Item 1A. Risk Factors.
You should carefully
consider the risks described below as well as other information provided to you in this document, including information in the section
of this document entitled “Cautionary Note Concerning Forward Looking Statements.” If any of the following risks actually
occur, the Company’s business, financial condition or results of operations could be materially adversely affected, the value of
the Company’s Common Stock could decline, and you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
Risks Related to our Business
Our business could be materially and adversely
affected by the lingering impact of the global COVID-19 pandemic or other epidemics and outbreaks.
The COVID-19 pandemic had disrupted and affected our business
operations, which has led to business and supply chain disruptions. The lingering effects of the pandemic are likely to continue to disrupt
our business and supply chain in the future. For example, our ability to gain new retail authorizations could be impacted by restrictions
in retail outlets and our ability to generate sales and brand awareness in bars and restaurants could be impacted if restrictions are
place on these establishments. However, given the unpredictable nature of COVID-19 and its variants, it is difficult, if not
impossible, to predict, whether any government-imposed restrictions will be reimposed at previous levels or enhanced in one or more ways
impacting our business operations or those of third parties upon which we rely. The COVID-19 pandemic, including associated
business interruptions and recovery, as well as other possible epidemics or outbreaks of other contagions could result in a material adverse
impact on our or our current or anticipated customers’ or suppliers’ business operations, including reduction or suspension
of operations in the U.S. or other parts of the world. Our design and engineering operations, among others, cannot all be conducted remotely
and often require on-site access to materials and equipment. We have customers, suppliers, and partners with international operations,
and our customers, suppliers, and partners also depend on suppliers and manufacturers worldwide, which means that our business and prospects
could be affected by the lingering effects of the COVID-19 pandemic anywhere in the world. Depending upon the duration of the
lingering effects of the COVID-19 pandemic and the associated business interruptions, our customers, suppliers, manufacturers,
and partners may suspend or delay their engagements with us. We and our customers’ and suppliers’ response to the lingering
effects of the COVID-19 pandemic may prove to be inadequate and they may be unable to continue their respective operations in
the manner they had prior to the outbreak or the worsening of the outbreak, and we may consequently endure interruptions, reputational
harm, delays in our product development, and shipments, all of which could have an adverse effect on our business, operating results,
and financial condition. In addition, we cannot assure you as to the timing of the economic recovery given the lingering effects of the
pandemic, which could have a material adverse effect on our target markets and our business.
9
If we are unable to continue as a going concern,
our securities will have little or no value.
We have sustained recurring losses
and we have had a working capital and stockholders’ equity deficits. These prior losses and expected future losses have had, and
will continue to have, an adverse effect on our financial condition. In addition, continued operations and our ability to continue as
a going concern may be dependent on our ability to obtain additional financing in the near future and thereafter, and there are no assurances
that such financing will be available to us at all or will be available in sufficient amounts or on reasonable terms. Our financial statements
do not include any adjustments that may result from the outcome of this uncertainty. If we are unable to generate additional funds in
the future through sales of our products, financings or from other sources or transactions, we will exhaust our resources and will be
unable to continue operations. If we cannot continue as a going concern, our shareholders would likely lose most or all of their investment
in us.
We have experienced recurring losses from operations
and negative cash flows from operating activities and anticipate that we will continue to incur significant operating losses
in the future.
We have experienced recurring
losses from operations and negative cash flows from operating activities. We expect to continue to incur significant expenses related
to our ongoing operations and generate operating losses for the foreseeable future. The size of our losses will depend, in part, on the
rate of future expenditures and our ability to generate revenues. We incurred a net loss of $21.7
million for the year ended December 31, 2022. Our accumulated deficit increased to $112.3
million as of December 31, 2022, compared to the prior year’s deficit of $90.6
million.
We may encounter unforeseen expenses,
difficulties, complications, delays, and other unknown factors that may adversely affect our financial condition. Our prior losses and
expected future losses have had, and will continue to have, an adverse effect on our financial condition. If our products do not achieve
sufficient market acceptance and our revenues do not increase significantly, we may never become profitable. Even if we achieve profitability
in the future, we may not be able to sustain profitability in subsequent periods. Our failure to become and remain profitable would decrease
the value of our company and could impair our ability to raise capital, expand our business, diversify our product offerings or continue
our operations. A decline in the value of our company could cause you to lose all or part of your investment.
If we are not able to successfully execute on
our future operating plans and objectives, our financial condition and results of operation may be materially adversely affected, and
we may not be able to continue as a going concern.
It is important that we meet our
sales goals and increase sales going forward as our operating plan already reflects prior significant cost containment measures and may
make it difficult to achieve top-line growth if further significant reductions become necessary. If we do not meet our sales goals, our
available cash and working capital will decrease and our financial condition will be negatively impacted.
In order to be successful, we
believe that we must, among other things:
● increase the sales volume and gross margins for our products;
● maintain efficiencies in operations;
● manage our operating expenses to sufficiently support operating activities;
● maintain fixed costs at or near current levels; and
We may not be able to meet these
objectives, which could have a material adverse effect on our results of operations. We have incurred significant operating expenses in
the past and may do so again in the future and, as a result, will need to increase revenues in order to improve our results of operations.
Our ability to increase sales will depend primarily on success in expanding our current markets, improving our distribution base, entering
into Direct-To-Retail (DTR) arrangements with national accounts, and introducing new brands, products or product extensions to the market.
Our ability to successfully enter new distribution areas and obtain national accounts will, in turn, depend on various factors, many of
which are beyond our control, including, but not limited to, the continued demand for our brands and products in target markets, the ability
to price our products at competitive levels, the ability to establish and maintain relationships with distributors in each geographic
area of distribution and the ability in the future to create, develop and successfully introduce one or more new brands, products, and
product extensions.
10
Demand for our products
may be adversely affected by changes in consumer preferences or any inability on our part to innovate, market or distribute our products
effectively, and any significant reduction in demand could adversely affect our business, financial condition or results of operations.
Our beverage portfolio is comprised
of a number of unique brands with reputations and consumer imagery that have been built over time. Our investments in marketing as well
as our strong commitment to product quality are intended to have a favorable impact on brand image and consumer preferences. If we do
not adequately anticipate and react to changing demographics, consumer and economic trends, health concerns and product preferences, our
financial results could be adversely affected.
Additionally, failure to introduce
new brands, products or product extensions into the marketplace as current ones mature and to meet the changing preferences of consumers
could prevent us from gaining market share and achieving long-term profitability. Product lifecycles can vary and consumer preferences
and loyalties change over time. Although we try to anticipate these shifts and innovate new products to introduce to our consumers, we
may not succeed. Consumer preferences also are affected by factors other than taste, such as health and nutrition considerations and obesity
concerns, shifting consumer needs, changes in consumer lifestyles, increased consumer information and competitive product and pricing
pressures. Sales of our products may be adversely affected by the negative publicity associated with these issues... If we do not adequately
anticipate or adjust to respond to these and other changes in consumer preferences, we may not be able to maintain and grow our brand
image and our sales may be adversely affected.
Volatility in the price or availability
of the inputs we depend on, including raw materials, packaging, energy and labor, could adversely impact our financial results.
The principal raw materials we
use include glass bottles, aluminum cans, labels and cardboard cartons, flavorings and sweeteners. These ingredient costs are subject
to fluctuation. Substantial increases in the prices of our ingredients, raw materials and packaging materials, to the extent that they
cannot be recouped through increases in the prices of finished beverage products, would increase our operating costs and could reduce
our profitability. If our supply of these raw materials is impaired or if prices increase significantly, it could affect the affordability
of our products and reduce sales.
If we are unable to secure sufficient
ingredients or raw materials including glass, sugar, and other key supplies, we might not be able to satisfy demand on a short-term basis.
11
Changes in government regulation or failure
to comply with existing regulations could adversely affect our business, financial condition and results of operations.
Our business and properties are
subject to various federal, state and local laws and regulations, including those governing the production, packaging, quality, labeling
and distribution of beverage products. In addition, various governmental agencies have enacted or are considering additional taxes on
soft drinks and other sweetened beverages. Changes in existing laws or regulations could require material expenses and negatively affect
our financial results through lower sales or higher costs.
We compete in an industry that is brand-conscious,
so brand name recognition and acceptance of our products are critical to our success.
Our business is dependent upon
awareness and market acceptance of our products and brands by our target market, trendy, young consumers looking for a distinctive tonality
in their beverage choices. In addition, our business depends on acceptance by our independent distributors and retailers of our brands
as beverage brands that have the potential to provide incremental sales growth. If we are not successful in the revitalization and growth
of our brand and product offerings, we may not achieve and maintain satisfactory levels of acceptance by independent distributors and
retail consumers. Any failure of our brand to maintain or increase acceptance or market penetration would likely have a material adverse
effect on our revenues and financial results.
Our brands and brand images are keys to our
business and any inability to maintain a positive brand image could have a material adverse effect on our results of operations.
Our success depends on our ability
to maintain brand image for our existing products and effectively build up brand image for new products and brand extensions. We cannot
predict whether our advertising, marketing and promotional programs will have the desired impact on our products’ branding and on
consumer preferences. In addition, negative public relations and product quality issues, whether real or imagined, could tarnish our reputation
and image of the affected brands and could cause consumers to choose other products. Our brand image can also be adversely affected by
unfavorable reports, studies and articles, litigation, or regulatory or other governmental action, whether involving our products or those
of our competitors.
Competition from traditional and large, well-financed
non-alcoholic and alcoholic beverage manufacturers may adversely affect our distribution relationships and may hinder development of our
existing markets, as well as prevent us from expanding our markets.
The beverage industry is highly
competitive. We compete with other beverage companies not only for consumer acceptance but also for shelf space in retail outlets and
for marketing focus by our distributors, all of whom also distribute other beverage brands. Our products compete with all non-alcoholic
and alcoholic beverages, most of which are marketed by companies with substantially greater financial resources than ours. Some of these
competitors are placing severe pressure on independent distributors not to carry competitive brands such as ours. We also compete with
regional beverage producers and “private label” hydration suppliers.
12
Increased competitor consolidations,
market-place competition, particularly among branded beverage products, and competitive product and pricing pressures could impact our
earnings, market share and volume growth. If, due to such pressure or other competitive threats, we are unable to sufficiently maintain
or develop our distribution channels, we may be unable to achieve our current revenue and financial targets. Competition, particularly
from companies with greater financial and marketing resources than ours, could have a material adverse effect on our existing markets,
as well as on our ability to expand the market for our products.
We may experience a reduced demand for some of our products due to
health concerns (including obesity) and legislative initiatives against sweetened beverages.
Consumers are concerned about
health and wellness; public health officials and government officials are increasingly vocal about obesity and its consequences. There
has been a trend among some public health advocates and dietary guidelines to recommend a reduction in sweetened beverages, as well as
increased public scrutiny, new taxes on sugar-sweetened beverages (as described below), and additional governmental regulations concerning
the marketing and labeling/packing of the beverage industry. Additional or revised regulatory requirements, whether labeling, tax or otherwise,
could have a material adverse effect on our financial condition and results of operations. Further, increasing public concern with respect
to sweetened beverages could reduce demand for our beverages and increase desire for more low-calorie soft drinks, water, enhanced water,
coffee-flavored beverages, tea, and beverages with natural sweeteners. We are continuously working to reduce calories and sugar in our
TapouT products while launching new products, to pair with existing brand extensions that round out our diversified portfolio.
Legislative or regulatory changes that affect
our products, including new taxes, could reduce demand for products or increase our costs.
Taxes imposed on the sale of certain
of our products by federal, state and local governments in the United States, or other countries in which we operate could cause consumers
to shift away from purchasing our beverages. Several municipalities in the United States have implemented or are considering implementing
taxes on the sale of certain “sugared” beverages, including non-diet soft drinks, fruit drinks, teas and flavored waters to
help fund various initiatives. These taxes could materially affect our business and financial results.
Our reliance on distributors, retailers and
brokers could affect our ability to efficiently and profitably distribute and market our products, maintain our existing markets and expand
our business into other geographic markets.
Our ability to maintain and expand
our existing markets for our products, and to establish markets in new geographic distribution areas, is dependent on our ability to establish
and maintain successful relationships with reliable distributors, retailers and brokers strategically positioned to serve those areas.
Most of our distributors, retailers and brokers sell and distribute competing products, including non-alcoholic and alcoholic beverages,
and our products may represent a small portion of their businesses. The success of this network will depend on the performance of the
distributors, retailers and brokers of this network. There is a risk that the mentioned entities may not adequately perform their functions
within the network by, without limitation, failing to distribute to sufficient retailers or positioning our products in localities that
may not be receptive to our product. Our ability to incentivize and motivate distributors to manage and sell our products is affected
by competition from other beverage companies who have greater resources than we do. To the extent that our distributors, retailers and
brokers are distracted from selling our products or do not employ sufficient efforts in managing and selling our products, including re-stocking
the retail shelves with our products, our sales and results of operations could be adversely affected. Furthermore, such third-parties’
financial position or market share may deteriorate, which could adversely affect our distribution, marketing and sales activities.
Our ability to maintain and expand
our distribution network and attract additional distributors, retailers and brokers will depend on a number of factors, some of which
are outside our control. Some of these factors include:
We may not be able to successfully
manage all or any of these factors in any of our current or prospective geographic areas of distribution. Our inability to achieve success
with regards to any of these factors in a geographic distribution area will have a material adverse effect on our relationships in that
particular geographic area, thus limiting our ability to maintain or expand our market, which will likely adversely affect our revenues
and financial results.
13
It is difficult to predict the timing and amount
of our sales because our distributors are not required to place minimum orders with us.
Our independent distributors and
national accounts are not required to place minimum monthly or annual orders for our products. In order to reduce their inventory costs,
independent distributors typically order products from us on a “just in time” basis in quantities and at such times based
on the demand for the products in a particular distribution area. Accordingly, we cannot predict the timing or quantity of purchases by
any of our independent distributors or whether any of our distributors will continue to purchase products from us in the same frequencies
and volumes as they may have done in the past. Additionally, our larger distributors and national partners may make orders that are larger
than we have historically been required to fill. Shortages in inventory levels, supply of raw materials or other key supplies could negatively
affect us.
If we do not adequately manage our inventory
levels, our operating results could be adversely affected.
We need to maintain adequate inventory
levels to be able to deliver products to distributors on a timely basis. Our inventory supply depends on our ability to correctly estimate
demand for our products. Our ability to estimate demand for our products is imprecise, particularly for new products, seasonal promotions
and new markets. If we materially underestimate demand for our products or are unable to maintain sufficient inventory of raw materials,
we might not be able to satisfy demand on a short-term basis. If we overestimate distributor or retailer demand for our products, we may
end up with too much inventory, resulting in higher storage costs, increased trade spend and the risk of inventory spoilage. If we fail
to manage our inventory to meet demand, we could damage our relationships with our distributors and retailers and could delay or lose
sales opportunities, which would unfavorably impact our future sales and adversely affect our operating results. In addition, if the inventory
of our products held by our distributors and retailers is too high, they will not place orders for additional products, which would also
unfavorably impact our sales and adversely affect our operating results.
If we fail to maintain relationships with our
independent contract manufacturers, our business could be harmed.
We do not manufacture our products
but instead outsource the manufacturing process to third-party bottlers and independent contract manufacturers (co-packers). We do not
own the plants or the majority of the equipment required to manufacture and package our beverage products, and we do not anticipate bringing
the manufacturing process in-house in the future. Our ability to maintain effective relationships with contract manufacturers and other
third parties for the production and delivery of our beverage products in a particular geographic distribution area is important to the
success of our operations within each distribution area. We may not be able to maintain our relationships with current contract manufacturers
or establish satisfactory relationships with new or replacement contract manufacturers, whether in existing or new geographic distribution
areas. The failure to establish and maintain effective relationships with contract manufacturers for a distribution area could increase
our manufacturing costs and thereby materially reduce gross profits from the sale of our products in that area. Poor relations with any
of our contract manufacturers could adversely affect the amount and timing of product delivered to our distributors for resale, which
would in turn adversely affect our revenues and financial condition. In addition, our agreements with our contract manufacturers are terminable
at any time, and any such termination could disrupt our ability to deliver products to our customers.
The volatility of energy and increased regulations
may have an adverse impact on our gross margin.
Over the past few years, volatility
in the global oil markets has resulted in variable fuel prices, which many shipping companies have passed on to their customers by way
of higher base pricing and increased fuel surcharges. If fuel prices increase, we expect to experience higher shipping rates and fuel
surcharges, as well as energy surcharges on our raw materials. It is hard to predict what will happen in the fuel markets in 2021 and
beyond. Due to the price sensitivity of our products, we may not be able to pass such increases on to our customers.
14
Disruption within our supply chain, contract
manufacturing or distribution channels could have an adverse effect on our business, financial condition and results of operations.
Our ability, through our suppliers,
business partners, contract manufacturers, independent distributors and retailers, to make, move and sell products is critical to our
success. Damage or disruption to our suppliers or to manufacturing or distribution capabilities due to weather, natural disaster, fire
or explosion, terrorism, pandemics such as influenza COVID-19, labor strikes or other reasons, could impair the manufacture, distribution
and sale of our products. Many of these events are outside of our control. Failure to take adequate steps to protect against or mitigate
the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business,
financial condition and results of operations.
We rely upon our ongoing relationships with
our key flavor suppliers. If we are unable to source our flavors on acceptable terms from our key suppliers, we could suffer disruptions
in our business.
We currently purchase our flavor
concentrate from various flavor concentrate suppliers, and continually develop other sources of flavor concentrate for each of our products.
Generally, flavor suppliers hold the proprietary rights to their flavor specific ingredients. Although we have the exclusive rights to
flavor concentrates developed with our current flavor concentrate suppliers, and while we have the rights to the ingredients for our products,
we do not have the list of ingredients for our flavor extracts and concentrates. Consequently, we may be unable to obtain these exact
flavors or concentrates from alternative suppliers on short notice. If we have to replace a flavor supplier, we could experience disruptions
in our ability to deliver products to our customers, which could have a material adverse effect on our results of operations.
If we are unable to attract and retain key personnel,
our efficiency and operations would be adversely affected; in addition, management turnover causes uncertainties and could harm our business.
Our success depends on our ability
to attract and retain highly qualified employees in such areas as finance, sales, marketing and product development. We compete to hire
new employees, and, in some cases, must train them and develop their skills and competencies. We may not be able to provide our employees
with competitive salaries, and our operating results could be adversely affected by increased costs due to increased competition for employees,
higher employee turnover or increased employee benefit costs.
Changes to operations, policies
and procedures, which can often occur with the appointment of new personnel, can create uncertainty, may negatively impact our ability
to execute quickly and effectively, and may ultimately be unsuccessful. In addition, management transition periods are often difficult
as the new employees gain detailed knowledge of our operations, and friction can result from changes in strategy and management style.
Management turnover inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution.
Further, to the extent we experience
additional management turnover, our operations, financial condition and employee morale could be negatively impacted. In addition, competition
for top management is high and it may take months to find a candidate that meets our requirements. If we are unable to attract and retain
qualified management personnel, our business could suffer.
If we fail to protect our trademarks and trade
secrets, we may be unable to successfully market our products and compete effectively.
We rely on a combination of trademark
and trade secrecy laws, confidentiality procedures and contractual provisions to protect our intellectual property rights. Failure to
protect our intellectual property could harm our brand and our reputation, and adversely affect our ability to compete effectively. Further,
enforcing or defending our intellectual property rights, including our trademarks, copyrights, licenses and trade secrets, could result
in the expenditure of significant financial and managerial resources. We regard our intellectual property, particularly our trademarks
and trade secrets to be of considerable value and importance to our business and our success, and we actively pursue the registration
of our trademarks in the United States and internationally. However, the steps taken by us to protect these proprietary rights may not
be adequate and may not prevent third parties from infringing or misappropriating our trademarks, trade secrets or similar proprietary
rights. In addition, other parties may seek to assert infringement claims against us, and we may have to pursue litigation against other
parties to assert our rights. Any such claim or litigation could be costly. In addition, any event that would jeopardize our proprietary
rights or any claims of infringement by third parties could have a material adverse effect on our ability to market or sell our brands,
profitably exploit our products or recoup our associated research and development costs.
15
As part of the licensing strategy
of our brands, we enter into licensing agreements under which we grant our licensing partners certain rights to use our trademarks and
other designs. Although our agreements require that the use of our trademarks and designs is subject to our control and approval, any
breach of these provisions, or any other action by any of our licensing partners that is harmful to our brands, goodwill and overall image,
could have a material adverse impact on our business.
We may be required in the future to record a
significant charge to earnings if our goodwill or intangible assets become impaired.
Under United States Generally
Accepted Accounting Principles (“U.S. GAAP”), we are required to review our intangible assets for impairment when events or
changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances
indicating that the carrying value of our intangible assets may not be recoverable include, declining or slower than anticipated growth
rates for certain of our existing products, a decline in stock price and market capitalization, and slower growth rates in our industry.
We may be required in the future
to record a significant charge to earnings during the period in which we determine that our intangible assets have been impaired. Any
such charge would adversely impact our results of operations. As of December 31, 2022, our intangible assets totaled approximately $5.81million.
If we encounter product recalls or other product
quality issues, our business may suffer.
Product quality issues, real or
imagined, or allegations of product contamination, even when false or unfounded, could tarnish our image and could cause consumers to
choose other products. In addition, because of changing government regulations or implementation thereof, or allegations of product contamination,
we may be required from time to time to recall products entirely or from specific markets. Product recalls could affect our profitability
and could negatively affect brand image.
Our business is subject to many regulations and noncompliance is
costly.
The production, marketing and
sale of our beverages, including contents, labels, caps and containers, are subject to the rules and regulations of various federal, provincial,
state and local health agencies. If a regulatory authority finds that a current or future product or production batch or “run”
is not in compliance with any of these regulations, we may be fined, or production may be stopped, which would adversely affect our financial
condition and results of operations. Similarly, any adverse publicity associated with any noncompliance may damage our reputation and
our ability to successfully market our products. Furthermore, the rules and regulations are subject to change from time to time and while
we closely monitor developments in this area, we cannot anticipate whether changes in these rules and regulations will impact our business
adversely. Additional or revised regulatory requirements, whether labeling, environmental, tax or otherwise, could have a material adverse
effect on our financial condition and results of operations.
Significant additional labeling or warning requirements
may inhibit sales of affected products.
Various jurisdictions may seek
to adopt significant additional product labeling or warning requirements relating to the chemical content or perceived adverse health
consequences of certain of our products. These types of requirements, if they become applicable to one or more of our products under current
or future environmental or health laws or regulations, may inhibit sales of such products. In California, a law requires that a specific
warning appear on any product that contains a component listed by the state as having been found to cause cancer or birth defects. This
law recognizes no generally applicable quantitative thresholds below which a warning is not required. If a component found in one of our
products is added to the list, or if the increasing sensitivity of detection methodology that may become available under this law and
related regulations as they currently exist, or as they may be amended, results in the detection of an infinitesimal quantity of a listed
substance in one of our beverages produced for sale in California, the resulting warning requirements or adverse publicity could affect
our sales.
16
Litigation or legal could expose us to significant
liabilities and damage our reputation.
We may become party to litigation
claims and legal proceedings. Litigation involves significant risks, uncertainties and costs, including distraction of management attention
away from our business operations. We evaluate litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes
and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we establish reserves and disclose
the relevant litigation claims or legal proceedings, as appropriate. These assessments and estimates are based on the information available
to management at the time and involve a significant amount of management judgment. Actual outcomes or losses may differ materially from
those envisioned by our current assessments and estimates. Our policies and procedures require strict compliance by our employees and
agents with all U.S. and local laws and regulations applicable to our business operations, including those prohibiting improper payments
to government officials. Nonetheless, our policies and procedures may not ensure full compliance by our employees and agents with all
applicable legal requirements. Improper conduct by our employees or agents could damage our reputation or lead to litigation or legal
proceedings that could result in civil or criminal penalties, including substantial monetary fines, as well as disgorgement of profits.
Additionally, there has been public
attention directed at the beverage alcohol industry, which we believe is due to concern over problems related to harmful use of alcohol,
including drinking and driving, underage drinking and health consequences from the misuse of alcohol. We could be exposed to lawsuits
relating to product liability or marketing or sales practices with respect to our alcoholic products. Adverse developments in lawsuits
concerning these types of matters or a significant decline in the social acceptability of beverage alcohol products that may result from
lawsuits could have a material adverse effect on our business, liquidity, financial condition and results of operations.
We are subject to risks inherent in sales of
products in international markets.
Our operations outside of the
United States, contribute to our revenue and profitability, and we believe that developing and emerging markets could present future growth
opportunities for us. However, there can be no assurance that existing or new products that we manufacture, distribute or sell will be
accepted or be successful in any particular foreign market, due to local or global competition, product price, cultural differences, and
consumer preferences or otherwise. There are many factors that could adversely affect demand for our products in foreign markets, including
our inability to attract and maintain key distributors in these markets; volatility in the economic growth of certain of these markets;
changes in economic, political or social conditions, the status and renegotiations of the North American Free Trade Agreement, imposition
of new or increased labeling, product or production requirements, or other legal restrictions; restrictions on the import or export of
our products or ingredients or substances used in our products; inflationary currency, devaluation or fluctuation; increased costs of
doing business due to compliance with complex foreign and U.S. laws and regulations. If we are unable to effectively operate
or manage the risks associated with operating in international markets, our business, financial condition or results of operations could
be adversely affected.
17
Water scarcity and poor quality could negatively impact our
costs and capacity.
Water is a main ingredient in
substantially all of our products, is vital to the production of the agricultural ingredients on which our business relies and is needed
in our manufacturing process. It also is critical to the prosperity of the communities we serve. Water is a limited resource in many parts
of the world, facing unprecedented challenges from overexploitation, increasing demand for food and other consumer and industrial products
whose manufacturing processes require water, increasing pollution and emerging awareness of potential contaminants, poor management, lack
of physical or financial access to water, sociopolitical tensions due to lack of public infrastructure in certain areas of the world and
the effects of climate change. As the demand for water continues to increase around the world, and as water becomes scarcer and the quality
of available water deteriorates, we may incur higher costs or face capacity constraints and the possibility of reputational damage, which
could adversely affect our profitability or net operating revenues in the long run.
Fluctuations in quantity and quality of grape
supply could adversely affect our business.
A shortage in the supply of quality
grapes may result from a variety of factors that determine the quality and quantity of our grape supply, including weather conditions,
pruning methods, diseases and pests, the ability to buy grapes on long and short-term contracts and the number of vines producing grapes.
Any shortage in grape production could cause a reduction in the amount of wine we are able to produce, which could reduce sales and adversely
impact our results from operations. Factors that reduce the quantity of our grapes may also reduce their quality, which in turn could
reduce the quality or amount of wine we produce. Deterioration in the quality of our wines could harm our brand name, reduce sales and
adversely impact our business and results of operations.
Contamination of our wines could harm our business.
We are subject to certain hazards
and product liability risks, such as potential contamination, through tampering or otherwise, of ingredients or products. Contamination
of any of our wines could force us to destroy wine held in inventory and could cause the need for a product recall, which could significantly
damage our reputation for product quality. We maintain insurance against certain of these kinds of risks, and others, under various insurance
policies. However, the insurance may not be adequate or may not continue to be available at a price or on terms that are satisfactory
to us and this insurance may not be adequate to cover any resulting liability.
Our business and operations would be adversely
impacted in the event of a failure or interruption of our information technology infrastructure or as a result of a cybersecurity attack.
The proper functioning of our
own information technology (IT) infrastructure is critical to the efficient operation and management of our business. We may not
have the necessary financial resources to update and maintain our IT infrastructure, and any failure or interruption of our IT system could
adversely impact our operations. In addition, our IT is vulnerable to cyberattacks, computer viruses, worms and other malicious software
programs, physical and electronic break-ins, sabotage and similar disruptions from unauthorized tampering with our computer systems. We
believe that we have adopted appropriate measures to mitigate potential risks to our technology infrastructure and our operations from
these IT-related and other potential disruptions. However, given the unpredictability of the timing, nature and scope of any such
IT failures or disruptions, we could potentially be subject to downtimes, transactional errors, processing inefficiencies, operational
delays, other detrimental impacts on our operations or ability to provide products to our customers, the compromising of confidential
or personal information, destruction or corruption of data, security breaches, other manipulation or improper use of our systems and networks,
financial losses from remedial actions, loss of business or potential liability, and/or damage to our reputation, any of which could have
a material adverse effect on our cash flows, competitive position, financial condition or results of operations.
If we fail to comply with personal data protection and privacy laws,
we could be subject to adverse publicity, government enforcement actions and/or private litigation, which could negatively affect our
business and operating results.
In the ordinary course of our
business, we receive, process, transmit and store information relating to identifiable individuals (“personal data”), primarily
employees, former employees and consumers with whom we interact. As a result, we are subject to various U.S. federal and state and foreign
laws and regulations relating to personal data. These laws have been subject to frequent changes, and new legislation in this area may
be enacted in other jurisdictions at any time. These laws impose operational requirements for companies receiving or processing personal
data, and many provide for significant penalties for noncompliance. These requirements with respect to personal data have subjected and
may continue in the future to subject the Company to, among other things, additional costs and expenses and have required and may in the
future require costly changes to our business practices and information security systems, policies, procedures and practices. Our security
controls over personal data, the training of employees and vendors on data privacy and data security, and the policies, procedures and
practices we implemented or may implement in the future may not prevent the improper disclosure of personal data by us or the third-party
service providers and vendors whose technology, systems and services we use in connection with the receipt, storage and transmission of
personal data. Unauthorized access or improper disclosure of personal data in violation of personal data protection or privacy laws could
harm our reputation, cause loss of consumer confidence, subject us to regulatory enforcement actions (including fines), and result in
private litigation against us, which could result in loss of revenue, increased costs, liability for monetary damages, fines and/or criminal
prosecution, all of which could negatively affect our business and operating results.
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If our third-party service providers and business
partners do not satisfactorily fulfill their commitments and responsibilities, our financial results could suffer.
In the conduct of our business,
we rely on relationships with third parties, including cloud data storage and other information technology service providers, suppliers,
distributors, contractors, joint venture partners and other external business partners, for certain functions or for services in support
of key portions of our operations. These third-party service providers and business partners are subject to similar risks as we are relating
to cybersecurity, privacy violations, business interruption, and systems and employee failures, and are subject to legal, regulatory and
market risks of their own. Our third-party service providers and business partners may not fulfill their respective commitments and responsibilities
in a timely manner and in accordance with the agreed-upon terms. In addition, while we have procedures in place for selecting and managing
our relationships with third-party service providers and other business partners, we do not have control over their business operations
or governance and compliance systems, practices and procedures, which increases our financial, legal, reputational and operational risk.
If we are unable to effectively manage our third-party relationships, or for any reason our third-party service providers or business
partners fail to satisfactorily fulfill their commitments and responsibilities, our financial results could suffer.
Our results of operations may fluctuate from
quarter to quarter for many reasons, including seasonality.
Our sales are seasonal, and we
experience fluctuations in quarterly results as a result of many factors. Companies similar to ours have historically generated a greater
percentage of our revenues during the warm weather months of April through September. Timing of customer purchases will vary each year
and sales can be expected to shift from one quarter to another. As a result, management believes that period-to-period comparisons of
results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance or results
expected for the fiscal year.
Changes in accounting standards and subjective
assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.
The U.S. GAAP and related pronouncements,
implementation guidelines and interpretations with regard to a wide variety of matters that are relevant to our business, such as, but
not limited to, stock-based compensation, trade spend and promotions, and income taxes are highly complex and involve many subjective
assumptions, estimates and judgments by our management. Changes to these rules or their interpretation or changes in underlying assumptions,
estimates or judgments by our management could significantly change our reported results.
If we are unable to maintain effective disclosure
controls and procedures and internal control over financial reporting, our stock price and investor confidence could be materially and
adversely affected.
We are required to maintain both
disclosure controls and procedures and internal control over financial reporting that are effective. Because of their inherent limitations,
internal control over financial reporting, however well designed and operated, can only provide reasonable, and not absolute, assurance
that the controls will prevent or detect misstatements. Because of these and other inherent limitations of control systems, there is only
the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions. The failure of
controls by design deficiencies or absence of adequate controls could result in a material adverse effect on our business and financial
results, which could also negatively impact our stock price and investor confidence.
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We are dependent on a distiller in Mexico, to
provide us with our finished SALT tequila product. Failure to obtain satisfactory performance from them or a loss of their services could
cause us to lose sales, incur additional costs, and lose credibility in the marketplace.
We depend on a distiller in Mexico,
a company in Jalisco, for the production, bottling, labeling, capping and packaging of our finished tequila product. We do not have a
written agreement with our distiller in Mexico obligating it to produce our product. The termination of our relationship with our distiller
in Mexico distiller or an adverse change in the terms of its services could have a negative impact on our business. If our distiller in
Mexico increases its prices, we may not have alternative sources of supply at comparable prices and may not be able to raise the prices
of our products to cover all, or even a portion, of the increased costs. In addition, if our distiller in Mexico fails to perform satisfactorily,
fails to handle increased orders, or the loss of the services of our distiller in Mexico, along with delays in shipments of products,
could cause us to fail to meet orders, lose sales, incur additional costs, and/or expose us to product quality issues. In turn, this could
cause us to lose credibility in the marketplace and damage our relationships with our customers and consumers, ultimately leading to a
decline in our business and results of operations.
Regulatory decisions and changes in the legal,
regulatory and tax environment where our tequila is produced and where we operate could limit our business activities or increase our
operating costs and reduce our margins.
Our business is subject to extensive
regulation regarding production, distribution, marketing, advertising and labeling of beverage alcohol products in the U.S. and in Mexico,
where our tequila is produced. We are required to comply with these regulations and maintain various permits and licenses. We are also
required to conduct business only with holders of licenses to import, warehouse, transport, distribute, and sell spirits. We cannot assure
you that these and other governmental regulations, applicable to our industry, will not change or become more stringent. Moreover, because
these laws and regulations are subject to interpretation, we may not be able to predict when, and to what extent, liability may arise.
Additionally, due to increasing public concern over alcohol-related societal problems, including driving while intoxicated, underage drinking,
alcoholism and health consequences from the abuse of alcohol, various levels of government may seek to impose additional restrictions
or limits on advertising or other marketing activities promoting beverage alcohol products. Failure to comply with any of the current
or future regulations and requirements relating to our industry and products, could result in monetary penalties, suspension or even revocation
of our licenses and permits. Costs of compliance with changes in regulations could be significant and could harm our business, as we may
find it necessary to raise our prices in order to maintain profit margins, which could lower the demand for our products and reduce our
sales and profit potential.
In addition, the distribution
of beverage alcohol products is subject to extensive taxation both in the United States and internationally (and, in the United States,
at both the federal and state government levels), and beverage alcohol products themselves are the subject of national import and excise
duties in most countries around the world. An increase in taxation or in import or excise duties could also significantly harm our sales
revenue and margins, both through the reduction of overall consumption and by encouraging consumers to switch to lower-taxed categories
of beverage alcohol.
We face substantial competition in the alcoholic
beverage industry, and we may not be able to effectively compete.
Consolidation among spirits producers,
distributors, wholesalers, or retailers could create a more challenging competitive landscape for our products. Consolidation at any level
could hinder the distribution and sale of our products as a result of reduced attention and resources allocated to our brands, both during
and after transition periods, because our brands might represent a smaller portion of the new business portfolio. Expansion into new product
categories by other suppliers, or innovation by new entrants into the market, could increase competition in our product categories. Changes
to our route-to-consumer models or partners in important markets could result in temporary or longer-term sales disruption, higher implementation-related
or fixed costs, and could negatively affect other business relationships we might have with that partner. Distribution network disruption
or fluctuations in our product inventory levels with distributors, wholesalers, or retailers could negatively affect our results for a
particular period.
Our competitors may respond to
industry and economic conditions more rapidly or effectively than we do. Our competitors offer products that compete directly with ours
for shelf space, promotional displays, and consumer purchases. Pricing, (including price promotions, discounting, couponing, and free
goods), marketing, new product introductions, entry into our distribution networks, and other competitive behavior by our competitors
could adversely affect our sales margins, and profitability.
Our business operations may be adversely affected
by social, political and economic conditions affecting market risks and the demand for and pricing of our tequila products. These risks
include:
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● Dependence upon the continued growth of brand names;
● Production facility or supply chain disruption;
● Imprecision in supply/demand forecasting;
● Insufficient protection of our intellectual property rights;
● Failure or breach of key information technology systems;
Uncertainty in the financial markets and other
adverse changes in general economic or political conditions in any of the major countries in which we do business could adversely affect
our industry, business and results of operations.
Global economic uncertainties,
including foreign currency exchange rates, affect businesses such as ours in a number of ways, making it difficult to accurately forecast
and plan our future business activities. There can be no assurance that economic improvements will occur, or that they would be sustainable,
or that they would enhance conditions in markets relevant to us.
Our limited operating history makes it difficult
to forecast our future results, making any investment in us highly speculative.
We have a limited operating history,
and our historical financial and operating information is of limited value in predicting our future operating results. We may not accurately
forecast customer behavior and recognize or respond to emerging trends, changing preferences or competitive factors facing us, and, therefore,
we may fail to make accurate financial forecasts. Our current and future expense levels are based largely on our investment plans and
estimates of future revenue. As a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected
revenue shortfall, which could then force us to curtail or cease our business operations.
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Risks Related to our Securities
An investment in our common stock is speculative
and there can be no assurance of any return on any such investment.
An investment in tour common stock
is speculative and there is no assurance that investors will obtain any return on their investment. Investors will be subject to substantial
risks involved in an investment in the Company, including the risk of losing their entire investment.
Future sales of common stock, or the perception
of such future sales, by some of our existing stockholders could cause our stock price to decline.
The market price of our common
stock could decline as a result of sales of a large number of shares of our common stock in the market or the perception that these sales
may occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell shares in the
future at a time and at a price that we deem appropriate.
From time to time, certain of
our stockholders may be eligible to sell all or some of their common shares by means of ordinary brokerage transactions in the open market
pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), subject to certain limitations.
In general, pursuant to Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information
requirement. Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), and current
public information and notice requirements.
Our Board of Directors may issue and fix the terms of shares
of our Preferred Stock without stockholder approval, which could adversely affect the voting power of holders of our Common Stock or any
change in control of our Company.
Our Articles of Incorporation
authorize the issuance of up to 5,000,000 shares of “blank check” preferred stock, with par value $0.001 per share, with such
designation rights and preferences as may be determined from time to time by the Board of Directors. Our Board of Directors is empowered,
without shareholder approval, to issue shares of preferred stock with dividend, liquidation, conversion, voting or other rights which
could adversely affect the voting power or other rights of the holders of our common stock. In the event of such issuances, the preferred
stock could be used, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of our company.
Any such issuance would be subject to terms and conditions of any current offering that may disallow any such issuance.
Because certain principal stockholders own a
large percentage of our voting stock, other stockholders’ voting power may be limited.
As of December 31, 2022, our ten
(10) largest shareholders own or controlled approximately 35.5% of our outstanding common stock. If those stockholders act together, they
would have the ability to have a substantial influence on matters submitted to our stockholders for approval, including the election and
removal of directors and the approval of any merger, consolidation or sale of all or substantially all of our assets. As a result, our
other stockholders may have little or no influence over matters submitted for shareholder approval. In addition, the ownership of such
stockholders could preclude any unsolicited acquisition of us, and consequently, adversely affect the price of our common stock. These
stockholders may make decisions that are adverse to your interests.
We do not expect to pay dividends and investors
should not buy our Common Stock expecting to receive dividends.
We do not anticipate that we will
declare or pay any dividends in the foreseeable future. Consequently, you will only realize an economic gain on your investment in our
common stock if the price appreciates. You should not purchase our common stock expecting to receive cash dividends. Therefore, our failure
to pay dividends may cause you to not see any return on your investment even if we are successful in our business operations.
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There can be no assurances that our common
stock will not be subject to potential delisting if we do not continue to maintain the listing requirements of the NYSE American.
Since June 11, 2021, our common
stock has been listed on the NYSE American, under the symbol “SBEV”. The NYSE American has rules for continued listing,
including, without limitation, minimum market capitalization and other requirements. Failure to maintain our listing (i.e., being de-listed
from the NYSE American), would make it more difficult for shareholders to sell our common stock and more difficult to obtain accurate
price quotations on our common stock. This could have an adverse effect on the price of our common stock. Our ability to issue additional
securities for financing or other purposes, or otherwise to arrange for any financing we may need in the future, may also be materially
and adversely affected if our common stock is not traded on a national securities exchange.
Our common stock could be further diluted as
the result of the issuance of additional common stock, convertible securities, warrants or options.
Our issuance of additional common
stock, convertible securities, options and warrants could affect the rights of our stockholders, result in a reduction in the overall