The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of the unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 – Organization and Summary of 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 unaudited condensed consolidated financial
statements include the operations of New You, Inc. and its wholly-owned subsidiary, New You LLC. These unaudited condensed consolidated
financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information and with Article 10 of Securities and Exchange Commission (SEC) Regulation S-X for Interim Reporting.
All intercompany transactions, accounts and profits, if any, have been eliminated in the unaudited condensed consolidated financial statements.
In the opinion of management, all adjustments considered necessary for fair statement have been included.
These unaudited condensed consolidated financial
statements do not include all disclosures required by GAAP. Therefore, these unaudited condensed consolidated financial statements should
be read in conjunction with the more detailed audited financial statements of New You, Inc. for the year ended December 31, 2020, which
are included in the Company’s Annual Report on Form 10-K.
The results for the three months ended March
31, 2021 and 2020 are not necessarily indicative of results to be expected for a full year, any other interim periods, or any future year
or period.
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 U.S. generally accepted accounting principles 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 and allowance for slow moving or obsolete inventory.
Basic
and Diluted Net Loss and Income 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 or income per common share:
|
|
For The Three Months Ended March 31,
|
|
|
|
2021
|
|
|
|
2020
|
|
Historical net loss per share
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(877,500
|
)
|
|
|
(964,736
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
40,780,981
|
|
|
|
33,190,726
|
|
Less: Weighted-average restricted shares
|
|
|
—
|
|
|
|
(5,381,526
|
)
|
Denominator for basic and diluted net loss per share
|
|
|
40,780,981
|
|
|
|
27,809,200
|
|
Basic and diluted net loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities that
are not included in the calculation of diluted net loss or income per share because their effect is anti-dilutive are as follows (in common
equivalent shares):
|
|
For The Three Months Ended March 31,
|
|
|
2021
|
|
2020
|
Restricted Stock
|
|
|
—
|
|
|
|
5,366,538
|
|
Convertible Notes
|
|
|
4,868,029
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
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 has adopted this guidance as of its first quarter ended March 31, 2021. Such adoption
did not have an impact to the Company’s financial position, results of operations, or cash flows.
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 $877,500 for the three months ended March 31, 2021
and had an accumulated deficit of $8,404,515. At March 31, 2021, we had a cash balance of $19,196 and a working capital deficit of
$1,647,715.
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 March
31, 2021 and 2020, one credit card processor accounted for 100% of credit card receivables.
The
Company also made purchases from and has accounts payable to Carlsbad Naturals, LLC as described in Note 10.
Note 4
– Loan Receivable
During
the three months ended March 31, 2021, and prior to an Exchange Agreement entered into on May 3, 2021, the Company loaned $25,000 to ST
Brands. (See Note 12.) The loan is non-interest bearing and payable upon demand. As of March 31, 2021 and December 31, 2020, the balance
was $25,000 and $0, respectively.
Note 5
– Equity
Restricted
Stock Grants
The Company
estimated the fair value of restricted stock grants 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 from August 2019 to March 31, 2021 when the equity instruments were granted. There were no grants of restricted stock to
employees or consultants during the first quarter of 2021.
The table below
summarizes the activity of the restricted stock during the three months ended March 31, 2021:
|
|
Number of Shares
|
|
Weighted Average Fair Value per Share
|
|
Non-vested as of January 1, 2021
|
|
|
|
3,343,064
|
|
|
$
|
0.50
|
|
|
Granted
|
|
|
|
70,000
|
|
|
|
0.50
|
|
|
Vested
|
|
|
|
(3,413,064
|
)
|
|
|
0.50
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
Non-vested as of March 31, 2021
|
|
|
|
—
|
|
|
$
|
0.50
|
|
For the three
months ended March 31, 2021 the compensation costs include $1,801,619 of stock based compensation. No portion of the total compensation
cost was capitalized. The unrecognized compensation costs as of March 31, 2021 is $0. The Company recognized stock based compensation
expense using the straight line method and forfeitures are recognized as they occur. During the three months ended March 31, 2021, the
Company wrote off the balance of unamortized, non-vested restricted stock because the Board modified the terms of the grants to accelerate
vesting. As a result, all outstanding share grants had fully vested as of March 31, 2021.
Note 6 – Commitments and Contingencies
Operating
Lease Commitments
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:
|
|
Three Months Ended
March 31,
2021
|
Operating lease cost
|
|
$
|
18,613
|
|
Total lease cost
|
|
$
|
18,613
|
|
|
|
|
|
|
Cash paid for
amounts included in operating lease liabilities was $12,138 for the three months ended March 31, 2021. The table below presents
total operating lease ROU assets and lease liabilities as of March 31, 2021:
Operating lease ROU assets
|
|
$
|
24,440
|
|
Operating lease liabilities
|
|
$
|
70,816
|
|
The table below
presents the maturities of operating lease liabilities as of March 31,
|
2021
|
|
$
|
71,193
|
|
2022
|
|
$
|
—
|
|
Total Lease Payments
|
|
$
|
71,193
|
|
Less: Discount
|
|
$
|
(377
|
)
|
Operating Lease Liability
|
|
$
|
70,816
|
|
|
|
Three Months Ended
March 31,
2021
|
Weighted average remaining lease term (years)
|
|
|
0.33
|
|
Weighted average discount rate
|
|
|
7
|
%
|
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 required an accrual as of March 31, 2021 or 2020, nor were there any asserted or unasserted material claims for which material losses
are reasonably possible.
Note 7
– 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 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.
During
the three months ended March 31, 2021, directors and members of management converted deferred
payroll to related party debt in the amount of $67,500. As of December 31, 2020, the balance
includes loans to the Company or various expenses paid for on behalf of the Company. These loans contained no interest, term or due date.
As of March 31, 2021, these loans and deferred payroll had a combined balance of $549,159 for the CEO, the President, and two other board
members. See Note 10.
Note 8
– Convertible Debt
As of March 31, 2021, the Company owed $353,500 in
principal (before a debt discount of $156,186 and $13,250 in accrued interest (included in accounts payable and accrued expenses) on its
outstanding convertible promissory notes. 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.
|
|
March 31,
2021
|
|
December 31,
2020
|
Principal
|
|
$
|
353,500
|
|
|
$
|
406,000
|
|
Debt discount
|
|
|
(156,186
|
)
|
|
|
(177,798
|
)
|
Total Principal
|
|
$
|
197,314
|
|
|
$
|
228,202
|
|
|
|
|
|
|
|
|
|
|
Note 1 - On
January 2, 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 March 31, 2021. 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 March 31, 2021, 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. During the three months ended March 31, 2021, the Company issued 2,292,012 common shares
for a value of $91,520, satisfying the balance of principal and accrued interest on the Note.
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. During the three months ended March 31, 2021, the Company issued 1,433,333 common
shares for a value of $44,720, satisfying the balance of principal and accrued interest on the Note.
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 March 31, 2021, the Company owed $150,000 in principal
and $13,026 in accrued interest on the note. As of March 31, 2021, the equivalent number of common shares the Company would be required
to issue to satisfy the Note is 2,717,100.
Note
5 – On March 18, 2021, the Company received $75,000 in loan proceeds, which is net of $3,500 in debt issuance costs, pursuant to
a loan agreement (“Fifth Convertible Note”), with a maturity date of March 18, 2022 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 March 31, 2021, the
Company owed $78,500 in principal and $224 in accrued interest on the Note. As of March 31, 2021, the equivalent number of common shares
the Company would be required to issue to satisfy the Note is 2,150,928.
Note 9
– 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, and Fifth 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 March 31, 2021 and
December 31, 2020, the unamortized beneficial conversion feature associated with our convertible notes was $0 and $25,896, respectively.
During the first quarter of 2021, an active market
developed for the Company’s stock. Accordingly, the Company began recording the conversion features of its convertible notes payable
as embedded derivatives. As a result, the Company re-characterized the beneficial conversion feature recorded on Note 4 as a discount
related to the derivative liability, resulting in a decrease to additional paid in capital in the amount of $150,000.
Note 10
- Derivatives
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 three months ended
March 31, 2021, 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.
The Company evaluated the terms
of the convertible notes in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity’s Own
Stock and determined that the underlying is indexed to the Company’s common stock. The Company determined that the conversion
features meet the definition of a liability and therefore bifurcated the conversion feature and accounted for it as a separate derivative
liability. The Company then evaluated the conversion feature for the embedded conversion option. Since these notes contain conversion
price adjustment provisions (i.e. down round, true-up, or ratchet provisions), the Company determined that the embedded conversion options
met the definition of a derivative. The Monte Carlo model was used to estimate the fair values of the embedded derivatives on the conversion
features of our convertible notes. The values are based on simulating stock volatility, risk free interest rates, and the conversion stock
prices on the date of measurement.
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 March 31, 2021, 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.
The following table summarizes the valuations of the default liability
for each note and valuation date.
|
|
|
|
|
|
|
|
Level 3
|
Note
|
|
Issue Date
|
|
Maturity Date
|
|
Initial Derivative Fair Value
|
|
Derivative Value at
12/31/2020
|
|
Change in Derivative Value
|
|
Derivative Value at 3/31/2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Convertible Note
|
|
6/17/2020
|
|
6/17/2021
|
|
|
27,103
|
|
|
|
825,165
|
|
|
|
(825,165
|
)
|
|
|
—
|
|
Third Convertible Note
|
|
7/20/2020
|
|
7/20/2021
|
|
|
82,563
|
|
|
|
350,922
|
|
|
|
(350,922
|
)
|
|
|
—
|
|
Fourth Convertible Note
|
|
11/18/2020
|
|
5/18/2021
|
|
|
147,242
|
|
|
|
—
|
|
|
|
(33,233
|
)
|
|
|
114,009
|
|
Fifth Convertible Note
|
|
3/18/2021
|
|
3/18/2022
|
|
|
217,469
|
|
|
|
—
|
|
|
|
(66,534
|
)
|
|
|
150,935
|
|
Totals:
|
|
|
|
|
|
$
|
474,377
|
|
|
$
|
1,176,087
|
|
|
$
|
(1,275,854
|
)
|
|
$
|
264,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of the default 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 3/31/21
|
Default probability
|
5% to 30%
|
22% to 24%
|
Volatility
|
306.4% to 310.1%
|
328.5% to 340.7%
|
Risk free rate
|
1.62%
|
0.13% to 0.20%
|
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
11– Related Party Transactions
During
the three months ended March 31, 2021 and 2020, 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 March 31, 2021, these loans had a combined balance
of $546,159 for the CEO, the President, and two other board members. Total additions to these loans during the three months ended March
31, 2021 were cash loan proceeds of $0 and deferred compensation of $67,500 transferred from accounts payable to related parties to related
party debt. As of March 31, 2020, these loans had a combined balance of $529,647 for the CEO, the President, and two other board
members. Total additions for the three months ended March 31, 2020 were $76,500.
As of March
31, 2021 and 2020, we also owed $58,135 and $66,325, respectively, 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 three months ended March 31, 2021 and 2020, we made purchases of $58,135 and $19,975, respectively, from Carlsbad Naturals, LLC.
As of March
31, 2021 and 2020, we owed $27,500 and $27,500, 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. A total of $75,000 has been repaid, including $25,000 in interest and
$50,000 in principal and interest payments are now $2,500 per month. As of March 31, 2021 and 2020, the balance owed by the Company was
$50,000 and $50,000, respectively.
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
12 – Subsequent Events
The Company
has evaluated subsequent events through the date the financial statements were issued.
On May 3, 2021, we
entered into an Exchange Agreement with ST Brands, Inc. (STB), a Wyoming corporation, and the shareholders of STB. Under the Agreement,
the Company acquired all of the issued and outstanding common stock of STB in exchange for our issuance to the Shareholders of STB, shares
of our newly-designated Series A Preferred Stock. The class of Series A Preferred Stock consists of 4,500,000 shares of preferred stock
convertible to our common stock at a ratio of 100 for 1. As a whole, all designated shares of Series A Preferred are convertible to approximately
the cumulative equivalent of ninety percent (90%) of our issued and outstanding share capital as of May 3, 2021. The Agreement contemplates
that the Company’s existing business and assets of the Company will remain and continue under the Company’s ownership following
the closing of the Closing.
Shares of Series
A Preferred Stock shall be issuable to the Shareholders under the Agreement upon each of several contemplated Closings, each Closing to
take place upon our receipt of audited financial statements reflecting certain levels of annual revenue earned by STB and/or Acquired
Material Businesses, as defined in the Exchange Agreement and as described in Exhibit B in the Agreement. Up to 4,500,000 shares of Series
A Preferred Stock may be issued to the Shareholders, with all Closings to occur on or before April 30, 2022. Under the Initial Closing
on the date of the Agreement, we issued 500,000 shares of Series A Preferred Stock to the Shareholders of STB. The
issuance was exempt under Section 4(a)(2) of the Securities Act as the transaction did not involve a public offering.
On May 6, 2021, pursuant
to the terms of the Agreement, the Board of Directors (the “Board”) of the Company appointed Jason Frankovich to serve as
the new Executive Chairman of the Board.
On May 6, 2021, we
filed a Certificate of Designation for our newly-designated Series A Preferred Stock with the Secretary of State of the State of Nevada
(the “Secretary of State”). The class of Series A Preferred Stock (“Series A”) consists of four million five hundred
thousand (4,500,000) shares, par value $0.00001 per share. Key provisions include:
Conversion:
Each share of Series A shall be convertible at the option of the holders thereof, and without the payment of additional consideration,
at any time, into shares of our common stock at a conversion rate of one hundred (100) shares of common stock for every one (1) share
of Series A held (the “Conversion Rate”), subject to adjustment as set forth in the Certificate of Designation. The Conversion
Rate is subject to pro-rata downward adjustment based on the number of shares of common stock (or common stock equivalents) issued in
the future by us for the acquisition of Acquired Material Businesses within the meaning of the Agreement. The Conversion Rate is also
subject to adjustment for stock splits, reverse splits, share dividends, and similar corporate actions.
Ranking: Shares
of Series A shall, with respect to rights on liquidation, winding up and dissolution, rank pari passu to our common stock,
par value $0.00001 per share, and any other classes of capital stock.
Voting Rights:
Each share of Series A shall vote on an as-converted basis with the common stock or other equity securities, resulting in 100 votes per
one share of Series A Preferred Stock.
On May 5, 2021,
the Company issued 2,414,890 common shares to its Chief Executive Officer in exchange for the extinguishment of his shareholder loan
owed to him by the Company. The shares were valued at fair market value on the date of grant.
On May 5, 2021, the
Company issued 2,921,690 common shares to a related party and shareholder in exchange for the extinguishment of his shareholder loan owed
to him by the Company. The shares were valued at fair market value on the date of grant.
On May 5, 2021, the
Company issued 1,200,000 shares to a related party in consideration of interest owed by the Company on a related Note Payable. The shares
were valued at fair market value on the date of grant.
On May 5, 2021, the
Company issued 100,000 shares to a consultant as a bonus for services provided to the Company. The shares were valued at fair market value
on the date of grant.