Notes
to Consolidated Financial Statements
Note 1 – Organization and
Significant Accounting Policies
Nature
of Business
New
You, Inc., formerly known as The Radiant Creations Group, Inc. (the “Company”) was incorporated in Nevada on December 29,
2005. From inception, the Company's principal business activity was the acquisition and exploration of mineral resources. On June 20,
2013, following a change of control and subsequent acquisition of an exclusive license agreement, the Company changed its principal business
to the development and marketing of cosmetics and over-the-counter personal enhancement products and devices. After a change in control
on July 11, 2018, the Company changed its principal business to selling cannabidiol (“CBD”) hemp oil-based products through
independent business owners (called “Brand Partners”).
The Company,
through its wholly owned subsidiary New You LLC, markets and sells its products through a multi-level marketing sales opportunity.
Basis
of Presentation
The accompanying
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”)
to reflect the accounts and operations of the Company.
On
January 9, 2019, the Company completed a reverse recapitalization (“Recapitalization”) with New You LLC, a privately held
Wyoming limited liability company, in accordance with the terms of a share exchange agreement (“Share Exchange Agreement”).
Pursuant to the Share Exchange Agreement, the Company issued 15,974,558 common shares in exchange for one hundred percent (100%) of the
outstanding units of New You LLC (11,450 units), with New You LLC becoming a wholly-owned operating subsidiary of the Company. The transaction
was accounted for as a reverse recapitalization because the Company was a shell company prior to the transaction. For accounting purposes,
New You LLC is considered to have obtained the net monetary assets of the Company in exchange for equity. Upon the consummation of the
Recapitalization, the historical financial statements of New You LLC became the consolidated company’s historical financial statements.
Accordingly, these financial statements reflect the financial position and operations of New You LLC, except that the capital structure
of New You LLC has been adjusted based on the ratio of common shares issued and units transferred in accordance with the Share Exchange
Agreement.
Risks and Uncertainties
In March 2020, the World Health Organization
declared the outbreak of a novel coronavirus (COVID-19) as a pandemic which continues to spread throughout the United States. We are currently
negatively impacted through a reduction in sales by the outbreak of COVID-19 and the related business and travel restrictions and changes
to behavior intended to reduce its spread, and continue to monitor its impact on operations, financial position, cash flows, customer
purchasing trends, and the industry in general, in addition to the impact on our employees. We have concluded that while it is reasonably
possible that the virus could continue to have a negative impact on the results of operations, the specific impact is not readily determinable
as of the date of these financial statements. The financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s
significant estimates include estimates for future charge-backs, allowance for slow moving or obsolete inventory, stock-based compensation
expense, and the fair value of the derivative liabilities.
Financial Instruments
The Company’s balance sheets include the following
financial instruments: cash, accounts payable, accrued expenses, notes payable and payables to a stockholder. The carrying amounts of
current assets and current liabilities approximate their fair value because of the relatively short period of time between the origination
of these instruments and their expected realization. The carrying values of the notes payable and amounts due to stockholder approximates
fair value based on borrowing rates currently available to the Company for instruments with similar terms and remaining maturities.
FASB Accounting Standards Codification (ASC) topic,
“Fair Value Measurements and Disclosures”, defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market
participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s
own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable
inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the
fair value hierarchy are described below:
Level 1 - Unadjusted quoted
prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities
Level 2 - Inputs other than
quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted
prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that
are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that
are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 - Inputs
that are both significant to the fair value measurement and unobservable.
Fair value estimates discussed herein are based upon
certain market assumptions and pertinent information available to management as of December 31, 2020.
Derivative Liabilities
The Company assessed the classification of its derivative
financial instruments as of December 31, 2020, which consist of convertible instruments, and determined that such derivatives meet the
criteria for liability classification under ASC 815.
ASC 815 generally provides three criteria that, if
met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial
instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative
instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument
that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable
generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with
the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815.
Beneficial Conversion Features
ASC 470-20 applies to convertible securities
with beneficial conversion features that must be settled in stock and to those that give the issuer a choice in settling the obligation
in either stock or cash. ASC 470-20 requires that the beneficial conversion feature should be valued at the commitment date as the difference
between the conversion price and the fair market value of the common stock into which the security is convertible, multiplied by the number
of shares into which the security is convertible. This amount is recorded as a debt discount and amortized over the life of the debt.
ASC 470-20 further limits this amount to the proceeds allocated to the convertible instrument.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original term of three months or less to be cash equivalents. As of December 31,
2020 and 2019, the Company had no cash equivalents.
Credit
Card Receivables
Credit
card receivable consists of only the amount due from the credit card processing companies. There is no need for an allowance for doubtful
accounts, since the system and processor make sure that the transaction is successful prior to the sale being finalized. Accordingly,
no allowance was recorded as of December 31, 2020 or 2019.
Inventory
Inventory
consists of finished goods and is valued at the lower of cost or net realizable value. Cost is determined using the first in first out
(FIFO) method. Provision for potentially obsolete or slow-moving inventory is made based on management analysis or inventory levels and
future sales forecasts.
Prepaid
Expenses
Prepaid
expenses consist of various payments that the Company has made in advance for goods or services to be received in the future. These prepaid
expenses primarily consist of deposits on inventory yet to be delivered or shipped.
Property
and Equipment
Property
and equipment are stated at cost, net of depreciation provided by use of a straight-line method over the estimated useful lives of the
assets, which is five years for vehicles and seven years for furniture and fixtures. The Company reviews property and equipment for potential
impairment whenever events or changes in circumstances indicate that the carrying amounts of assets may not be recoverable.
Impairment
of Long-Lived Assets
We
evaluate the recoverability of long-lived assets in accordance with authoritative guidance on accounting for the impairment or disposal
of long-lived assets. We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying
value of these assets may not be recoverable. Such impairment is recognized in the event the net book value of such assets exceeds their
fair value. No impairment of long-lived assets occurred during the years ended December 31, 2020 and 2019.
Basic
and Diluted Net Loss Per Share
Basic
net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common
shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing
the net loss attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period
determined using the treasury-stock method. For purposes of this calculation, the Company currently does not have any common share equivalents;
therefore, its basic and diluted net loss per share calculations is the same.
The following
table presents the computation of basic and diluted net loss per common share:
|
|
2020
|
|
2019
|
Historical Net loss per share
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(5,046,711
|
)
|
|
|
(1,692,298
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
36,756,792
|
|
|
|
27,514,330
|
|
Less: Restricted weighted-average shares
|
|
|
(2,275,826
|
)
|
|
|
(1,171,194
|
)
|
Denominator for basic and diluted net loss per share
|
|
|
34,480,966
|
|
|
|
26,343,136
|
|
Basic and diluted net loss per share
|
|
$
|
(0.15
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
Potentially dilutive
securities that are not included in the calculation of diluted net loss per share because their effect is anti-dilutive are as follows
(in common equivalent shares):
|
|
2020
|
|
2019
|
Restricted Stock
|
|
|
3,343,064
|
|
|
|
5,151,000
|
Convertible Notes
|
|
|
4,097,104
|
|
|
|
—
|
Revenue
Recognition
Revenue
is recognized in accordance with ASC 606, Contracts with Customers, by analyzing exchanges with the Company’s customers and Brand
Partners using a five-step analysis that includes identifying performance obligations in the contract, estimating the amount of variable
consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
The
Company recognizes revenue when the customer obtains control of the promised good and all performance obligations are met. Revenue is
recognized at an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those services.
The
Company records sales of finished products once the customer or Brand Partner places and pays for the order and the product is shipped.
Control is considered transferred when title and risk of loss have transferred to the customer, which is upon shipment of the product.
The Company treats shipping expenses as costs to fulfill a contract, so that revenue is recognized gross of shipping expenses. The Company
recognizes revenue net of sales taxes.
The
Company and its Brand Partners agree to provide customers with a 100% satisfaction guaranteed policy that allows the customer sixty days
from the sales transaction to return the product and receive a 100% refund, and one year for a Brand Partner to get a 90% refund, as long
as the product remains in saleable condition and the Brand Partner or the Company have not cancelled the Brand Partner agreement. The
Company records an estimate for provisions of returns and other adjustments for each shipment, which is netted with gross sales. The Company
accounts for such provisions during the same period in which the related revenues are earned. The Company has determined that the population
of contracts with the Company’s customers and Brand Partners tends to be homogenous, so that review of the contracts and estimate
of various revenue related adjustments can be applied to the entire population. The Company had customer returns of $63,272 for the year
ended December 31, 2020 and $79,090 for the year ended December 31, 2019. The Company has not recorded a reserve for returns at December
31, 2020, or 2019 since it does not believe such returns will be material.
As
of December 31, 2020, the Company did not have any in-process or prepaid sales orders or transactions that would require the recognition
of a contract liability.
Cost
of Revenue
Amounts
recorded as cost of revenue relate to direct product costs. Such costs are recorded when the associated revenue is recognized. Our cost
of revenue consists primarily of the cost of product, and the cost of product samples.
Commission
Expense and Contract Acquisition Costs
The
Company markets and sells its products through a multi-level marketing sales platform. Commissions are earned on product sales to Brand
Partners and customers at a rate of 10% for every transaction plus a specified spread on recurring sales. Brand Partners earn a 5% commission
on sales by other team members at lower levels up to nine levels below the Brand Partner. Brand Partners can earn an additional
bonus for customer sales and team sales. The team bonus is $400 for each time their team bonus volume reaches a certain amount in a 30-day
period. Brand Partners can also earn an initial bonus for qualifying customer purchases in the Brand Partners’ first 30 days of
20% of the transaction value.
The
Company treats commission payments as costs to obtain a contract in accordance with ASC 340, “Other Assets and Deferred Costs.”
Commissions are accrued upon shipment of the product to either the Brand Partner or the customer.
Advertising
Expenses
The
Company expenses advertising costs as incurred in accordance with ASC 720-35, “Other Expenses – Advertising Cost.” Advertising
expenses totaled $12,385 for the year ended December 31, 2020 and $12,626 for the year ended December 31, 2019.
Income
Taxes
The
Company provides for income taxes utilizing the asset and liability method of accounting. Under this method, deferred income taxes are
recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial
reporting amounts at each balance sheet date, based on enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. If it is determined that it is more likely than not that future tax benefits associated
with a deferred tax asset will not be realized, a valuation allowance is provided. The effect on deferred tax assets and liabilities of
a change in the tax rates is recognized in the statements of operations as an adjustment to income tax expense in the period that includes
the enactment date. Utilization of the net operating loss carry forwards and credits may be subject to a substantial annual limitation
due to ownership change limitations provided by Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions.
ASC
Topic 740-10, Income Taxes, clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements
in accordance with GAAP. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions
that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in
which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized
in the first subsequent financial reporting period in which that threshold is no longer met.
The
Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.
Stock
Compensation Expense
ASC
718, Compensation – Stock Compensation, prescribes accounting and reporting standards for all share-based payment transactions.
Transactions include incurring liabilities, or issuing or offering to issue shares, options, and other equity instruments such as employee
stock ownership plans and stock appreciation rights. Share-based payments to employees and non-employees, including grants of employee
stock options, are recognized as compensation expense in the financial statements based on their fair values at the grant date. That expense
is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite
service period (usually the vesting period).
The
Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50,
Equity – Based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees is based on the fair
grant date FV of equity instruments. The fair value of the share-based payment transaction is determined at the earlier of performance
commitment date or performance completion date. Share-based compensation expense for the year ended December 31, 2020 and 2019 was $2,787,568
and $677,604, respectively.
Recently
Issued Accounting Pronouncements
FASB
ASU No. 2019-12 Income Taxes - In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting
for Income Taxes, as part of its initiative to reduce complexity in the accounting standards. The standard eliminates certain exceptions
related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition
of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting
for income taxes. The standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal
years. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have upon its financial position
and results of operations, if any.
ASU
2020-06: In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an
Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under
current GAAP. The ASU also removes certain settlement conditions that are required for equity contracts to qualify for the derivative
scope exception and simplifies the diluted earnings per share calculation in certain areas. The amendments in this ASU are effective for
annual and interim periods beginning after December 15, 2023, although early adoption is permitted. The Company is in the process of evaluating
the impact of this new guidance on its financial statements.
Note 2 – Going Concern
We
incurred a net loss of $5,046,711 for the year ended December 31, 2020, of
which $2,787,568 was related to non-cash stock based compensation, and had an accumulated deficit of $7,167,015 . At December
31, 2020, we had a cash balance of approximately $45,102, compared to a cash balance of $1,125
at December 31, 2019. At December 31, 2020, we had a working capital deficit of $2,460,718,
compared to a working capital deficit of $1,047,273 at December 31, 2019.
We
have not been able to generate sufficient cash from operating activities to fund our ongoing operations. We will be required to raise
additional funds through public or private financing, additional collaborative relationships or other arrangements until we are able to
raise revenues to a point of positive cash flow. We are evaluating various options to further reduce our cash requirements to operate
at a reduced rate, as well as options to raise additional funds, including obtaining loans and selling common stock. There is no guarantee
that we will be able to generate enough revenue and/or raise capital to support operations.
Based on the
above factors, substantial doubt exists about our ability to continue as a going concern for one year from the issuance of these financial
statements.
Note 3 – Concentrations of Business and
Credit Risk
The
Company at times maintains balances in various operating accounts in excess of federally insured limits.
Since the Company
sells its products to a large number of customers, there is no receivable or revenue concentration from customers. However, as of December
31, 2020 and 2019, one credit card processor accounted for 100% of credit card receivables.
Note 4 – Equity
On
January 9, 2019, the Company purchased one hundred percent (100%) of the outstanding units of New You LLC. Pursuant to the terms and conditions
of the Share Exchange Agreement, the Company issued 15,974,558 common shares in exchange for one hundred percent (100%) of New You LLC
outstanding units. As a result of the Share Exchange Agreement, New You LLC became a wholly owned subsidiary of the Company. New You LLC
began operations in August 2018.
On
March 8, 2019, pursuant to stockholder consent, our Board of Directors authorized an amendment (the "Amendment") to our Certificate
of Incorporation, as amended, to (i) change the name of the Company from The Radiant Creations Group, Inc. to New You, Inc. and (ii) effect
a reverse stock split of the issued and outstanding shares of our common stock, par value $0.00001, on a 1 for 50 basis (the "Reverse
Stock Split"). We filed the Amendment with the Nevada Secretary of State reflecting the name change on March 27, 2019. On April 29,
2019, the Financial Industry Regulatory Authority, Inc. notified us that the Name Change and Reverse Stock Split would take effect on
April 30, 2019 (the "Effective Date"). On the Effective Date, each holder of common stock received 1 share of our common stock
for each 50 shares of our common stock they owned immediately prior to the Reverse Stock Split. We did not issue fractional shares in
connection with the Reverse Stock Split. Fractional shares were rounded up to the nearest whole share. In addition, on the Effective Date
the Company’s trading symbol changed to “RCGPD” for a period of 20 business days, after which the "D" was
removed from the Company’s trading symbol and began trading under new trading symbol “NWYU.” Unless otherwise indicated,
the information in these unaudited condensed consolidated financial statements gives effect to the 1-for-50 reverse stock split of the
Company’s common stock, par value $0.00001 per share and name change from The Radiant
Creations Group, Inc. to New You, Inc., effected on April 30, 2019.
Stock Sales
2020
During the year
ended December 31, 2020, the Company issued 90,000 common shares which resulted in raising $45,000 in additional capital that was received
in 2019.
2019
During the year
ended December 31, 2019, the Company issued 652,450 common shares which resulted in raising $316,300 in additional capital and two investors
paid a total of $45,000 for 90,000 common shares that were not issued as of December 31, 2019.
2020 Restricted
Stock Grants
During the year
ended December 31, 2020, the Company granted 6,111,130 common shares (of which 770,000 were cancelled in the same period) valued at $3,055,565
for employees and several consultants for services that will be provided in the future and will vest over the course of twenty-four months
or twelve months based on the specific contract. The Company estimates the fair value of the shares at $0.50 per share based on the price
at which the Company issued common shares for cash in 2019 and not based on the amount that shares were trading for on the OTC “Pink”
market since shares were thinly traded on the market when the equity instruments were granted.
The table below
summarizes the activity of the restricted stock during 2020:
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value per Share
|
|
Non-vested as of December 31, 2019
|
|
|
|
3,754,750
|
|
|
$
|
—
|
|
|
Granted
|
|
|
|
6,111,130
|
|
|
$
|
0.50
|
|
|
Vested
|
|
|
|
(5,752,816
|
)
|
|
$
|
0.50
|
|
|
Forfeited/Cancelled
|
|
|
|
(770,000
|
)
|
|
$
|
0.50
|
|
|
Non-vested as of December 31, 2020
|
|
|
|
3,343,064
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year
ended December 31, 2020, the compensation cost that has been charged to Stock Compensation Expense is $2,787,568. No portion of the total
compensation cost was capitalized. The unrecognized compensation costs as of December 31, 2020 and 2019 is $1,766,619 and $1,902,896,
respectively, which will be recognized over 0.8 years and one year respectively. The company recognizes the cost of these stocks using
a straight-line method and forfeitures are recognized as they occur.
Note 5 – Commitments and Contingencies
Operating
Lease Commitments
A lease provides
the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. Right of use (ROU)
assets represent the Company's right to use an underlying asset for the lease term and operating lease liabilities represent the Company's
obligation to make lease payments arising from the lease. The Company determines if an arrangement is a lease at inception. ROU assets
and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Most operating
leases contain renewal options that provide for rent increases based on prevailing market conditions. The lease term used to calculate
the ROU asset includes renewal periods or periods subject to termination when it is reasonably certain that the Company will lease the
assets in such periods.
The discount
rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that
is not readily determinable, the estimated incremental secured borrowing rate. ROU assets include any lease payments required to be made
prior to commencement and exclude lease incentives. Both ROU assets and lease liabilities exclude variable payments not based on an index
or rate, which are treated as period costs. The Company's lease agreements do not contain significant residual value guarantees, restrictions
or covenants.
The Company leases
a warehouse facility under a lease agreement that expires July 31, 2021. The Company does not have any significant capital leases.
The components
of total lease costs are as follows:
|
|
Year
Ended
December
31, 2020
|
Operating lease cost
|
|
$
|
74,451
|
|
Total lease cost
|
|
$
|
74,451
|
|
|
|
|
|
|
Cash paid for
amounts included in operating lease liabilities was $39,746 for the year ended December 31, 2020. The table below presents total
operating lease ROU assets and lease liabilities as of December 31, 2020:
Year Ended
December 31, 2020
|
Operating lease ROU assets
|
|
$
|
42,380
|
|
Operating lease liabilities
|
|
$
|
82,281
|
|
The table below
presents the maturities of operating lease liabilities as of December 31,
|
2021
|
|
$
|
83,332
|
|
2022
|
|
$
|
—
|
|
Total Lease Payments
|
|
$
|
83,332
|
|
Less: Discount
|
|
$
|
(1,051
|
)
|
Operating Lease Liability
|
|
$
|
82,281
|
|
|
|
Year Ended
December 31, 2020
|
Weighted average remaining lease term (years)
|
|
|
0.58
|
|
Weighted average discount rate
|
|
|
7
|
%
|
Note 6 - Litigation and Claims
The
Company may be involved in lawsuits and claims arising in the ordinary course of business from time to time. The Company reviews any
such legal proceedings and claims on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure
decisions. The Company establishes accruals for those contingencies where the incurrence of a loss is probable and can be reasonably
estimated, and it discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued,
if such disclosure is necessary for the Company’s financial statements not to be misleading. To estimate whether a loss
contingency should be accrued by a charge to income, the Company evaluates, among other factors, the degree of probability of an
unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. The Company does not record liabilities
when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated. Based upon
present information, the Company determined that there were no matters that neither required an accrual as of December 31, 2020 or
2019, nor were there any asserted or unasserted material claims for which material losses are reasonably possible.
Note 7 – Related Party Transactions
During the
year December 31, 2020 and 2019, directors and members of management provided loans to the Company or paid for various expenses of the
Company. These loans contained no interest, term or due date. As of December 31, 2020, these loans had a combined balance of $523,658
for the CEO, the President, and two other board members. Total additions to these loans during the year ended December 31, 2020 were cash
loan proceeds of $61,100 and deferred compensation of $270,000 transferred from accounts payable to related parties to related party debt.
As of December 31, 2019, these loans had a combined balance of $497,147 for the CEO, the President, and two other board members.
Total additions for the year ended December 31, 2019 were $159,975.
As of December
31, 2020 and December 31, 2019, we also owed $3,125 and $78,105 to Carlsbad Naturals, LLC (included in accounts payable to related parties),
which is a principal stockholder of New You, Inc. and is owned by a principal stockholder of New You, Inc., for inventory purchases. During
the years ended December 31, 2020 and December 31, 2019, we made purchases of $183,929 and $238,588, respectively, from Carlsbad Naturals,
LLC. As of December 31, 2020 and December 31, 2019, we owed $27,500 and $22,500, respectively, for consulting payments to a relative of
the CEO.
During the
year ended December 31, 2020, the Company received loan proceeds of $100,000 from a related party pursuant to a promissory note with a
maturity date of April 7, 2020 and interest of $5,000 per month. If the Company defaults on the loan, the note’s terms require the
Company to issue default shares of 100,000 each time the Company is late on its interest payment, 250,000 shares if it is late on principal
repayment, and 100,000 shares each subsequent month that repayment has not occurred. The amount of the foregoing shares is doubled if
the stock price falls below $1.00, and may also increase significantly if the Company’s outstanding common shares exceed 40,000,000.In
addition, the Company will incur a 15% charge each year that repayment has not occurred. The terms also lay out a blanket lien on all
assets of New You, Inc. including all the shares of New You LLC., all the assets of New You LLC and all shares of any acquired companies
in the future as well as all of their assets. Further, the note requires that the full balance be repaid in order for a change in control
to be consummated. During the year ended December 31, 2020, the amount of penalty shares issued was doubled due to the stock price falling
below $1.00. In total, the Company issued a total of 900,000 shares to the related party during the year ended December 31, 2020 per the
agreement: 500,000 shares due to late repayment of the note, and 400,000 shares due to late payment of two months of interest payments.
A total of $75,000 has been repaid, including $25,000 in interest and $50,000 in principal during the year ended December 31, 2020. Interest
payments are now $2,500 per month.
The Company
leases and pays for a warehouse facility where it shares space with Carlsbad Naturals, LLC. In exchange, Carlsbad Naturals, LLC leases
and pays for an office facility where it shares space with the Company. As a result of this arrangement, the Company has recorded rent
expense in the accompanying statements of operations for the lease that it is responsible for paying.
During the
first five months of 2019, along with the months of April, May, June, and July 2020, all credit card receivable payments were processed
through the bank account of one of the founding members due to the frequent bank account changes that were occurring with the Company’s
accounts. All funds received into the founder’s bank account were transferred directly to the Company’s account on a weekly
basis and have been accounted for. Between May 31, 2019 and April 4, 2020 and after July 31, 2020, all credit card receivables were deposited
by the credit card processor directly into the Company’s bank account. The balance due from the related party at December 31, 2020
was $0.
During the
year ended December 31, 2019, the Company received two loans from a board member’s family member in the amount of $100,000 each
for a total of $200,000 which were paid in full prior to year-end. A total of $5,000 was paid in interest for the loans during the year
ended December 31, 2019.
The Company
leases and pays for a warehouse facility where it shares space with Carlsbad Naturals, LLC. In exchange, Carlsbad Naturals, LLC leases
and pays for an office facility where it shares space with the Company. As a result of this arrangement, the Company has recorded rent
expense in the accompanying statements of operations for the lease that it is responsible for paying.
Note 8
– Notes Payable
In
April 2020, the Company’s subsidiary received a non-interest bearing advance from the Small Business Administration under the Emergency
Injury Disaster Loan program of $10,000. All or a portion of this loan may be forgiven if the Company satisfies certain criteria.
In May, 2020,
the Company’s subsidiary received a Paycheck Protection Program loan in the amount of $103,958. The monthly payments on the note
are deferred for a period of 6 months and the notes bear interest of 1%. Monthly payments of $5,850 will begin on December 21, 2021; however
all or a portion of this loan may be forgiven if the Company satisfies certain criteria as follows:
The Company may apply for forgiveness of the amount due on
this loan in an amount equal to the sum of the following costs incurred during the 8-week period beginning on the date of first disbursement
of this loan:
|
b.
|
Any payment of interest on a covered mortgage obligation (which shall not
include any prepayment of or payment of principal on a covered mortgage obligation)
|
|
c.
|
Any payment on a covered rent obligation
|
|
d.
|
Any covered utility payment
|
The amount of loan forgiveness shall
be calculated (and may be reduced) in accordance with the requirements of the Paycheck Protection Program, including the provisions of
Section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (P.L. 116-136). Not more than 25% of the amount forgiven
can be attributable to non-payroll costs.
In
July 2020, the Company’s subsidiary received a second Paycheck Protection Program loan in the amount of $100,000.The monthly payments
on the note are deferred for a period of 6 months and the notes bear interest of 1%. Monthly payments of $5,628 will begin on January
1, 2021. The proceeds of the requested PPP Loan may be used only for business purposes permitted under the Paycheck Protection
Program, including permitted payroll costs and benefits, interest on business mortgage obligations incurred before February 15, 2020,
rent under a lease entered into before February 15, 2020 and utilities for which service began before February 15, 2020. Loan forgiveness
will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities,
and not more than 25% of the forgiven amount may be for non-payroll costs.
Note 9
– Convertible Debt
As of December 31, 2020, the Company owed $406,000
in principal (before a debt discount of $177,798) and $9,549 in accrued interest (included in accounts payable and accrued expenses) on
its outstanding convertible promissory notes. As of December 31, 2019, the Company did not have any outstanding convertible promissory
notes.
|
|
December 31,
2020
|
|
December 31,
2019
|
Principal
|
|
$
|
406,000
|
|
|
$
|
—
|
|
Debt discount
|
|
|
(177,798
|
)
|
|
|
—
|
|
Total Principal
|
|
$
|
228,202
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Note 1 - During the
year ended December 31, 2020, the Company received loan proceeds of $125,000 pursuant to a promissory note (“First Convertible
Note”), with a maturity date of June 15, 2020 and interest of $4,167 per month. The note’s terms required that the Company
issue 50,000 common shares, and allowed the note holder to convert the note into common shares at a conversion price of $0.50 per share.
This note was not paid off as of December 31, 2020. The Company is still making the agreed upon interest payments of $4,167 per month
and there are no penalties for not paying the note off by its maturity date. As of December 31, 2020, the equivalent number of
common shares the Company would be required to issue to satisfy the Note is 250,000.
Note 2
- On June 17, 2020, the Company received $85,000 in loan proceeds, which is net of $3,000 in debt issuance costs, pursuant to a loan agreement
(“Second Convertible Note”), with a maturity date of June 17, 2021 and an interest rate of 8% per annum from the date of issuance
until maturity date. Any amount of principal or interest on this note which is not paid when due shall bear interest at the rate of 22%
per annum from the due date until the full amount is paid. Upon certain events of default, the Company would be obligated to pay
cash equal to the greater of (i) 150% of the outstanding principal and interest, and (ii) the highest closing price of the Company’s
common stock from the date of first default to the date of payment, multiplied by the number of shares that would be issued if the outstanding
principal and interest were converted at 61% of the lowest closing price in the last 20 trading days prior to the date of payment.
The holder may convert the note to common shares starting 180 days after the issuance date at a conversion price equal to 61% of the lowest
trading price in the last 20 trading days. The Company is required to reserve three (6) times the number of shares necessary for
the issuance of common stock upon conversion. As of December 31, 2020, the Company owed $88,000 in principal and $3,882 in accrued interest
on the note. As of December 31, 2020, the equivalent number of common shares the Company would be required to issue to satisfy the Note
is 1,552,856.
Note
3 - On July 20, 2020, the Company received $40,000 in loan proceeds, which is net of $3,000 in debt issuance costs, pursuant to a
loan agreement (“Third Convertible Note”), with a maturity date of July 20, 2021 and an interest rate of 8% per annum from
the date of issuance until maturity date. Any amount of principal or interest on this note which is not paid when due shall bear interest
at the rate of 22% per annum from the due date until the full amount is paid. Upon certain events of default, the Company would
be obligated to pay cash equal to the greater of (i) 150% of the outstanding principal and interest, and (ii) the highest closing price
of the Company’s common stock from the date of first default to the date of payment, multiplied by the number of shares that would
be issued if the outstanding principal and interest were converted at 61% of the lowest closing price in the last 20 trading days prior
to the date of payment. The holder may convert the note to common shares starting 180 days after
the issuance date at a conversion price equal to 61% of the lowest trading price in the last 20 trading days. The Company is required
to reserve three (6) times the number of shares necessary for the issuance of common stock upon conversion. As of December 31, 2020, the
Company owed $43,000 in principal and $1,574 in accrued interest on the note. As of December 31, 2020, the equivalent number of common
shares the Company would be required to issue to satisfy the Note is 753,314
Note
4 – On November 18, 2020, the Company entered into a Secured Promissory Note (“Fourth Convertible Note”) with a
third party, receiving $150,000 in loan proceeds. The Note matures on May 18, 2021 and accrues interest at 2% per month. The Noteholder
may convert any portion of the debt into shares of common stock of the Company at $0.10 USD per share or 30% discount to the 5 day VWAP
on the day of conversion. In addition to the monthly interest, the Company agreed to transfer 100,000 shares of common stock to the Noteholder.
In the event that Company fails to make any payment of principal and/or interest within ten (10) calendar days of the due date for the
same, then in addition to such payment due, the Company is obligated to pay a late payment charge to the Noteholder in the amount of five
percent (5%) of the delinquent principal and/or interest payment. As of December 31, 2020, the Company owed $150,000 in principal
and $4,093 in accrued interest on the note. As of December 31, 2020, the equivalent number of common shares the Company would be required
to issue to satisfy the Note is 2,839,277.
Note 10
– Beneficial Conversion Feature
ASC 470-20 applies to convertible securities with beneficial
conversion features that must be settled in stock and to those that give the issuer a choice in settling the obligation in either stock
or cash. ASC 470-20 requires that the beneficial conversion feature should be valued at the commitment date at its intrinsic value; that
being the difference between the conversion price and the fair market value of the common stock into which the security is convertible,
multiplied by the number of shares into which the security is convertible. This amount is recorded as a debt discount and amortized over
the life of the debt. ASC 470-20 further limits this amount to the proceeds allocated to the convertible instrument.
The effective conversion prices were compared to the
market prices on the dates of each convertible note and they were deemed to be less than the inception date fair value of the underlying
common stock for the Second Convertible Note. The Company recognized a debt discount as a reduction (contra-liability) to the Second and
Fourth Convertible Notes with an increase to paid in capital. The debt discounts are being amortized over the life of the notes. The
Company recognized financing costs for charges by the lender for original issue discounts and other applicable administrative costs, normally
withheld from proceeds, which are being amortized as finance costs over the life of the loan. As of December 31, 2020 and 2019, the unamortized
beneficial conversion feature associated with our convertible notes was $140,261 and $0, respectively.
Note 11
- Derivatives and Fair Value
The Company assessed its convertible notes for purposes
of determining the associated embedded default derivatives. The Company relied on ASC 820-10-35-37 Fair Value in Financial Instruments
and ASC 815 Accounting for Derivative Instruments and Hedging Activities. The Company uses judgment in determining the fair value
of derivative liabilities at the date of issuance and at every balance sheet thereafter and in determining which valuation method is most
appropriate for the instrument, the expected volatility, the implied risk-free interest rate, as well as the expected dividend rate, if
any.
During the year ended December
31, 2020, the Company had convertible notes payable outstanding in which the conversion rate was variable and undeterminable. The Company
determined that the embedded conversion options met the definition of a derivative. The effective conversion price was compared to the
market price on the date of the note and was deemed to be less than the market value of underlying common stock at the inception of the
note. The Company recognized a debt discount on the notes as a reduction (contra-liability) to the Convertible Notes Payable. The debt
discounts are being amortized over the life of the notes. The Company recognized financing costs for charges by the lender applicable
administrative costs, normally withheld from proceeds, which are being amortized as finance costs over the life of the loan.
Accordingly, the Company recognized
that a derivative liability in connection with such instruments for the year ended December 31, 2020 exists; however, the Company determined
that there was no active market for the Company’s common stock and because of this lack of liquidity and market value, the Company
did not record the derivative liabilities associated with the conversion features in its convertible notes.
The Company is subject to significant
cash penalties in the event that the Company defaults on its convertible notes. The default penalties vary based on the type of default
and range from incurring a default interest rate of 22% to a penalty of 50% of the amount due, to a parity value based on the effective
conversion of the note on the date of payment of the default and the maximum stock value during the period between the default date and
the settlement date. The Company determined that certain of the default provisions should be bifurcated from the debt host and treated
as a liability, since they involve the contingent payment of a substantial premium on the convertible notes. The Company used a Monte
Carlo model that values the embedded default derivatives based on simulating the stock price, the default likelihood, and the default
liability.
Fair Value
ASC 825-10 defines fair value
as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 825-10 also establishes
a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. ASC 825-10 describes three levels of inputs that may be used to measure fair value: Level 1 –
Quoted prices in active markets for identical assets or liabilities; Level 2 – Observable inputs other than
Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities; and Level 3 – Unobservable
inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing
models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires
significant judgment or estimation. The Company’s Level 3 liabilities consist of the derivative liabilities associated with the
convertible notes. At December 31, 2017 and 2016, all of the Company’s derivative liabilities were categorized as Level 3
fair value liabilities. If the inputs used to measure the financial assets and liabilities fall within more than one level described above,
the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Level 3 Valuation Techniques
Financial assets are considered
Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least
one significant model assumption or input is unobservable. Level 3 financial liabilities consist of the derivative liabilities
for which there is no current market for these securities such that the determination of fair value requires significant judgment or
estimation. At the date of the original transaction, we valued the convertible note that contains down round provisions using a
Black-Scholes model, with the assistance of a valuation consultant, for which management understands the methodologies. This model incorporates
transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, as well as assumptions about
future financings, volatility, and holder behavior. ASC 825-10 defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. ASC 825-10 also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC
825-10 describes three levels of inputs that may be used to measure fair value: Level 1 – Quoted prices
in active markets for identical assets or liabilities; Level 2 – Observable inputs other than Level 1 prices,
such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities; and Level 3 – Unobservable inputs that
are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted
cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant
judgment or estimation. The Company’s Level 3 liabilities consist of the derivative liabilities associated with the convertible
notes. At December 31, 2020, all of the Company’s derivative liabilities were categorized as Level 3 fair value liabilities.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization
is based on the lowest level input that is significant to the fair value measurement of the instrument.
Note
|
|
Issue Date
|
|
Maturity Date
|
|
Term Remaining
|
|
Derivative Value at Issuance (Level 3)
|
|
Change in Derivative Value (Level 3)
|
|
Derivative Value at 12/31/20 (Level 3)
|
Second Convertible Note
|
|
6/17/2020
|
|
6/17/2021
|
|
|
.46
|
|
|
$
|
27,103
|
|
|
$
|
798,063
|
|
|
$
|
825,166
|
|
Third Convertible Note
|
|
7/20/2020
|
|
7/20/2021
|
|
|
.55
|
|
|
|
82,563
|
|
|
|
268,358
|
|
|
|
350,921
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
$
|
109,666
|
|
|
$
|
1,066,421
|
|
|
$
|
1,176,087
|
|
Valuation of the default derivative liability involves
subjective judgments and requires forecasting future stock price movement and estimating the probability of default and the amount of
time that passes between the date of default and the date of settlement. The following table summarizes the significant assumptions used
to estimate the fair value of the default liability:
|
|
At issuance
|
|
At 12/31/20
|
Default probability
|
|
|
5% to 30%
|
|
|
|
50%
|
|
Volatility
|
|
|
306.4% to 310.1%
|
|
|
|
357.8% to 363.3%
|
|
Risk free rate
|
|
|
1.62%
|
|
|
|
0.08% to 0.09%
|
|
The Company used a Monte Carlo model that values
the embedded default derivatives based on simulating the stock price, the default likelihood, and the default liability.
Note 12 – Income Taxes
The Company incurred no deferred tax
expense during the years ended December 31, 2020 and 2019. The components of deferred tax assets and liabilities are:
|
|
December 31,
2020
|
|
December 31,
2019
|
|
|
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
558,782
|
|
|
$
|
284,193
|
|
Lease liability
|
|
|
12,503
|
|
|
|
—
|
|
Stock-Based Compensation
|
|
|
969,680
|
|
|
|
189,618
|
|
|
|
|
1,540,965
|
|
|
|
473,811
|
|
Less: valuation allowance
|
|
|
(1,527,314
|
)
|
|
|
(473,529
|
)
|
Total deferred income tax assets
|
|
|
13,651
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Right of use asset
|
|
|
(11,860
|
)
|
|
|
—
|
|
Depreciation and amortization
|
|
|
(1,791
|
)
|
|
|
(282
|
)
|
Total deferred income tax liabilities
|
|
|
(13,651
|
)
|
|
|
(282
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets/(liabilities)
|
|
$
|
—
|
|
|
$
|
—
|
|
For the years ended December 31, 2020
and 2019, a reconciliation of the federal statutory tax rate to the Company's effective tax rate is as follows:
|
|
December 31,
2020
|
|
December 31,
2019
|
U.S. Federal Statutory Income Tax Rate
|
|
$
|
(1,059,641
|
)
|
|
$
|
(355,383
|
)
|
State income tax, net of federal benefit
|
|
|
(352,386
|
)
|
|
|
(117,346
|
)
|
Meals and entertainment
|
|
|
397
|
|
|
|
—
|
|
Non-deductible interest
|
|
|
104,294
|
|
|
|
—
|
|
Mark-to-market on derivative liability
|
|
|
232,887
|
|
|
|
—
|
|
Debt discounts
|
|
|
21,170
|
|
|
|
—
|
|
Other
|
|
|
294
|
|
|
|
—
|
|
|
|
|
(1,052,985
|
)
|
|
|
(472,729
|
)
|
Change in valuation allowance
|
|
|
1,053,785
|
|
|
|
473,529
|
|
Income Tax Expense
|
|
$
|
800
|
|
|
$
|
800
|
|
As
of December 31, 2020, the Company had federal and state net operating loss carryforwards of approximately $1,996,820 and $1,996,820,
respectively. The Company’s federal net operating losses may be carried forward indefinitely, and its state net operating losses will
begin to expire in 2039. Management assesses the available positive and negative evidence to estimate if sufficient future taxable
income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was
the cumulative losses incurred through the period ended December 31, 2020. Such objective evidence limits the ability to consider
other subjective evidence such as our projections for future growth. On the basis of this evaluation, management has determined to
record a full valuation allowance on its deferred tax assets. The amount of the deferred tax asset considered realizable, however,
could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective
negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence
such as our projections for growth.
The Company
is subject to U.S. federal income tax as well as income tax in various state jurisdictions. The Company is currently open to audit under
the statute of limitations by the Internal Revenue Service and various state agencies for the years ended December 31, 2015 through December
31, 2020.
The
Coronavirus Aid, Relief, and Economic Security (CARES) Act, was enacted March 27, 2020. Among the business provisions, the CARES Act provided
for various payroll tax incentives, changes to net operating loss carryback and carryforward rules, business interest expense limitation
increases, and bonus depreciation on qualified improvement property. Additionally, the Consolidated Appropriations Act of 2021 was signed
on December 27, 2020 which provided additional COVID relief provisions for businesses. The Company has evaluated the impact of both the
Acts and has determined that any impact is not material to its financial statements.
Note 13 – Subsequent Events
The Company
has evaluated subsequent events through April 7, 2021, which is the date the financial statements were issued. The Company has determined
that there were no subsequent events which required recognition or disclosure in the financial statements.
On February 23,
2021, the Company issued 70,000 shares of common stock at $0.05 per share with a value of $3,500 were issued as a finder’s fee for
potential debt issuances in the future.
On March 11, 2021, we entered into a Letter of Intent
with ST Brands, Inc., a Wyoming corporation (“ST”). The LOI outlines the terms for a potential merger or share exchange agreement
(the “Potential Acquisition”) under which we will acquire all of the issued and outstanding common stock of ST in exchange
for our issuance, on a pro rata basis to the stockholders of ST, of new shares of our preferred stock having the right to convert to the
cumulative equivalent of ninety percent (90%) of our issued and outstanding share capital. The LOI contemplates that our existing business
and assets will remain and continue under the Company’s legal ownership following the closing of the Potential Acquisition.
During March 2021, the Company issued an aggregate
of 3,725,345 shares of common stock in satisfaction of principal and interest on two convertible notes payable. The Company will record
the issuances at the contract value, at the date of exchange, off-setting the notes payable and accrued interest.
The Potential Acquisition is subject to various conditions
and contingencies, including the satisfactory completion of due diligence by both parties and ST’s ability to furnish audited consolidated
financial statements.