticipated rollout of our drink products with a national retailer late in the third quarter, and the hiring of additional sales representatives to service new territories. We anticipate that the rollout of our drink products with a national retailer will continue in the fourth quarter. The Company will continue to experience delays in the rebranding our hemp product line and the subsequent production in the remainder of fiscal year 2022. Despite this delay, we expect that our product revenue will increase in the remaining fiscal year 2022 compared to fiscal year 2021. Further, the additional sales personnel the Company hired will continue to lead sales efforts as the Company expands into the new territories. The Company anticipates signing more favorable agreements with larger, reputable tier 1 and mid-size distributors, big box stores, and grocery chains in these new territories. In addition, we anticipate that our retail revenue will continue to increase as we broaden our customer base with increased distribution to additional grocery and convenience chains.

Cost of Revenues

Cost of revenues consists primarily of expenses associated with products sold to distributors and resellers, including product and shipping costs. Costs also include credit card fees, fees incurred for sales that occur on Amazon.com, and other transaction fees related to the processing of consumer transactions. Typically, we expect that the cost of revenues will increase as a direct correlation to increases in sales. Thus, our cost of revenues increases on an absolute basis versus on a percentage of sales basis. At the same time, when sales increase, thereby increasing our orders with our co-packers, our cost of products decreases because of the volume discounts we receive from our co-packers.

During the three months ended September 30, 2022, we reported cost of revenues of $873,319, which is an increase of $430,553, or 97%, compared to $442,766 for the three months ended September 30, 2021. This increase is attributed to an increase in sales in both our products and retail distribution in 2022, compared to the prior year period. The cost of revenues increase was less than the increase in revenues. This is primarily attributed to increased costs in the prior period in obtaining our ingredients for our products, for production of our products, and for shipping our products. We expect that we will continue to see an increased cost of revenues in the remaining fiscal year 2022, primarily due to an anticipated increase in revenues. In addition, as the cost of shipping our products continues to remain elevated, we also anticipate increased costs for obtaining our ingredients for our products, increased costs for production of our products, and increased costs of shipping our products. We continue to seek alternative methods to reduce costs for production and the cost of shipping our products in fiscal year 2022.

Selling, General and Administrative Expenses

Selling, General and Administrative Expenses (“SG&A”) expenses consist primarily of professional fees, salaries and wages, advertising, rent, travel expenses, sponsorships, and general office and administrative expenses related to maintaining our facilities. Selling, general and administrative expenses increased in the three months ended September 30, 2022, to $1,075,044 from $756,110, an increase of $318,934 over the same period last year. The increase was driven by increased operating expenses associated with hiring additional sales employees, advertising and marketing, travel expenses, legal and accounting fees, rent related to an additional distribution warehouse, vehicle and shipping expenses, and partially offset by lower professional fees. We expect that, as we expand our business operations, SG&A expenses will continue to increase.

We expect that as we expand our business operations and continue to incur additional corporate-related expenses associated with our status as a fully registered issuer with the SEC under the Securities Exchange Act of 1934, as amended (the “1934 Act”), SG&A expenses will continue to increase.

Other Income and Expenses

Other expense for the three months ended September 30, 2022, was $374,240, as compared to other expense of $1,577,214 for the three months ended September 30, 2021. The change was attributable to the decrease in interest expense of $563,616 related to our debt levels and debt amortization, the decrease in the change in the fair value of derivative liabilities of $888,220, and a loss on extinguishment of debt of $268,810, 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 $1,192,057 for the three months ended September 30, 2022, a decrease of $1,038,658 compared to the prior year period in which we incurred a net loss of $2,230,715. The decrease in net loss is primarily due to increased gross profit offset by increased SG&A expenses and the decrease in other expenses, as discussed above.

Nine Months ended September 30, 2022 compared to Nine Months ended September 30, 2021

Overview

As reflected in the accompanying financial statements, during the nine months ended September 30, 2022, we incurred a net loss of $6,142,144 and used cash in operations of $2,148,583, compared to a net loss of $4,423,399 and used cash in operations of $1,586,677 for the nine months ended September 30, 2021. As of September 30, 2022, we had a stockholders’ deficit of $3,349,654.

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

Revenue

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

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

During the nine months ended September 30, 2022, we reported net revenues of $3,299,075, which is an increase of $1,500,076, or 83%, compared to net revenues of $1,798,999 for the nine months ended September 30, 2021. An increase of $1,732,854 of our revenue is attributable to increased retail revenue, while our product sales decreased in net revenue by $232,778. We attribute the significant increase in retail revenue to attaining a larger percentage of the territory in which the Company distributes, including the addition of a third distribution hub in late fiscal 2021 and the hiring of additional employees to service this territory. We attribute the decrease in product sales to certain delays in production of a new product line and existing product lines, as well as to a change-over in our customer mix from the prior period due to a non-repetitive, regional, one-off customer relationship in the prior period and a different regional customer imposing slotting fees in the current period (which fees we declined to pay). We anticipate that the rollout of our drink products with a national retailer that commenced late in the third quarter will continue in the remaining fiscal year 2022. Additionally, the Company experienced delays in the rebranding of our hemp product line and the subsequent production. We expect that our product revenue will increase in the remaining fiscal year 2022 compared to fiscal year 2021, and we do not anticipate further delays. Further, the Company hired additional sales personnel to lead sales efforts as the Company began to expand into new territories late in the third quarter. The Company anticipates to continue signing more favorable agreements with larger, reputable tier 1 and mid-size distributors, big box stores, and grocery chains. In addition, we anticipate that our retail revenue will continue to increase as we broaden our customer base with increased distribution to additional grocery and convenience chains.

Cost of Revenues

Cost of revenues consists primarily of expenses associated with products sold to distributors and resellers, including product and shipping costs. Costs also include credit card fees, fees incurred for sales that occur on Amazon.com, and other transaction fees related to the processing of consumer transactions. Typically, we expect that the cost of revenues will increase as a direct correlation to increases in sales. Thus, our cost of revenues increases on an absolute basis versus on a percentage of sales basis. At the same time, when sales increase, thereby increasing our orders with our co-packers, our cost of products decreases because of the volume discounts we receive from our co-packers.

During the nine months ended September 30, 2022, we reported cost of revenues of $2,608,712, which is an increase of $1,164,985, or 81%, compared to $1,443,727 for the nine months ended September 30, 2021. This increase is attributed to an increase in sales in our retail distribution in 2022, compared to the prior year period. The cost of revenues increase was comparable to the increase in revenues for the same period. We expect that we will continue to see an increased cost of revenues in the remaining fiscal year 2022, primarily due to an anticipated increase in revenues. In addition, as the cost of shipping our products continues to remain elevated, we also anticipate increased costs for obtaining our ingredients for our products, increased costs for production of our products, and increased costs of shipping our products. We continue to seek alternative methods to reduce costs for production and the cost of shipping our products in fiscal year 2022.

Selling, General and Administrative Expenses