ITEM
1. BUSINESS
CORPORATE
HISTORY
Earth
Science Tech, Inc. (“ETST” or the “Company”) was incorporated under the laws of the State of Nevada on
April 23, 2010 under the name Ultimate Novelty Sports Inc. The Company provided consulting services to the athletic facilities
industry and offered a full range of consulting services, including start-up strategy development, membership pricing and management,
operational analysis, marketing and public relations and staff training.
On
May 6, 2010, the Company formed a wholly owned subsidiary, Ultimate Novelty Sports Inc., an Ontario, Canada Corporation (“UNSI
Canada”). On October 30, 2013, pursuant to a sale of subsidiary agreement (the “Sale of Subsidiary Agreement”)
the Company sold all of the capital stock of UNSI Canada to Optimal, Inc., a Nevada corporation.
On
January 29, 2014, the Company entered into a consulting agreement with Pure Health, Inc. (“Pure”), a Puerto Rican
corporation (the “Pure Consulting Agreement”). The purpose of the Pure Consulting Agreement was to retain Pure to
consult the Company with regard to the development of health and wellness products as well as nutritional supplements, including
idea generation, preforming and designing formulations for products to be used in the health and nutrition market.
On
March 6, 2014, the Company changed its name from Ultimate Novelty Sports, Inc. to Earth Science Tech, Inc. (the “Name Change”).
On
May 28, 2014 the Financial Industry Regulatory Authority (“FINRA”) approved the Name Change and a change of trading
symbol from UNOV to ETST.
On
June 6, 2014, the Company filed with the Secretary of State of the State of Nevada Articles of Amendment to the Articles of Incorporation
and a Certificate of Designation creating a Preferred A class of stock with 10,000,000 preferred A shares (the “Preferred
A Shares”) having a par value of $0.001 per share.
On
March 6, 2015, the Company entered into a License and Distribution Agreement (the “I Vape License and Distribution Agreement”)
with I Vape Vapor, Inc. a Minnesota corporation (“I Vape”). Pursuant to the I Vape License and Distribution Agreement
the Company licensed to I Vape the rights to use the Company’s Ultra-High Grade CBD Rich Hemp Oil in I Vape’s E-Cigarettes
within the U.S. As part of the I Vape License and Distribution Agreement, the Company formed Earth Science Tech Vapor One, Inc.,
a wholly owned Florida corporation subsidiary.
Today,
ETST is a biotechnology company focused on unique nutraceuticals and bioceuticals designed to excel in industries such as health,
wellness, nutrition, supplements, cosmetics and alternative medicine to improve the quality of life for consumers worldwide. ETST
seeks to deliver non-prescription nutritional and dietary supplements that help with treating symptoms such as: chronic pain,
joint pain, inflammation, seizures, high blood pressure, memory loss, depression, weight management, nausea, aging and overall
wellness. This may include products such as CBD as a natural constituent of hemp oil, vitamins, minerals, herbs, botanicals, personal
care products, homeopathies, functional foods and other products. These products will be in various formulations and delivery
forms including capsules, tablets, soft gels, chewables, liquids, creams, sprays, powders, and whole herbs.
In
particular, ETST is focused on researching and developing innovative hemp extracts and making them accessible worldwide. ETST
plans to be a supplier of high quality hemp oil enriched with high-grade CBD. ETST’s primary goal is to advance different
high quality hemp extracts with a broad profile of cannabinoids and additional natural molecules found in industrial hemp and
to identify their distinct properties.
On
January 11, 2019, the Company entered into an agreement with Aaron Decker, and Derrick West, individuals, pursuant to which the
Company will transfer, set over and assign to Mr. Decker and Mr. West 95% of the issued and outstanding shares of common stock
of Kannabidioid, Inc. This transfer of KBD and its business places Mr. Decker and Mr. West or their corporate nominee in full
control of KBD for all purposes, subject to their undertaking aggressively and assiduously to pursue the growth of Kannabidioid,
Inc.’s business and to maximize its customer base, product line, and profitability. ETST entered into this agreement because
management determined that the opportunities for the growth of its other product lines will require that it deploy its resources
on these other product lines such that it’s better to allow another management team to build the KBD business. In allowing
another management team to build the KBD business, it is expected that ETST will not only continue to benefit from the sales,
but it may also be in a position to benefit from its growth without the necessity of deploying additional resources to realize
that growth.
On
January 11, 2019, the Company received notice that Strongbow Advisors, Inc. (“Strongbow”), and Robert Stevens (“Stevens”,
and together with Strongbow, the “Receiver”) had been appointed by the Nevada District Court, as Receiver for the
Registrant in Case No. A-18-784952-C.
The
Company sought the appointment of the Receiver after it found itself in an imminent danger of insolvency following the issuance
by an arbitration panel of an award (the “Award”) in the sum of $3,994,522.5 million in favor of Cromogen Biotechnology
Corporation (“Cromogen”) in the matter entitled Cromogen Biotechnology Corporation vs. Earth Science Tech, Inc. (the
“Cromogen Litigation”).
The
Award consisted of a sum for breach of contract against the Company in the amount of $120,265.00, a sum for costs and fees against
the Company in the amount of $111,057.00 and a sum for the claim of tortuous interference and conversion against the Company in
the amount of $3,763,200.00. The District Court in Florida had confirmed the Award granted by the arbitration panel, denying however,
the award of fees that the arbitration panel had granted Cromogen.
The
Cromogen Litigation is now on appeal and the Company is optimistic about its prospects on appeal. Nevertheless, the outcome remains
speculative and so notwithstanding its prospects for success on appeal, and faced with such a large judgment and the imminent
danger of insolvency, the Company determined that it was in the best interest of its shareholders and creditors to seek protection
under receivership and the appointment of a receiver. As of the date of this prospectus, the Company remains in imminent danger
of insolvency as the outcome of the Cromogen Litigation remains speculative.
As
part of the impact of the receivership, the Court issued a Writ of Injunction and “Blanket Stay” covering the
Company and its assets during the time that the Company is in receivership. As a result of the “Blanket Stay” the
Company’s estate is protected from creditors and interference with its administration is prevented while the Company’s
financial issues are being fully analyzed and resolved. As part of this process, creditors will be notified and required to provide
claims in writing under oath on or before the deadline stated in the notice provided by the Receiver or those claims will be barred
under NRS §78.675. The Blanket Stay will remain in place unless otherwise waived by the Receiver, or it is vacated by the
Court or alternatively, lifted by the Court, upon a “motion to lift stay” duly made and approved by the Nevada District
Court.
The
appointment of the Receiver was approved unanimously by the Board and by a majority of the Company’s shareholders. Strongbow
and Stevens were selected because of their reputation in helping (i) companies restructure and (ii) to execute on their business
plans, albeit under a debt and capital structure that allows them to succeed. Stevens and Strongbow assist companies by helping
them raise the capital needed not only to pay debts, but build and grow their businesses. The Receiver, however, is an agent of
the court, and will be independent and neutral in managing the Company’s operations and trying to preserve the Company’s
value for the creditors and shareholders.
There
are a number of possible outcomes to the receivership, including settlement and payment to creditors, reorganization, or liquidation.
The intent of the Receiver is to reorganize the Company, pay or settle the Company’s debts and emerge from receivership.
If the Receiver is not successful in mitigating the Company’s liabilities, the Company’s results could be materially
adversely impacted, and the Company may be forced to liquidate its business.
On
February 28, 2019, the Company entered into an Equity Financing Agreement (the “GHS Equity Financing Agreement”) and
Registration Rights Agreement (the “GHS Registration Rights Agreement”) with GHS Investments LLC, a Nevada limited
liability company (“GHS”). Under the terms of the Equity Financing Agreement, GHS agreed to provide the Company with
up to $5,000,000 upon effectiveness of a registration statement on Form S-1 (the “Registration Statement”) filed with
the U.S. Securities and Exchange Commission (the “Commission”).
Following
effectiveness of the Registration Statement, the Company shall have the discretion to deliver puts to GHS and GHS will be obligated
to purchase shares of the Company’s common stock, par value $0.001 per share based on the investment amount specified in
each put notice. Additionally, in accordance with the Equity Financing Agreement, the Company shall issue GHS a promissory note
in the principal amount of $30,000 to offset transaction costs (the “Note”).
On
November 8, 2019, the Company filed a motion for preliminary injunction against Majorca Group Ltd. in the 8th Judicial District
in Clark County, Nevada on November 7, 2019. The filing requests a show cause hearing whereby the Company will request the Court
grants it motion to cancel certain shares and class of stock and to nullify certain amendments of the Articles of Incorporation.
Specifically, the Company is asking that Majorca Group Ltd. be restricted from selling, transferring, converting, encumbering,
hypothecating, obtaining loans against or in any fashion or in any way transferring their shares of common and preferred stock
in the Company. Additionally, the motion seeks a Freezing Injunction over any broker, bank, any financial institution, attorney,
or agent holding shares of the Company as well as any proceeds from shares of the Company.
On
January 27, 2020 Earth Science Tech, Inc., a Nevada corporation (the “Company”) reached a confidential settlement
with Majorca Group, Ltd (“Majorca”). The Receiver withdrew its motion for injunction over the Majorca common and preferred
shares. The Settlement Agreement provided that Majorca Group, Ltd. and all relevant parties will, within 10 days of execution
of the settlement agreement, return 18,000,000 common shares and 5,200,000 Series A Preferred Stock held by Majorca for cancellation.
The Series A Preferred Stock class will be cancelled completely. The remaining 6,520,000 common shares held by Majorca is subject
to lockup agreement and thereafter, sales will be made only pursuant to a limited strict bleed-out agreement administered by a
third party.
[On
May 19, 2020, the Company filed documents with the Delaware Secretary of State on May 19, 2020 to effect a holding company reorganization
(the “Delaware Reorg”), which will result in a newly formed Delaware corporation, ETST Holdings, Inc., (“ETST
Delaware”), owning all the capital stock of Earth Science Tech, Inc. ETST Delaware will initially be a direct, wholly owned
subsidiary of Earth Science Tech, Inc. Pursuant to the Delaware Reorg, a newly formed entity (“Merger Sub”), a direct,
wholly owned subsidiary of ETST Delaware and an indirect, wholly owned subsidiary of Earth Science Tech, Inc., will merge with
and into Earth Science Tech, Inc., with Earth Science Tech, Inc. surviving as a direct, wholly owned subsidiary of ETST Delaware.
Each share of each class of Earth Science Tech, Inc. stock issued and outstanding immediately prior to the ETST Delaware Merger
will automatically convert into an equivalent corresponding share of ETST Delaware stock, having the same designations, rights,
powers and preferences and the qualifications, limitations and restrictions as the corresponding share of Earth Science Tech,
Inc. stock being converted. Accordingly, upon consummation of the ETST Delaware Merger, Earth Science Tech, Inc.’s current
stockholders will become stockholders of ETST Delaware. The stockholders of Earth Science Tech, Inc. will not recognize gain or
loss for U.S. federal income tax purposes upon the conversion of their shares in the ETST Delaware Merger.
The
ETST Delaware Merger was conducted pursuant to Section 251(g) of the General Corporation Law of the State of Delaware, which provides
for the formation of a holding company without a vote of the stockholders of the constituent corporations. Effective upon the
consummation of the ETST Delaware Merger, ETST Delaware will adopt an amended and restated certificate of incorporation and amended
and restated bylaws that are identical to those of Earth Science Tech, Inc. immediately prior to the consummation of the ETST
Delaware Merger, except for the change of the name of the corporation as permitted by Section 251(g). Furthermore, the conversion
will occur automatically without an exchange of stock certificates. Stock certificates previously representing shares of a class
of Earth Science Tech, Inc. stock will represent the same number of shares of the corresponding class of ETST Delaware stock after
the ETST Delaware Merger. Following the consummation of the ETST Delaware Merger shares of our Common Stock will continue to trade
on the under the symbol ETST on the OTC Markets.
BUSINESS
OVERVIEW
The
Company offers high-grade full spectrum cannabinoid oil on the market. There are positive results in studies on breast cancer
and immune cells through the University of Central Oklahoma, in addition to studies through DV Biologics that prove the Company’s
CBD oil formulation lowers cortisol and functions as a neuro-protectant, with positive result case studies through key health
organizations. ETST formulates, markets and distributes the CBD oil used for its studies to the public, offering the most effective
quality of CBD on the market.
Earth
Science Foundation (“ESF”) is a favored entity of ETST, effectively being a non-profit organization on February 11,
2019 and is structured to accept grants and donations to conduct further studies and help donate ETST’s effective CBD products
to those in need.
Current
Operations
CORPORATE
STRATEGY
In
particular, ETST is focused on researching and developing innovative hemp extracts and making them accessible worldwide. ETST
plans to be a supplier of high-quality hemp oil enriched with high-grade CBD. ETST’s primary goal is to advance different
high-quality hemp extracts with a broad profile of cannabinoids and additional natural molecules found in industrial hemp and
to identify their distinct properties.
Our
missions are to educate the public on the many and varied nutritional and health benefits of CBD-rich hemp oil, to optimize purity
in formulation, and to find new product delivery systems. Our corporate strategy in developing our operations is as follows.
To
design and produce CBD enhanced nutraceutical products for sale to the general public. We intend to create high-grade CBD-rich
hemp oil and other CBD containing products unique to the current market in the nutraceuticals industry. We believe that our formulations
will set us apart from competing products for promoting health. We have formulated and produced our initial CBD products, intended
for, subject to performance, treating various symptoms of diseases and ailments or for overall health. The Company plans to expand
manufacturing and marketing of these CBD products with expansion of products over the next five years.
To
offer a wide selection of health and nutrition products through online, clinics, pharmacies, and in-store retail. Through our
wholly owned subsidiary, we plan to continue expanding retail sales of nutritional supplements through online, clinics, pharmacies,
and in-store sales. Our product selection includes many high-quality supplement brands, and includes our proprietary CBD-rich
hemp oil.
CONSUMER
PRODUCTS
We
seek to take advantage of an emerging worldwide trend to re-energize the production of hemp and to foster its many uses for consumers.
Historically cultivated for industrial and practical purposes, hemp is used today for textiles, paper, auto parts, biofuel, cosmetics,
animal feed, nutritional supplements, and much more. The market for hemp-based products is expected to increase substantially
over the next five years.
Hemp-based
CBD is one of at least 80 cannabinoids found in hemp, and is non-psychoactive. Our U.S. based operations oversee our raw material
supply chain, raw material processing, product development and manufacturing, and sales and marketing. We will continue to scale-up
our processing capability to accommodate new products in our pipeline.
We
expect to realize revenue to fund our working capital needs through the sale of finished products and raw materials to third parties.
However, in order to fund our drug development efforts, we will need to raise additional capital either through the issuance of
equity and/or the issuance of debt. In the event we are unable to raise sufficient additional capital to fund our drug development
efforts, we may need to curtail or delay such activity.
Consumer
product extraction and quality
We
believe our high-grade CBD-rich hemp oil contains the high-quality natural CBD because it’s formulated using a wide array
of cutting-edge technologies, including super critical extraction process (CO 2), isolation, and micron filtration. Super critical
extraction is a gentle approach and the key method in the extraction of our CBD. The method exploits the fact that CO 2 at low
temperature and under high pressure becomes liquid and thereby draws the cannabinoids and terpenes from the plant material. Using
state-of-the-art equipment, carbon dioxide (CO 2) is compressed to upwards of 10,000 psi. At these extremes CO 2 becomes ‘super
critical’ where it retains the properties of both a liquid and a gas at the same time. The cold temperature does not damage
any heat-sensitive nutrients like vitamins or enzymes. When the super critical fluid is added to the nutrient-rich hemp it releases
the phytonutrients. The CO 2 is then free and recycled, leaving a concentrated and pure extract that we believe is more easily
digested. These low temperatures thru the extraction process preserve a broad spectrum of valuable and beneficial molecules that
are often lost using other extraction methods. This gentle method permits the production of a purer form of CBD-rich hemp oil
while conserving other valuable and beneficial molecules that are originally contained in the hemp plant. We believe that there
are over 400 phytonutrients that exist in hemp plants.
Our
CBD-rich hemp oil does not contain any synthetic cannabinoids and is not an isolate. It contains everything that is naturally
occurring in the original industrial hemp plant. With our high quality CBD-rich hemp oil you benefit from the natural interaction
of phytonutrients in their balanced wide-ranging form that may offer the most benefit for overall wellness. Our commercialized
CBD based product line, High Grade Full Spectrum Cannabinoids, offers 7 distinct cannabinoids maximizing all the therapeutic benefits
the industrial hemp plant has to offer.
Other
competitors and companies may use certain methods for extracting hemp including toxic solvents and/or high heat which we believe
are unsustainable, dangerous and don’t extract the full balance of nutrients from the industrial hemp plant. One of the
most popular processes used to extract hemp oils is alcohol extraction, due to its simplicity and low costs. This may lead to
a product that still contains trace amounts of alcohol, as it can be difficult to separate out after extraction. The alcohol extraction
used by other companies and our competitors requires the hemp and alcohol mixture to be boiled for long periods of time, potentially
damaging sensitive nutrients and important components of the oil. Most companies that claim to be full spectrum only contain 2-5
cannabinoids compared to the 7 we offer in our commercialized batches.
Our
CBD-rich hemp oil is sourced from the high quality industrial hemp plants grown by generational family farmers. In order to produce
consistent and nutritious CBD-rich oils, these hemp plants are grown domestically currently in Oregon and Kentucky.
We
lab test our hemp oil multiple times during the manufacturing process, from seed to shelf. This includes being tested for cannabinoid
panel content, terpenoids, pesticides, residual solvents, mycotoxins, and micros.
[do
we want to mention the PPE sales ?]
SUBSIDIARIES
The
Company’s’ subsidiaries include Earth Science Tech Inc., Nutrition Empire LLC., Cannabis Therapeutics, Inc., Earth
Science Pharmaceutical Inc., and Earth Science Foundation, Inc. (all intercompany balances and transactions have been eliminated
on consolidation.)
PRODUCT
REGULATION
We
are subject to local and federal laws in our operating jurisdictions. We hold required licenses for product production and distribution
and monitor changes in laws, regulations, treaties and agreements.
The
Agriculture Improvement Act of 2018 known as the “2018 Farm Bill” is United States federal legislation signed into
law on December 20, 2018 which provides much of the legal framework for the hemp-based CBD product category. The 2018 Farm Bill
permanently removed “hemp” from the purview of the Controlled Substances Act, and accordingly, the Drug Enforcement
Administration (the “DEA”) no longer has any claim to interfere with the interstate commerce of hemp products. Some
of the immediate impact from this legislation includes the ability for farmers to access crop insurance and U.S. Department of
Agriculture programs for certification and competitive grants. While the DEA is now officially not involved in hemp regulation,
the FDA retains its authority to regulate ingestible and topical products, including those that contain hemp and hemp extracts
such as CBD.
A
range of federal regulations govern our product development, manufacturing, distribution, sales and marketing, including the Dietary
Supplement Health and Education Act of 1994 (the “DSHEA”). Under DSHEA, supplements are effectively regulated by the
FDA for Good Manufacturing Practices under 21 CFR Part 111. DSHEA defines a “dietary supplement” as a product intended
to supplement the diet that contains one or more of the following: (a) a vitamin; (b) a mineral; (c) an herb or other botanical;
(d) an amino acid; (e) a dietary substance for use by man to supplement the diet by increasing the total dietary intake; or (f)
a concentrate, metabolite, constituent, extract, or combination of any ingredient described in clause (a) through (e). Thus, the
law permits a wide range of dietary ingredients in dietary supplements, including CBD which is an extract of a botanical ( Cannabis
sativa L. plant). CBD also falls under clause (e) as it is a dietary substance for use by man to supplement the diet by increasing
the total dietary intake.
MARKETS
The
user market for CBD products and other nutraceuticals is generally an individual who has a specific health issue where a health
advisor or distributor has provided or directed that user to our product. The market for nutraceuticals is subject to many influential
factors, but the main issues affecting the market are consumer spending and government regulation.
COMPETITION
The
nutraceutical industry is subject to significant competition and pricing pressures. We may experience significant competitive
pricing pressures as well as competitive products. Several significant competitors may offer products with prices that may match
or are lower than ours. We believe that the products we offer are generally competitive with those offered by other supplement
and nutraceutical companies; however, we believe that our products are unique and will set themselves apart from competing products.
It is possible that one or more of our competitors could develop a significant research advantage over us that allows them to
provide superior products or pricing, which could put us at a competitive disadvantage. Continued pricing pressure or improvements
in research and shifts in customer preferences away from natural supplements could adversely impact our customer base or pricing
structure and have a material and adverse effect on our business, financial condition, results of operations and cash flows.
RESEARCH
AND DEVELOPMENT
Research
and development costs are expensed as incurred. The Company’s research and development expenses relate to its engineering
activities, which consist of the design and development of new products for specific customers, as well as the design and engineering
of new or redesigned products for the industry in general.
EMPLOYEES
As
of March 31, 2020, the Company has six (6) employees. None of our employees are represented by a union or covered by a collective
bargaining agreement. We have not experienced any work stoppages and we consider our relationship with our employees to be good.
ITEM
1A. RISK FACTORS
This
investment has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below
and the other information in this prospectus. If any of the following risks actually occur, our business, operating results and
financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your
investment. You should carefully consider the risks described below together with all of the other information included in our
public filings before making an investment decision with regard to our securities. The statements contained in or incorporated
into this document that are not historic facts are forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the
following events described in these risk factors actually occur, our business, financial condition or results of operations could
be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Moreover, additional risks not presently known to us or that we currently deem less significant also may impact our business,
financial condition or results of operations, perhaps materially. For additional information regarding risk factors, see “Forward-Looking
Statements.”
Because
we have a limited history of operations, and our other ventures are in the development stage or not of yet capitalized, we anticipate
our operating expenses will increase prior to earning revenue, and we may never achieve profitability:
The
Company launched its first product hemp products in 2015. As we continue to conduct research and development of other CBD and
cannabinoid products, we anticipate increases in our operating expenses, without realizing significant revenues from operations.
Within the next 12 months, these increases in expenses will be attributed to the cost of (i) administration and start-up costs,
(ii) research and development, (iii) advertising, (iv) legal and accounting fees at various stages of operation, (v) joint venture
activities, (vi) creating and maintaining distribution and supply chain channels.
As
a result of some or all of these factors in combination, the Company may incur losses in the foreseeable future. There is no history
upon which to base any assumption as to the likelihood that the Company will prove successful in its research and development
projects. We cannot provide investors with any assurance that our business will attract customers and investors. If we were unable
to address these risks our business could fail.
Failure
to raise additional capital to fund operations could harm our business and results of operations:
Our
primary source of operating funds from 2015 through the March 31, 2020 fiscal year end has been from revenue generated from proceeds
from sales of our CBD products and full spectrum oils powders and gelcaps as well as the sale of our common stock. The Company
has experienced net losses from operations since inception, but expects these conditions to improve in 2020 and beyond as it develops
its business model. The Company has stockholders’ deficiencies at March 31, 2020 and will require additional financing to
fund future operations. Currently, we do not have any firm committed arrangements for financing and can provide no assurance to
investors that we will be able to obtain financing when required. No assurance can be given that the Company will obtain access
to capital markets in the future or that financing, adequate to satisfy the cash requirements of implementing our business strategies,
will be available on acceptable terms. The inability of the Company to gain access to capital markets or obtain acceptable financing
could have an adverse effect upon the results of its operations and upon its financial conditions.
We
may not have the liquidity to support our future operations and capital requirements.
Whether
we can achieve cash flow levels sufficient to support our operations cannot be accurately predicted. Unless such cash flow levels
are achieved, we may need to borrow additional funds or sell debt or equity securities, or some combination thereof, to provide
funding for our operations. Such additional funding may not be available on commercially reasonable terms, or at all. If adequate
funds are not available when needed, our financial condition and operating results would be materially and adversely affected
and we may not be able to operate our business without significant changes in our operations, or at all.
We
are currently under the control of a court - appointed receiver.
On
January 11, 2019, the Company received notice that Strongbow Advisors, Inc., and Robert Stevens had been appointed by the Nevada
District Court, as Receiver for the Registrant in Case No. A-18-784952-C. The company sought the appointment of the Receiver after
it found itself in an imminent danger of insolvency following the issuance by an arbitration panel of an award in the sum of $3,994,522.5
million in favor of Cromogen Biotechnology Corporation in the matter entitled Cromogen Biotechnology Corporation vs. Earth Science
Tech, Inc.
The
Award consisted a sum for breach of contract against the Company in the amount of $120,265, a sum for costs and fees against the
Company in the amount of $111,057 and a sum for the claim of tortuous interference and conversion against the Company in the amount
of $3,763,200. The District Court in Florida had confirmed the Award granted by the arbitration panel, denying however, the award
of fees that the arbitration panel had granted Cromogen.
Cromogen
prevailed in our appeal in the appeals process in No. 19-10118, United States Court of Appeals for the Eleventh Circuit on April
14, 2020. The Receiver subsequently allowed Cromogen status as an unsecured creditor in the estate. As of the date of this filing
the Company remains in danger of insolvency if a plan of reorganization is not subsequently approved by the court that adequately
resolves the Cromogen unsecured debt or Cromogen agrees to a settlement. Previous attempts to settle the amounts with Cromogen
have been fruitless.
As
part of the impact of the receivership, the Court issued a Writ of Injunction and “Blanket Stay” covering the Company
and its assets during the time that the Company is in receivership. As a result of the “Blanket Stay” the Company’s
estate is protected from creditors and interference with its administration is prevented while the Company’s financial issues
are being fully analyzed and resolved. As part of this process, creditors will be notified and required to provide claims in writing
under oath on or before the deadline stated in the notice provided by the Receiver or those claims will be barred under NRS §78.675.
The Blanket Stay will remain in place unless otherwise waived by the Receiver, or it is vacated by the Court or alternatively,
lifted by the Court, upon a “motion to lift stay” duly made and approved by the Nevada District Court.
The
appointment of the Receiver was approved unanimously by the Board and by a majority of the Company’s shareholders. Strongbow
and Stevens were selected because of their reputation in helping (i) companies restructure and (ii) to execute on their business
plans, albeit under a debt and capital structure that allows them to succeed. Stevens and Strongbow assist companies by helping
them raise the capital needed not only to pay debts, but build and grow their businesses. The Receiver, however, is an agent of
the court, and will be independent and neutral in managing the Company’s operations and trying to preserve the Company’s
value for the creditors and shareholders.
There
are a number of possible outcomes to the receivership, including settlement and payment to creditors, reorganization, or liquidation.
The intent of the Receiver is to reorganize the Company, pay or settle the Company’s debts and emerge from receivership.
If the Receiver is not successful in mitigating the Company’s liabilities, the Company’s results could be materially
adversely impacted and the Company may be forced to liquidate its business.
We
sell our products in highly competitive markets, which results in pressure on our profit margins and limits our ability to maintain
or increase the market share of our services.
The
nutraceutical industry is subject to significant competition and pricing pressures. We will experience significant competitive
pricing pressures as well as competitive products. Several significant competitors offer products with prices that may match or
are lower than ours. We believe that the products we offer are generally competitive with those offered by other supplement and
nutraceutical companies. It is possible that one or more of our competitors could develop a significant research advantage over
us that allows them to provide superior products or pricing, which could put us at a competitive disadvantage. Continued pricing
pressure or improvements in research and shifts in customer preferences away from natural supplements could adversely impact our
customer base or pricing structure and have a material and adverse effect on our business, financial condition, results of operations
and cash flows.
Marijuana,
and Cannabinoids and CBD with more than 0.3% THC are illegal under federal law
Marijuana,
and CBD containing in excess of 0.3% THC are Schedule 1 controlled substances and are illegal under federal law, specifically
the Controlled Substances Act (21 U.S.C. § 811). Even in states that have legalized the use of marijuana, its sale and use
remain violations of federal law. CBD and cannabinoids derived from industrial hemp are not distinguishable. Although the products
we buy are certified as THC free, if there were mistakes in processing or mislabeling and THC were found in our products we could
be subject to enforcement and prosecution which would have a negative impact on our business and operation.
Laws
and regulations affecting our industry are constantly changing:
The
constant evolution of laws and regulations affecting the marijuana industry could detrimentally affect our operations. Local,
state and federal medical marijuana laws and regulations are broad in scope and subject to changing interpretations. These changes
may require us to incur substantial costs associated with legal and compliance fees and ultimately require us to alter our business
plan. Furthermore, violations of these laws, or alleged violations, could disrupt our business and result in a material adverse
effect on our operations. In addition, we cannot predict the nature of any future laws, regulations, interpretations or applications,
and it is possible that regulations may be enacted in the future that will be directly applicable to our business.
Our
future growth is largely dependent upon our ability to successfully compete with new and existing competitors by developing or
acquiring new products that achieve market acceptance with acceptable margins.
Our
business operates in markets that are characterized by rapidly changing products, evolving industry standards and potential new
entrants. For example, a number of new companies with innovative products, which promise significant health benefits are established
every year and are competitive with our products. If these companies gain market acceptance, our ability to grow our business
could be materially and adversely affected. Accordingly, our future success depends upon a number of factors, including our ability
to accomplish the following: identify emerging trends in our target end-markets; develop, acquire and maintain competitive products;
enhance our products by adding innovative features that differentiate us from our competitors; and develop or acquire and bring
products to market quickly and cost-effectively. Our ability to develop or acquire new products based on quality research can
affect our competitive position and requires the investment of significant resources. These acquisitions and development efforts
divert resources from other potential investments in our businesses, and they may not lead to the development of new research
or products on a timely basis. New or enhanced products may not satisfy consumer preferences and potential product failures may
cause consumers to reject these products. As a result, these products may not achieve market acceptance and our brand image could
suffer. In addition, our competitors may introduce superior designs or business strategies, impairing our brand and the desirability
of our products, which may cause consumers to defer or forego purchases of our products or services. Also, the markets for our
products and services may not develop or grow as we anticipate. The failure of our products to gain market acceptance, the potential
for product defects or the obsolescence of our products could significantly reduce our revenue, increase our operating costs or
otherwise adversely affect our business, financial condition, results of operations or cash flows.
Our
business is dependent on laws pertaining to the cannabis industry:
The
federal government has issued guidance to federal prosecutors concerning marijuana enforcement under the Controlled Substances
Act (CSA). The Cole Memorandum updates that guidance in light of state ballot initiatives that legalize under state law the possession
of small amounts of marijuana and provide for the regulation of marijuana production, processing, and sale. The guidance set forth
herein applies to all federal enforcement activity, including civil enforcement and criminal investigations and prosecutions,
concerning marijuana in all states.
Congress
has determined that marijuana is a dangerous drug and that the illegal distribution and sale of marijuana is a serious crime that
provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels. The Department of Justice is
committed to enforcement of the Controlled Substance Act (CSA) consistent with those determinations. The Department is also committed
to using its limited investigative and prosecutorial resources to address the most significant threats in the most effective,
consistent, and rational way. In furtherance of those objectives, as several states enacted laws relating to the use of marijuana
for medical purposes, the Department in recent years has focused its efforts on certain enforcement priorities that are particularly
important to the federal government:
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Preventing
the distribution of marijuana to minors;
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Preventing
revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
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Preventing
the diversion of marijuana from states where it is legal under state law in some form to other states;
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Preventing
state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other
illegal activity;
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Providing
the necessary resources and demonstrate the willingness to enforce their laws, and,
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Enacting
regulations in a manner that ensures they do not undermine federal enforcement priorities.
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In
jurisdictions that have enacted laws legalizing marijuana in some form, and that have also implemented strong and effective regulatory
and enforcement systems to control the cultivation, distribution, sale, and possession of marijuana, conduct in compliance with
those laws and regulations is less likely to threaten the federal priorities set forth above. Indeed, a robust system may affirmatively
address those priorities by, for example, implementing effective measures to prevent diversion of marijuana outside of the regulated
system and to other states, prohibiting access to marijuana by minors, and replacing an illicit marijuana trade that funds criminal
enterprises with a tightly regulated market in which revenues are tracked and accounted for. In those circumstances, consistent
with the traditional allocation of federal-state efforts in this area, enforcement of state law by state and local law enforcement
and regulatory bodies should remain the primary means of addressing marijuana-related activity. If state enforcement efforts are
not sufficiently robust to protect against the harms set forth above, the federal government may seek to challenge the regulatory
structure itself in addition to continuing to bring individual enforcement actions, including criminal prosecutions, focused on
those harms.
As
with the Department’s previous statements on this subject, this memorandum is intended solely as a guide to the exercise
of investigative and prosecutorial discretion. This memorandum does not alter in any way the Department’s authority to enforce
federal law, including federal laws relating to marijuana, regardless of state law. Neither the guidance herein nor any state
or local law provides a legal defense to a violation of federal law, including any civil or criminal violation of the CSA. Even
in jurisdictions with strong and effective regulatory systems, evidence that particular conduct threatens federal priorities will
subject that person or entity to federal enforcement action, based on the circumstances. This memorandum is not intended to, does
not, and may not be relied upon to create any rights, substantive or procedural, enforceable at law by any party in any matter
civil or criminal. It applies prospectively to the exercise of prosecutorial discretion in future cases and does not provide defendants
or subjects of enforcement action with a basis for reconsideration of any pending civil action or criminal prosecution. Finally,
nothing herein precludes investigation or prosecution, even in the absence of any one of the factors listed above, in particular
circumstances where investigation and prosecution otherwise serves an important federal interest.
As
to the Company engaging in business outside of the jurisdiction of the U.S.A., the Company must first assume that the laws in
other country(s), territories or destinations are similar to that of the U.S. Federal Government, however, the Company must then
retain competent legal counsel in this outside jurisdiction and insisting that they understand and obtain a copy of these foreign
laws and rules and should gain the expertise and representation of a foreign specialist or attorney in the foreign destination
being considered prior to engaging in any cannabis, marijuana or hemp business.
Our
business is subject to risk of government action:
While
we will use our best efforts to comply with all laws, including federal, state and local laws and regulations, there is a possibility
that governmental action to enforce any alleged violations may result in legal fees and damage awards that would adversely affect
us.
Because
our business is dependent upon continued market acceptance by consumers, any negative trends will adversely affect our business
operations:
We
are substantially dependent on continued market acceptance and proliferation of consumers of cannabis, medical marijuana and recreational
marijuana as well as CBD and full spectrum cannabinoids. We believe that as marijuana becomes more accepted the stigma associated
with marijuana use will diminish and as a result consumer demand will continue to grow. While we believe that the market and opportunity
in the marijuana space continues to grow, we cannot predict the future growth rate and size of the market. Any negative outlook
on the marijuana industry will adversely affect our business operations.
In
addition, it is believed by many that large well-funded businesses may have a strong economic opposition to the cannabis industry.
We believe that the pharmaceutical industry clearly does not want to cede control of any product that could generate significant
revenue. For example, medical marijuana will likely adversely encroach, impact or displace the existing market for the current
marijuana pill Marinol, sold by the mainstream pharmaceutical industry. The pharmaceutical industry is well funded with a strong
and experienced lobby that eclipses the funding of the medical marijuana movement. Any inroads the pharmaceutical industry could
make in halting the impending cannabis industry could have a detrimental impact on our business.
The
possible FDA Regulation of cannabis marijuana and CBD, and the possible registration of facilities where cannabis is grown and
CBD products are produced, if implemented, could negatively affect the cannabis industry generally, which could directly affect
our financial condition:
The
FDA has not approved cannabis, marijuana, industrial hemp or CBD derived from cannabis or industrial hemp as a safe and effective
drug for any indication. The FDA considers these substances illegal Schedule 1 drugs. As of the date of this filing, we have not,
and do not intend to file an IND with the FDA, concerning any of our products that may contain cannabis, industrial hemp or CBD
derived from industrial hemp. Further, The FDA has concluded that products containing cannabis, marijuana industrial hemp or CBD
derived from industrial hemp are excluded from the dietary supplement definition under sections 201(ff)(3)(B)(i) and (ii) of the
U.S. Food, Drug & Cosmetic Act, respectively. Our products are not marketed or sold as dietary supplements. However, at some
indeterminate future time, the FDA may choose to change its position concerning products containing cannabis, marijuana, or CBD
derived from industrial hemp, and may choose to enact regulations that are applicable to such products, including, but not limited
to: the growth, cultivation, harvesting and processing of cannabis and marijuana; regulations covering the physical facilities
where cannabis and marijuana are grown; and possible testing to determine efficacy and safety of CBD. In this hypothetical event,
our industrial hemp based products containing CBD may be subject to regulation. In the hypothetical event that some or all of
these regulations are imposed, we do not know what the impact would be on the cannabis industry in general, and what costs, requirements
and possible prohibitions may be enforced. If we are unable to comply with the conditions and possible costs of possible regulations
and/or registration as may be prescribed by the FDA, we may be unable to continue to operate our business.
We
may have difficulty accessing the service of banks:
On
February 14, 2014, the U.S. government issued rules allowing banks to legally provide financial services to state-licensed marijuana
businesses. A memorandum issued by the Justice Department to federal prosecutors re-iterated guidance previously given, this time
to the financial industry that banks can do business with legal marijuana businesses and “may not” be prosecuted.
The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued guidelines to banks that it is possible to
provide financial services to state-licensed marijuana businesses and still be in compliance with federal anti-money laundering
laws. The guidance falls short of the explicit legal authorization that banking industry officials had pushed the government to
provide and to date, it is not clear if any banks have relied on the guidance and taken on legal marijuana companies as clients.
The aforementioned policy may be administration dependent and a change in presidential administrations may cause a policy reversal
and retraction of current policies, wherein legal marijuana businesses may not have access to the banking industry.
Banking
regulations in our business are costly and time consuming:
In
assessing the risk of providing services to a marijuana-related business, a financial institutions may conduct customer due diligence
that includes: (i) verifying with the appropriate state authorities whether the business is duly licensed and registered; (ii)
reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate
its marijuana-related business; (iii) requesting from state licensing and enforcement authorities available information about
the business and related parties; (iv) developing an understanding of the normal and expected activity for the business, including
the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers); (v) ongoing
monitoring of publicly available sources for adverse information about the business and related parties; (vi) ongoing monitoring
for suspicious activity, including for any of the red flags described in this guidance; and (vii) refreshing information obtained
as part of customer due diligence on a periodic basis and commensurate with the risk. With respect to information regarding state
licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy
of information provided by state licensing authorities, where states make such information available. These regulatory reviews
may be time consuming and costly. Currently we are not licensed and have operated in a manner to avoid the necessity of licensure
by not using products containing THC, nevertheless CBD and cannibnoids are still part of the cannabis plant and as such are considered
schedule 1 drugs, as such many banks will not transact business with us. We have been successful to date in finding merchant credit
card processing and a bank that will do business with us. If either of them decided to cease doing business with us we would not
have a way to receive payment and our operations would be negatively affected unless we could find a new bank or processor that
would work with us, of which there can be no assurance.
Due
to our involvement in the cannabis industry, we may have a difficult time obtaining the various insurances that are desired to
operate our business, which may expose us to additional risk and financial liability:
Insurance
that is otherwise readily available, such as general liability, and directors and officer’s insurance, is more difficult
for us to find, and more expensive, because we are service providers to companies in the cannabis industry. There are no guarantees
that we will be able to find such insurances in the future, or that the cost will be affordable to us. If we are forced to go
without such insurances, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose
us to additional risk and financial liabilities.
The
Company’s industry is highly competitive and we have less capital and resources than many of our competitors which may give
them an advantage in developing and marketing products similar to ours or make our products obsolete:
We
are involved in a highly competitive industry where we may compete with numerous other companies who offer alternative methods
or approaches, who may have far greater resources, more experience, and personnel perhaps more qualified than we do. Such resources
may give our competitors an advantage in developing and marketing products similar to ours or products that make our products
obsolete. There can be no assurance that we will be able to successfully compete against these other entities.
Our
products and services are new and our industry is rapidly evolving:
Due
consideration must be given to our prospects in light of the risks, uncertainties and difficulties frequently encountered by companies
in their early stage of development, particularly companies in the rapidly evolving legal cannabis industry. To be successful
in this industry, we must, among other things:
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develop
and introduce functional and attractive service offerings;
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attract
and maintain a large base of consumers;
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increase
awareness of our brands and develop consumer loyalty;
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establish
and maintain strategic relationships with distribution partners and service providers;
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respond
to competitive and technological developments;
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attract,
retain and motivate qualified personnel.
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We
cannot guarantee that we will succeed in achieving these goals, and our failure to do so would have a material adverse effect
on our business, prospects, financial condition and operating results.
Some
of our products and services are new and are only in early stages of commercialization. We are not certain that these products
and services will function as anticipated or be desirable to its intended market. Also, some of our products may have limited
functionalities, which may limit their appeal to consumers and put us at a competitive disadvantage. If our current or future
products and services fail to function properly or if we do not achieve or sustain market acceptance, we could lose customers
or could be subject to claims which could have a material adverse effect on our business, financial condition and operating results.
As
is typical in a new and rapidly evolving industry, demand and market acceptance for recently introduced products and services
are subject to a high level of uncertainty and risk. Because the market for the Company is new and evolving, it is difficult to
predict with any certainty the size of this market and its growth rate, if any. We cannot guarantee that a market for the Company
will develop or that demand for Company’s products and services will emerge or be sustainable. If the market fails to develop,
develops more slowly than expected or becomes saturated with competitors, our business, financial condition and operating results
would be materially adversely affected.
Adverse
publicity or consumer perception of our products and any similar products distributed by others could harm our reputation and
adversely affect our sales and revenues.
We
believe we are highly dependent upon positive consumer perceptions of the safety and quality of our products as well as similar
products distributed by other health and wellness companies. Consumer perception of health products, nutrition supplements and
our products in particular can be substantially influenced by scientific research or findings, national media attention and other
publicity about product use. Adverse publicity from these sources regarding the safety, quality or efficacy of nutritional supplements
and our products could harm our reputation and results of operations. The mere publication of news articles or reports asserting
that such products may be harmful or questioning their efficacy could have a material adverse effect on our business, financial
condition and results of operations, regardless of whether such news articles or reports are scientifically supported or whether
the claimed harmful effects would be present at the dosages recommended for such products.
Our
operating results may fluctuate, which makes our results difficult to predict and could cause our results to fall short of expectations.
Our
operating results may fluctuate as a result of a number of factors, many of which may be outside of our control. As a result,
comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results
as an indication of our future performance. Our quarterly, year-to-date, and annual expenses as a percentage of our revenues may
differ significantly from our historical or projected rates. Our operating results in future quarters may fall below expectations.
Each of the following factors may affect our operating results:
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our
ability to deliver products in a timely manner in sufficient volumes;
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our
ability to recognize product trends;
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our
loss of one or more significant customers;
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the
introduction of successful new products by our competitors;
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adverse
media reports on the use or efficacy of nutritional supplements; and
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our
inability to make our online division profitable.
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Because
our business is changing and evolving, our historical operating results may not be useful to you in predicting our future operating
results.
The
loss of key management personnel could adversely affect our business.
We
depend on the continued services of our executive officers and senior management team as they work closely with independent representative
and are responsible for our day-to-day operations. Our success depends in part on our ability to retain our executive officers,
to compensate our executive officers at attractive levels, and to continue to attract additional qualified individuals to our
management team. Although we have entered into employment agreements with members of our senior management team, and do not believe
that any of them are planning to leave or retire in the near term, we cannot assure that our senior managers will remain with
us. The loss or limitation of the services of any of our executive officers or members of our senior management team, or the inability
to attract additional qualified management personnel, could have a material adverse effect on our business, financial condition,
results of operations, or independent associate relations.
Independent
Sales Representatives could fail to comply with our policies and procedures or make improper product, compensation, marketing
or advertising claims that violate laws or regulations, which could result in claims against us that could harm our financial
condition and operating results.
We
sell our products through a sales force of independent representatives. The independent representatives are independent contractors
and, accordingly, we are not in a position to provide the same direction, motivation, and oversight as we would if associates
were our own employees. As a result, there can be no assurance that our representatives will participate in our marketing strategies
or plans, accept our introduction of new products, or comply with our policies and procedures. All independent representatives
will be required to sign a written contract and agree to adhere to our policies and procedures, which prohibit associates from
making false, misleading or other improper claims regarding products or income potential from the distribution of the products.
However, independent representatives may from time to time, without our knowledge and in violation of our policies, create promotional
materials or otherwise provide information that does not accurately describe our marketing program. There is a possibility that
some jurisdictions could seek to hold us responsible for independent representatives’ activities that violate applicable
laws or regulations, which could result in government or third-party actions or fines against us, which could harm our financial
condition and operating results.
Uncertainty
of profitability:
Our
business strategy may result in increased volatility of revenues and earnings. As we only have a limited number of products developed
at this time, our overall success will depend on a limited number of products and our ability to develop or find new ones or new
applications as well as our research and development efforts, which may cause variability and unsteady profits and losses depending
on the products offered and their market acceptance.
Our
revenues and our profitability may be adversely affected by economic conditions and changes in the market for medical and recreational
marijuana. Our business is also subject to general economic risks that could adversely impact the results of operations and financial
condition.
Because
of the anticipated nature of the products that we offer and attempt to develop, it is difficult to accurately forecast revenues
and operating results and these items could fluctuate in the future due to a number of factors. These factors may include, among
other things, the following:
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Our
ability to raise sufficient capital to take advantage of opportunities and generate sufficient revenues to cover expenses.
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Our
ability to source strong opportunities with sufficient risk adjusted returns.
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Our
ability to manage our capital and liquidity requirements based on changing market conditions generally and changes in the
developing legal medical marijuana and recreational marijuana industries.
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The
acceptance of the terms and conditions of our service.
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The
amount and timing of operating and other costs and expenses.
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The
nature and extent of competition from other companies that may reduce market share and create pressure on pricing and investment
return expectations.
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Adverse
changes in the national and regional economies in which we will participate, including, but not limited to, changes in our
performance, capital availability, and market demand.
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Adverse
changes in the projects in which we plan to invest which result from factors beyond our control, including, but not limited
to, a change in circumstances, capacity and economic impacts.
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Adverse
developments in the efforts to legalize marijuana or increased federal enforcement.
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Changes
in laws, regulations, accounting, taxation, and other requirements affecting our operations and business.
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Our
operating results may fluctuate from year to year due to the factors listed above and others not listed. At times, these fluctuations
may be significant.
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Management
of growth will be necessary for us to be competitive:
Successful
expansion of our business will depend on our ability to effectively attract and manage staff, strategic business relationships,
and shareholders. Specifically, we will need to hire skilled management and technical personnel as well as manage partnerships
to navigate shifts in the general economic environment. Expansion has the potential to place significant strains on financial,
management, and operational resources, yet failure to expand will inhibit our profitability goals.
We
are entering a potentially highly competitive market:
The
markets for businesses in the medical marijuana and recreational marijuana industries as well as their related CBD and cannabinoid
industries are competitive and evolving. In particular, we face strong competition from larger companies that may be in the process
of offering similar products and services to ours. Many of our current and potential competitors have longer operating histories,
significantly greater financial, marketing and other resources and larger client bases than we have (or may be expected to have).
Given
the rapid changes affecting the global, national, and regional economies generally and the medical marijuana and recreational
marijuana industries, in particular, we may not be able to create and maintain a competitive advantage in the marketplace. Our
success will depend on our ability to keep pace with any changes in its markets, especially with legal and regulatory changes.
Our success will depend on our ability to respond to, among other things, changes in the economy, market conditions, and competitive
pressures. Any failure by us to anticipate or respond adequately to such changes could have a material adverse effect on our financial
condition, operating results, liquidity, cash flow and our operational performance.
If
we fail to protect our intellectual property, our business could be adversely affected:
Our
viability will depend, in part, on our ability to develop and maintain the proprietary aspects of our products and brands to distinguish
our products from our competitors’ products. We rely on trade secrets and confidentiality provisions to establish and protect
our intellectual property. Any infringement or misappropriation of our intellectual property could damage its value and limit
our ability to compete. We may have to engage in litigation to protect the rights to our intellectual property, which could result
in significant litigation costs and require a significant amount of our time. Competitors may also harm our sales by designing
products that mirror the capabilities of our products or technology without infringing on our intellectual property rights. If
we do not obtain sufficient protection for our intellectual property, or if we are unable to effectively enforce our intellectual
property rights, our competitiveness could be impaired, which would limit our growth and future revenue. We may also find it necessary
to bring infringement or other actions against third parties to seek to protect our intellectual property rights. Litigation of
this nature, even if successful, is often expensive and time-consuming to prosecute, and there can be no assurance that we will
have the financial or other resources to enforce our rights or be able to enforce our rights, or prevent other parties from developing
similar technology or designing around our intellectual property.
Our
lack of sufficient patent and/or trademark or copyright protection and any unauthorized use of our proprietary information and
technology may affect our business:
We
currently rely on a combination of protections by contracts, including confidentiality and nondisclosure agreements, and common
law rights, such as trade secrets, to protect our intellectual property. However, we cannot assure you that we will be able to
adequately protect our technology or other intellectual property from misappropriation in the U.S. and abroad. This risk may be
increased due to the lack of certain patent and/or copyright protection. Furthermore, patent applications that we file may not
result in issuance of a patent, or, if a patent is issued, the patent may not be issued in a form that is advantageous to us.
Despite our efforts to protect our intellectual property rights, others may independently develop similar products, duplicate
our products or design around our patents and other rights. In addition, it is difficult to monitor compliance with, and enforce,
our intellectual property rights on a worldwide basis in a cost-effective manner. In jurisdictions where foreign laws provide
less intellectual property protection than afforded in the U.S., our technology or other intellectual property may be compromised,
and our business could be materially adversely affected. If any of our proprietary rights are misappropriated or we are forced
to defend our intellectual property rights, we will have to incur substantial costs. Such litigation could result in substantial
costs and diversion of our resources, including diverting the time and effort of our senior management, and could disrupt our
business, as well as have a material adverse effect on our business, prospects, financial condition and results of operations.
We can provide no assurance that we will have the financial resources to oppose any actual or threatened infringement by any third
party. Furthermore, any patent or copyrights that we may be granted may be held by a court to infringe on the intellectual property
rights of others and subject us to the payment of damage awards.
Ordinary
and necessary business deduction other than the cost of goods sold are disallowed by the Internal Revenue Services for Cannabis
companies under IRC Section 280E:
At
this juncture, we do not believe that IRS 280E interferes with our businesses model from deducting ordinary and necessary business
expenses because we believe that we are in compliance with the 2014 Farm Bill and/or the products we sell are either from participants
that are compliant with the 2014 Farm Bill or are made from lawfully imported industrial hemp full spectrum cannabinoids or CBD.
Although we believe that the Farm Bill applies to commercial activity in that it references the “marketing,” “sale”
and “transportation,” of industrial hemp and hemp products that are derived from an authorized state program, it is
possible that our suppliers may not be in compliance with the Farm Bill or that a government agency or prosecutor could take a
narrower view of the activity allowed under the Farm Bill or import laws, if that were the case we could be seen as selling and
distributing a Schedule 1 substance under the CSA and we would therefore be subject to IRC Section 280E. IRC Section 280E only
allows the cost of goods sold to be deducted from revenues earned from the sale of cannabis and cannabis products that come under
the purview of the CSA. If that were the case we would not be able to deduct many of our overhead expenses. To the extent that
we have subsidiaries and other lines of trade or business, many of those overhead expenses could be allocated to those subsidiaries
that are note involved in products that come within the CSA so we would have an opportunity to deduct those disallowed expenses
elsewhere. Nevertheless, the revenue that is derived from those other trade or businesses may not be as large as the corresponding
deductions so be may still not be able to realize the full benefit of those expenses and instead have net operating losses in
the other trade or businesses that we would not be able to use or would have to carry-forward indefinitely. In addition, if the
Company enters the cannabis industry more directly, for example if the company were to purchase a marijuana dispensary that was
legal under state law and operated in compliance with state law, IRC Section 280E would unquestionably be applicable in which
case the onerous tax burden might significantly impact the profitability of the Company and may make the pricing of its products
less competitive, to the extent that competitors could manage to find a way to not have their operations subject to IRC Section
280E. Notwithstanding the forgoing, there can be no assurance that if we were to reallocate items of deduction form business segments
that were involved in the sales of products coming within the CSA that the Internal Revenue Service (“IRS”) would
not challenge those deductions or disallow them on some other basis. This could result in an onerous tax burden.
We
may be held responsible for certain taxes or assessments relating to the activities of our independent representatives, which
could harm our financial condition and operating results.
Our
independent representatives are subject to taxation and, in some instances, legislation or governmental agencies impose an obligation
on us to collect taxes, such as value added taxes, and to maintain appropriate tax records. In addition, we are subject to the
risk in some jurisdictions of being responsible for social security and similar taxes with respect to our distributors. In the
event that local laws and regulations require us to treat our independent contractors as employees, or if our reps are deemed
by local regulatory authorities to be our employees, rather than independent contractors, we may be held responsible for social
security and related taxes in those jurisdictions, plus any related assessments and penalties, which could harm our financial
condition and operating results.
A
pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, may materially and adversely affect our business and
operations, and our ability to complete financial reports to enable us to comply with our reporting obligation under the Exchange
Act.
The
occurrence of a pandemic, epidemic, or outbreak of an infectious disease including the recent outbreak of respiratory illness
caused by a novel coronavirus (COVID-19), and efforts to contain the spread of the such a pandemic, epidemic, or outbreak, which
includes social distancing, travel bans and quarantine, could limited access to our facilities, management, support staff and
professional advisors. These, in turn, could impact our operations, financial condition, development work and demand for our products
and services, and our overall ability to react timely to mitigate the impact of such an event. These factors could substantially
hamper our efforts to provide our investors with timely information and comply with our filing obligations with the Securities
and Exchange Commission.
Risks
Related to Our Securities
Because
we may issue additional shares of our common stock, investment in our company could be subject to substantial dilution:
Investors’
interests in our Company will be diluted and investors may suffer dilution in their net book value per share when we issue additional
shares. We are authorized to issue 75,000,000 shares of common stock, $0.001 par value per share. As of March 31, 2020, there
were 38,144,182 shares issued and outstanding and as of August 3, 2020 there were 40,589,197 shares of our common stock issued
and outstanding. We anticipate that all or at least some of our future funding, if any, will be in the form of equity financing
from the sale of our common stock. If we do sell more common stock, investors’ investment in our company will likely be
diluted. Dilution is the difference between what investors pay for their stock and the net tangible book value per share immediately
after the additional shares are sold by us. If dilution occurs, any investment in our company’s common stock could seriously
decline in value.
Trading
in our common stock on the OTCQB Exchange has been subject to wide fluctuations:
Our
common stock is currently quoted for public trading on the OTCQB Exchange. The trading price of our common stock has been subject
to wide fluctuations. Trading prices of our common stock may fluctuate in response to a number of factors, many of which will
be beyond our control. The stock market has generally experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of companies with limited business operation. There can be no assurance that
trading prices and price earnings ratios previously experienced by our common stock will be matched or maintained. These broad
market and industry factors may adversely affect the market price of our common stock, regardless of our operating performance.
In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation
has often been instituted. Such litigation, if instituted, could result in substantial costs for us and a diversion of management’s
attention and resources.
Our
common stock is currently quoted only on the OTCQB marketplace, which may have an unfavorable impact on our stock price and liquidity:
Our
common stock is quoted on the OTCQB Marketplace. The OTCQB Marketplace is a significantly more limited market than the New York
Stock Exchange or the NASDAQ stock market. The quotation of our shares of common stock on the OTCQB Marketplace may result in
a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the
trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future.
There
can be no assurance that there will be an active market for our shares of common stock either now or in the future. Market liquidity
will depend on the perception of our operating business and any steps that our management might take to bring us to the awareness
of investors. There can be no assurance given that there will be any awareness generated. Consequently, investors may not be able
to liquidate their investment or liquidate at a price that reflects the value of the business. As a result, holders of our securities
may not find purchasers for our securities should they desire to sell them. Consequently, our securities should be purchased only
by investors having no need for liquidity in their investment and who can hold our securities for an indefinite period of time.
The
regulation of penny stocks by SEC and FINRA may discourage the tradability of our securities.
We
are a “penny stock” company. None of our securities currently trade in any market and, if ever available for trading,
will be subject to a Securities and Exchange Commission rule that imposes special sales practice requirements upon broker-dealers
who sell such securities to persons other than established customers or Accredited Investors. For purposes of the rule, the phrase
“Accredited Investors” means, in general terms, institutions with assets in excess of $5,000,000, or individuals having
a net worth in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, when combined with a spouse’s
income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination
for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Effectively, this
discourages broker-dealers from executing trades in penny stocks. Consequently, the rule will affect the ability of purchasers
of our stock to sell their securities in any market that might develop therefore because it imposes additional regulatory burdens
on penny stock transactions.
In
addition, the Securities and Exchange Commission has adopted a number of rules to regulate “penny stocks”. Such rules
include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities and Exchange Act of 1934,
as amended. Because our securities constitute “penny stocks” within the meaning of the rules, the rules would apply
to us and to our securities. The rules will further affect the ability of owners of shares to sell our securities in any market
that might develop for them because it imposes additional regulatory burdens on penny stock transactions.
Shareholders
should be aware that, according to Securities and Exchange Commission, the market for penny stocks has suffered in recent years
from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers
that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales
and false and misleading press releases; (iii) “boiler room” practices involving high-pressure sales tactics and unrealistic
price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling
broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated
to a desired consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock
market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate
in the market, management will strive within the confines of practical limitations to prevent the described patterns from being
established with respect to our securities.
Nevada
law, our Articles of Incorporation and our by-laws provides for the indemnification of our officers and directors at our expense,
and correspondingly limits their liability, which may result in a major cost to us and hurt the interests of our shareholders
because corporate resources may be expended for the benefit of officers and/or directors:
Our
Articles of Incorporation and By-Laws include provisions that eliminate the personal liability of our directors for monetary damages
to the fullest extent possible under the laws of the State of Nevada or other applicable law. These provisions eliminate the liability
of our directors and our shareholders for monetary damages arising out of any violation of a director of his fiduciary duty of
due care. Under Nevada law, however, such provisions do not eliminate the personal liability of a director for (i) breach of the
director’s duty of loyalty, (ii) acts or omissions not in good faith or involving intentional misconduct or knowing violation
of law, (iii) payment of dividends or repurchases of stock other than from lawfully available funds, or (iv) any transaction from
which the director derived an improper benefit. These provisions do not affect a director’s liabilities under the federal
securities laws or the recovery of damages by third parties.
We
do not intend to pay cash dividends on any investment in the shares of stock of our Company and any gain on an investment in our
Company will need to come through an increase in our stock’s price, which may never happen:
We
have never paid any cash dividends and currently do not intend to pay any cash dividends for the foreseeable future. To the extent
that we require additional funding currently not provided for, our funding sources may prohibit the payment of a dividend. Because
we do not currently intend to declare dividends, any gain on an investment in our company will need to come through an increase
in the stock’s price. This may never happen and investors may lose all of their investment in our company.
Because
our securities are subject to penny stock rules, you may have difficulty reselling your shares:
Our
shares as penny stocks, are covered by Section 15(g) of the Securities Exchange Act of 1934 which imposes additional sales practice
requirements on broker/dealers who sell our company’s securities including the delivery of a standardized disclosure document;
disclosure and confirmation of quotation prices; disclosure of compensation the broker/dealer receives; and, furnishing monthly
account statements. These rules apply to companies whose shares are not traded on a national stock exchange, trade at less than
$5.00 per share, or who do not meet certain other financial requirements specified by the Securities and Exchange Commission.
These rules require brokers who sell “penny stocks” to persons other than established customers and “accredited
investors” to complete certain documentation, make suitability inquiries of investors, and provide investors with certain
information concerning the risks of trading in such penny stocks. These rules may discourage or restrict the ability of brokers
to sell our shares of common stock and may affect the secondary market for our shares of common stock. These rules could also
hamper our ability to raise funds in the primary market for our shares of common stock.
Our
common stock market prices may be volatile, which substantially increases the risk that investors may not be able to sell their
Securities at or above the price that was paid for the security.
Because
of the limited trading market for our common stock and because of the possible price volatility, shareholders may not be able
to sell their shares of common stock when desired. The inability to sell Securities in a rapidly declining market may substantially
increase the risk of loss because of such illiquidity and because the price for our Securities may suffer greater declines because
of our price volatility.
Certain
factors, some of which are beyond our control, that may cause our share price to fluctuate significantly include, but are not
limited to the following:
●
variations in our quarterly operating results;
●
loss of a key relationship or failure to complete significant transactions;
●
additions or departures of key personnel; and
●
fluctuations in stock market price and volume.
Additionally,
in recent years the stock market in general, and the personal care markets in particular, have experienced extreme price and volume
fluctuations. In some cases, these fluctuations are unrelated or disproportionate to the operating performance of the underlying
company. These market and industry factors may materially and adversely affect our stock price, regardless of our operating performance.
In the past, class action litigation often has been brought against companies following periods of volatility in the market price
of those companies common stock. If we become involved in this type of litigation in the future, it could result in substantial
costs and diversion of management attention and resources, which could have a further negative effect on shareholders’ investments
in our stock.
Because
we may issue additional shares of our common stock, investment in our company could be subject to substantial dilution:
Investors’
interests in our Company will be diluted and investors may suffer dilution in their net book value per share when we issue additional
shares. We are authorized to issue 75,000,000 shares of common stock, $0.001 par value per share. As of the date hereof there
are 40,589,197 shares of our common stock issued and outstanding. We anticipate that all or at least some of our future funding,
if any, will be in the form of equity financing from the sale of our common stock. If we do sell more common stock, investors’
investment in our company will likely be diluted. Dilution is the difference between what investors pay for their stock and the
net tangible book value per share immediately after the additional shares are sold by us. If dilution occurs, any investment in
our company’s common stock could seriously decline in value.
FINRA
sales practice requirements may also limit a stockholder’s ability to buy and sell our stock:
In
addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (known as “FINRA”)
has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds
for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial
status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there
is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA requirements
make it more difficult for broker-dealers to recommend that their customers buy our common shares, which may limit your ability
to buy and sell our stock and have an adverse effect on the market for our shares.
Our
existing stockholders may experience significant dilution from the sale of our common stock pursuant to the GHS financing agreement.
The
sale of our common stock to GHS Investments LLC in accordance with the Financing Agreement may have a dilutive impact on our shareholders.
As a result, the market price of our common stock could decline. In addition, the lower our stock price is at the time we exercise
our put options, the more shares of our common stock we will have to issue to GHS in order to exercise a put under the Financing
Agreement.
The
perceived risk of dilution may cause our stockholders to sell their shares, which may cause a decline in the price of our common
stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price could encourage investors
to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling
could further contribute to progressive price declines in our common stock.
The
issuance of shares pursuant to the GHS financing agreement may have a significant dilutive effect.
Depending
on the number of shares we issue pursuant to the GHS Financing Agreement, it could have a significant dilutive effect upon our
existing shareholders. Although the number of shares that we may issue pursuant to the Financing Agreement will vary based on
our stock price (the higher our stock price, the less shares we have to issue), there may be a potential dilutive effect to our
shareholders, based on different potential future stock prices, if the full amount of the Financing Agreement is realized. Dilution
is based upon common stock put to GHS and the stock price discounted to GHS’s purchase price of 80% of the lowest trading
price during the pricing period.
A
pandemic, epidemic or outbreak of an infectious disease, such as COVID-19, may materially and adversely affect our business and
operations, and our ability to complete financial reports to enable us to comply with our reporting obligation under the Exchange
Act.
The
occurrence of a pandemic, epidemic, or outbreak of an infectious disease including the recent outbreak of respiratory illness
caused by a novel coronavirus (COVID-19), and efforts to contain the spread of the such a pandemic, epidemic, or outbreak, which
includes social distancing, travel bans and quarantine, could limited access to our facilities, management, support staff and
professional advisors. These, in turn, could impact our operations, financial condition, development work and demand for our products
and services, and our overall ability to react timely to mitigate the impact of such an event. These factors could substantially
hamper our efforts to provide our investors with timely information and comply with our filing obligations with the Securities
and Exchange Commission.