Overview
Acquisition of iMetabolic Corp.
On December 31, 2014, we entered
into an Agreement of Share Exchange and Plan of Reorganization (the “Share Exchange Agreement”) and consummated a share
exchange (the “Share Exchange”) with iMetabolic Corp. (“IMET”), a Nevada corporation. The Effective
Date of the transaction was March 16, 2015 (the “Effective Date”) and resulted in the acquisition of IMET (the
“Acquisition”). Pursuant to the terms of the Share Exchange Agreement, we acquired all of the outstanding capital
stock of IMET from the 16 IMET shareholders for an aggregate of 60,000,000 shares, or 76.2% of the Company’s common stock.
As a result of the Share Exchange Agreement,
the IMET shareholders transferred all their interest in IMET to the Company and, as a result, IMET became a wholly owned subsidiary
of the Company.
As a further condition of the Share Exchange
Agreement, the then current officers of the Company resigned on March 16, 2015 and Mark W. Conte was appointed President, CEO and
a director of the Company, Kevin J. Pikero as CFO, Treasurer, Secretary, and a director and Andrew D. Smith as a director.
The IMET acquisition is discussed more
fully in the Form 8-K we filed with the Securities and Exchange Commission (“SEC”) on March 20, 2015. Included as an
exhibit to that Form 8-K is a copy of the Share Exchange Agreement.
Name Change
On December 30, 2015, the Company filed Articles of Merger (the
“Merger”) with the Nevada Secretary of State. The Merger was between the Company and our wholly owned subsidiary, UPD
Holding Corp. (the “Subsidiary”). Pursuant to Nevada corporate law, we amended our Articles of Incorporation by the
Merger to change our name to UPD Holding Corp. We believe our new name more properly indicates our current lines of business because
the Company has not been in the water and beverage industry since 2012. “UPD” stands for United Product Development
which is the name of one of our wholly owned subsidiaries. We applied to FINRA to have our common stock traded under the new name
and symbol UPDH. FINRA granted this new symbol on March 1, 2017.
IMET Products
IMET was formed on July 1, 2013 for the
purpose of marketing products under the brand “iMetabolic” that previously were sold by the brand’s licensor,
International Metabolic Institute LLC (“IMI”), as well as to develop new products that are targeted to a national marketing
plan. IMI transferred certain product and trademark rights to IMET on July 22, 2013 (the “License”). The
License was amended on March 16, 2015 to clarify IMET’s and IMI’s future rights. See “IMET License Agreement”
below.
IMI currently produces a line of weight
loss and weight management products, including, but not limited to, proprietary blend meal replacements, dietary specialty foods,
and nutraceuticals, that are sold at IMI’s company store and doctors’ offices pursuant to a reservation of rights by
IMI in the License and on IMI’s website at www.imetabolic.com. These are staple products in the weight loss and weight
management industry and form a comprehensive foundation for IMET’s new product innovation.
IMET’s initial product innovations
were as follows:
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The iMetabolic “Catalyst”, which provides essential vitamins and plant compounds that
aid in metabolic functions. Such ingredients include broad spectrum B-Complex Vitamins, as well as Green Tea Extract and Resveratrol
(polyphenols).
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The iMetabolic “Mini-Meal”, which provides whey protein isolate intake for a person
who is on a four-to-five meal per day diet or needs a snack that will act as a low-calorie, high nutritional value appetite suppressant.
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The iMetabolic “Multi-Pro”, which provides essential broad-spectrum vitamins and minerals
that typically are marketed as “multi-vitamin supplements”; however, this product is specifically tailored to dovetail
with the “Catalyst” so as to virtually eliminate the duplicate consumption of overlapping ingredients that routinely
plagues supplement users.
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The iMetabolic “BittX,” which is premised on the scientific theory that modern horticulture
and food producers have systematically promoted foods that are sweet or lack bitterness—the flavor typically associated with
foods that have the greatest health benefits. This product is intended to reform the body’s disposition toward bitter foods
in a subtle, inoffensive way.
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Most recently, IMET has been working with
lab facilities that hold both ISO 9001 and good manufacturing practices certifications (“cGMP”) to develop new products
that integrate the nutritional benefits of various hemp-derived cannabinoids such as CBD, CBG, and CBN into traditional and developing
weight loss and weight management products. In recent years, it has become evident that consumers are most attracted to new and
novel products, and it is inherently necessary to follow trends in order to obtain and retain market share and achieve industry-leading
product profit margins. This is the current focus of IMET new product development and marketing resources.
We believe IMET’s new product launches
can be successfully marketed through the use of video vignettes, website refreshes and splash pages, SEO (search engine optimization),
social media, and e-mail marketing, together with heavy focus on social media influencer content creation, to drive revenues. Once
a consumer is acquired through new product sales, we believe that consumers also will choose to purchase staple products such as
protein powders from IMET as well. However, there is no assurance IMET’s marketing strategies will be successful.
Regional distributors for our products
may be used in the future as opportunities become available.
The target launch for IMET’s line
of cannabinoid products that currently are under development is Spring 2020.
Acquisition
of Record Street Brewing Co.
On December 31,
2017, the Company closed an Agreement of Exchange and Plan of Reorganization (the “RSB Agreement”) with Record Street
Brewing Co., a Nevada corporation (“RSB”), which was dated December 31, 2017. Pursuant to the RSB Agreement,
the Company issued 80,000,000 restricted common stock shares to the four shareholders of RSB in exchange for all outstanding capital
stock of RSB.
Pursuant to the
RSB Agreement, RSB became a wholly owned subsidiary of the Company. RSB manufactures and markets its line of Record Street™
branded beers, including its three flagship ales—Blonde Ale, Pale Ale, and India Pale Ale—and its lager named Stylus™.
RSB previously
had relationships with contract manufacturers who brewed its beers in California and Florida, including Mendocino Brewing Company
(“Mendocino”), which filed for bankruptcy and ceased to engage in contract brewing for RSB. RSB distributes its beers
through a distribution relationship with Southern Glazer's Wine & Spirits in Nevada. RSB previously distributed its beers through
Young's Market Company, LLC (“Young’s”) in California until that company’s determination to exit the beer
distribution market in California.
At the time RSB
was acquired by the Company, RSB’s business model for beer production and distribution was enhanced by pasteurization incorporated
into Mendocino’s brewing and bottling process, which facilitated up to a twelve-month shelf life for the refrigerated beer,
and the ability of Mendocino to brew commercially small batches. RSB has been unable to identify a suitable substitute contract
brewer that employs pasteurization and brews commercially small batches.
Unpasteurized
craft beer generally is fresh tasting only for 120–180 days from the package date if kept refrigerated. Therefore, it is
economically imprudent to maintain inventories without the certainty of distribution and sales of the product. This reduced shelf
life also makes it difficult to maintain brewing schedules, as there becomes a higher risk of perishability of the excess inventory.
The decision of
Young’s to exit the beer distribution market in California further compounds the issue of the reduced shelf life because
Young’s provided statewide access to sales. Without that centralized opportunity, RSB would be required to obtain distribution
in each regional market throughout the state. Therefore, as a result of the need to find substitute distribution in California,
coupled with the truncated time frame in which to do so caused by a shortened shelf life, RSB has determined to exit the beer market
in California until such time as suitable brewing and distribution alternatives are available.
Effective as of
January 1, 2020, RSB entered into a license of the Record Street™ and Stylus™ brands with a related-party
private entity (the “Licensee”) that intends to open a brewpub located in Reno, Nevada. The Licensee will have the
exclusive right to brew and distribute Record Street™ and Stylus™ brand beers off premise in the State
of Nevada.
RSB shall be entitled
to receive 25% of the net profits from all off-premise sales by the Licensee for an initial term of five (5) years and a five (5)
year renewal term. The license will renew in perpetuity after the first renewal term if the Licensee achieves gross sales of licensed
products of $10,000,000 during the initial term and first renewal term, collectively. The president and principal shareholder of
the Licensee is Jesse Corletto, a related-party to the Company, who ceased to hold any officer or director positions with the Company
or RSB as of December 31, 2019.
In addition to
brewing and off-premise distribution licensing opportunities, RSB also is developing a taproom, restaurant, and lounge business
model that can be franchised under the Record Street™ brand. RSB taprooms will focus on the sale of Record Street™
branded beers and are envisioned as music and sports lounges that sell RSB’s beers, affordable fast casual cuisine, and related
merchandise. With RSB’s beers displayed on a prominently featured tap system, beer sales will be the primary revenue driver.
The economic strategy of the tap rooms will be value pricing, high margins, and high volumes. The flagship location for the first
RSB taproom is intended for Reno, Nevada.
RSB intends to
utilize the excess brewing capacity of the Licensee to restart its beer distribution business and support taproom franchise locations.
The Licensee intends to commence off-premise beer distribution in Spring 2020.
Creation or Acquisition and Development
of Potential Specialty and Alternative Beverage Products
The Company has followed trends in specialty
and alternative beverages very closely over the past 12-18 months and been engaged in strategic discussions with multiple novel
ingredient manufacturers and bottling copackers with the intent to develop and acquire beverage products that have or will have
industry leading margins and market penetration. Among those ingredients are nootropics, terpenes, and cannabinoids in flavored
and carbonated waters with multiple bottling formats that include aluminum screw-top bottles, slim-line aluminum cans, biodegradable
PET and PET-alternative plastic bottles, and glass bottles—each with the environmentally friendly, sustainable packaging
solutions. These products may be developed in-house or sold by the Company through distribution agreements with existing brands.
However, there is no assurance the Company can create in the future any beverage product that can be profitably manufactured and
marketed.
Plan of Operation
If the Company is successful in developing
new beverage products and bringing them to market, our initial target stores will include convenience stores, natural food products
stores, large ethnic markets, and national retailers. Products may be sold directly by us to retailers or through brokers and distributors,
including direct to store distributors (DSDs). Larger retail clients typically bring beverages in through their own warehouse distribution
network. Among our target retail clients are convenience stores, including 7-11’s, large national retailers, including Walmart,
Albertson’s/Safeway, Kroger companies, and regional grocery chains such as Schnucks, Smart & Final, Jewel-Osco, Sprouts,
Bashas’, Bristol Farms, Stater Brothers, Vallarta, Superior Foods, Brookshire’s, HEB and other companies throughout
the United States.
In order to accomplish our marketing goals,
we anticipate that we will be required, in most cases, to give promotional deals throughout our first year of new product distribution
and in subsequent years on a quarterly basis ranging from a 5%-20% discount similar to all other beverage company promotional programs.
It has been our experience that most retailers request some type of promotional introductory program that includes either a $0.25
-$0.50 per unit discount on an initial order, a buy one get one free program, or a free-fill program, which includes 1- 2 cases
of free product per store location. Slotting and slotting fees are only anticipated in the larger national grocery chains and,
in most cases, would be offset by higher volume product sales.
In order for us to implement our business
plan over the next twelve-month period, we have identified the following milestones that we expect to achieve:
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Expansion of Broker Network – We expect to develop a working relationship with
one or more regional and national broker networks. We will continually meet, train, and go on sales calls with our broker network
representatives in order to take advantage of momentum that may be created by their efforts. We anticipate a considerable amount
of travel and ongoing expenses at an estimated cost during that time of between $50,000 to $100,000.
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Increase Manufacturing Capacity – We expect to add one or two new co-packer facilities,
strategically located to reduce freight costs and meet anticipated product volumes and future growth objectives.
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Expand Retail Distribution – We will strive to expand retail distribution in calendar 2020 based on our ability to hire headcount to support these endeavors.
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Addition of Support Staff – In order to support expansion efforts and the training
and support of our broker network, we will need to hire approximately two more people on the corporate level, which will be hired
for the specific purpose of supporting the broker, distributor and retailers and their logistical and accounting requirements.
We are seeking and interviewing candidates for additional staffing at this time. The additional cost of these new hires is expected
to be approximately $120,000 in salary and benefits over the next twelve months.
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Capital Considerations – Our business plan can be adjusted based on the available
capital to the business. We anticipate that approximately $500,000 would be necessary in the near term in order to build-out a
bi-coastal presence for our product and to allow for the purchase or lease the necessary equipment and facility space over the
next twelve months. We intend to rely on third-party manufacturers and distributors in an effort to reduce capital requirements,
except as special opportunities may arise from time to time.
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We believe that cash flow from operations
will not meet our present and near-term cash needs and thus we will require additional cash resources, including the sale of equity
or debt securities, to meet our planned capital expenditures and working capital requirements for the next twelve (12) months.
We estimate that our capital needs over the next twelve (12) months will be up to $1,000,000. However, we may require additional
cash resources to achieve the milestones indicated above. If our own financial resources and future cash-flows from operations
are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional
credit facilities. The sale of additional equity securities will result in dilution to our stockholders. The incurrence of indebtedness
will result in increased debt service obligations and could require us to agree to operating and financial covenants that could
restrict our operations or modify our plans to grow the business. Financing may not be available in amounts or on terms acceptable
to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, will affect our ability to reach
the milestones indicated above, will limit our ability to expand our business operations, and could harm our overall business prospects.
Distribution Method for Our Product
Our intended distribution network is a
broker-distributor-retailer network, whereby brokers represent our products to distributors and retailers. Our target retail markets
are: (a) chain and independent health food stores; (b) grocery stores; (c) convenience stores; (d) drug stores; and (e) the mass
retail market. We anticipate certain opportunities in the near future to have common distributors for RSB beers and our alternative
beverage products.
Dependence on Few Customers
We may rely on relatively few customers
as we initiate new product sales. There can be no assurance that such customers will continue to order our products in the same
level or at all. A reduction or delay in orders from such customers, including reductions or delays due to market, economic or
competitive conditions, could have a material adverse effect on our business, operating results and financial condition.
Marketing
We intend to market our product through
our broker network and to avail ourselves to the promotional activities of other companies and competitors regarding the benefits
of our beverages and their ingredients. We anticipate that our initial marketing thrust will be to support the retailers and distribution
network with point-of-sales displays and other marketing materials that can be strategically utilized by public relations and marketing
firms retained by us as financial resources and markets dictate.
Competition
The business of marketing weight management
and nutrition products is highly competitive and sensitive to the introduction of new products or weight management plans, including
various prescription drugs, which may rapidly capture a significant share of the market. These market segments include numerous
manufacturers, distributors, marketers, retailers and physicians that actively compete for the business of consumers both in the
United States and abroad. Some of these competitors have longer operating histories, significantly greater financial, technical,
product development, marketing and sales resources, greater name recognition, larger established customer bases and better-developed
distribution channels than we do. Our present or future competitors may be able to develop products that are comparable or superior
to those we offer, adapt more quickly than we do to new technologies, evolving industry trends and standards or customer requirements,
or devote greater resources to the development, promotion and sale of their products than we do. For example, if our competitors
develop other diet or weight loss treatments that prove to be more effective than our products, demand for our products could be
reduced. Accordingly, we may not be able to compete effectively in our markets and competition may intensify.
We expect to be subject to significant
competition from network marketing organizations, including those that market weight management products, dietary and nutritional
supplements and personal care products as well as other types of products. We will compete for global customers and distributors
with regard to weight management, nutritional supplement and personal care products. Our competitors will include both direct selling
companies such as Herbalife, NuSkin Enterprises, Nature’s Sunshine, Alticor/Amway, Melaleuca, Avon Products, Oriflame and
Mary Kay, as well as retail establishments in which we are not a vendor such as Weight Watchers, Jenny Craig, General Nutrition
Centers, Wal-Mart and retail pharmacies.
In addition, because the industry in which
we operate is not particularly capital intensive or otherwise subject to high barriers to entry, it is relatively easy for new
competitors to emerge who will compete with us for our distributors and customers.
The beverage industry also is extremely
competitive. The principal areas of competition include pricing, packaging, development of new products and flavors, and marketing
campaigns. Our products will be competing directly with a wide range of drinks produced by a relatively large number of manufacturers.
Most of these brands have enjoyed broad, well-established national recognition for years, through well-funded ad and other marketing
campaigns. In addition, companies manufacturing these products generally have far greater financial, marketing, and distribution
resources than we have.
Important factors that will affect our
ability to compete successfully include the continued public perception of the benefits of specialty and alterative beverages,
taste and flavor of our product, trade and consumer promotions, the development of new, unique and cutting edge products, attractive
and unique packaging, branded product advertising, pricing, and the success of our distribution network.
We will also be competing to secure distributors,
most of which will market our product alongside those of our competitors, with the goal of obtaining stable and reliable distribution
and securing adequate shelf space in retail outlets. The extremely competitive pressures within the beverage categories could result
in our product never even being introduced beyond what they can market locally themselves.
Our product will compete generally with
all liquid refreshments, including bottled water and numerous specialty beverages, such as Core Hydration, SoBe, Snapple, Arizona
Iced Tea, Vitamin Water, Gatorade, and Powerade. We also will compete directly with alkaline water producers and brands focused
on the emerging alkaline beverage market including Eternal, Essentia, Icelandic, Real Water, Aqua Hydrate, Mountain Valley, Qure,
Penta, AQUA Hydrate, Alkaline 88, and Alka Power.
Products offered by our direct competitors
are sold in various volumes and prices with prices ranging from approximately $0.99 for a half-liter bottle to $3.99 for a one-liter
bottle, and volumes ranging from eight-ounce bottles to one-liter bottles.
Research and Development
The Company is in discussions and negotiations
with several flavor and formulation houses, ingredient manufacturers, and contract bottlers and co-packers in the research and
development of its alternative and specialty beverages. The Company also is engaged in anecdotal product research and development
for a weight loss and follow-on weight management program to be marketed under the iMetabolic® brand based
upon conversations with medical professionals who observe patient eating behaviors and market trends. The Company currently is
not engaged in any research and development activities on behalf of the Record Street™ brand, except to the extent
that existing beer formulas may be improved while retaining their signature flavors. Once the Company is able to secure new contract
brewers and broad distribution relationships, the Company will begin redistributing its signature beers and recommence the research
and development of new beer varieties and packaging formats. The Company did not expend any capital resources on research and development
during the reporting period.
Intellectual Property
Where available, we intend to obtain trademark
protection in the United States for a number of trademarks for slogans and product designs. We intend to aggressively assert our
rights under trade secret, unfair competition, trademark and copyright laws to protect our intellectual property, including product
design, product research and concepts and recognized trademarks. These rights are protected through the acquisition of patents
and trademark registrations, the maintenance of trade secrets, the development of trade dress, and, where appropriate, litigation
against those who are, in our opinion, infringing these rights.
While there can be no assurance that registered
trademarks will protect our proprietary information, we intend to assert our intellectual property rights against any infringer.
Although any assertion of our rights could result in a substantial cost to, and diversion of effort by, our Company, management
believes that the protection of our intellectual property rights will be a key component of our sales and operating strategy.
Seasonality of Business
The sales of our products are influenced
to some extent by weather conditions in the markets in which we operate. Unusually cold or rainy weather during the summer months
may have a temporary effect on the demand for our product and contribute to lower sales, which could have an adverse effect on
our results of operations for such periods.
Government Regulation
The advertising, distribution, labeling,
production, safety, sale, and transportation in the United States of our product will be subject to: the Federal Food, Drug, and
Cosmetic Act; the Federal Trade Commission Act; the Lanham Act; state consumer protection laws; competition laws; federal, state
and local workplace health and safety laws; various federal, state and local environmental protection laws; and various other federal,
state and local statutes and regulations.
Legal requirements apply in many jurisdictions
in the United States requiring that deposits or certain ecotaxes or fees be charged for the sale, marketing, and use of certain
non-refillable beverage containers. The precise requirements imposed by these measures vary and are constantly evolving. Other
types of statutes and regulations relating to beverage container deposits, recycling, ecotaxes and/or product stewardship also
apply in various jurisdictions in the United States. We anticipate that additional, similar legal requirements may be proposed
or enacted in the future at the local, state and federal levels in the United States.
Any third-party bottling facility that
we may choose to utilize in the future and any other such operations will be subject to various environmental protection statutes
and regulations, including those relating to the use of water resources and the discharge of wastewater. It will be our policy
to comply with any and all such legal requirements. Compliance with these provisions has not had, and we do not expect such compliance
to have, any material adverse effect on our capital expenditures, net income or competitive position.
Financial Planning
At June 30, 2019, the Company was not engaged
in any revenue producing activities that generated positive cash flow. As of June 30, 2019, the Company had $7,215 in cash and
cash equivalents.
Over the next 12 months we anticipate our
operating expenses will include: (i) costs for the production of product inventory; (ii) marketing costs; (iii) general and administrative
expenses; (ii) officer and director wages and consulting fees, and (ii) costs associated with maintaining the Company as a publicly
traded entity, including the filing of Exchange Act reports. We believe we will be able to meet these costs through the use of
existing cash and cash equivalents or additional amounts, as necessary, to be loaned by or invested in us by our stockholders,
management or other investors. However, no assurance can be given that we will be able to raise additional capital, when needed
or at all, or that such capital, if available, will be on acceptable terms. In the absence of obtaining additional financing, we
may be unable to fund our operations. Accordingly, the Company’s financial condition could require that it seek the
protection of applicable reorganization laws in order to avoid or delay actions by third parties, which could materially adversely
affect, interrupt or cause the cessation of its operations. As a result, the Company’s independent registered public accounting
firm has issued going concern opinion on the consolidated financial statements of the Company for the fiscal year ended June 30,
2019.
Government Regulation
In both domestic and foreign markets, the
formulation, manufacturing, packaging, labeling, distribution, importation, exportation, licensing, sale and storage of our products
are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints.
Such laws, regulations and other constraints may exist at the federal, state or local levels in the United States and at all levels
of government in foreign jurisdictions. There can be no assurance that we or our distributors are in compliance with all of these
regulations. Our failure or our distributors’ failure to comply with these regulations or new regulations could lead to the
imposition of significant penalties or claims and could negatively impact our business. In addition, the adoption of new regulations
or changes in the interpretations of existing regulations may result in significant compliance costs or discontinuation of product
sales and may negatively impact the marketing of our products, resulting in significant loss of sales revenues.
Employees
We currently have informal arrangements
with three individuals, who are officers and Directors of the Company, who serve as support staff for the functioning of all the
corporate activities. There are no written agreements with these individuals. If administrative requirements expand, we anticipate
that we may hire additional employees, and utilize a combination of employees and consultants as necessary to conduct our business.
Available Information
The Company is a Nevada corporation with
its principal executive office located at 75 Pringle Way, 8th Floor, Suite 804, Reno, Nevada 89502 and its telephone number is (775)
829-7999 x112.
You should carefully consider the risks
described below together with all of the other information included in this document before making an investment decision with
regard to our securities. The statements contained or incorporated herein 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 risks actually occurs, 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.
Risks Relating to Our Business
Because we have a limited operating
history, our ability to fully and successfully develop our business is unknown.
We acquired our beer operations in January
2018 and only commenced our specialty and alternative beverages development in 2019. Accordingly, we have a limited operating history
from which investors can evaluate our business. Our ability to successfully develop our products, and to realize consistent, meaningful
revenues and profit, has not been established and cannot be assured. For us to achieve success, our products must receive broad
market acceptance by consumers. Without this market acceptance, we will not be able to generate sufficient revenue to continue
our business operation. If our products are not widely accepted by the market, our business may fail.
Our ability to achieve and maintain profitability
and positive cash flow is dependent upon our ability to generate revenues, manage development costs and expenses, and compete successfully
with our direct and indirect competitors. We anticipate operating losses in upcoming future periods. This will occur because there
are expenses associated with the development, production, marketing, and sales of our product.
Our independent registered public accounting
firm has expressed substantial doubt about our ability to continue as a going concern.
Our financial statements are prepared using
generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of business. We have not yet established an ongoing source
of revenues sufficient to cover our operating costs and to allow us to continue as a going concern. Our ability to continue as
a going concern is dependent on our company obtaining adequate capital to fund operating losses until we become profitable. If
we are unable to obtain adequate capital, we could be forced to significantly curtail or cease operations. In its report on the
financial statements for the year ended June 30, 2019, our independent registered public accounting firm included an explanatory
paragraph regarding substantial doubt about our ability to continue as a going concern. Our financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
We will need additional funds to produce,
market, and distribute our product.
We will have to spend additional funds
to produce, market and distribute our product. If we cannot raise sufficient capital, we may have to cease operations and you could
lose your investment. We will need additional funds to produce our product for distribution to our target market. Even after we
have produced our product, we will have to spend substantial funds on distribution, marketing and sales efforts before we will
know if we have commercially viable and marketable/sellable products.
We may have difficulty raising additional
capital to fund expanded operations.
At present we have no plans to obtain financing
for our proposed short- term marketing plans and have no agreement or arrangements to obtain the financing needed to fund our future
expanded operations. If we do not obtain substantial funding, we expect our expansion expenses will exceed our immediate
sales revenues. Our successful long-term future is dependent on receiving substantial funding in the long-term. (See
“Management’s Discussion and Analysis of Financial Condition,” below.)
There is no guarantee that sufficient
sale levels will be achieved.
There is no guarantee that the expenditure
of money on distribution and marketing efforts will translate into sufficient sales to cover our expenses and result in profits.
Consequently, there is a risk that you may lose all of your investment.
If we fail to further penetrate existing
markets or successfully expand our business into new markets, then the growth in sales of our products, along with our operating
results, could be negatively impacted.
The success of our business is to a large
extent contingent on our ability to continue to grow by entering new markets and further penetrating existing markets. Our ability
to further penetrate existing markets or to successfully expand our business into additional countries is subject to numerous factors,
many of which are out of our control.
In addition, government regulations in
both our domestic and international markets can delay or prevent the introduction, or require the reformulation or withdrawal,
of some of our products, which could negatively impact our business, financial condition and results of operations. Also, our ability
to increase market penetration in certain countries may be limited by the finite number of persons in a given country inclined
to pursue a direct selling business opportunity or consumers willing to purchase our products. Moreover, our growth will depend
upon improved training and other activities that enhance distributor retention in our markets.
We cannot guarantee that our anticipated
growth levels will be achieved in the immediate or long-term future.
Our development, marketing, and sales
activities are limited by our size.
Because we are small and do not have much
capital, we must limit our product development, marketing, and sales activities. As such, we may not be able to complete our production
and business development program in a manner that is as thorough as we would like. We may not ever generate sufficient revenues
to cover our operating and expansion costs and you may, therefore, lose your entire investment.
Changes in the non-alcoholic beverage
business environment and retail landscape could adversely impact our financial results.
The non-alcoholic beverage business environment
is rapidly evolving as a result of, among other things, changes in consumer preferences, including changes based on health and
nutrition considerations and obesity concerns; shifting consumer tastes and needs; changes in consumer lifestyles; and competitive
product and pricing pressures. In addition, the non-alcoholic beverage retail landscape is very dynamic and constantly evolving,
not only in emerging and developing markets, where modern trade is growing at a faster pace than traditional trade outlets, but
also in developed markets, where discounters and value stores, as well as the volume of transactions through e-commerce, are growing
at a rapid pace. If we are unable to successfully adapt to the rapidly changing environment and retail landscape, our share of
sales, volume growth and overall financial results could be negatively affected.
Intense competition and increasing competition
in the commercial beverage market could hurt our business.
The commercial retail beverage industry,
and in particular its non-alcoholic beverage segment, is highly competitive. Market participants are of various sizes, with various
market shares and geographical reach, some of whom have access to substantially more sources of capital.
We intend to compete generally with all
liquid refreshments, including bottled water and numerous specialty beverages, such as: Core Hydration, SoBe; Snapple; Arizona
Iced Tea; Vitamin Water; Gatorade; and Powerade.
We also intend to compete indirectly with
major international beverage companies including but not limited to: the Coca-Cola Company; PepsiCo, Inc.; Nestlé; Dr Pepper
Snapple Group; Groupe Danone; Kraft Foods Group, Inc.; and Unilever. These companies have established market presence in the United
States and offer a variety of beverages that are substitutes to our product. We will face potential direct competition from such
companies, because they have the financial resources, and access to manufacturing and distribution channels to rapidly enter the
specialty and alternative water market. For example, we may compete directly with alkaline water producers and brands focused on
the emerging alkaline beverage market including: Eternal; Essentia; Icelandic; Real Water; Aqua Hydrate; Mountain Valley; Qure;
Penta; and Alka Power. These companies could bolster their position in the alkaline water market through additional expenditure
and promotion.
As a result of both direct and indirect
competition, our ability to successfully distribute, market and sell our product, and to gain sufficient market share in the United
States to realize profits may be limited, greatly diminished, or totally diminished, which may lead to partial or total loss of
your investments in the Company.
Expansion of the specialty and alternative
beverage market or sufficiency of consumer demand in that market for operations to be profitable are not guaranteed.
The specialty and alternative water market
is an emerging market and there is no guarantee that this market will expand or that consumer demand will be sufficiently high
to allow our company to successfully market, distribute and sell our product, or to successfully compete with current or future
competition, all of which may result in total loss of your investment. Notably, these specialty and alternative waters often include
high-priced ingredients and have a higher retail price point than spring and filtered waters. Therefore, our beverages may be particularly
sensitive to changes in consumer behaviors and economic downturns.
Our growth and profitability depends
on the performance of third parties and our relationship with them.
Our distribution network and its success
may depend on the performance of third parties. Any non-performance or deficient performance by such parties may undermine our
operations, profitability, and result in total loss to your investment. To distribute our product, we intend to use a broker-distributor-retailer
network whereby brokers represent our products to distributors and retailers who would in turn sell our product to consumers. The
success of this network will depend on the performance of the brokers, distributors and retailers of this network. There is a risk
that a broker, distributor, or retailer may refuse to or cease to market or carry our product. 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 product in localities that may not be receptive to our product. Furthermore, such third parties’
financial position or market share may deteriorate, which could adversely affect our distribution, marketing and sale activities.
We also will need to maintain good commercial relationships with third-party brokers, distributors and retailers so that they will
promote and carry our product. Any adverse consequences resulting from the performance of third parties or our relationship with
them could undermine our operations, profitability and may result in total loss of your investment.
Our failure to establish and maintain
distributor relationships for any reason could negatively impact sales of our products and harm our financial condition and operating
results.
We intend to depend upon third-party distributors
of our products for the origination of a substantial portion, if not all, of our sales. To increase our revenue, we must increase
the number of, or the productivity of, our distributors. Accordingly, our success depends in significant part upon our ability
to recruit, retain, and motivate a large base of distributors. There may be a high rate of turnover among our distributors, which
is a characteristic of retail sales and the network marketing business. The loss of a significant number of distributors for any
reason could negatively impact sales of our products and could impair our ability to attract new distributors. In our efforts to
attract and retain distributors, we will compete with other network marketing organizations, including those in the weight management,
dietary, and nutritional supplement and personal care and cosmetic product industries. Our operating results could be harmed if
our existing and new business opportunities and products do not generate sufficient interest to retain existing distributors and
attract new distributors.
Since we cannot exert the same level
of influence or control over third-party distributors as we could if they were our own employees, our distributors could fail to
comply with our distributor policies and procedures, which could result in claims against us that could harm our financial condition
and operating results.
Our third-party distributors are independent
contractors and, accordingly, we are not in a position to directly provide the same direction, motivation, and oversight as we
would if distributors were our own employees. As a result, there can be no assurance that our distributors will participate in
our marketing strategies or plans, accept our introduction of new products, or comply with our distributor policies and procedures.
Extensive federal, state and local laws
may regulate our business, products, and network marketing programs. While we intend to implement distributor policies and procedures
designed to govern distributor conduct and protect the goodwill associated with our trademarks and trade names, it can be difficult
to enforce these policies and procedures. Violations by our third-party distributors of applicable law or of our policies and procedures
in dealing with customers could reflect negatively on our products and operations and harm our business reputation. In addition,
it is possible that a court could hold us civilly or criminally accountable based on vicarious liability because of the actions
of our third-party distributors.
The loss of one or more of our major
customers or a decline in demand from one or more of these customers could harm our business.
A limited number of customers may account
for a majority of our revenues. There can be no assurance that such customers will continue to order our products in the same level
or at all. A reduction or delay in orders from such customers, including reductions or delays due to market, economic or competitive
conditions, could have a material adverse effect on our business, operating results and financial condition.
Our dependence on a limited number of
vendors could leave us vulnerable to having an inadequate or quantity-restrictive supply of required products, price increases,
late deliveries, and poor product quality.
We currently have three vendors for specialty
and alternative water-based beverages, no current vendors for our beers, and two vendors for our nutraceutical products. Like other
companies in our industry, we may experience shortages or cost-prohibitive minimum order quantities (MOQs) and be unable to purchase
our desired volume of products. If we are unable to maintain an adequate supply of products, our revenue and gross profit could
suffer considerably. Finally, we cannot provide any assurance that our products will be available in quantities sufficient to meet
customer demand. Any limits to product access could materially and adversely affect our business and results of operations.
Due to the high level of competition
in our industry, we might fail to retain our customers and distributors, which would harm our financial condition and operating
results.
The business of marketing weight management
and nutrition products is highly competitive and sensitive to the introduction of new products or weight management plans, including
various prescription drugs, which may rapidly capture a significant share of the market. These market segments include numerous
manufacturers, distributors, marketers, retailers and physicians that actively compete for the business of consumers both in the
United States and abroad. Some of these competitors have longer operating histories, significantly greater financial, technical,
product development, marketing and sales resources, greater name recognition, larger established customer bases and better-developed
distribution channels than we do. Our present or future competitors may be able to develop products that are comparable or superior
to those we offer, adapt more quickly than we do to new technologies, evolving industry trends and standards or customer requirements,
or devote greater resources to the development, promotion and sale of their products than we do. For example, if our competitors
develop other diet or weight loss treatments that prove to be more effective than our products, demand for our products could be
reduced. Accordingly, we may not be able to compete effectively in our markets and competition may intensify.
We are also subject to significant competition
from network marketing organizations, including those that market weight management products, dietary and nutritional supplements
and personal care products as well as other types of products. We compete for global customers and distributors with regard to
weight management, nutritional supplement and personal care products. Our competitors include both direct selling companies such
as Herbalife, NuSkin Enterprises, Nature’s Sunshine, Alticor/Amway, Melaleuca, Avon Products, Oriflame and Mary Kay, as well
as retail establishments in which we are not a vendor such as Weight Watchers, Jenny Craig, General Nutrition Centers, Wal-Mart,
and retail pharmacies.
In addition, because the industry in which
we operate is not particularly capital intensive or otherwise subject to high barriers to entry, it is relatively easy for new
competitors to emerge who will compete with us for our distributors and customers.
Our failure to appropriately respond
to changing consumer preferences and demand for new products or product enhancements could significantly harm our distributor and
customer relationships and product sales and harm our financial condition and operating results.
Our business is subject to changing consumer
trends and preferences, especially with respect to weight management products. Our continued success depends in part on our ability
to anticipate and respond to these changes, and we may not respond in a timely or commercially appropriate manner to such changes.
Furthermore, the nutritional supplement industry is characterized by rapid and frequent changes in demand for products and new
product introductions and enhancements. Our failure to accurately predict these trends could negatively impact consumer opinion
of our products, which in turn could harm our customer and distributor relationships and cause the loss of sales. The success of
our new product offerings and enhancements depends upon a number of factors, including our ability to:
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accurately anticipate customer needs;
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innovate and develop new products or product enhancements that meet these needs;
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successfully commercialize new products or product enhancements in a timely manner;
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price our products competitively;
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manufacture and deliver our products in sufficient volumes and in a timely manner; and
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differentiate our product offerings from those of our competitors.
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If we do not introduce new products or
make enhancements to meet the changing needs of our customers in a timely manner, some of our products could be rendered obsolete,
which could negatively impact our revenues, financial condition and operating results.
Health benefits of certain specialty
and alternative beverages and nutraceutical products may not be guaranteed or proven, but rather perceived by consumers.
The health benefits of novel ingredients
often are not guaranteed and have not been proven. There is a consumer perception that ingesting certain products may have beneficial
health effects. Consequently, negative changes in consumers’ perception of the benefits of our products or any ingredients
in the products or negative publicity surrounding the ingredients or products may result in loss of market share or potential market
share and hence loss of your investment.
Adverse publicity associated with our
products, ingredients or network marketing program, or those of similar companies, could harm our financial condition and operating
results.
The size of our distribution force and
the results of our operations may be significantly affected by the public’s perception of the Company and similar companies.
This perception is dependent upon opinions concerning:
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the safety and quality of our products and ingredients;
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the safety and quality of similar products and ingredients distributed by other companies;
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our network marketing program; and
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the direct selling business generally.
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Adverse publicity concerning any actual
or purported failure of our Company or our third-party distributors to comply with applicable laws and regulations regarding product
claims and advertising, good manufacturing practices, the regulation of our network marketing program, the licensing of our products
for sale in our target markets or other aspects of our business, whether or not resulting in enforcement actions or the imposition
of penalties, could have an adverse effect on the goodwill of our Company and could negatively affect our ability to attract, motivate,
and retain distributors, which would negatively impact our ability to generate revenue. We cannot ensure that all distributors
will comply with applicable legal requirements relating to the advertising, labeling, licensing, or distribution of our products.
In addition, our distributors’ and
consumers’ perception of the safety and quality of our products and ingredients as well as similar products and ingredients
distributed by other companies can be significantly influenced by media attention, publicized scientific research or findings,
widespread product liability claims and other publicity concerning our products or ingredients or similar products and ingredients
distributed by other companies.
Adverse publicity, whether or not accurate
or resulting from consumers’ use or misuse of our products, that associates consumption of our products or ingredients or
any similar products or ingredients with illness or other adverse effects, questions the benefits of our or similar products or
claims that any such products are ineffective, inappropriately labeled or have inaccurate instructions as to their use, could lead
to lawsuits or other legal challenges and could negatively impact our reputation, the market demand for our products, or our general
business.
From time to time we may receive inquiries
from government agencies and third parties requesting information concerning our products. We intend to fully cooperate with these
inquiries including, when requested, by the submission of detailed technical reports addressing product composition, manufacturing,
process control, quality assurance, and contaminant testing. We understand that such materials may undergo review by regulators
in certain markets from time to time. We also are confident in the safety of our products when used as directed. However,
there can be no assurance that regulators in these or other markets will not take actions that might delay or prevent the introduction
of new products, or require the reformulation or the temporary or permanent withdrawal of certain of our existing products from
their markets.
Water scarcity and poor quality could
negatively impact our production costs and capacity.
Water is the main ingredient in our beverages.
It is also a limited resource, facing unprecedented challenges from overexploitation, increasing pollution, poor management, and
climate change. As demand for water continues to increase, as water becomes scarcer, and as the quality of available water deteriorates,
we may incur increasing production costs or face capacity constraints that could adversely affect our profitability or net operating
revenues in the long run.
Increase in the cost, disruption of
supply, or shortage of ingredients, other raw materials, or packaging materials could harm our business.
We and our bottlers will use water, minerals,
phytoceutical and nutraceutical ingredients, and packaging materials for bottles such as plastic and paper products. The prices
for these ingredients, other raw materials, and packaging materials fluctuate depending on market conditions. Substantial increases
in the prices of our or our contract manufacturer’s ingredients, other raw materials, and packaging materials, to the extent
they cannot be recouped through increases in the prices of finished beverage products, would increase our operating costs, and
could reduce our profitability. Increases in the prices of our finished products resulting from a higher cost of ingredients, other
raw materials and packaging materials could affect the affordability of our product and reduce sales.
An increase in the cost, a sustained interruption
in the supply, or a shortage of some of these ingredients, other raw materials, or packaging materials and containers that may
be caused by a deterioration of our or our bottlers’ relationships with suppliers; by supplier quality and reliability issues;
or by events such as natural disasters, power outages, labor strikes, political uncertainties or governmental instability, or the
like, could negatively impact our net revenues and profits.
Changes in laws and regulations relating
to beverage and other product containers and packaging could increase our costs and reduce demand for our products.
We and our contract manufacturers intend
to offer our product in non-refillable, recyclable containers in the United States. Legal requirements have been enacted in various
jurisdictions in the United States requiring that deposits or certain ecotaxes or fees be charged for the sale, marketing and use
of certain non-refillable beverage containers. Other proposals relating to beverage container deposits, recycling, ecotax and/or
product stewardship have been introduced in various jurisdictions in the United States and overseas, and we anticipate that similar
legislation or regulations may be proposed in the future at local, state, and federal levels in the United States. Consumers’
increased concerns and changing attitudes about solid waste streams and environmental responsibility and the related publicity
could result in the adoption of such legislation or regulations. If these types of requirements are adopted and implemented on
a large scale in the geographical regions in which we operate or intend to operate, they could affect our costs or require changes
in our distribution model, which could reduce our net operating revenues or profitability.
Since we rely on independent third parties
for the manufacture and supply of our products, if these third parties fail to reliably supply products to us at required levels
of quality, then our financial condition and operating results would be harmed.
The majority of our products are manufactured
at third party contract manufacturers. We cannot assure you that our outside manufacturers will continue to reliably supply products
to us at the levels of quality, or the quantities, we require, especially under the FDA’s cGMP regulations. Additionally,
while we are not presently aware of any current liquidity issues with our suppliers, we cannot assure you that they will not experience
financial hardship as a result of the current global financial crisis.
In the event any of our third-party manufacturers
were to become unable or unwilling to continue to provide us with products in required volumes and at suitable quality levels,
we would be required to identify and obtain acceptable replacement manufacturing sources. There is no assurance that we would be
able to obtain alternative manufacturing sources on a timely basis. An extended interruption in the supply of products would result
in the loss of sales. In addition, any actual or perceived degradation of product quality as a result of reliance on third party
manufacturers may have an adverse effect on sales or result in increased product returns and buybacks. Also, while we may experience
ingredient and product price pressure, we believe that we will be able to mitigate some of these cost pressures through economies
of scale and improved optimization of our supply chain.
Our products often are positioned in
the market as premium products and may be sold at premium prices compared to our competitors. We cannot provide any assurances
as to consumers’ market acceptance of our current or future products.
We will compete directly with other water-based
beverage and nutraceutical producers and brands focused on the emerging, specialty, and alternative markets. Products offered by
our direct competitors may be sold in various volumes and prices. Our competitors may offer different products and product formats
at suggested retail prices that are lower than for our products. We can provide no assurances that consumers will purchase our
products or that they will not prefer to purchase a competitive product.
We may incur material product liability
claims, which could increase our costs and harm our financial condition and operating results.
Our products consist of herbs, vitamins,
minerals, and other ingredients that are classified as foods or dietary supplements and are not subject to pre-market regulatory
approval in the United States. Our products could contain contaminated substances, and some of our products contain some ingredients
that do not have long histories of human consumption. We conduct limited clinical studies on some key products but not all products.
Previously unknown adverse reactions resulting from human consumption of these ingredients could occur. As a marketer of dietary
and nutritional supplements and other products that are ingested by consumers or applied to their bodies, we have been, and may
again be, subjected to various product liability claims, including that the products contain contaminants, the products include
inadequate instructions as to their uses, or the products include inadequate warnings concerning side effects and interactions
with other substances. It is possible that widespread product liability claims could increase our costs, and adversely affect our
revenues and operating income. Moreover, liability claims arising from a serious adverse event may increase our costs through higher
insurance premiums and deductibles, and may make it more difficult to secure adequate insurance coverage in the future. In addition,
our product liability insurance may fail to cover future product liability claims, thereby requiring us to pay substantial monetary
damages and adversely affecting our business.
We may incur material product liability
claims, which could increase our costs and harm our financial condition and operating results.
Our products consist of herbs, vitamins,
minerals, and other ingredients that are classified as foods or dietary supplements and are not subject to pre-market regulatory
approval in the United States. Our products could contain contaminated substances, and some of our products contain some ingredients
that do not have long histories of human consumption. We conduct limited clinical studies on some key products but not all products.
Previously unknown adverse reactions resulting from human consumption of these ingredients could occur. As a marketer of dietary
and nutritional supplements and other products that are ingested by consumers or applied to their bodies, we have been, and may
again be, subjected to various product liability claims, including that the products contain contaminants, the products include
inadequate instructions as to their uses, or the products include inadequate warnings concerning side effects and interactions
with other substances. It is possible that widespread product liability claims could increase our costs, and adversely affect our
revenues and operating income. Moreover, liability claims arising from a serious adverse event may increase our costs through higher
insurance premiums and deductibles, and may make it more difficult to secure adequate insurance coverage in the future. In addition,
our product liability insurance may fail to cover future product liability claims, thereby requiring us to pay substantial monetary
damages and adversely affecting our business.
We may be subject to frequent claims
and litigation that could result in unexpected expenses and ultimately could be resolved against us.
From time to time, we may be involved in
litigation and other proceedings, including matters related to product liability claims, stockholder class action and derivative
claims, commercial disputes and intellectual property, as well as trade, regulatory, employment, and other claims related to our
business. Any of these proceedings could result in significant settlement amounts, damages, fines or other penalties, divert financial
and management resources, and result in significant legal fees. An unfavorable outcome of any particular proceeding could exceed
the limits of our insurance policies or the carriers may decline to fund such final settlements and/or judgments and could have
an adverse impact on our business, financial condition, and results of operations. In addition, any proceeding could negatively
impact our reputation among our guests and our brand image.
If we are unable to protect our information
systems against service interruption, misappropriation of data or breaches of security, our operations could be disrupted, we may
suffer financial losses and our reputation may be damaged.
We rely on networks and information systems
and other technology (“information systems”), including the Internet and third-party hosted services, to support a
variety of business processes and activities, including procurement and supply chain, manufacturing, distribution, invoicing and
collection of payments, employee processes and consumer marketing. We use information systems to process financial information
and results of operations for internal reporting purposes and to comply with regulatory financial reporting and legal and tax requirements.
In addition, we depend on information systems for digital marketing activities and electronic communications between our company
and our bottlers and other customers, suppliers and consumers. Because information systems are critical to many of our operating
activities, our business may be impacted by system shutdowns, service disruptions or security breaches. These incidents may be
caused by failures during routine operations such as system upgrades or by user errors, as well as network or hardware failures,
malicious or disruptive software, unintentional or malicious actions of employees or contractors, cyberattacks by common hackers,
criminal groups or nation-state organizations or social-activist (hacktivist) organizations, geopolitical events, natural disasters,
failures or impairments of telecommunications networks, or other catastrophic events. In addition, such incidents could result
in unauthorized or accidental disclosure of material confidential information or regulated individual personal data. If our information
systems suffer severe damage, disruption or shutdown and our business continuity plans do not effectively resolve the issues in
a timely manner, we could experience delays in reporting our financial results, and we may lose revenue and profits as a result
of our inability to timely manufacture, distribute, invoice and collect payments for concentrate or finished products. Unauthorized
or accidental access to, or destruction, loss, alteration, disclosure, falsification or unavailability of, information could result
in violations of data privacy laws and regulations, damage to the reputation and credibility of our company and, therefore, could
have a negative impact on net operating revenues. In addition, we may suffer financial and reputational damage because of lost
or misappropriated confidential information belonging to us, our current or former employees, our bottling partners, other customers
or suppliers, or consumers or other data subjects, and may become exposed to legal action and increased regulatory oversight. We
could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to
repair or replace networks and information systems.
In addition, third-party providers of data
hosting or cloud services, as well as our bottling partners, distributors, retailers or suppliers, may experience cybersecurity
incidents that may involve data we share with them. Although we have taken steps to prevent cybersecurity incidents, there can
be no assurance that such steps will be adequate. In order to address risks to our information systems, we continue to make investments
in personnel, technologies and training of our personnel.
Unfavorable general economic conditions
in the United States could negatively impact our financial performance.
Unfavorable general economic conditions,
such as a recession or economic slowdown, in the United States could negatively affect the affordability of, and consumer demand
for, our product in the United States. Under difficult economic conditions, consumers may seek to reduce discretionary spending
by forgoing purchases of our products or by shifting away from our beverages to lower-priced products offered by other companies,
including non-alkaline water. Consumers may also cease purchasing bottled water and consume tap water. Lower consumer demand for
our product in the United States could reduce our profitability.
Adverse weather conditions could reduce
the demand for our products.
The sales of our products are influenced
to some extent by weather conditions in the markets in which we operate. Unusually cold or rainy weather during the summer months
may have a temporary effect on the demand for our product and contribute to lower sales, which could have an adverse effect on
our results of operations for such periods.
We rely on key executive officers, their
knowledge of our business would be difficult to replace, and the loss of their services could adversely affect our business.
We are highly dependent on the efforts
of our management personnel, and place substantial reliance upon the efforts and abilities of our executive officer, Mark W. Conte.
The loss of management and industry expertise of any of our key executive officers could result in delays in product development,
loss of any future customers and sales and diversion of management resources, which could adversely affect our operating results.
We do not have an employment agreement with Mr. Conte or any other employee. We do not have “key person” life insurance
policies for any of our officers.
Our executive officers are not subject
to supervision or review by an independent board.
Our board of directors consists of Mark
Conte, Andrew Smith, and Kevin Pikero. The activities of our executive officers are not subject to the review of an independent
board of directors.
Risks Related to Regulations Applicable
to our Industry
Significant additional labeling or warning
requirements or limitations on the availability of our product may inhibit sales of affected products.
Various jurisdictions may seek to adopt
significant additional product labeling or warning requirements or limitations on the availability of our product relating to the
content or perceived adverse health consequences of our product. If these types of requirements become applicable to our product
under current or future environmental or health laws or regulations, they may inhibit sales of our product.
We are affected by extensive laws, governmental
regulations, administrative determinations, court decisions and similar constraints both domestically and abroad, and our failure
or our distributors’ failure to comply with these restraints could lead to the imposition of significant penalties or claims,
which could harm our financial condition and operating results.
In both domestic and foreign markets, the
formulation, manufacturing, packaging, labeling, distribution, importation, exportation, licensing, sale and storage of our products
are affected by extensive laws, governmental regulations, administrative determinations, court decisions and similar constraints.
Such laws, regulations and other constraints may exist at the federal, state or local levels in the United States and at all levels
of government in foreign jurisdictions. There can be no assurance that we or our distributors are in compliance with all of these
regulations. Our failure or our distributors’ failure to comply with these regulations or new regulations could lead to the
imposition of significant penalties or claims and could negatively impact our business. In addition, the adoption of new regulations
or changes in the interpretations of existing regulations may result in significant compliance costs or discontinuation of product
sales and may negatively impact the marketing of our products, resulting in significant loss of sales revenues.
The FTC revised its Guides Concerning the
Use of Endorsements and Testimonials in Advertising, or Guides, which became effective on December 1, 2009. Although the Guides
are not binding, they explain how the FTC interprets Section 5 of the FTC Act’s prohibition on unfair or deceptive acts or
practices. Consequently, the FTC could bring a Section 5 enforcement action based on practices that are inconsistent with the Guides.
Under the revised Guides, advertisements that feature a consumer and convey his or her atypical experience with a product or service
are required to clearly disclose the results that consumers can generally expect. In contrast to the 1980 version of the Guides,
which allowed advertisers to describe atypical results in a testimonial as long as they included a disclaimer such as “results
not typical”, the revised Guides no longer contain such a safe harbor. The revised Guides also add new examples to illustrate
the long-standing principle that “material connections” between advertisers and endorsers (such as payments or free
products), connections that consumers might not expect, must be disclosed. We intend for our marketing materials to be compliant
with the revised Guides. However, it is possible that our use, and that of our distributors, of testimonials in the advertising
and promotion of our products could unintentionally fail to comply with the revised Guides and subject us to regulatory scrutiny
that could negatively impact our sales.
We are subject to FDA rules for current
good manufacturing practices (“cGMPs”) for the manufacture, packing, labeling and holding of dietary supplements distributed
in the United States. We principally rely upon our vendors and contract manufacturers for compliance with the cGMPs for dietary
supplements manufactured by or on behalf of us for distribution in the United States. However, if we should be found not to be
in compliance with cGMPs for the products it self-manufactures it could negatively impact our reputation and ability to sell our
products even after any such situation had been rectified. Further, if contract manufacturers whose products bear our labels
fail to comply with the cGMPs, this could negatively impact our reputation and ability to sell its products even though we are
not directly liable under the cGMPs for such compliance. In complying with the dietary supplement cGMPs, we have experienced increases
in production costs as a result of the necessary increase in testing of raw ingredients, work in process and finished products.
From time to time, we may be subject to
inquiries from and investigations by various governmental and other regulatory authorities. To the extent any of these inquiries
are or become material they will be disclosed as required by applicable securities laws.
If we fail to comply with personal data
protection 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 and former employees. 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. There is no assurance that 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 will prevent the improper disclosure of personal data. Improper disclosure of personal data in violation of applicable personal
data protection laws could harm our reputation, cause loss of consumer confidence, subject us to government enforcement actions
(including fines), or 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.
Changes in, or failure to comply with,
the laws and regulations applicable to our products or our business operations could increase our costs or reduce our net operating
revenues.
The advertising, distribution, labeling,
production, safety, sale, and transportation in the United States of our product will be subject to: the Federal Food, Drug, and
Cosmetic Act; the Federal Trade Commission Act; the Lanham Act; state consumer protection laws; competition laws; federal, state,
and local workplace health and safety laws, such as the Occupational Safety and Health Act; various federal, state and local environmental
protection laws; and various other federal, state, and local statutes and regulations. Legal requirements also apply in many jurisdictions
in the United States requiring that deposits or certain ecotaxes or fees be charged for the sale, marketing, and use of certain
non-refillable product containers. The precise requirements imposed by these measures vary. Other types of statutes and regulations
relating to beverage container deposits, recycling, ecotaxes and/or product stewardship also apply in various jurisdictions in
the United States. We anticipate that additional, similar legal requirements may be proposed or enacted in the future at the local,
state and federal levels in the United States. Changes to such laws and regulations could increase our costs or reduce our net
operating revenues.
In addition, failure to comply with environmental,
health or safety requirements and other applicable laws or regulations could result in the assessment of damages, the imposition
of penalties, suspension of production, changes to equipment or processes, or a cessation of operations at our or our bottlers’
facilities, as well as damage to our image and reputation, all of which could harm our profitability.
If we produce, market and/or sell beverages
infused with hemp, as defined under the Agriculture Improvement Act of 2018, we will be subject to a myriad of different laws and
regulations governing the use of hemp in food and beverages and if we are unable to comply with such laws in a cost-effective manner,
our business could be adversely affected.
The production of a beverage infused with
hemp, as “hemp” is defined in the Agriculture Improvement Act of 2018 (also known as the 2018 Farm Bill, Public Law
115-334), is contingent on U.S. Food and Drug Administration, or the FDA, and state laws, regulations, and guidance. While the
Agriculture Improvement Act of 2018 removed hemp from Schedule I of the Controlled Substances Act, the law did not change the FDA’s
authorities with respect to food or drugs. As of June 28, 2019, the FDA has not made a determination that the use of hemp in food
is safe. The FDA has evaluated Generally Recognized as Safe or GRAS notices for three hemp seed-derived food ingredients and determined
that the agency has no questions that those ingredients are GRAS under their intended conditions of use. We intend to comply in
full with all federal, state, and local laws, rules and regulations as we develop our hemp alkaline water and other product lines.
We will not pursue the production or sale of hemp-infused products until legally permitted.
Laws and regulations governing the use
of hemp in food and beverages in the United States are broad in scope; subject to evolving interpretations; and subject to enforcement
by a myriad of regulatory agencies and law enforcement entities. Under the Agriculture Improvement Act of 2018, a state or Indian
tribe that desires to have primary regulatory authority over the production of hemp in the state or territory of the Indian tribe
must submit a plan to monitor and regulate hemp production to the Secretary of the United States Department of Agriculture or USDA.
The Secretary must then approve the state or tribal plan after determining if the plan complies with the requirements set forth
in the Agriculture Improvement Act of 2018. The Secretary may also audit the state or Indian tribe’s compliance with the
federally approved plan. If the Secretary does not approve the state or Indian tribe’s plan, then the production of hemp
in that state or territory of that Indian tribe will be subject to a plan established by USDA. USDA has not yet established such
a plan. We anticipate that many states will seek to have primary regulatory authority over the production of hemp. States that
seek such authority may create new laws and regulations that permit the use of hemp in food and beverages.
Federal and state laws and regulations
on hemp may address production, monitoring, manufacturing, distribution, and laboratory testing to ensure that that the hemp has
a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis. Federal laws and regulations may
also address the transportation or shipment of hemp or hemp products, as the Agriculture Improvement Act of 2018 prohibits states
and Indian tribes from prohibiting the transportation or shipment of hemp or hemp products produced in accordance with that law
through the state or territory of the Indian tribe, as applicable. Because we rely on a nationwide broker-distributor-retailer
network whereby brokers represent our products to distributors and retailers in turn sell our product to consumers in the fifty
states and the District of Columbia, we may be subject to many different state-based regulatory regimens for hemp, all of which
could require us to incur substantial costs associated with compliance requirements. In addition, violations of these laws, or
allegations of such violations, could disrupt our business and result in a material adverse effect on our operations, as well as
adverse publicity and potential harm to our reputation. We and our suppliers and vendors must take significant enterprise risk
management steps to ensure that there is no commingling of hemp and marihuana, as “marihuana” is defined in the federal
Controlled Substances Act. Marihuana remains subject to the Controlled Substances Act and related regulations.
Furthermore, if we decide to produce, market
and sell beverages infused with hemp outside of the United States, we will be subject to applicable laws and regulations in those
non-U.S. jurisdictions, which would require us to expend significant costs associated with compliance.
In addition, it is possible that additional
regulations may be enacted in the future in the United States and globally that will be directly applicable to our proposed product
offerings infused with hemp. We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor
can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated,
could have on our business.
FDA’s current position is that
the sale of food and beverages that contain hemp-derived cannabidiol (“CBD”) is prohibited under the Federal Food,
Drug, and Cosmetic Act; therefore, if we decide to produce, market and/or sell beverages infused with hemp-derived cannabidiol,
we may be subject to federal enforcement actions which could adversely affect our business and harm our reputation and brand.
The FDA has jurisdiction over drugs and
foods that contain CBD, including CBD derived from hemp. Under the Federal Food, Drug and Cosmetic Act or the FDCA, it is a prohibited
act to introduce or deliver for introduction into interstate commerce any food (which the FDCA defines to include beverages) that
is adulterated. The FDCA therefore prohibits the introduction or delivery for introduction of a food that contains CBD, because
the FDCA deems a food to be adulterated if it bears or contains any food additive that is unsafe, and CBD is presently an unsafe
food additive under the FDCA and FDA regulations. The FDCA also states that it is a prohibited act to introduce or deliver for
introduction into interstate commerce any food to which an FDA-approved drug has been added, unless certain exceptions are met.
The FDA has approved a drug in which CBD is an active ingredient, and the agency has stated that based on available evidence, none
of the exceptions apply to CBD. One of the exceptions addresses whether the drug was marketed in food before the FDA approved the
drug and before the institution of any substantial clinical investigations involving the drug. The FDA has stated that interested
parties may present the agency with evidence that has bearing on the issue of whether CBD was marketed in food before the FDA approved
the CBD drug in 2018 or before the institution of substantial clinical investigations involving the CBD drug. FDA’s current
position is that this provision of the FDCA also prohibits the introduction or delivery for introduction into interstate commerce
of a food to which CBD has been added.
Congress may decide to amend the FDCA to
permit the use of hemp-derived CBD in food. The FDA may also decide to issue regulations or guidance that address the use of hemp-derived
CBD in food or use its enforcement discretion with respect to hemp-derived CBD products. On May 31, 2019, the FDA held a public
hearing, as well as providing a broader opportunity for written public comment, for stakeholders to share their experiences and
challenges with CBD products, including information and views related to product safety. Based on this hearing, any legislative
or regulatory action could take years to implement or finalize and may not include provisions that would enable our company to
produce, market and/or sell hemp beverages that contain hemp-derived CBD. We risk becoming subject to adverse publicity and costly
federal enforcement actions should we decide to produce, market and/or sell beverages infused with hemp-derived CBD in the United
States. We may be required to expend significant resources in defending our company from such actions which could adversely affect
our business and results of operations and divert the attention of management. We may also incur the risk of sustaining considerable
damage to our reputation and brand should we become party to federal enforcement actions resulting from the production, marketing
or sale of hemp-derived CBD infused beverages.
Accordingly, if Congress amended federal
laws or FDA issued regulations or guidance permitting the use of hemp-derived CBD in food or announcing the agency’s decision
to use its enforcement discretion with respect to hemp-derived CBD products, we and our suppliers and vendors would be required
to implement significant enterprise risk management measures to ensure that there is no commingling of CBD derived from marihuana,
as “marihuana” is defined in the federal Controlled Substances Act, with any future commercial supply of hemp-derived
CBD that is used to produce our products.
The FDA could force the removal of our
products from the U.S. market.
The FDA has broad authority over the regulation
of our products. The FDA could, among other things, force us to remove our products from the U.S. market, levy fines or change
their regulations on advertising. Any adverse action by the FDA could have a material adverse impact on our business.
Government reviews, inquiries, investigations,
and actions could harm our business or reputation.
As our product portfolio evolves, the regulatory
environment with regard to our business is also evolving. Government officials often exercise broad discretion in deciding how
to interpret and apply applicable laws or regulations. We may in the future receive formal and informal inquiries from various
governmental regulatory authorities, as well as self-regulatory organizations or consumer protection watchdog groups, about our
business and compliance with local laws, regulations, or standards. Any determination that our products, operations or activities,
or the activities of our employees, contractors or agents, are not in compliance with existing laws, regulations or standards,
could adversely affect our business in a number of ways. Even if such an inquiry does not result in the imposition of fines, interruptions
to our business, loss of suppliers or other third-party relationships, terminations of necessary licenses and permits, or similar
direct results, the existence of the inquiry alone could potentially create negative publicity that could harm our business and/or
reputation.
Risks Related to Our Intellectual
Property
If we fail to protect our trademarks
and trade names, then our ability to compete could be negatively affected, which would harm our financial condition and operating
results.
The market for our products depends to
a significant extent upon the goodwill associated with our trademark and trade names. We own, or have licenses to use, the material
trademark and trade name rights used in connection with the packaging, marketing and distribution of our products in the markets
where those products are sold. Therefore, trademark and trade name protection is important to our business. Although our primary
trademark iMetabolic® is registered in the United States, we may not be successful in asserting trademark
or trade name protection in foreign countries. In addition, the laws of certain foreign countries may not protect our intellectual
property rights to the same extent as the laws of the United States. The loss or infringement of our trademarks or trade names
could impair the goodwill associated with our brands and harm our reputation, which would harm our financial condition and operating
results.
We permit the limited use of our trademarks
by our third-party distributors to assist them in the marketing of our products. It is possible that doing so may increase the
risk of unauthorized use or misuse of our trademarks in markets where their registration status differs from that asserted by our
independent distributors, or they may be used in association with claims or products in a manner not permitted under applicable
laws and regulations. Were this to occur it is possible that this could diminish the value of these marks or otherwise impair our
further use of these marks.
It is difficult and costly to protect
our intellectual property.
Our commercial success will depend in part
on obtaining and maintaining trademark protection and trade secret/know-how protection of our products and brands, as well as successfully
defending that intellectual property against third-party challenges. We will only be able to protect our intellectual property
related to our trademarks and brands to the extent that we have rights under valid and enforceable trademarks, know-how or trade
secrets that cover our products and brands. Changes in either the trademark laws or in interpretations of trademark and laws in
the U.S. and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of
claims that may be allowed or enforced in our issued trademarks. The degree of future protection for our proprietary rights is
uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or
keep our competitive advantage.
We may face intellectual property infringement
claims that could be time-consuming and costly to defend, and could result in our loss of significant rights and the assessment
of treble damages.
From time to time we may face intellectual
property claims from third parties. Some of these claims may lead to litigation. The outcome of any such litigation can never be
guaranteed, and an adverse outcome could affect us negatively. For example, were a third party to succeed on an infringement claim
against us, we may be required to pay substantial damages (including up to treble damages if such infringement were found to be
willful). In addition, we could face an injunction, barring us from conducting the allegedly infringing activity. The outcome of
the litigation could require us to enter into a license agreement which may not be under acceptable, commercially reasonable, or
practical terms or we may be precluded from obtaining a license at all. It is also possible that an adverse finding of infringement
against us may require us to dedicate substantial resources and time in developing non-infringing alternatives, which may or may
not be possible.
Finally, we may initiate claims to assert
or defend our own intellectual property against third parties. Any intellectual property litigation, irrespective of whether we
are the plaintiff or the defendant, and regardless of the outcome, is expensive and time-consuming, and could divert our management’s
attention from our business and negatively affect our operating results or financial condition.
We may be subject to claims by third
parties asserting that our employees or our company has misappropriated their intellectual property, or claiming ownership of what
we regard as our own intellectual property.
Although we try to ensure that our company,
our employees, and independent contractors (suppliers/vendors/distributors) do not use the proprietary information or know-how
of others in their work for us, we may be subject to claims that our company, our employees, or independent contractors (suppliers/vendors/distributors)
have used or disclosed intellectual property in violation of others’ rights. These claims may cover a range of matters, such
as challenges to our trademarks, as well as claims that our employees or independent contractors are using trade secrets or other
proprietary information of any such employee’s former employer or independent contractors. As a result, we may be forced
to bring claims against third parties, or defend claims they may bring against us, to determine the ownership of what we regard
as our intellectual property. If we fail in prosecuting or defending any such claims, in addition to paying monetary damages, we
may lose valuable intellectual property rights or personnel. Even if we are successful in prosecuting or defending against such
claims, litigation could result in substantial costs and be a distraction to management.
Risk Related to Our Stock
Because we can issue additional shares
of common stock, our stockholders may experience dilution in the future.
We are authorized to issue up to
200,000,000 shares of common stock and 10,000,000 shares of preferred stock, of which 171,459,556 shares of common stock are
issued and outstanding as of March 11, 2020. Our board of directors has the authority to cause us to issue additional shares of
common stock and preferred stock, and to determine the rights, preferences and privileges of shares of our preferred stock,
without consent of our stockholders. Consequently, the stockholders may experience more dilution in their ownership of our
stock in the future.
Trading on the OTC Pinksheets stock
market may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders
to resell their shares.
Our common stock is quoted on the OTC Pinksheets
stock market operated by the OTC Markets Group with the trading symbol “UPDC”. Trading in stock quoted on OTC Pinksheets
is often characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations
or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance.
Moreover, trading of securities on OTC Pinksheets is often more sporadic than the trading of securities listed on a stock exchange
like the NASDAQ or the NYSE. Accordingly, stockholders may have difficulty reselling any of our shares.
Our shares of common stock may be very
thinly traded, or not at all, the price may not reflect our values and there can be no assurance that there will be an active market
for our shares of common stock either now or in the futures.
Shares of our common stock may be very
thinly traded in the future, and the price, if traded, may not reflect our value. There can be no assurance that there will
be an active market for our shares of common stock either now or in the future. The market liquidity will be dependent 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 it at a price that reflects the value of the business. If a more active market
should develop, the price may be highly volatile. Because there may be a low price for our shares of common stock, many brokerage
firms may not be willing to effect transactions in the securities. Even if an investor finds a broker willing to affect a
transaction in the shares of our common stock, the combination of brokerage commissions, transfer fees, taxes, if any, and any
other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of such shares
of common stock as collateral for any loans.
Sales of our currently issued and outstanding
stock may become freely tradeable pursuant to Rule 144 and may dilute the market for your shares and have a depressive effect on
the price of the shares of our common stock.
Certain of our issued and outstanding shares
of common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act. As restricted
shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or
other applicable exemptions from registration under the Securities Act and as required under applicable state securities laws.
Rule 144 provides in essence that an “affiliated” person, such as our management, who have held
our restricted securities for a period of at least one year from the date of this Form 8-K filing, may, under certain conditions,
sell every three months in brokerage transactions, a number of shares that does not exceed the greater of 1% of a company’s
outstanding shares of common stock. There is no limit on the amount of restricted securities that may be sold by a non-affiliate
after the restricted securities have been held by the owner for a period of one year from the date of this Form 8-K filing. A
sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registrations
of our shares of common stock, may have a depressive effect upon the price of our shares of common stock in any active market that
may develop.
The market for penny stocks has experienced
numerous frauds and abuses which could adversely impact investors in our stock.
We believe that the market for penny stocks
has suffered from patterns of fraud and abuse. Such patterns include:
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Control of the market for the security by one or a few broker-dealers that are often related to
the promoter or issuer;
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Manipulation of prices through prearranged matching of purchases and sales and false and misleading
press releases;
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“Boiler room” practices involving high pressure sales tactics and unrealistic price
projections by inexperienced salespersons;
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Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
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Wholesale dumping of the same securities by promoters and broker-dealers after prices have been
manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
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We believe that many of these abuses have
occurred with respect to the promotion of low-priced stock companies that lacked experienced management, adequate financial resources,
an adequate business plan and/or marketable and successful business or product.
A decline in the price of our common
stock could affect our ability to raise further working capital and adversely impact our ability to continue operations, and we
may go out of business.
A prolonged decline in the price of our
common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital.
Because we plan to acquire a significant portion of the funds we need in order to conduct our planned operations through the sale
of equity securities, a decline in the price of our common stock could be detrimental to our liquidity and our operations because
the decline may cause investors not to choose to invest in our stock. If we are unable to raise the funds we require for all our
planned operations, we may be forced to reallocate funds from other planned uses and may suffer a significant negative effect on
our business plan and operations, including our ability to develop new products and continue our current operations. As a result,
our business may suffer, and not be successful and we may go out of business. We also might not be able to meet our financial obligations
if we cannot raise enough funds through the sale of our equity securities and we may be forced to go out of business.
Our stock is a penny stock. Trading
of our stock may be restricted by the SEC’s penny stock regulations, which may limit a stockholder’s ability to buy
and sell our stock.
Our stock is a penny stock. The Securities
and Exchange Commission (“SEC”) has adopted Rule 15g-9 which generally defines “penny stock” to be any
equity security that has a market price (as defined in Rule 15g-9) less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales
practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”.
The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals
with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for
the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing
the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer
and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special
written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written
agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the
secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the
ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit
the marketability of our common stock.
FINRA sales practice requirements may
also limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock”
rules promulgated by the SEC, the Financial Industry Regulatory Authority (“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 stock, which may limit your ability to buy and sell our stock.
We do not intend to pay any cash dividends
on our shares of common stock in the near future, and our stockholders will not be able to receive a return on their shares unless
they sell them.
We intend to retain any future earnings
to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in
the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors,
and will depend upon, among other things, the results of operations, cash flows and financial condition, operating and capital
requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will
be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend. Unless we pay dividends,
our stockholders will not be able to receive a return on their shares unless they sell them.
We may incur significant costs to ensure
compliance with United States corporate governance and accounting requirements.
We may incur significant costs associated
with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including
requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the Securities and Exchange Commission. We expect
all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some
activities more time consuming and costly. We also expect that these applicable rules and regulations may make it more difficult
and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult
for us to attract and retain qualified individuals to serve on our Board of Directors or as executive officers. We are currently
evaluating and monitoring developments with respect to these newly applicable rules, and we cannot predict or estimate the amount
of additional costs we may incur or the timing of such costs.
We may not be able to meet the accelerated
filing and internal control reporting requirements imposed by the Securities and Exchange Commission resulting in a possible decline
in the price of our common stock and our inability to obtain future financing.
As directed by Section 404 of the Sarbanes-Oxley
Act, the Securities and Exchange Commission adopted rules requiring each public company to include a report of management on the
company’s internal controls over financial reporting in its annual reports. In addition, the independent registered
public accounting firm auditing a company’s financial statements must also attest to and report on management’s assessment
of the effectiveness of the company’s internal controls over financial reporting as well as the operating effectiveness of
the company’s internal controls.
While we expect to expend significant resources
in developing the necessary documentation and testing procedures required by Section 404 of the Sarbanes-Oxley Act, there is a
risk that we may not be able to comply timely with all of the requirements imposed by this rule. In the event that we are
unable to receive a positive attestation from our independent registered public accounting firm with respect to our internal controls,
investors and others may lose confidence in the reliability of our financial statements and our stock price and ability to obtain
equity or debt financing as needed could suffer.
In addition, in the event that our independent
registered public accounting firm is unable to rely on our internal controls in connection with its audit of our financial statements,
and in the further event that it is unable to devise alternative procedures in order to satisfy itself as to the material accuracy
of our financial statements and related disclosures, it is possible that we would be unable to file our Annual Report on Form 10-K
with the Securities and Exchange Commission, which could also adversely affect the market price of our common stock and our ability
to secure additional financing as needed.
Our articles of incorporation provide
for indemnification of officers and directors at our expense and limit 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 applicable
Nevada law provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against
attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association
with or activities on our behalf. We will also bear the expenses of such litigation for any of our directors, officers, employees,
or agents, upon such person’s written promise to repay us if it is ultimately determined that any such person shall not have
been entitled to indemnification. This indemnification policy could result in substantial expenditures by us which we will be unable
to recoup.
We have been advised that, in the opinion
of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the
Securities Act of 1933 (the “Securities Act”) and is, therefore, unenforceable. In the event that a claim for
indemnification for liabilities arising under federal securities laws, other than the payment by us of expenses incurred or paid
by a director, officer or controlling person in the successful defense of any action, suit or proceeding, is asserted by a director,
officer or controlling person in connection with the securities being registered, we will (unless in the opinion of our counsel,
the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction, the question whether indemnification
by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The legal process relating to this matter if it were to occur is likely to be very costly and may result in us receiving negative
publicity, either of which factors is likely to materially reduce the market and price for our shares, if such a market
ever develop.
Our board of directors has the authority,
without stockholder approval, to issue shares of “blank check” preferred stock with terms that may not be viewed as
beneficial to common stockholders, and which may adversely affect common stockholders.
Our articles of incorporation allow us
to issue shares of preferred stock without any vote by our stockholders. Our Board of Directors has the authority to fix and determine
the relative rights and preferences of preferred stock. Our Board of Directors also has the authority to issue preferred stock
without further stockholder approval. As a result, our Board of Directors could authorize the issuance of preferred stock that
would grant to holders the preferred right to vote on decisions submitted for a vote of the stockholders, to a priority on distribution
of our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common
stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock, and
similar rights and priorities over our common stock.