ITEM 1. BUSINESS
This annual
report on Form 10-K (including, but not limited to, the following disclosures regarding our Business) contains forward-looking
statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,”
“anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates”
and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive
means of identifying forward-looking statements in this annual report on Form 10-K. Additionally, statements concerning future
matters such as the development of new products, enhancements or technologies, sales levels, expense levels and other statements
regarding matters that are not historical are forward-looking statements.
Forward-looking
statements in this annual report on Form 10-K reflect our good faith judgment based on facts and factors currently known to us.
Forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially
from the results and outcomes discussed in or anticipated by the forward-looking statements. Readers are urged not to place undue
reliance on these forward-looking statements, which speak only as of the date of this annual report on Form 10-K. We undertake
no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after
the date of this annual report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made in
this annual report on Form 10-K, which attempt to advise interested parties of the risks and factors that may affect our business,
financial condition, results of operations and prospects.
Company
Background – Business Overview
We were
originally incorporated as “Nova Mining Corporation” in Nevada on December 29, 2005. After a change in control the
Company changed its name to “The Radiant Creations Group, Inc.” and we were focused on developing and marketing a skin
crème and other cosmetic and over-the-counter personal enhancement products and devices.
On July
11, 2018, we closed our Subscription and Securities Purchase Agreement (the “SPA”) with three investors, Carlsbad Naturals,
LLC, Ray Grimm, and Nish Mehta. Under the SPA, the investors were issued a (collectively) controlling interest in the Company consisting
of a total of 9,695,328 shares of common stock. These shares were issued in exchange for a total Purchase Price of $95,000. The
Purchase Price was used to settle and retire our notes payable, for certain compliance costs, and for general working capital.
In conjunction with the SPA, our formerly controlling shareholder, Biodynamic Molecular Technologies, LLC, exchanged its preferred
stock for a total of 269,315 shares of common stock. Upon issue, these shares were transferred to principal of Biodynamic Molecular
Technologies, LLC, Michael Alexander. This common stock position, which represented 2.5% of our post-closing common stock, was
formerly non-dilutable for a period of one (1) year. We acquired New You LLC following the passage of the United States Agricultural
Improvement Act of 2018, commonly known as the “Farm Bill,” which contained a permanent declassification of cannabidiol
(CBD) as a controlled substance under federal law. As a result of that transaction, we own and operate the CBD brand New You LLC
which now represents our focus and all of our revenues.
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.
New You,
Inc.’s principal business is the marketing of unique and proprietary cannabidiol (“CBD”) products, which include
CBD beverage enhancers that can be added to any beverage, CBD infused coffee, and CBD oil tinctures. The Company has five products:
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DROPS - 220 mgs of CBD – odorless, tasteless, flavorless and can be added to any beverage or liquid.
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CB2 & CBD 2 Plus - A Multi Spectrum Hemp-extracted CBD and Beta-Caryophyllene (β-Caryophyllene is the primary sesquiterpene contributing to the spiciness of black pepper; it is also a major constituent of cloves, hops, rosemary, copaiba, and cannabis), naturally blended coconut-derived MCT oil (made from a coconut fat called medium-chain triglyceride) and a hint of peppermint.
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Drops for Pets - This 50 mgs CBD product is designed to be used by pets.
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CAFFE
CANNA - Caffe Canna is a rich organic CBD-infused non-GMO dark roast coffee.
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ABSORB – Made of a Japanese root and rice flour veggie capsule.
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RELEASE - Made with organic Clove, Cascara Sagrada, Agave Inulin, Rhubarb Root Extract, Slippery Elm Bark, Aloe Vera and other herbs.
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Drops FX –Our proprietary blend of CBD and Vitamins B3, B6, B9 & B12, that you can use in any drink or liquid.
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Drops FX Sleep –A blend of CBD, GABA (Gamma-amino butyric acid is an amino acid in the body that acts as a neurotransmitter in the central nervous system), Melatonin, Valerian Root.
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New You,
Inc. through its wholly owned subsidiary, New You LLC, markets and sells its products through a multi-level marketing and direct
sales opportunity afforded to independent business owners called “Brand Partners.” Commissions are earned on product
sales to Brand Partners and their 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 level 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 the team bonus volume
reaches a certain amount in a 30 day period. Brand Partners can also earn an initial bonus of 20% of the transaction value for
qualifying Brand Partners in the Brand Partner’s first 30 days. There is a risk that Brand Partners may find it difficult
to sell in a network marketing environment. Brand Partners may also find it difficult to sell CBD related products due to the uncertainty
surrounding FDA regulations of CBD and hemp related products. Lastly, public perception of CBD products may be negative, as such
products are derived from the Hemp plant. The Company does not hold any patents or trademarks and, as a result, may be vulnerable
to competition from other companies offering very similar products and product brands The Company purchases inventory from Carlsbad
Naturals, LLC. Carlsbad Naturals, LLC is a principal shareholder of New You, Inc., and is owned by a principal shareholder of New
You, Inc. As a result, we are dependent on a related party for product inventory and do not have a broad base of unaffiliated suppliers.
The officers and directors of the Company own 43.81% of the outstanding common shares. Accordingly, management will have a determinative
influence on matters requiring shareholder approval.
We conduct
our principal operations through one operating subsidiary, New You LLC, a Wyoming limited liability company. Our net losses for
the years ended December 31, 2019 and 2018 were $1,692,298 and $428,006, respectively. The Company will need to raise between $250,000
and $500,000 in additional capital to fund operations based on the current level of sales. We can provide no assurance that the
required additional capital will be available to us on favorable terms, or at all.
Marketing
and Sales
We
market and sell our products through a multi-level marketing and direct sales opportunity afforded to independent business owners
called “Brand Partners”. Commissions are earned on product sales to Brand Partners and their 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 level below the Brand Partner. Brand Partners can earn an additional bonus for customer sales
and team sales. The team bonus is $400 for each and every time the team bonus volume reaches a certain amount in a 30 day period.
Brand Partners can also earn an initial bonus of 20% of the transaction value for qualifying Brand Partners in the Brand Partner’s
first 30 days.
As
of December 2019, we had 4,434 Brand Partners, of which 324 joined in the fourth quarter of 2019, 418 joined in the third quarter
of 2019, 636 joined in the second quarter of 2019, 697 joined in the first quarter of 2019, and 756 joined in the fourth quarter
of 2018. On top of the Brand Partners that have joined, there are also over 2,000 customers that have placed orders through Brand
Partners.
The
process of becoming a New You LLC Brand Partner or Customer begins with viewing the company website which gives information on
all of the products. Brand Partners are introduced to the business and products through word of mouth, tradeshows, and local events.
When Brand Partners decide to join, they are required to read and agree to the terms and conditions of the Company prior to signing
up. All Brand Partners are supplied with training videos, weekly conference calls, and training seminars to teach them about the
products.
Suppliers
and Production
Carlsbad
Naturals is a wholesale supplier of a wide range of private label and white label CBD consumer products including beverages tinctures,
skincare, and creams. Carlsbad Naturals manufactures Drops, Energy FX, and Sleep FX. In addition to Carlsbad Naturals, New You,
Inc. has made arrangements with one additional supplier as a backup. The contract with Carlsbad Naturals is a traditional vendor
relationship, there is no formal agreement in place.
Kelker
Pharma, Inc., is a cGMP certified contract manufacturer of capsules, tablets, powders and nutritional bars. Kelker manufactures
our Absorb and Release capsules. The contract with Kelker Pharma is a traditional vendor relationship, there is no formal agreement
in place.
Orders
from Brand Partners and Customers are placed through our online website and phone application. Once a customer or Brand Partner
places an order, our warehouse staff will receive that order and fulfill that order on the same day or within one business day.
Our Brand Partners and Customers are located in the United States throughout all fifty states.
Competition
The
market for the sale of CBD-based products is fragmented and intensely competitive. Currently, in the United States, New You LLC
does not believe that there are any businesses that can demonstrate or claim a dominant market share of the growing CBD products
market. Our competitors in the sales of CBD-based products include cbdMD, Green Roads, PlusCBD, and Select CBD, Diamond CBD, CBDistillery,
and Lazarus Naturals. We have no known competitors in the multi-level marketing space. We believe we compete based upon the quality
of our products. We expect that the quantity and composition of the competitive environment will continue to evolve as the industry
matures and new customers enter the marketplace.
Regulatory
Requirements and Government Regulations
On December 20, 2018 the President of the United
States signed the Farm Bill into law. Among other things, this new law changed certain federal authorities relating to the production
and marketing of hemp, defined as cannabis (Cannabis sativa L.), and derivatives of cannabis with extremely low (less than
0.3 percent on a dry weight basis) concentrations of the psychoactive compound delta-9-tetrahydrocannabinol (THC). These changes
include removing hemp and derivatives of hemp from the Controlled Substances Act, which means that it is no longer an illegal substance
under federal law. For the first time since 1937, industrial hemp has been legalized at the federal level and this paved the way
for the growth of the industry. With the recent publication of the USDA interim final rule regarding the Establishment of a Domestic
Hemp Production Program on October 31, 2019, hemp can now be grown and processed legally in the United States, and is legal to
transport in interstate commerce. Although this interim final rule became effective on the date of publication, it is still subject
to comment and there is a possibility it will be modified from its current application.
The Farm Bill recognizes hemp as distinct from
its genetic cousin, marijuana, and specifically industrial hemp has been excluded from U.S. drug laws. The Farm Bill allows for
each individual state to regulate industrial hemp and industrial hemp based products or accept the USDA rules. Although no longer
a controlled substance under federal law, cannabinoids derived from industrial hemp (other than THC) are still subject to a patchwork
of state regulations. We are actively monitoring the regulations and proposed regulations in each state to ensure our operations
are compliant.
In conjunction with the enactment of the Farm
Bill, the United States Food and Drug Administration (“FDA”) released a statement about the status of CBD and the agency’s
actions in the short term with regards to CBD will guide the industry. The statement noted that the Farm Bill explicitly preserved
the FDA’s authority to regulate products containing cannabis or cannabis derived compounds under the Federal Food, Drug,
and Cosmetic Act (FD&C Act) and Section 351 of the Public Health Service Act.
This authority allows the FDA to continue enforcing
the law to protect patients and the public while also providing potential regulatory pathways for products containing cannabis
and cannabis-derived compounds. The statement also noted the growing public interest in cannabis and cannabis-derived products,
including CBD, and informed the public that the FDA will treat products containing cannabis or cannabis-derived compounds as it
does any other FDA-regulated products — meaning the products will be subject to the same authorities and requirements as
FDA-regulated products containing any other substance, regardless of the source of the substance, including whether the substance
is derived from a plant that is classified as hemp under the Farm Bill. Recently, both the U.S. House of Representatives (McNerney
CA-09) and the Senate (McConnell R-KY) have passed amendments to the respective appropriations bills working their way through
each chamber, which would help clear the way for cannabidiol (CBD) to become an approved dietary ingredient by the FDA through
an alternative rule making process available to the FDA. Although it is uncertain if either of these amendments will make it to
the final federal appropriation bill, or if the President will ultimately sign the appropriations bill, this signifies the legislatures
clear intent to pave a pathway for clear and consistent federal regulation for cannabidiol.
As of the date of this report, and based upon
publicly available information, to our knowledge the FDA has not taken any enforcement actions against CBD companies. The FDA,
however, has sent warning letters to companies demanding they cease and desist from the production, distribution, or advertising
of CBD products, only relating to instances that such CBD companies have made misleading and unapproved label claims. We will continue
to monitor the FDA’s position on CBD.
We are subject to federal and state consumer
protection laws, including laws protecting the privacy of customer non-public information and the handling of customer complaints
and regulations prohibiting unfair and deceptive trade practices. The growth and demand for online commerce has and may continue
to result in more stringent consumer protection laws that impose additional compliance burdens on online companies. These laws
may cover issues such as user privacy, spyware and the tracking of consumer activities, marketing e-mails and communications, other
advertising and promotional practices, money transfers, pricing, product safety, content and quality of products and services,
taxation, electronic contracts and other communications and information security. There is also great uncertainty over whether
or how existing laws governing issues such as sales and other taxes, auctions, libel and personal privacy apply to the internet
and commercial online services. These issues may take years to resolve. For example, tax authorities in a number of states, as
well as a Congressional advisory commission, are currently reviewing the appropriate tax treatment of companies engaged in online
commerce, and new state tax regulations may subject us to additional state sales and income taxes. New legislation or regulation,
the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the application
of existing laws and regulations to the internet and commercial online services could result in significant additional taxes or
regulatory restrictions on our business. These taxes or restrictions could have an adverse effect on our cash flows, results of
operations and overall financial condition. Furthermore, there is a possibility that we may be subject to significant fines or
other payments for any past failures to comply with these requirements.
Employees
As of December 31,
2019, we had 5 full-time employees and 2 part-time warehouse employees
ITEM 1A. RISK FACTORS
RISK FACTORS
An investment in our
securities is subject to numerous risks, including the risk factors described below.
You should carefully consider the risks, uncertainties, and other factors described
below, in addition to the other information set forth in this Prospectus, before making
an investment decision with regard to our securities. Any of these risks, uncertainties,
and other factors could materially and adversely affect our business, financial condition, results of operations, cash flows, or
prospects. In that case, the trading price of our Common Stock could decline, and you may lose all or part of your investment.
See also “Cautionary Note Regarding Forward-Looking Statements.”
RISKS RELATING TO OUR BUSINESS AND INDUSTRY
We have a limited operating
history, which may make it difficult for investors to predict future performance based on current operations.
We
have a limited operating history upon which investors may base an evaluation of our potential future performance. In particular,
we have not proven that the Company’s multi-level marketing business model will work. As a result, there can be no assurance
that we will be able to develop or maintain consistent revenue sources, or that our operations will be profitable and/or generate
positive cash flows.
Any forecasts we make
about our operations may prove to be inaccurate. We must, among other things, determine
appropriate risks, rewards, and level of investment in our products, respond to economic and market variables outside of our control,
respond to competitive developments and continue to attract, retain, and motivate qualified employees. There can be no assurance
that we will be successful in meeting these challenges and addressing such risks and the failure to do so could have a materially
adverse effect on our business, results of operations, and financial condition. Our prospects must be considered in light of the
risks, expenses, and difficulties frequently encountered by companies in the early stage of development. As a result of these risks,
challenges, and uncertainties, the value of your investment could be significantly reduced or completely lost.
We have incurred
significant losses in prior periods, and losses in the future could cause the quoted price of our Common Stock to decline or have
a material adverse effect on our financial condition, our ability to pay our debts as they become due, and on our cash flows.
We
have incurred significant losses in prior periods. For the year ended December 31, 2019, we incurred a net loss of $1,692,298
and, as of that date, we had an accumulated deficit of $2,120,304, of which $677,605 was related to non-cash stock based compensation.
For the year ended December 31, 2018, we incurred a net loss of $428,006 and, as of that date, we had an accumulated deficit of
$428,006. Any losses in the future could cause the quoted price of our Common Stock to decline or have a material adverse effect
on our financial condition, our ability to pay our debts as they become due, and on our cash flows.
We
will likely need additional capital to sustain our operations and will likely need to seek further financing, which
we may not be able to obtain on acceptable terms or at all. If we fail to raise additional capital as needed, our ability to implement
our business model and strategy could be compromised.
We
have limited capital resources and operations. To date, our operations have
been funded entirely from the proceeds of debt and equity financings. We expect to
require substantial additional capital in the near future to expand our products and establish our targeted levels of commercial
production. We may not be able to obtain additional financing on terms acceptable
to us, or at all.
Even if we obtain financing
for our near-term operations, we expect that we will require additional capital thereafter. Our capital needs will depend on numerous
factors including: (i) our profitability; (ii) the release of competitive products by our competition; (iii) the level of our
investment in research and development; and (iv) the amount of our capital expenditures, including acquisitions. We
cannot assure you that we will be able to obtain capital in the future to meet our needs.
If we raise additional
funds through the issuance of equity or convertible debt securities, the percentage ownership held by our existing stockholders
will be reduced and our stockholders may experience significant dilution. In addition, new securities may contain rights, preferences
or privileges that are senior to those of our Common Stock. If we raise additional capital by incurring debt, this will result
in increased interest expense. If we raise additional funds through the issuance of securities, market fluctuations in the price
of our shares of Common Stock could limit our ability to obtain equity financing.
We
cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable
to us. If we are unable to raise capital when needed, our business, financial condition, and results of operations would be materially
adversely affected, and we could be forced to reduce or discontinue our operations.
We face intense competition
and many of our competitors have greater resources that may enable them to compete more effectively.
The industries in which
we operate in general are subject to intense and increasing competition. Some of our competitors may have greater capital resources,
facilities, and diversity of products, which may enable them to compete more effectively in this market. Our competitors may devote
their resources to developing and marketing products that will directly compete with our products. Due to this competition, there
is no assurance that we will not encounter difficulties in obtaining revenues and market share or in the positioning of our products.
There are no assurances that competition in our respective industries will not lead to reduced prices for our products. If we are
unable to successfully compete with existing companies and new entrants to the market this will have a negative impact on our business
and financial condition.
If we fail to protect our intellectual
property, our business could be adversely affected.
Our viability will depend, in
part, on our ability to maintain the proprietary aspects of our products to distinguish our products from our competitors’
products. We do not have trademarks or patents on our products and therefore must rely on, trade secrets and confidentiality provisions
to protect the unique aspects of our supplier’s products.
Competitors may harm our
sales by designing products that mirror the capabilities of our products or technology without infringing on our vendor’s
intellectual property rights. If our vendors do not obtain sufficient protection for their intellectual property, or if they are
unable to effectively enforce their intellectual property rights, our competitiveness could be impaired, which would limit our
growth and future revenue.
Although we believe that
our technology does not and will not infringe upon the patents or violate the proprietary rights of others, it is possible such
infringement or violation has occurred or may occur, which could have a material adverse
effect on our business.
We
are not aware of any infringement by us of any person’s or entity’s intellectual property rights. In the event
that products we sell are deemed to infringe upon the patents or proprietary rights of others, we could be required to modify our
products, or obtain a license for the manufacture and/or sale of such products, or cease selling such products. In such event,
there can be no assurance that we would be able to do so in a timely manner, upon acceptable terms and conditions, or at all, and
the failure to do any of the foregoing could have a material adverse effect upon our business.
There can be no
assurance that we will have the financial or other resources necessary to enforce or defend a patent infringement or
proprietary rights violation action. If our products or proposed products are deemed to infringe or likely to infringe upon
the patents or proprietary rights of others, we could be subject to injunctive relief and, under certain circumstances,
become liable for damages, which could also have a material adverse effect on our business and our financial condition.
Our trade secrets may be difficult
to protect.
Our success depends upon
the skills, knowledge, and experience of our scientific and technical personnel, our consultants and advisors, as well as our licensors
and contractors. Because we operate in several highly competitive industries, we rely in part on trade secrets to protect our proprietary
technology and processes. However, trade secrets are difficult to protect. We enter
into confidentiality or non-disclosure agreements with our corporate partners, employees, consultants, outside scientific collaborators,
developers, and other advisors. These agreements generally require that the receiving party keep confidential and not disclose
to third parties confidential information developed by the receiving party or made known to the receiving party by us during the
course of the receiving party’s relationship with us. These agreements also generally provide that inventions conceived by
the receiving party in the course of rendering services to us will be our exclusive property, and we enter into assignment agreements
to perfect our rights.
These confidentiality, inventions,
and assignment agreements may be breached and may not effectively assign intellectual property rights to us. Our trade secrets
also could be independently discovered by competitors, in which case we would not be able to prevent the use of such trade secrets
by our competitors. The enforcement of a claim alleging that a party illegally obtained and was using our trade secrets could be
difficult, expensive, and time consuming and the outcome would be unpredictable. In addition, courts outside the United States
may be less willing to protect trade secrets. The failure to obtain or maintain meaningful trade secret protection could adversely
affect our competitive position.
Our business, financial
condition, results of operations, and cash flows have been, and may in the future be, negatively impacted by challenging global
economic conditions.
The recent global economic
slowdown has caused disruptions and extreme volatility in global financial markets, increased rates of default and bankruptcy,
and declining consumer and business confidence, which has led to decreased levels of consumer spending. These macroeconomic developments
have and could continue to negatively impact our business, which depends on the general economic environment and levels of
consumer spending. As a result, we may not be able to maintain our existing customers or attract new customers, or we may
be forced to reduce the price of our products. We are unable to predict the likelihood
of the occurrence, duration or severity of such disruptions in the credit and financial markets and adverse global economic conditions.
Any general or market-specific economic downturn could have a material adverse effect on our business, financial condition, results
of operations, and cash flows.
Our future success depends
on our key executive officers and our ability to attract, retain, and motivate qualified personnel.
Our future success largely
depends upon the continued services of our executive officers and management team, especially our President and Chief Executive
Officer, Mr. Ray Grimm Jr. If one or more of our executive officers are unable or unwilling to continue in their present positions,
we may not be able to replace them readily, if at all. Additionally, we may incur additional expenses to recruit and retain new
executive officers. If any of our executive officers joins a competitor or forms a competing company, we may lose some or all of
our customers. Finally, we do not maintain “key person” life insurance on any of our executive officers. Because of
these factors, the loss of the Services of any of these key persons could adversely affect our business, financial condition, and
results of operations, and thereby an investment in our Common Stock.
Our continuing ability
to attract and retain highly qualified personnel will also be critical to our success because we will need to hire and retain additional
personnel as our business grows. There can be no assurance that we will be able to attract or retain highly qualified personnel.
We face significant competition for skilled personnel in our industry. This competition
may make it more difficult and expensive to attract, hire, and retain qualified managers and employees. Because of these factors,
we may not be able to effectively manage or grow our business, which could adversely affect our financial condition or business.
As a result, the value of your investment could be significantly reduced or completely lost.
Federal and State Government
regulations may change how we do business
The
effect of existing or probable federal and state government regulations on our business is not known at this time. Due to the nature
of our business, it is anticipated that there may be increasing government regulation that may cause us to have to take serious
corrective actions or make changes to the business plan. Federal and State government agencies have not yet put Hemp and CBD regulations
into effect, these proceedings over time should result in revisions or decisions providing even greater legal certainty for CBD
sellers.
CBD
related products have not established legality within the FDA
The FDA
has deemed marketing food to which CBD has been added, or labeling CBD as a dietary supplement, to be impermissible.. The FDA is
continuing to assess potential pathways available for various types of CBD products to be lawfully marketed. The FDA has summarized
its current policies regarding CBD products at: https://www.fda.gov/news-events/public-health-focus/fda-regulation-cannabis-and-cannabis-derived-products-including-cannabidiol-cbd.
As discussed in Item 14
of its summary, the FDA has thus far limited its enforcement actions regarding CBD sellers to actions involving the impermissible
use of medical or therapeutic claims for CBD products. Should the FDA change its enforcement policies regarding CBD products and
begin broader enforcement actions against all sellers of products containing CBD, we would be forced to take serious corrective
actions or make drastic changes to our business plan, and our business may fail. In
addition, we cannot predict the form and content of future FDA regulations regarding CBD. Should the FDA adopt a legal framework
for the marketing of CBD products, the requirements of its new regulations may be costly or burdensome such that we will lack the
financial resources to become compliant with them.
Network
marketing guidelines set by the Federal Trade Commission could impact how we do business.
As a network
marketing company, we have to follow specific guidelines set by the Federal Trade Commission. The Company and its Brand
Partners must follow all of these guidelines. Should the Company or Brand Partners deviate from these guidelines, the company
could be fined and would have to take corrective actions. One of the FTC’s primary concerns with regard to
“multi-level marketing” (“MLM”) or “network marketing” businesses is the potential for
the compensation structure of an MLM business to be unfair or deceptive within the meaning of Section 5 of the FTC Act. At
the most basic level, FTC policy requires that an MLM pay compensation that is based on actual sales to real customers,
rather than based on mere wholesale purchases or other payments by its participants. In evaluating MLM practices, the FTC
focuses on how the structure as a whole operates in practice, and considers factors including marketing representations,
participant experiences, the compensation plan, and the incentives that the compensation structure creates. The assessment of
an MLM’s compensation structure is a fact-specific determination that the FTC makes after careful investigation. In any
such investigation, the FTC staff is likely to consider whether features of the MLM’s compensation structure
incentivize or encourage participants to purchase product for reasons other than satisfying their own personal demand or
actual consumer demand in the marketplace. Second, the FTC staff is likely to consider information bearing on whether
particular wholesale purchases by business opportunity participants were made to satisfy personal demand. In addition, FTC
focuses on whether an MLM’s representations regarding is business opportunity are deceptive. Although we believe the
compensation structure for our Brand Partners and the other features of our network marketing program are in compliance with
current FTC guidelines, any material change to those guidelines could force us to restructure our Brand Partners program or
otherwise adversely affect our business.
We may not be able to
effectively manage our growth or improve our operational, financial, and management information systems, which would impair our
results of operations.
In the near term,
we intend to expand the scope of our operations activities significantly. If we are successful in executing our business plan,
we will experience growth in our business that could place a significant strain on our business operations, finances, management
and other resources. The factors that may place strain on our resources include, but are not limited to, the following:
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The need for continued development of our financial and information management systems;
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The need to manage strategic relationships and agreements with manufacturers, customers and partners; and
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Difficulties in hiring and retaining skilled management, technical, and other personnel necessary
to support and manage our business.
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Additionally, our strategy envisions
a period of rapid growth that may impose a significant burden on our administrative and operational resources. Our ability to effectively
manage growth will require us to substantially expand the capabilities of our administrative and operational resources and to attract,
train, manage, and retain qualified management and other personnel. There can be no assurance that we will be successful in recruiting
and retaining new employees or retaining existing employees.
We cannot provide assurances
that our management will be able to manage this growth effectively. Our failure to successfully manage growth could result in our
sales not increasing commensurately with capital investments or otherwise materially adversely affecting our business, financial
condition, or results of operations.
If we are unable to continually
innovate and increase efficiencies, our ability to attract new customers may be adversely affected.
In the area of innovation,
we must be able to develop new technologies and products that appeal to our customers. This depends, in part, on the technological
and creative skills of our personnel. We may not be successful in the development,
introduction, marketing, and sourcing of new technologies or innovations, that satisfy customer needs, achieve market acceptance,
or generate satisfactory financial returns.
Litigation may adversely affect
our business, financial condition, and results of operations.
From time to time in the
normal course of our business operations, we may become subject to litigation that may result in liability material to our financial
statements as a whole or may negatively affect our operating results if changes to our business operations are required. The cost
to defend such litigation may be significant and may require a diversion of our resources. There also may be adverse publicity
associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations
are valid or whether we are ultimately found liable. Insurance may not be available at all or in sufficient amounts to cover any
liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims
could adversely affect our business and the results of our operations.
Our officers and directors
have significant control over stockholder matters and the minority stockholders will have little or no control over our affairs.
Our officers and directors
currently own approximately 43.81% of our outstanding Common Stock, and thus significant control over stockholder matters, such
as election of directors, amendments to the Articles of Incorporation, and approval of significant corporate transactions. As a
result, our minority stockholders will have little or no control over its affairs.
Our internal controls
and accounting methods may require modification.
We continue to review and
develop controls and procedures sufficient to accurately report our financial performance on a timely basis. If we do
not develop and implement effective controls and procedures, we may not be able to report our financial performance on a timely
basis and our business and stock price would be adversely affected.
If we fail to implement
and maintain proper and effective internal controls and disclosure controls and procedures pursuant to Section 404 of the Sarbanes-Oxley
Act of 2002, our ability to produce accurate and timely financial statements and public reports could be impaired, which could
adversely affect our operating results, our ability to operate our business, and investors’ views of us.
The Sarbanes-Oxley Act
of 2002 requires that we report annually on the effectiveness of our internal control over financial reporting. Among other things,
we must perform systems and processes evaluation and testing. We must also conduct an assessment of our internal controls to allow
management to report on our assessment of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley
Act. We are required to provide management’s assessment of internal controls in conjunction with the filing our Annual Report
on Form 10-k. The failure to implement and maintain proper and effective internal controls and disclosure controls could result
in material weaknesses in our financial reporting such as errors in our financial statements and in the accompanying footnote disclosures
that could require restatements. Investors may lose confidence in our reported financial information and disclosure, which could
negatively impact our stock price.
We
do not expect that our internal controls over financial reporting will prevent all errors and all fraud. A control system,
no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate
because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the
inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
The Company has the
following material weaknesses:
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The Company lacks an effective control environment since there are insufficient personnel to exercise appropriate oversight of accounting judgments and estimates.
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Due to limited accounting and financial reporting resources, the Company lacks formal processes to identify, update, and assess risks to the Company’s financial reporting.
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Due to limited accounting and financial reporting resources, the Company has not implemented significant monitoring controls.
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Due to limited accounting and financial reporting resources, authorization, approval, and review controls over the Company's financial statements and accounting records have not been implemented or have not been applied consistently. This includes controls over the identification, approval, and disclosure of related party transactions. In certain cases, formal documentation does not exist regarding the design of controls, evidence of implementation of controls, or evidence of occurrence of certain transactions. In addition, certain of the Company’s processes lack segregation of duties.
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Our insurance coverage may be inadequate
to cover all significant risk exposures.
Like all sellers of products
for human consumption, we cannot eliminate the risk that our products may be subjection to contamination during the manufacturing
or distribution process, causing illness or injury to the consumer. While we intend to maintain insurance for certain risks, the
amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial
costs resulting from risks and uncertainties of our business. It is also not possible to obtain insurance to protect against all
operational risks and liabilities. The failure to obtain adequate insurance coverage on terms favorable to us, or at all, could
have a material adverse effect on our business, financial condition, and results of operations. We
do not have any business interruption insurance. Any business disruption or natural disaster could result in substantial costs
and diversion of resources.
Our failure to maintain and expand
our distributor relationships could adversely affect our business.
We
distribute our products through independent distributors, and we depend upon them directly for all of our sales in most of our
markets. Accordingly, our success depends in significant part upon our ability to attract, retain and motivate
a large base of distributors. Our direct selling organization is headed by a relatively small number of key distributors. The
loss of a significant number of distributors, especially key distributors, could materially and adversely affect sales of our products
and could impair our ability to attract new distributors. Moreover, the replacement of distributors could be difficult
because, in our efforts to attract and retain distributors, we compete with other direct selling organizations, including but not
limited to those in the personal care, cosmetic product and nutritional supplement industries. Our distributors may
terminate their services with us at any time..
The
number of active distributors or their productivity may not increase and could decline in the future. We cannot accurately
predict any fluctuation in the number and productivity of distributors because we primarily rely upon existing distributors to
sponsor and train new distributors and to motivate new and existing distributors. Operating results could be adversely affected
if our existing and new business opportunities and products do not generate sufficient economic incentive or interest to retain
existing distributors and to attract new distributors.
The number and productivity
of our distributors could be harmed by several factors, including:
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adverse publicity or negative perceptions regarding us, our products, our method of distribution or our competitors;
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lack of interest in, or the technical failure of, existing or new products;
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lack of interest in our existing compensation plan for distributors or in enhancements or other changes to that compensation plan;
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our actions to enforce our policies and procedures;
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regulatory actions or charges or private actions against us or others in our industry;
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general economic and business conditions;
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changes in management or the loss of one or more key distributor leaders;
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entry of new competitors, or new products or compensation plan enhancements by existing competitors, in our markets; and
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potential saturation or maturity levels in a given country
or market which could negatively impact our ability to attract and
retain distributors in such market.
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An increase in
the amount of compensation paid to distributors would reduce profitability.
A significant expense is the payment of compensation
to our distributors, which represented approximately 49%, and 33% of net sales during 2018, and the first nine months of 2019,
respectively. We compensate our distributors by paying commissions, bonuses, and certain awards and prizes. Factors
impacting the overall commission payout include the growth and depth of the distributor network, the distributor retention rate,
the level of promotions, local promotional programs and business development agreements. Any increase in compensation
payments to distributors as a percentage of net sales will reduce our profitability.
Failure of new products to gain
distributor and market acceptance could harm our business.
An
important component of our business is our ability to develop new products that create enthusiasm among our distributor force. If
we fail to introduce new products on a timely basis, our distributor productivity could be harmed. In addition, if
any new products fail to gain market acceptance, are restricted by regulatory requirements, or have quality problems, this would
harm our results of operations. Factors that could affect our ability to continue to introduce new products include,
among others, limited capital and human resources, government regulations, proprietary protections of competitors that may limit
our ability to offer comparable products and any failure to anticipate changes in consumer tastes and buying preferences.
Although our distributors are
independent contractors, improper distributor actions that violate laws or regulations could harm our business.
Our
distributors are independent contractors and, accordingly, we are not in a position to directly provide the same direction, motivation
and oversight as we would if distributors were our own employees. As a result, there can be no assurance that our distributors
will participate in our marketing strategies or plans, accept our introduction of new products, or comply with our distributor
policies and procedures. Extensive federal, state and local laws regulate our business, our products and our network
marketing program. Given the size and diversity of our distributor force, we experience problems with distributors
from time to time. Distributors often desire to enter a market, before we have received approval to do business, to
gain an advantage in the marketplace. Improper distributor activity in new geographic markets could result in adverse
publicity and can be particularly harmful to our ability to ultimately enter these markets. Violations by our distributors
of applicable law or of our policies and procedures in dealing with customers could reflect negatively on our products and operations
and harm our business reputation. In addition, it is possible that a court could hold us civilly or criminally accountable
based on vicarious liability because of the actions of our distributors. If any of these events occur, our business,
financial condition, or results of operations could be materially adversely affected.
Because we do not have an audit
or compensation committee, stockholders will have to rely on our officers and directors, most of whom are not independent, to
perform these functions.
Because we do not have an audit or compensation
committee, stockholders will have to rely on our officers and directors, most of whom are not independent, to perform these functions.
Thus, there is a potential conflict of interest in that our officers and directors have the authority to determine issues concerning
management compensation, nominations, and audit issues that may affect management decisions.
RISKS RELATED TO AN INVESTMENT IN OUR SECURITIES
We expect to experience volatility in the price of our
Common Stock, which could negatively affect stockholders’ investments.
The trading price of our Common Stock may
be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control.
The stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of companies with securities traded in those markets. Broad market and industry factors may seriously
affect the market price of companies’ stock, including ours, regardless of actual operating performance. All of these factors
could adversely affect your ability to sell your shares of Common Stock or, if you are able to sell your shares, to sell your
shares at a price that you determine to be fair or favorable.
The relative lack of public company experience of our
management team could adversely impact our ability to comply with the reporting requirements of U.S. securities laws.
Our management
team lacks public company experience, which could impair our ability to comply with legal and regulatory requirements such as
those imposed by the Sarbanes-Oxley Act of 2002. Our senior management has little experience in managing a publicly traded company.
Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. Our senior
management may not be able to implement programs and policies in an effective and timely manner that adequately respond to such
increased legal, regulatory compliance, and reporting requirements, including the establishing and maintaining of internal controls
over financial reporting. Any such deficiencies, weaknesses, or lack of compliance could have a materially adverse effect on our
ability to comply with the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
which is necessary to maintain our public company status. If we were to fail to fulfill those obligations, our ability to continue
as a U.S. public company would be in jeopardy, we could be subject to the imposition
of fines and penalties and our management would have to divert resources from attending to our business plan.
Our Common Stock is categorized as “penny
stock,” which may make it more difficult for investors to sell their shares of Common Stock due to suitability requirements.
Our Common Stock is categorized as “penny
stock”. The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that
has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain
exceptions. The price of our Common Stock is significantly less than $5.00 per share and is therefore considered “penny
stock.” This designation imposes additional sales practice requirements on broker-dealers who sell to persons other than
established customers and accredited investors. The penny stock rules require a broker-dealer buying our securities to disclose
certain information concerning the transaction, obtain a written agreement from the purchaser, and determine that the purchaser
is reasonably suitable to purchase the securities given the increased risks generally inherent in penny stocks. These rules may
restrict the ability and/or willingness of brokers or dealers to buy or sell our Common Stock, either directly or on behalf of
their clients, may discourage potential stockholders from purchasing our Common Stock, or may adversely affect the ability of
stockholders to sell their shares.
Financial Industry Regulatory Authority (“FINRA”)
sales practice requirements may also limit a stockholder’s ability to buy and sell our Common Stock, which could depress
the price of our Common Stock.
In addition to the “penny stock”
rules described above, FINRA has adopted rules that require a broker-dealer to have reasonable grounds for believing that the
investment is suitable for that customer before recommending an investment to a customer. Prior to recommending speculative low
priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about
the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these
rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least
some customers. Thus, the FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our
Common Stock, which may limit your ability to buy and sell our shares of Common Stock, have an adverse effect on the market for
our shares of Common Stock, and thereby depress our price per share of Common Stock.
The elimination of monetary liability against our directors,
officers, and employees under Nevada law and the existence of indemnification rights for our obligations to our directors, officers,
and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers, and employees.
Our Articles of Incorporation contain a provision permitting
us to eliminate the personal liability of our directors to us and our stockholders for damages
for the breach of a fiduciary duty as a director or officer to the extent provided by Nevada law.
We may also have contractual indemnification obligations under any future
employment agreements with our officers. The foregoing indemnification obligations could result in us incurring substantial expenditures
to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions
and the resulting costs may also discourage us from bringing a lawsuit against directors and officers for breaches of their fiduciary
duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers
even though such actions, if successful, might otherwise benefit us and our stockholders.
We may issue additional
shares of Common Stock or preferred stock in the future, which could cause significant dilution to all stockholders.
Our Articles of Incorporation authorize
the issuance of up to 1.4 billion shares of Common Stock and 100 million shares of preferred stock, with a par value of $0.00001
per share. As of December 19, 2019, we had 32,985,200 shares of Common Stock, 0 shares of Series A Preferred Stock and 0 shares
of Series B Preferred Stock outstanding; however, we may issue additional shares of Common Stock or preferred stock in the future
in connection with a financing or an acquisition. Such issuances may not require the approval of our stockholders. In addition,
certain of our outstanding rights to purchase additional shares of Common Stock or securities convertible into our Common Stock
are subject to full-ratchet anti-dilution protection, which could result in the right to purchase significantly more shares of
Common Stock being issued or a reduction in the purchase price for any such shares or both.
Any issuance of additional shares of
our Common Stock, or equity securities convertible into our Common Stock, including but not limited to, preferred stock, warrants,
and options, will dilute the percentage ownership interest of all stockholders, may dilute the book value per share of our Common
Stock, and may negatively impact the market price of our Common Stock.
Anti-takeover effects of certain
provisions of Nevada state law hinder a potential takeover of us.
Nevada has a business combination law
which prohibits certain business combinations between Nevada corporations and “interested stockholders” for three
years after an “interested stockholder” first becomes an “interested stockholder,” unless the corporation’s
board of directors approves the combination in advance. For purposes of Nevada law, an
“interested stockholder” is any person who is (i) the beneficial owner, directly or indirectly, of ten percent or
more of the voting power of the outstanding voting shares of the corporation, or (ii) an affiliate or associate of the corporation
and at any time within the three previous years was the beneficial owner, directly or indirectly, of ten percent or more of the
voting power of the then-outstanding shares of the corporation. The definition of the term “business combination”
is sufficiently broad to cover virtually any kind of transaction that would allow a potential acquiror to use the corporation’s
assets to finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its
other stockholders.
The effect of Nevada’s business combination law is to potentially discourage parties interested in taking
control of us from doing so if it cannot obtain the approval of our Board. Both of these provisions could limit the price investors
would be willing to pay in the future for shares of our Common Stock.
Because we do not intend to pay any cash dividends
on our Common Stock, our stockholders will not be able to receive a return on their shares unless they sell them.
We intend
to retain any future earnings to finance the development and expansion of our business. We
do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. Declaring and paying future
dividends, if any, will be determined by our Board, based upon earnings, financial
condition, capital resources, capital requirements, restrictions in our Articles of Incorporation, contractual restrictions, and
such other factors as our Board deems relevant. Unless we pay dividends, our stockholders will not be able to receive a return
on their shares unless they sell them. There is no assurance that stockholders will be able to sell shares when desired.