Item 1. Business
Corporate History
Breathe eCig Corp. is a Nevada corporation organized June 2, 2006. Our original name was Celtic Capital, Inc. On October 20, 2008, we changed our name to Entertainment Education Arts Inc. On May 12, 2010, we changed our name to DNA Precious Metals, Inc. On March 5, 2015 pursuant to an agreement and plan of merger, the Company changed its name to Breathe eCig Corp. (Breathe eCig Corp. may also be referred to as “Breathe”, “we”, “us” or the “Company”)
From May 2010 through December 31, 2014, we were an exploration stage mining company. The Company’s focus was the development of the the Montauban Mining Project, located in the Montauban and Chavigny townships near Grondines-West in Portneauf County, Quebec, Canada (“Montauban Mine Property” or “Property”). Recognizing the need to secure significant additional capital to put the Property into production, management began to focus its attention on other business opportunities which would not require the significant capital required to expand the Property. In furtherance thereof, on January 16, 2015 the Company entered into a share exchange agreement with Breathe LLC, a Tennessee limited liability company, whereby the Company acquired all of the issued and outstanding membership interests in Breathe LLC in consideration for the issuance of 150,000,000 shares of the Company’s common stock to the members of Breathe, LLC
On January 16, 2015, Breathe eCigs Corp., a Tennessee corporation (“Breathe”), entered into a Share Exchange Agreement (the “Exchange Agreement”) with the Company, whereby the Company acquired all of the issued and outstanding shares of common stock of Breathe in consideration for the issuance of 150,000,000 shares of common stock.
As a result of the transaction effected by the Exchange Agreement, at closing Breathe became a wholly owned subsidiary of the Company, with the former Breathe shareholders owning approximately 56% of the then issued and outstanding common stock of the Company. The Company accounted for this acquisition as a reverse merger, whereby Breathe became the accounting acquirer. As a result, the comparative figures are those of Breathe.
The Company declared a stock dividend to its shareholders of record as of February 3, 2015 of its wholly owned subsidiary, DNA Canada, Inc. Each shareholder of record on this date will receive one share of DNA Canada, Inc. for every two shares of DNA Precious Metals Inc. owned by the shareholder on this date. All stock dividends will be rounded down to the next whole number. With the completion of the stock dividend, the Company, no longer has an equity interest in DNA Canada, Inc.
The former shareholders of Breathe participating in the stock dividend were required to tender for redemption any shares of DNA Canada, Inc. common stock received pursuant to the stock dividend in accordance with the Exchange Agreement.
With the acquisition of Breathe, management determined that it would be in the best interest of the Company and its shareholders to operate each company separate and independently of each other. The operation of DNA Canada, Inc. and Breathe were inconsistent. Breathe is a manufacturer and distributor of e-cigarette and related products while DNA Canada, Inc. is an exploration stage mining company. The spin-off of DNA Canada, Inc. will allow each company to focus on its principal business activity and facilitate capital formation.
On March 5, 2015, the Company and Breathe entered into an Agreement and Plan of Merger pursuant to which the Company merged with its wholly owned subsidiary, Breathe. Upon the consummation of the Merger on March 11, 2015, the separate existence of Breathe ceased, and the shareholders of the Company became shareholders of the surviving company, named Breathe eCig Corp. As permitted under Nevada law, the sole purpose of the Merger was to effect a change to the Company’s name from DNA Precious Metals, Inc. to Breathe eCig Corp. This change to the Amended Articles of Incorporation and name change took effect on March 11, 2015.
With the completion of the spin-off, the Company is no longer in the mining field and its sole and exclusive business operations was marketing its electronic cigarettes and related vapor devices.
On March 30, 2016, the Company announced its intention to file for a name and symbol change to reflect the new direction of the primary business. Subsequently, the Company will be known as WhiteFox Ventures, Inc. ("WhiteFox"). The Company intends to commence the merger process through an exclusive License Agreement, while the ultimate goal is a completed merger or similar transaction between the two firms. WhiteFox expects to be a revenue generating growth company with a vertical business model in which paying members may participate in various business opportunities put before the Company.
As of March 30, 2016, pursuant to a settlement agreement under trademark litigation with plaintiff, Breathe LLC (a Florida organization), the Company has ceased its continuing operations in the eCigarette business. In accordance with the settlement agreement, the Company will pay two cash payments ($10,000 immediately and $15,000 due by July 31, 2016) and issue 50 million restricted common shares of Company stock in addition to the transfer of 5,000,000 common shares which it holds in Tauriga. The Company further agrees to split 50/50 any future sales of its held inventory. The sale of inventory shall be shall be a joint effort by the two companies and shall last for a duration of one year from April 1, 2016. After such period, the Company will dispose of any remaining inventory, at such time the Company shall no longer operate in the ECigarette industry in any capacity.
On April 5, 2016, the Company announced its intention to give White Fox Ventures, Inc. (“White Fox”) a majority controlling interest in the Company pursuant to an Acquisition Agreement by which White Fox was to be acquired for an undetermined amount of shares equating 85% of the total authorized capital of the Company. The deal was to be effective April 15, 2016. On May 5, 2016, the Company announced that the deal will be rescinded based on the due diligence on this acquisition. It was determined that the agreement and acquisition were not in the best interests of the Company at this time. The parties are working on an alternative structure at this time. The principal of White Fox, Shinsuke Nakano (“Nakano”), and investors had invested $196,557 into the Company in the form of payment of various settlements and invoices outstanding. The investment will be treated as private placement at $0.0001, whereby the Company issued to Nakano and investors 1,965,570,000 shares of common stock. In addition, for their investments Nakano was named as the Chief Executive Officer of the Company and the Chairman of the Board and Abe was appointed to the positions of Chief Operating Officer ("COO") and Director ("Board Member".)
Our Operations during the Fiscal Year ended December 31, 2015.
The following discussion does not include a material change in our business which occurred with the Company entering into a settlement agreement which resulted in exiting the eCigarette business. We are no longer an eCigarette nor a mining company nor do we have any interest in any operations in either market. The following discussion relates to our operations during 2015. We are no longer in the eCigarette field.
During 2015 we a development stage company, with the intentions of designing marketing and distributing electronic cigarettes (“E-cigarettes”), vaporizers, e-liquids (i.e., liquid nicotine) and related accessories. The Company attempted to develop strategic partner and distributor relationship to sell product on the wholesale market, through distribution networks as well as direct to consumer through ecommerce via its own website.
THE PRODUCT
E-cigarettes and vaporizers are replacements for traditional cigarettes allowing smokers to reproduce the smoking experience. Although they do contain nicotine, E-cigarettes and vaporizers do not burn tobacco and are not smoking cessation devices. The Company’s initial line of products will focus on E-cigarettes. The present day E-Cigarette is a smokeless, battery-powered device that vaporizes liquid nicotine for delivery via inhalation by the user. The E-Cigarette does not contain tobacco, only nicotine derived from the tobacco plant and trace amounts of secondary chemical ingredients. The component parts of an E-Cigarette are the nicotine cartridge; the atomizer (which vaporizes the liquid nicotine); the rechargeable battery that powers it; and a light-emitting diode (LED) indicator at the end that is activated when the user draws in air (collectively referred to as the “Component Parts”). Breathe will partner with manufacturers in the United States who will be responsible for producing the liquid nicotine filling the nicotine cartridge with liquid nicotine; thereby ensuring a safe and high standard process for producing a consumer product.
ABOUT BREATHE SMART CIGARETTE
Breathe, LLC was formed in October 2013 and Breathe eCigs. Corp. was formed on December 31, 2014. On December 31, 2014, Breathe, LLC entered into a Bill of Sale to transfer 100% of the assets to Breathe eCigsCorp.
Since formation, Breathe has operated as a development stage company, with the intentions of designing marketing and distributing electronic cigarettes (“E-cigarettes”), vaporizers, e-liquids (i.e., liquid nicotine) and related accessories. As of December 31, 2014 Breathe had no revenues and limited assets.
E-cigarettes and vaporizers are replacements for traditional cigarettes allowing smokers to reproduce the smoking experience. Although they do contain nicotine, E-cigarettes and vaporizers do not burn tobacco and are not smoking cessation devices.
Breathe’s initial line of products will focus on E-cigarettes. The present day E-Cigarette is a smokeless, battery-powered device that vaporizes liquid nicotine for delivery via inhalation by the user. The E-Cigarette does not contain tobacco, only nicotine derived from the tobacco plant and trace amounts of secondary chemical ingredients. The component parts of an E-Cigarette are the nicotine cartridge; the atomizer (which vaporizes the liquid nicotine); the rechargeable battery that powers it; and a light-emitting diode (LED) indicator at the end that is activated when the user draws in air (collectively referred to as the “Component Parts”). Breathe will partner with manufacturers in the United States who will be responsible for producing the liquid nicotine filling the nicotine cartridge with liquid nicotine; thereby ensuring a safe and high standard process for producing a consumer product.
License to Intellectual Property and Brand Portfolio
Breathe has the exclusive licensing rights to sell the following product lines:
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Mini e-cigarette Pack - a standard e-cigarette pack designed for vending machines and convenience
stores.
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Original non CP - a standard rechargeable single unit without the child protective device.
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Original with CP - a standard rechargeable single unit with the child protective device.
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Smart e-cigarette PCC - Smart e-cigarette carrying case, 2 rechargeable mini-e-cigarettes with 5
cartridges and iPhone chargeable connections.
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5 Pack mini Ref - 5 mini cartridges for the mini size e-cigarette.
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5 pack Standard Ref - 5 refillable cartridges for the mini-size e-cigarettes.
Market Opportunity For E-Cigarettes
Breathe operates within the rapidly growing and global e-cigarette industry, an emerging product category that is taking market share from the $783 billion global tobacco industry. The American Cancer Society estimates that there are 1.3 billion tobacco smokers in the world, consuming approximately 6 trillion cigarettes per year, or 190 thousand cigarettes per second. Tobacco use is the leading cause of preventable illness and death, causing more than 5 million annual deaths across the globe according to the CDC. We believe e-cigarettes offer an alternative for current smokers of traditional cigarettes.
Still in the early stages of its market penetration, the e-cigarette industry is highly fragmented with approximately 250 brands worldwide according to the CDC. Primarily propelled by the cannibalization of the traditional tobacco industry, the global e-cigarette industry has recently experienced dramatic growth. According to Euromonitor, e-cigarettes accounted for approximately $3.5 billion in 2013 global retail sales, with approximately 40% of sales generated in the U.S., 30% of sales generated in Europe, and 30% of sales generated in the rest of the world. Euromonitor estimated that significant market growth was achieved from 2012 to 2013 with the U.S., Europe and the rest of the world generating growth rates of 180%, 160%, and 150%, respectively. Euromonitor also projects e-cigarette sales to represent approximately $51 billion, or 4% of the global tobacco and tobacco alternatives market by 2030. We believe that we are well positioned to benefit from, and take advantage of, these attractive market trends in the coming years.
Source: Euromonitor International 2013.
Below is a table presenting the market shares in the United States of various e-cigarette brands for the 52 weeks ended August 30, 2014:
BUSINESS STRATEGY
Breathe’s strategic goal is to profitably expand its operations. The business strategies employed by Breathe to achieve this goal are defined succinctly through the Company’s mission statement of creating Socially Responsible Innovation in the E-Cigarette and Vaporizer industries and by fulfilling the following objectives:
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Building a strong brand through a concentration of operational focus on the design, market and
distribution of exceptional quality electronic cigarettes and vaporizers.
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Specializing in the development of great tasting proprietary organic and naturally flavored
e-liquids with nicotine from Tennessee-sourced Tobacco plants.
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Exceptional Packaging - The Company’s high-end products will comprise high quality packaging,
unique and customizable labeling for specific customers and retailers.
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Age Verification A commitment to verifying and ensuring that all Breathe customers are
at least 21 years old, through specific product labeling and marketing efforts focused on the adult
population age 21 and older.
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Environmentally Conscious Production and Disposal Process A commitment to
establishing an environmentally aware production and disposal process, which shall include a special
recycling program for eligible retailers where (a) said retailers will be provided with a self-mailer option
to ship expended lithium batteries and other recyclables to a designated facility and (b) where proceeds
from these eligible recyclables will then be shared with the respective retailers.
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Developing Our Organizational Capability Continuing to develop our organizational capability
through recruiting, retaining and rewarding highly capable people and through performance
management.
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Pursuing Growth Opportunities Focusing on pursuing growth opportunities after launching our
current product offerings and seeking brands, other products, and partnerships to complement our high-end quality products.
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Maximizing our financial performance Continuing to drive our business activities to deliver improved
financial performance.
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Developing a global distribution platform with the emphasis of serving customers throughout the entire
world.
License to Intellectual Property and Brand Portfolio
Breathe has the exclusive licensing rights to sell the following product lines:
●
Mini e-cigarette Pack - a standard e-cigarette pack designed for vending machines and convenience
stores.
●
Original non CP - a standard rechargeable single unit without the child protective device.
●
Original with CP - a standard rechargeable single unit with the child protective device.
●
Smart e-cigarette PCC - Smart e-cigarette carrying case, 2 rechargeable mini-e-cigarettes with 5
cartridges and iPhone chargeable connections.
●
5 Pack mini Ref - 5 mini cartridges for the mini size e-cigarette.
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5 pack Standard Ref - 5 refillable cartridges for the mini-size e-cigarettes.
Pricing, Sales Model; e-Commerce and Retail
Breathe plans to offer its Products at prices, determined based on pricing strategies that are developed by the Company from time to time and which management believes to be best suited to achieve the Company’s goals at such time. These pricing strategies are expected to be developed based on a number of factors, including the needs and behaviors of customers, purchase volumes, market specific criteria, and the Company’s costs of goods.
The price of the brand portfolio of products are broken down as follows, with prices varying based on product type and distribution channel (e-commerce vs. retail):
Management believes that the elegant design of the packaging, along with high quality products which feature excellent tasting, proprietary and handcrafted flavors justifies the costs and increases the margins.
Market Opportunity
The e-cigarette industry is booming - approximately 3.5 million Americans regularly use e-cigarettes, according to a 2013 study done by Mary Diduch. The Centers for Disease Control show that e-cigarette use quadrupled in a single year from 2009 to 2010. Based on 2011 numbers alone, 21% of adult smokers in the United States have used e-cigarettes, 6% of all adults have tried e-cigarettes, and general awareness of e-cigarettes rose to 60% of all adults, up from 40% from 2010 according to a 2013 study published by the CDC. The co-founder of the Tobacco Vapor Electronic Cigarette Association stated in March 2012 that nearly 20 million e-cigarette cartridges are sold in the United States, per week.
Moreover, there is currently a favorable regulatory environment with certain federal, local and state regulation focused at advertising, age verification and use bans in public areas.
Marketing and Growth Strategies
In order to increase brand awareness, the Company began to focus its marketing initiatives and efforts through the development of a proprietary system that has accumulated over 20 million individuals that have the potential to see very advertisement and social media post produced by the Company. In addition to hosting a secure web portal, www.breathecig.com, that promotes the Company’s products and will handle orders, the Company has also been marketed on major social media platforms: LinkedIn, Facebook, Twitter, Instagram, Google and Pinterest. Because of this successful initial marketing effort:
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The Company has already received hundreds of requests for more information on its products.
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These initial efforts have been cost effective and have not involved a substantial drive to promote sales.
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The Company’s website has received over 600,000 visitors during the last 18 months.
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The Company has received numerous requests from customers interested in purchasing Breathe’s products including but not limited to major retail groups, Hotel Chains, Restaurants and Club Owners.
Production and Supply for e-cigarette Lines
The launch of a new E-Cigarette line involves input from many different sources, from the manufacturer to the customer.
The stages of the development, manufacturing, production and distribution process of the E-cigarette can be summarized as follows:
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Discussions with designers and creators (includes analysis and factory trends, target clientele and market communication);
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Concept choice;
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Produce mock-ups for final acceptance of unit device, packaging and flavoring;
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Receive bids from component suppliers;
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Choose suppliers;
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Schedule production and packaging;
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Issue component part purchase orders;
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Follow quality control procedures for incoming components;
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Follow packaging and inventory control procedures;
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Engage U.S. based FDA certified e-liquid manufacturer to produce and fill nicotine cartridges after receiving Component Parts; and
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Production specialists who carry out packaging or logistics for storage, order preparation and shipment.
Procurement and Distribution
In launching E-Cigarette lines, the Company must be able to coordinate procuring the Component Parts, manufacturing the product, packaging the product, storage, distribution and order processing. The Company has been in discussions with a Canadian-based and Chinese based manufacturer who will produce the pen devices. The Company has been in discussions with a U.S. based manufacturer who will produce the e-liquids and who will also fill the cartridges with the e-liquids, which in turn will allow all of the Company’s consumables to be U.S. oriented. Therefore, after the pen devices are manufactured overseas, the e-liquid filled cartridges will be inserted in the U.S. and ready for distribution.
The Company has been in discussions with a distribution center and warehouse located in Knoxville, TN who will procure the component goods from the manufacturers and other suppliers, package the Company’s products for distribution, manage purchase orders and the electronic data interchange.
Additionally, the distribution partner, under the supervision of the Company’s leadership, will be responsible for negotiate pricing and payment terms with suppliers, manufacture and package the products and coordinate payment to the suppliers.
Finally, the Company’s experienced leadership team will be responsible for all component costs, transportation, assembly costs and a management fee paid to the Distribution and Manufacturer.
Retail and Wholesale Distribution:
The Company is developing unique and distinct brands for its E-cigarette Products for purposes of marketing and selling such branded E-cigarette Products, initially in North America, China, Africa, and Europe, through retail and wholesale distribution channels, including convenience stores, retail chains, wholesale trade, pharmacies, gas stations, hotels, industrial customers, clubs, casinos and duty free stores.
In addition, the Company intends to enter into exclusive agreements with various distributors providing them with exclusivity on certain brands of Product in defined territories and markets worldwide.
E-Commerce:
The Company intends to distribute its branded Products through its website, www.breathecig.com, and other online sales platforms. Through its e-commerce sales initiatives, the Company hopes to generate recurring purchases of its exclusive brands of E-cigarettes from customers who are legally allowed to purchase cigarettes in the United States and other regions. Management expects that its marketing strategy will include various forms of social media as a key element in its marketing strategies and in further establishing and growing the Company’s business.
White Label/Private Brand Distribution:
The Company is actively pursuing opportunities and relationships to develop and offer its Products on a “white label”, private branded basis. Management of the Company believes that there is an opportunity to supply Products on a custom branded basis to a variety of customers for purposes of resale. These potential customers may include wholesale and retail customers that have or wish to develop a private customizable label.
Competition
Competition in the electronic cigarette industry is intense. We compete with other sellers of electronic cigarettes, most notably Lorillard, Inc., Altria Group, Inc. and Reynolds American Inc., big tobacco companies, through their electronic cigarettes business segments; the nature of our competitors is varied as the market is highly fragmented and the barriers to entry into the business are low.
We compete primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, advertising and price. We are subject to highly competitive conditions in all aspects of our business. The competitive environment and our competitive position can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors’ introduction of low-priced products or innovative products, cigarette excise taxes, higher absolute prices and larger gaps between price categories, and product regulation that diminishes the ability to differentiate tobacco products.
Our principal competitors are “big tobacco”, U.S. cigarette manufacturers of both conventional tobacco cigarettes and electronic cigarettes like Altria Group, Inc., Lorillard, Inc. and Reynolds American Inc. We compete against “big tobacco” who offers not only conventional tobacco cigarettes and electronic cigarettes but also smokeless tobacco products such as “snus” (a form of moist ground smokeless tobacco that is usually sold in sachet form that resembles small tea bags), chewing tobacco and snuff. Furthermore, we believe that “big tobacco” will devote more attention and resources to developing and offering electronic cigarettes as the market for electronic cigarettes grows. Because of their well-established sales and distribution channels, marketing expertise and significant resources, “big tobacco” is better positioned than small competitors like us to capture a larger share of the electronic cigarette market. We also compete against numerous other smaller manufacturers or importers of cigarettes. There can be no assurance that we will be able to compete successfully against any of our competitors, some of whom have far greater resources, capital, experience, market penetration, sales and distribution channels than us. If our major competitors were, for example, to significantly increase the level of price discounts offered to consumers, we could respond by offering price discounts, which could have a materially adverse effect on our business, results of operations and financial condition.
Government Regulations
A recent United States Federal Court decision permits the United States Food and Drug Administration to regulate electronic cigarettes as “tobacco products” under the Family Smoking Prevention and Tobacco Control Act of 2009 and the United States Food and Drug Administration has indicated that it intends to do so.
Based on the December 2010 U.S. Court of Appeals for the D.C. Circuit’s decision in Sottera, Inc. v. Food & Drug Administration, 627 F.3d 891 (D.C. Cir. 2010), the United States Food and Drug Administration (the “FDA”) is permitted to regulate electronic cigarettes as “tobacco products” under the Family Smoking Prevention and Tobacco Control Act of 2009 (the “Tobacco Control Act”).
Under this Court decision, the FDA is not permitted to regulate electronic cigarettes as “drugs” or “devices” or a “combination product” under the Federal Food, Drug and Cosmetic Act unless they are marketed for therapeutic purposes.
Because we do not market our electronic cigarettes for therapeutic purposes, our electronic cigarettes are subject to being classified as “tobacco products” under the Tobacco Control Act. The Tobacco Control Act grants the FDA broad authority over the manufacture, sale, marketing and packaging of tobacco products, although the FDA is prohibited from issuing regulations banning all cigarettes or all smokeless tobacco products, or requiring the reduction of nicotine yields of a tobacco product to zero. Among other measures, the Tobacco Control Act (under various deadlines):
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Increases the number of health warnings required on cigarette and smokeless tobacco products,
increases the size of warnings on packaging and in advertising, requires the FDA to develop graphic
warnings for cigarette packages and grants the FDA authority to require new warnings;
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Requires practically all tobacco product advertising to eliminate color and imagery and instead
consist solely of black text on white background;
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Imposes new restrictions on the sale and distribution of tobacco products, including significant new
restrictions on tobacco product advertising and promotion as well as the use of brand and trade names;
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Bans the use of “light,” “mild,” “low” or similar descriptors on tobacco products;
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Gives the FDA the authority to impose tobacco product standards that are appropriate for the
protection of the public health (by, for example, requiring reduction or elimination of the use of
particular constituents or components, requiring product testing, or addressing other aspects of tobacco
product construction, constituents, properties or labeling);
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Requires manufacturers to obtain FDA review and authorization for the marketing of certain new or
modified tobacco products;
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Requires pre-market approval by the FDA for tobacco products represented (through
labels, labeling, advertising, or other means) as presenting a lower risk of harm or tobacco-related
disease;
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Requires manufacturers to report ingredients and harmful constituents and requires the FDA to
disclose certain constituent information to the public;
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Mandates that manufacturers test and report on ingredients and constituents identified by the FDA as
requiring such testing to protect the public health, and allows the FDA to require the disclosure of testing
results to the public;
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Requires manufacturers to submit to the FDA certain information regarding the health, toxicological,
behavioral or physiologic effects of tobacco products;
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Prohibits use of tobacco containing a pesticide chemical residue at a level greater than allowed under
federal law;
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Requires the FDA to establish “good manufacturing practices” to be followed at tobacco
manufacturing facilities;
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Requires tobacco product manufacturers (and certain other entities) to register with the FDA; and
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Grants the FDA the regulatory authority to impose broad additional restrictions.
The Tobacco Control Act also requires establishment, within the FDA’s new Center for Tobacco Products, of a Tobacco Products Scientific Advisory Committee to provide advice, information and recommendations with respect to the safety, dependence or health issues related to tobacco products. As indicated above, the Tobacco Control Act imposes significant new restrictions on the advertising and promotion of tobacco products. For example, the law requires the FDA to finalize certain portions of regulations previously adopted by the FDA in 1996 (which were struck down by the Supreme Court in 2000 as beyond the FDA’s authority). As written, these regulations would significantly limit the ability of manufacturers, distributors and retailers to advertise and promote tobacco products, by, for example, restricting the use of color, graphics and sound effects in advertising, limiting the use of outdoor advertising, restricting the sale and distribution of non-tobacco items and services, gifts, and sponsorship of events and imposing restrictions on the use for cigarette or smokeless tobacco products of trade or brand names that are used for non-tobacco products. The law also requires the FDA to issue future regulations regarding the promotion and marketing of tobacco products sold or distributed over the internet, by mail order or through other non-face-to-face transactions in order to prevent the sale of tobacco products to minors.
It is likely that the Tobacco Control Act could result in a decrease in tobacco product sales in the United States, including sales of our electronic cigarettes.
While the FDA has not yet mandated electronic cigarettes be regulated as tobacco products, the FDA issued proposed regulations on April 25, 2014 seeking to regulate electronic cigarettes as tobacco products. Under these proposed rules, products meeting the statutory definition of “tobacco products,” except accessories of a proposed deemed tobacco product, would be subject to the Federal Food, Drug, and Cosmetic Act (the FD&C Act), as amended by the Family Smoking Prevention and Tobacco Control Act (Tobacco Control Act). The Tobacco Control Act provides FDA authority to regulate cigarettes, cigarette tobacco, roll-your-own tobacco, smokeless tobacco, and any other tobacco products that the Agency by regulation deems to be subject to the law. Option 1 of the proposed rule would extend the Agency's “tobacco product” authorities in the FD&C Act to all other categories of products, except accessories of a proposed deemed tobacco product, that meet the statutory definition of “tobacco product” in the FD&C Act. Option 2 of the proposed rule would extend the Agency's “tobacco product” authorities to all other categories of products, except premium cigars and the accessories of a proposed deemed tobacco product, that meet the statutory definition of “tobacco product” in the FD&C Act. FDA also is proposing to prohibit the sale of “covered tobacco products” to individuals under the age of 18 and to require the display of health warnings on cigarette tobacco, roll-your own tobacco, and covered tobacco product packages and in advertisements. Further, the FDA proposed to extend its authority to cover additional products that meet the definition of a tobacco product under the proposed rule: Tobacco Products Deemed To Be Subject to the Food, Drug & Cosmetic Act (Deeming). Currently FDA regulates cigarettes, cigarette tobacco, roll-your-own tobacco and smokeless tobacco. Proposed newly “deemed” products would include: electronic cigarettes, cigars, pipe tobacco, certain dissolvables that are not “smokeless tobacco,” gels and water pipe tobacco.
If electronic cigarettes are regulated as proposed, the FDA will implement new rules to govern the labeling of electronic cigarettes, including smokeless tobacco product warning labels and “light,” “low,” “mild” or similar descriptors for tobacco products. These new laws are expected to have a significant public health impact by decreasing the number of people using tobacco products, resulting in lives saved, increased life expectancy, and lower medical costs. In addition, the FDA will also restrict the way electronic cigarette manufacturers, retailers, and distributers can advertise and promote cigarettes and smokeless tobacco products, especially marketing efforts designed to appeal to youth. Such restrictions relating to marketing, advertising, and promotion will include: prohibiting tobacco brand name sponsorship of any athletic, musical, or other social or cultural event, or any team or entry in those events, requiring that audio ads use only words with no music or sound effects, prohibiting the sale or distribution of items, such as hats and tee shirts, with cigarette and smokeless tobacco brands or logos and requiring that manufacturers receive a written order from FDA permitting the legal marketing of a new tobacco product. The FDA’s traditional “safe and effective” standard for evaluating medical products does not currently apply to tobacco. FDA evaluates new tobacco products based on a public health standard that considers the risks and benefits of the tobacco product on the population as a whole, including users and non-users. To legally market new tobacco products, a written order from FDA must be received permitting its marketing in the United States.
In this regard, total compliance and related costs are not possible to predict and depend substantially on the future requirements imposed by the FDA under the Tobacco Control Act. Costs, however, could be substantial and could have a material adverse effect on our business, results of operations and financial condition. In addition, failure to comply with the Tobacco Control Act and with FDA regulatory requirements could result in significant financial penalties and could have a material adverse effect on our business, financial condition and results of operations and ability to market and sell our products. At present, we are not able to predict whether the Tobacco Control Act will impact us to a greater degree than competitors in the industry, thus affecting our competitive position.
With the acquisition of Breathe, management determined that it would be in the best interest of the Company and its shareholders to operate each company separate and independently of each other. The operation of DNA Canada, Inc. and Breathe were inconsistent. Breathe is a manufacturer and distributor of e-cigarette and related products while DNA Canada, Inc. is an exploration stage mining company. The spin-off of DNA Canada, Inc. will allow each company to focus on its principal business activity and facilitate capital formation.
On March 5, 2015, the Company entered into an Agreement and Plan of Merger pursuant to which the Company merged with its wholly owned subsidiary, Breathe eCig Corp., a Nevada corporation with no material operations and created for the sole purpose of affecting a name change pursuant to Chapter 92A.180 of the Nevada Revised Statutes. Upon the consummation of the Merger on March 11, 2015, the separate existence of Breathe eCig Corp. ceased, and the shareholders of the Company became shareholders of the surviving company, named Breathe eCig Corp. As permitted under Nevada law, the sole purpose of the Merger was to effect a change to the Company’s name from DNA Precious Metals, Inc. to Breathe eCig Corp. This change to the Amended Articles of Incorporation and name change took effect on March 11, 2015.
Spinoff of Mining operations:
The Company declared a stock dividend to its shareholders of record as of February 3, 2015 of its wholly owned subsidiary, DNA Canada, Inc. Each shareholder of record on this date received one share of DNA Canada, Inc. for every two shares of DNA Precious Metals Inc. owned by the shareholder on this date. All stock dividends will be rounded up to the next whole number. With the completion of the stock dividend, the Company, no longer has an equity interest in DNA Canada, Inc.
The former shareholders of Breathe participating in the stock dividend were required to tender for redemption any shares of DNA Canada, Inc. common stock received pursuant to the stock dividend in accordance with the Exchange Agreement.
The following table represents the approximate value of the assets transferred and liabilities assumed by DNAC in connection with the spinoff:
The $5,288,703 represents the receivable that the Company would be due from DNAC following the stock dividend. This amount is not expected to be received as DNA Canada, Inc. does not have sufficient cash to repay the balance due. The Company will write off this receivable balance against the additional paid in capital of $4,188,806, and the remaining $1,099,897 will be reflected as a dividend.
With the acquisition of Breathe, management determined that it would be in the best interest of the Company and its shareholders to operate each company separate and independently of each other. The operation of DNA Canada, Inc. and Breathe were inconsistent. Breathe is a manufacturer and distributor of e-cigarette and related products while DNA Canada, Inc. is an exploration stage mining company. The spin-off of DNA Canada, Inc. will allow each company to focus on its principal business activity and facilitate capital formation.
On March 5, 2015, the Company entered into an Agreement and Plan of Merger pursuant to which the Company merged with its wholly owned subsidiary, Breathe eCig Corp., a Nevada corporation with no material operations and created for the sole purpose of affecting a name change pursuant to Chapter 92A.180 of the Nevada Revised Statutes. Upon the consummation of the Merger on March 11, 2015, the separate existence of Breathe eCig Corp. ceased, and the shareholders of the Company became shareholders of the surviving company, named Breathe eCig Corp. As permitted under Nevada law, the sole purpose of the Merger was to effect a change to the Company’s name from DNA Precious Metals, Inc. to Breathe eCig Corp. This change to the Amended Articles of Incorporation and name change took effect on March 11, 2015.
SUBSEQUENT EVENTS
On January 25, 2016, Mr. Seth M. Shaw succeeded Mr. Joshua Kimmel as Chief Executive Officer of the Company. Mr. Kimmel resigned as a director and officer of the Company at that time. On April 5, 2016, Mr. Shinsuke Nakano (‘Nakano”) was appointed CEO of the Company. Simultaneously, Mr. Shaw was appointed Interim Chief Financial Officer and Director.
On February 5, 2016 the Company filed a definitive Form 14A ("shareholder proxy") to amend the authorized issuable common shares from 500,000,000 with a par value of $0.001 per share to 8,000,000,000 common shares with a par value of $0.001 per share. This Authorized Share Increase Amendment was approved by the Board of Directors on February 1, 2016. The Board of Directors elected to obtain stockholder approval of the Authorized Share Increase Amendment by written consent (“Written Consent”) pursuant to Article II, Section 12 of our Bylaws and Section 78.370 of the Nevada Revised Statues. The close of business on February 4, 2016 has been fixed as the record date for the determination of holders of our Common Stock entitled to receive notice of and discretion to approve the Authorized Share Increase Amendment.
On March 15, 2016 the Company’s shareholders ratified managements restructuring plan by approving the increase in authorized shares to 8,000,000,000 (Quorum was achieved with 50.9% of outstanding shares having voted.)
On April 6, 2016, Mr. Shinsuke Nakano has assumed the positions of Director, Chairman of the Board ("Chairman") and Chief Executive Officer ("CEO"); and the Company appointed Mr. Takehiro Abe to the positions of Chief Operating Officer ("COO") and Director ("Board Member"). The outgoing CEO, Mr. Seth M. Shaw, continues to serve the Company as its Interim Chief Financial Officer ("Interim CFO") and as a Director.
Shinsuke Nakano, 33, is based in Tokyo, Japan and is the founder of AXS Company, Ltd., a successful company dedicated to production of infomercials and TV programs. Thereafter, Mr. Nakano focused on venture capital, and founded White Fox, Co. Ltd. in Japan and launched the Alternative Wall Street Academy ('AWA"), in September, 2015. Mr. Nakano currently has academies in nine cities throughout Japan and is now looking to replicate this business model in the US.
Mr. Takehiro Abe (“Abe”), 33, obtained his Master of Engineering Degree from Nagoya University in 2007, specializing in micro-nano systems. He was then a system engineer at Hitachi, Ltd. In 2009, he left Hitachi and started his independent practice as a financial planner. Currently, as the president of LDSQUARE Co., Ltd., Mr. Abe provides institutional financial consulting and services. He also identifies suitable investment opportunities on both domestic and overseas emerging markets.
On May 10, 2016, the Company issued 1,965,570,000 shares of common stock to the principal of White Fox, Mr. Shinsuke Nakano and investors who had invested $196,557 into the Company in the form of payment of various settlements and invoices outstanding. The investment was treated as a private placement at $0.0001, whereby the Company issued shares to Nakano and the investors which represents about 71.7% of the shares issued and outstanding.
Trademark Settlement/Disposal of eCigarette Operations
As of March 30, 2016, pursuant to a settlement agreement under trademark litigation with plaintiff, Breathe LLC (a Florida organization), the Company has ceased its continuing operations in the eCigarette business (the effective date of the discontinuance of operations in that industry). In accordance with the settlement agreement, the Company will pay two cash payments ($10,000 immediately and $15,000 due by July 31, 2016) and issue 50 million restricted common shares of Company stock (which was issued April 15, 2016 at a value of $50,000) in addition to the transfer of 5,000,000 common shares which it holds in Tauriga Sciences, Inc. (at a value of $0 as this had been written off). The Company further agrees to split 50/50 any future sales of its held inventory. The sale of inventory shall be a joint effort by the two companies and shall last for a duration of one year from April 1, 2016. After such period, the Company will dispose of any remaining inventory.
White Fox Ventures, Inc.
In an agreement dated as of April 1, 2016, the Company acquired White Fox Ventures, Inc. ("White Fox") for in an undetermined amount of shares equating 85% of the total authorized capital of the Company. White Fox, a Nevada Corporation was in existence less than 60 days and the only asset in the company was a license agreement that they entered into with a Japanese company. Since the license agreement only stipulated a royalty fee on sales, White Fox did not record a value to the agreement. When the Company was completing its due diligence on this acquisition, they determined that the agreement and acquisition were not in the best interests of the Company at this time. The parties are working on an alternative structure at this time. As a result of this, the agreement has been rescinded. The principal of White Fox, Mr. Shinsuke Nakano (“Nakano”) and investors had invested $196,557 into the Company in the form of payment of various settlements and invoices outstanding. The investment is treated as private placement at $0.0001, whereby the Company, on May 10, 2016, issued to Nakano and the investors 1,965,570,000 shares of common stock, which will represent about 71.7% of the shares issued and outstanding at the time the agreement was rescinded. In addition, for their investments, Nakano was named as the Chief Executive Officer of the Company and the Chairman of the Board and Abe to the position of Chief Operating Officer ("COO") and Director ("Board Member").
Item 1A.
Item 1A. Risk Factors
Risks related to our eCigarette operations in 2015. The following is representative of our discontinued operations. In accordance with March 30, 2016, settlement agreement under trademark litigation with plaintiff, Breathe LLC (a Florida organization), the Company has ceased its continuing operations in the eCigarette business. In accordance with the settlement agreement, The Company further agrees to split 50/50 any future sales of its held inventory. The sale of inventory shall be shall be a joint effort by the two companies and shall last for a duration of one year from April 1, 2016. After such period, the Company will dispose of any remaining inventory, at such time the Company shall no longer operate in the ECigarette industry in any capacity.
We are a development stage company winding down a discontinued operation as we attempt to start a new line of business. We have generated minimal online revenues and distribution sales to two customers. The Company as a going concern is in doubt.
We are a development stage company and our only business line is discontinued. As an eCigarette company we did not achieve profitability. We are subject to all of the risks inherent in a new business. We have generated limited revenues only and all other sales have been to two other distributors. At December 31, 2015 we have a working deficit of $2,094,601 and an accumulated deficit of $9,438,405. We require additional capital to finance our discontinued operations as well as any future business lines. We currently have no commitment for additional funding and there can be no assurance that we will be able to secure additional funding, or if available, available on terms acceptable to us.
During our operations unexpected events may occur, including litigation, changes in government regulations, fires, floods, or earthquakes. It is not always possible to fully insure against such risks and we may decide not to take out insurance against such risks as a result of high premiums or for other reasons. Should such liabilities arise, they may impede our exploration activities, raise costs and otherwise reduce the commercial viability of the Property.
We compete with larger, better-capitalized competitors in the eCigarette industry.
The eCigarette industry is intensely competitive, including financing, development of distribution networks, marketing and product innovation. It requires significant capital, established distribution networks, large expenditures for marketing and promotion to gain penetration and increased market share in order to effectively compete in the eCigarette industry. Larger companies with significant resources have an advantage over us. Competition for resources at all levels is very intense, particularly affecting the market penetration to increase market share.
Compliance with SEC reporting requirements can be costly.
We do not have any employees to segregate responsibilities and may be unable to afford increasing our staff or engaging outside consultants or professionals to overcome our lack of employees. During the course of our operations, we may identify other deficiencies that we may not be able to remedy in time to satisfy the requirements imposed by the Sarbanes-Oxley Act for compliance with that Section 404. If we fail to achieve and maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information.
Legislation, including the Sarbanes-Oxley Act of 2002, may make it difficult for us to retain or attract officers and directors.
We may be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of rules and regulations that govern publicly held companies. The Sarbanes-Oxley Act has resulted in a series of rules and regulations that increase responsibilities and liabilities of directors and executive officers. We are a small company with a limited operating history and no revenues. This may influence the decisions of potential candidates we may recruit as directors or officers. The perceived increased personal risk associated with these recent changes may deter qualified individuals from accepting these roles.
Risks related to our operations as an eCigarette manufacturer.
The following risk factors reflect our current operations as a result of our acquisition of Breathe LLC. And Breathe eCigs Corp. (“Breathe” or “Breathe OldCo.”)
Breathe has a limited operating history, and may not be successful in developing profitable business operations.
Breathe is a development stage company focused on the e-cigarette market. Breathe was organized in October 2013. Breathe’s business operations must be considered in light of the risks, expenses and difficulties frequently encountered by a developmental stage company. As of December 31, 2014, Breathe has not generated any revenues and has limited operations. Breathe will require additional capital to finance its ongoing operations. There is nothing at this time on which to base an assumption that our business operations will be successful in the long-term. Breathe’s future operating results will depend on many factors, including:
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Breathe’s ability to raise adequate working capital;
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success of in developing and marketing our e-cigarettes;
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demand for e-cigarettes;
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increased regulations of e-cigarettes
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the level of our competition; and
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Breathe’s ability to attract and maintain key management and employees.
While our officers and directors have significant business experience, there can be no assurance that this experience will help us fully implement its business plan. Prospects for success must be considered in the context of a new company in a highly competitive industry with few barriers to entry.
We have limited capital and will need to raise additional capital in the future.
Breathe does not currently have sufficient capital to fund both our continuing operations and its planned growth. Breathe will require additional capital to continue to expand its operations. Breathe may be unable to obtain additional capital when required. Future business development activities, as well as our administrative requirements (such as salaries, insurance expenses and general overhead expenses, as well as legal compliance costs and accounting expenses) will require a substantial amount of additional capital and cash flow.
Breathe may pursue sources of additional capital through various financing transactions or arrangements, including joint venturing of projects, debt financing, equity financing or other means. Breathe may not be successful in identifying suitable financing transactions in the time period required or at all, and we may not obtain the capital we require by other means. If Breathe does not succeed in raising additional capital, Breathe’s operations will terminate and there is a risk of loss of your entire investment.
Any additional capital raised through the sale of equity may dilute the ownership percentage of our stockholders. Raising any such capital could also result in a decrease in the fair market value of your equity securities because our assets would be owned by a larger pool of outstanding equity. The terms of securities we issue in future capital transactions may be more favorable to our new investors, and may include preferences, superior voting rights and the issuance of other derivative securities, and issuances of incentive awards under equity employee incentive plans, which may have a further dilutive effect.
The Company’s ability to obtain financing may be impaired by such factors as the capital markets (both generally and in our industry in particular), our limited operating history, national unemployment rates and the departure of key employees. Further, economic downturns will likely decrease our revenues may increase our requirements for capital. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs (even to the extent that we reduce our operations), we may be required to cease our operations, divest our assets at unattractive prices or obtain financing on unattractive terms.
We may not be able to successfully manage our growth, which could lead to our inability to implement our business plan.
Our growth is expected to place a significant strain on our managerial, operational and financial resources, especially considering that we currently only have a small number of executive officers, employees and advisors. Further, as we enter into various contracts or other transactions, we will be required to manage multiple relationships with various consultants, businesses and other third parties. There can be no assurance that our systems, procedures and/or controls will be adequate to support our operations or that our management will be able to achieve the rapid execution necessary to successfully implement our business plan. If we are unable to manage our growth effectively, our business, results of operations and financial condition will be adversely affected, which could lead to us being forced to abandon or curtail our business plan and operations.
Our executive officers and key employees will be crucial to our business, and we may not be able to recruit, integrate and retain the personnel we need to succeed.
Our future success is dependent, in a large part, on retaining the services of our current officers and directors. The knowledge, leadership and technical expertise of management would be difficult to replace. While no director has plans to leave or retire in the near future, the loss of any of our directors could have a material adverse effect on our operating and financial performance, including our ability to develop and execute our long The loss of the services of any key personnel, or our inability to attract, integrate and retain highly skilled technical, management, sales and marketing personnel could result in significant disruption to our operations, including our inability or limited success in developing our job verticals, completion of our initiatives, including growth plans and the results of our operations. Any failure by us to find suitable replacements for our key management may be disruptive to our operations. Competition for such personnel can be intense, and we may be unable to attract, integrate and retain such personnel successfully.
Breathe does not have any independent directors and have not implemented various corporate governance measures, in the absence of which, stockholders may have more limited protections against interested director transactions, conflicts of interest and similar matters.
Breathe does not have any independent directors to evaluate its decisions nor have we adopted corporate governance measures. Although not required by rules or regulations applicable to us, corporate governance measures such as the presence of independent directors, or the establishment of an audit and other independent committees of our Board of Directors, would be beneficial to our stockholders. We do not presently maintain any of these protections for our stockholders. It is possible that if our Board of Directors included independent directors and if we were to adopt corporate governance measures, stockholders would benefit from greater assurance that decisions were being made with impartiality by directors and that policies had been implemented to define conduct of our management and board members. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our officers and recommendations for director nominees may be made by existing members of the Board of Directors, who may have a direct interest in the outcome. Although we anticipate expanding the Board of Directors to include independent directors at some point in the future, when and if this will occur is uncertain.
Our management controls a significant percentage of our current outstanding common stock.
As of the date of this report, our officers and directors collectively and beneficially own a more than 50% of our outstanding common stock. This concentration of voting control gives management substantial influence over any matters which require a stockholder vote, including without limitation the election of directors and approval of merger and/or acquisition transactions, even if their interests may conflict with those of other stockholders. It could have the effect of delaying or preventing a change in control of, or otherwise discouraging, a potential acquirer from attempting to obtain control of the company. This could have a material adverse effect on the market price of our common stock or prevent our stockholders from realizing a premium over the then prevailing market prices for their shares of common stock.
Our business will suffer if we cannot adequately protect our patent and proprietary rights
We have a patent pending. The patent application may be challenged. In addition, there can be no assurance that the patent will provide us with meaningful protection from competition, or that we will possess the financial resources necessary to enforce any of our patents. Also, we cannot be certain that any products that we (or a licensee) develop will not infringe upon any patent or other intellectual property right of a third party. We also rely upon trade secrets, know-how, and continuing technological advances to develop and maintain our competitive position.
We are vulnerable to intellectual property infringement claims brought against us by others.
Successful intellectual property infringement claims against us could result in monetary liability or a material disruption in the conduct of our business. We cannot be certain that our products, content and brand names do not or will not infringe valid patents, trademarks, copyrights or other intellectual property rights held by third parties. We expect that infringement claims in our markets will increase in number. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. If we were found to have infringed the intellectual property rights of a third party, we could be liable to that party for license fees, royalty payments, lost profits or other damages, and the owner of the intellectual property might be able to obtain injunctive relief to prevent us from using the technology or software in the future. If the amounts of these payments were significant or we were prevented from incorporating certain technology into our products, our business could be significantly harmed. We may incur substantial expenses in defending against these third party infringement claims, regardless of their merit. As a result, due to the diversion of management time, the expense required to defend against any claim and the potential liability associated with any lawsuit, any significant litigation could significantly harm our business, financial condition and results of operations.
If we are unable to protect our, proprietary rights or maintain our rights to use key technologies of third parties, our business may be harmed.
We may be issued patents. Our patent applications or patents may be later challenged, invalidated or circumvented, and the rights granted under patents may not provide us with a competitive advantage. We may also face risks associated with any trademarks to which we own the rights. Policing unauthorized use of our patented, proprietary technology and other intellectual property rights could involve significant expense and could be difficult or impossible, particularly given the global nature of the Internet and the fact that the laws of certain other countries may afford us little or no effective protection of our intellectual property.
We may incur significant increased costs as a result of operating as a public company, and our management may be required to devote substantial time to new compliance initiatives.
In the future, we may incur significant legal, accounting and other expenses as a result of operating as a public company. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as new rules subsequently implemented by the SEC, have imposed various new requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage.
In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we are required to perform system and process evaluation and testing on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.
Risks Related to e-cigarettes:
E-cigarettes may be subject to extensive government regulations.
In early May, 2016, the FDA came out with new regulation which brings e-cigarettes under its Aegis. The final rule will become effective August 8th, 2016. Of significant import, for manufacturers of e-cigarettes the following requirements will now apply -
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Submit an application and obtain FDA authorization to market a new tobacco product (for timelines and more details please see Deeming Tobacco Products To Be Subject to the Federal Food, Drug, and Cosmetic Act)
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Register establishment(s) and submit product listing to FDA by December 31, 2016 (this currently only applies to domestic manufacturers)
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Submit listing of ingredients
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Submit information on harmful and potentially harmful constituents (HPHCs)
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Submit tobacco health documents
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Do not introduce into interstate commerce modified risk tobacco products (e.g., products with label, labeling, or advertising representing that they reduce risk or are less harmful compared to other tobacco products on the market) without an FDA order
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Manufacture your tobacco product with the required warning statement on packaging and advertisements
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Market your tobacco product in compliance with other applicable statutory requirements, rules and regulations
E-cigarettes may be subject to extensive government regulations.
E-cigarettes are likely to become subject to increasing government regulation Compliance with these government regulations may result in increased costs. If E-cigarettes become subject to taxes similar to regular cigarettes, or restriction on where individuals can smoke e-cigarettes, demand may decrease.
The FDA has concluded that electronic cigarettes may contain ingredients that are known to be toxic to humans and may contain other ingredients that may not be safe.
The FDA conducted a preliminary analysis on some samples of electronic cigarettes and components from two leading brands. These samples included 18 of the various flavored, nicotine, and no-nicotine cartridges offered for use with these products. These cartridges were obtained in order to test some of the ingredients contained in them and inhaled by users of electronic cigarettes. The FDA's Center for Drug Evaluation, Division of Pharmaceutical Analysis (DPA) analyzed the cartridges from these electronic cigarettes for nicotine content and for the presence of other tobacco constituents, some of which are known to be harmful to humans, including those that are potentially carcinogenic or mutagenic. The DPA's analysis of the electronic cigarette samples showed that the product contained detectable levels of known carcinogens and toxic chemicals to which users could potentially be exposed. DPA's testing also suggested that quality control processes used to manufacture these products are inconsistent or non-existent. Specifically, the DPA's analysis of the electronic cigarette cartridges from the two leading brands revealed the following:
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Diethylene glycol was detected in one cartridge at approximately 1%. Diethylene glycol, an
ingredient used in antifreeze, is toxic to humans.
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Certain tobacco-specific nitrosamines which are human carcinogens were detected in half of the
samples tested.
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Tobacco-specific impurities suspected of being harmful to humans-anabasine, myosmine, and-
nicotyrine-were detected in a majority of the samples tested.
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The electronic cigarette cartridges that were labeled as containing no nicotine had low levels of nicotine
present in all cartridges tested, except one.
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Three different electronic cigarette cartridges with the same label were tested and each cartridge
emitted a markedly different amount of nicotine with each puff. The nicotine levels per puff ranged
from 26.8 to 43.2 mcg nicotine/100 mL puff.
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One high-nicotine cartridge delivered twice as much nicotine to users when the vapor from that
electronic cigarette brand was inhaled than was delivered by a sample of the nicotine inhalation product
(used as a control) approved by FDA for use as a smoking cessation aid.
Because our products may contain ingredients that are known to be toxic to humans, any decreases in tobacco product sales in the United States, including sales of our electronic cigarettes, could have a material adverse effect on our business, results of operations and financial condition.
The FDA has received voluntary reports of adverse events involving e-cigarettes from consumers, health professionals and concerned members of the public.
The FDA regularly receives voluntary reports of adverse events involving e-cigarettes from consumers, health professionals and concerned members of the public. The adverse events described in these reports have included hospitalization for illnesses such as:
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Pneumonia
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Congestive heart failure,
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Disorientation,
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Seizure,
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Hypotension, and
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Other health problems.
Whether e-cigarettes caused these reported adverse events is unknown. Some of the adverse events could be related to a pre-existing medical condition or to other causes that were not reported to the FDA. Because our products may contribute to adverse events requiring hospitalization, any decreases in tobacco product sales in the United States as a result, including sales of our electronic cigarettes could have a material adverse effect on our business, results of operations and financial condition.
There have been publicized incidents of electronic cigarettes exploding if improperly used.
There have been several news reports publicizing incidents in which electronic cigarettes have exploded. According to such news reports, the cause of such electronic cigarettes exploding was due to improper use by users of such electronic cigarettes that charged the devices with equipment that was not intended for such devices. Although we notify users of our products with regard to how to properly use our products, we may be unable to prevent improper use that may result in explosions of our products similar to that publicized in recent news reports, which could have a material adverse effect on our business, results of operations and financial condition.
The recent development of electronic cigarettes has not allowed the medical profession to study the long-term health effects of electronic cigarette use.
Because electronic cigarettes were recently developed the medical profession has not had a sufficient period of time to study the long-term health effects of electronic cigarette use. Currently, therefore, there is no way of knowing whether or not electronic cigarettes are safe for their intended use. If the medical profession were to determine conclusively that electronic cigarette usage poses long-term health risks, electronic cigarette usage could decline, which could have a material adverse effect on our business, results of operations and financial condition.
Our business, results of operations and financial condition could be adversely affected if we are taxed like other tobacco products or if we are required to collect and remit sales tax on certain of our internet sales.
Presently the sale of electronic cigarettes is not subject to federal excise taxes, and most state and local excise taxes, like the sale of conventional cigarettes or other tobacco products, all of which have faced significant increases in the amount of taxes collected on their sales. At present, the sale of electronic cigarettes is subject to state excise taxes in only a small number of states, Minnesota and North Carolina. However, should federal, state and local governments and or other taxing authorities impose excise taxes similar to those levied by Minnesota and North Carolina, it may have a material adverse effect on the demand for our products, as consumers may be unwilling to pay the increased costs for our products.
We may be unable to establish the systems and processes needed to track and submit the excise and sales taxes we collect through Internet sales, which would limit our ability to market our products through our websites which would have a material adverse effect on our business, results of operations and financial condition. States such as New York, Hawaii, Rhode Island and North Carolina have begun collecting sales taxes on Internet sales where companies have used independent contractors in those states to solicit sales from residents of that state. The requirement to collect, track and remit sales taxes based on independent affiliate sales may require us to increase our prices, which may affect demand for our products or conversely reduce our net profit margin, either of which would have a material adverse effect on our business, results of operations and financial condition.
The market for electronic cigarettes is a niche market, subject to a great deal of uncertainty and is still evolving.
Electronic cigarettes, having recently been introduced to market, are at an early stage of development, represent a niche market and are evolving rapidly and are characterized by an increasing number of market entrants. Our future sales and any future profits are substantially dependent upon the widespread acceptance and use of electronic cigarettes. Rapid growth in the use of, and interest in, electronic cigarettes is recent, and may not continue on a lasting basis. The demand and market acceptance for these products is subject to a high level of uncertainty. Therefore, we are subject to all of the business risks associated with a new enterprise in a niche market, including risks of unforeseen capital requirements, failure of widespread market acceptance of electronic cigarettes, in general or, specifically our products, failure to establish business relationships and competitive disadvantages as against larger and more established competitors.
We face intense competition and our failure to compete effectively could have a material adverse effect on our business, results of operations and financial condition.
We are a developmental stage company with limited capital. We will face intense competition from larger, well established e-cigarette manufacturers including big tobacco companies which are increasingly entering into the e-cigarette market. There can be no assurance that we will be able to compete based on the superior quality of our product and niche marketing opportunities.
Sales of conventional tobacco cigarettes have been declining, which could have a material adverse effect on our business.
The overall U.S. market for conventional tobacco cigarettes has generally been declining in terms of volume of sales, as a result of restrictions on advertising and promotions, funding of smoking prevention campaigns, increases in regulation and excise taxes, a decline in the social acceptability of smoking, and other factors, and such sales are expected to continue to decline. Recently, a national drug store chain announced that it would cease selling tobacco products. If other national drug store chains also decide to cease selling tobacco products, cigarette sales could decline further. While the sales of electronic cigarettes have been increasing over the last several years, the electronic cigarette market is only developing and is a fraction of the size of the conventional tobacco cigarette market. A continual decline in cigarette sales may adversely affect the growth of the electronic cigarette market, which could have a material adverse effect on our business, results of operations and financial condition.
Electronic cigarettes face intense media attention and public pressure.
Electronic cigarettes are new to the marketplace and since their introduction certain members of the media, politicians, government regulators and advocate groups, including independent medical physicians have called for an outright ban of all electronic cigarettes, pending regulatory review and a demonstration of safety. A partial or outright ban would have a material adverse effect on our business, results of operations and financial condition.
We may experience product liability claims in our business, which could adversely affect our business.
The tobacco industry in general has historically been subject to frequent product liability claims. As a result, we may experience product liability claims from the marketing and sale of electronic cigarettes. Any product liability claim brought against us, with or without merit, could result in:
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Liabilities that substantially exceed our product liability insurance, which we would then be
required to pay from other sources, if available;
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An increase of our product liability insurance rates or the inability to maintain insurance coverage
in the future on acceptable terms, or at all;
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Damage to our reputation and the reputation of our products, resulting in lower sales;
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Regulatory investigations that could require costly recalls or product modifications;
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Litigation costs; and
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The diversion of management’s attention from managing our business.
Any one or more of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
If we experience product recalls, we may incur significant and unexpected costs and our business reputation could be adversely affected.
We may be exposed to product recalls and adverse public relations if our products are alleged to cause illness or injury, or if we are alleged to have violated governmental regulations. A product recall could result in substantial and unexpected expenditures that could exceed our product recall insurance coverage limits and harm to our reputation, which could have a material adverse effect on our business, results of operations and financial condition. In addition, a product recall may require significant management time and attention and may adversely impact on the value of our brands. Product recalls may lead to greater scrutiny by federal or state regulatory agencies and increased litigation, which could have a material adverse effect on our business, results of operations and financial condition.
Product exchanges, returns and warranty claims may adversely affect our business.
If we are unable to maintain an acceptable degree of quality control of our products we will incur costs associated with the exchange and return of our products as well as servicing our customers for warranty claims. Any of the foregoing on a significant scale may have a material adverse effect on our business, results of operations and financial condition.
Adverse economic conditions may adversely affect the demand for our products.
Electronic cigarettes are new to market and may be regarded by users as a novelty item and expendable as such demand for our products may be extra sensitive to economic conditions. When economic conditions are prosperous, discretionary spending typically increases; conversely, when economic conditions are unfavorable, discretionary spending often declines. Any significant decline in economic conditions that affects consumer spending could have a material adverse effect on our business, results of operations and financial condition.
Our success is dependent upon our marketing efforts.
We intend to undertake extensive marketing activities to promote brand awareness and our portfolio of products. If we are unable to generate significant market awareness for our products and our brands at the consumer level or unable to capitalize on significant marketing, advertising or promotional campaigns we undertake, our business, financial condition and results of operations could be adversely affected.
We depend on third party manufacturers for our products.
We depend on third party manufacturers for our electronic cigarettes. Our customers associate certain characteristics of our products including the weight, feel, draw, unique flavour, packaging and other attributes of our products to the brands we market, distribute and sell. Any interruption in supply and/or consistency of our products may adversely impact our ability to deliver our products to our wholesalers, distributors and customers and otherwise harm our relationships and reputation with customers, and have a materially adverse effect on our business, results of operations and financial condition.
Although we believe that several alternative sources for the components, chemical constituents and manufacturing services necessary for the production of our products are available, any failure to obtain any of the foregoing would have a material adverse effect on our business, results of operations and financial condition.
We may be unable to promote and maintain our brands.
We believe that establishing and maintaining the brand identities of our products is a critical aspect of attracting and expanding a large customer base. Promotion and enhancement of our brands will depend largely on our success in continuing to provide high quality products. If our customers and end users do not perceive our products to be of high quality, or if we introduce new products or enter into new business ventures that are not favorably received by our customers and end users, we will risk diluting our brand identities and decreasing their attractiveness to existing and potential customers.
Moreover, in order to attract and retain customers and to promote and maintain our brand equity in response to competitive pressures, we may have to increase substantially our financial commitment to creating and maintaining a distinct brand loyalty among our customers. If we incur significant expenses in an attempt to promote and maintain our brands, our business, results of operations and financial condition could be adversely affected.
We expect that new products and/or brands we develop will expose us to risks that may be difficult to identify until such products and/or brands are commercially available.
We are currently developing, and in the future will continue to develop, new products and brands, the risks of which will be difficult to ascertain until these products and/or brands are commercially available. For example, we are developing new formulations, packaging and distribution channels. Any negative events or results that may arise as we develop new products or brands may adversely affect our business, financial condition and results of operations.
The market for e-cigarettes is a niche market, subject to a great deal of uncertainty, and is still evolving.
E-cigarettes, having recently been introduced to market, are at an early stage of development, represent a niche market and are evolving rapidly and are characterized by an increasing number of market entrants. Our future sales and any future profits are substantially dependent upon the widespread acceptance and use of e-cigarettes. Rapid growth in the use of, and interest in, e-cigarettes is recent, and may not continue on a lasting basis. The demand and market acceptance for these products is subject to a high level of uncertainty. Therefore, we are subject to all of the business risks associated with a new enterprise in a niche market, including risks of unforeseen capital requirements, failure of widespread market acceptance of e-cigarettes, in general or, specifically our products, failure to establish business relationships and competitive disadvantages as against larger and more established competitors.
Our business is in a relatively new consumer product segment, which is difficult to forecast.
Our industry segment is relatively new, and is constantly evolving. As a result, there is a dearth of available information with which to forecast industry trends or patterns. For instance, after several quarters of rapid growth within the segment, there was a decrease in industry growth in the second quarter of 2014 as retailers grappled with high inventory levels from 2013, coupled with changes in preferences and attitudes among users of e-cigarettes and related products. There is no assurance that sustainable industry trends or preferences will develop that will lead to predictable growth or earnings forecasts for individual companies or the industry segment as a whole. We are also unable to determine what impact future governmental regulation may have on trends and preferences or patterns within our industry segment. See “Risks Related to Government Regulation” for a discussion of the risks associated with governmental regulation.
The recent development of e-cigarettes has not allowed the medical profession to study the long-term health effects of e-cigarette use.
Because e-cigarettes were recently developed the medical profession has not had a sufficient period of time to study the long-term health effects of e-cigarette use. Currently, therefore, there is no way of knowing whether or not e-cigarettes are safe for their intended use. If the medical profession were to determine conclusively that e-cigarette usage poses long-term health risks, e-cigarette usage could decline, which could have a material adverse effect on our business, results of operations and financial condition.
The use of e-cigarettes may pose health risks as great as, or greater than, regular tobacco products.
According to the FDA, e-cigarettes may contain ingredients that are known to be toxic to humans and may contain other ingredients that may not be safe. In addition, other publicized recent studies contain assertions that additional carcinogens, including formaldehyde, may be produced through the use of tank systems. Additionally, e-cigarettes may be attractive to young people and may lead them to try other tobacco products, including conventional cigarettes that are known to cause disease. Because clinical studies about the safety and efficacy of e-cigarettes have not been submitted to the FDA, consumers currently have no way of knowing whether e-cigarettes are safe before their intended use; what types or concentrations of potentially harmful chemicals are found in these products; or how much nicotine is being inhaled.
Our products contain nicotine, which is considered to be a highly addictive substance.
Certain of our products contain nicotine, a chemical found in cigarettes and other tobacco products which is considered to be highly addictive. The Family Smoking Prevention and Tobacco Control Act, empowers the FDA to regulate the amount of nicotine found in tobacco products, but may not require the reduction of nicotine yields of a tobacco product to zero. Any FDA regulation may require us to reformulate, recall and or discontinue certain of the products we may sell from time to time, which may have a material adverse effect on us.
We need to maintain state of the art software and websites.
Website and Internet technologies are constantly changing. In order for us to remain competitive we must continue to develop and or utilize state of the art software. We must also continue to upgrade our websites to make visitors to our websites an educational and rewarding experience. If the software and technologies used in our websites should fall behind, we success of our business could be materially adversely affected.
If Internet search engines’ methodologies are modified or our search result page rankings decline for other reasons, our user engagement could decline.
We will depend in part on various Internet search engines, such as Google, Bing and Yahoo!, to direct a significant amount of traffic to our website. Our ability to maintain the number of visitors directed to our website is not entirely within our control. Our competitors’ search engine optimization, or “SEO,” efforts may result in their websites receiving a higher search result page ranking than ours, or Internet search engines could revise their methodologies in an attempt to improve their search results, which could adversely affect the placement of our search result page ranking. If search engine companies modify their search algorithms in ways that are detrimental to our new user growth or in ways that make it harder for our users to use our website, or if our competitors’ SEO efforts are more successful than ours, overall growth in our user base could slow, user engagement could decrease, and we could lose existing users. These modifications may be prompted by search engine companies entering the online professional networking market or aligning with competitors. Any reduction in the number of users directed to our website would harm our business and operating results.
Risks Related to Government Regulation
Changes in laws, regulations and other requirements could adversely affect our business, results of operations or financial condition.
In addition to the anticipated regulation of our business by the FDA, our business, results of operations or financial condition could be adversely affected by new or future legal requirements imposed by legislative or regulatory initiatives, including, but not limited to, those relating to health care, public health and welfare and environmental matters. For example, in recent years, states and many local and municipal governments and agencies, as well as private businesses, have adopted legislation, regulations or policies which prohibit, restrict, or discourage smoking; smoking in public buildings and facilities, stores, restaurants and bars; and smoking on airline flights and in the workplace. Furthermore, some states prohibit and others are considering prohibiting the sales of electronic cigarettes to minors. Other similar laws and regulations are currently under consideration and may be enacted by state and local governments in the future. At present, it is not clear if electronic cigarettes, which omit no smoke or noxious odors, are subject to such restrictions. If electronic cigarettes are subject to restrictions on smoking in public and other places, our business, operating results and financial condition could be materially and adversely affected. New legislation or regulations may result in increased costs directly for our compliance or indirectly to the extent such requirements increase the prices of goods and services because of increased costs or reduced availability. We cannot predict whether such legislative or regulatory initiatives will result in significant changes to existing laws and regulations and/or whether any changes in such laws or regulations will have a material adverse effect on our business, results of operations or financial condition.
Restrictions on the public use of electronic cigarettes may reduce the attractiveness and demand for our electronic cigarettes.
Certain states, such as North Dakota, New Jersey, Utah, Arkansas, Colorado, Delaware, Hawaii, Kansas, Maryland, New Hampshire, Oklahoma, Oregon, South Dakota and Vermont, and certain cities, such as New York City, Boston, Chicago and San Francisco, have adopted limitations on the use of electronic cigarettes in certain public areas, while others are considering banning the use of electronic cigarettes. If the use of electronic cigarettes is banned anywhere the use of traditional tobacco burning cigarettes is banned, electronic cigarettes may lose their appeal as an alternative to traditional tobacco burning cigarettes, which may reduce the demand for our products and, thus, have a material adverse effect on our business, results of operations and financial condition.
Limitation by states on sales of electronic cigarettes may have a material adverse effect on our ability to sell our products.
If one or more states from which we generate or anticipate generating significant sales bring actions to prevent us from selling our products unless we obtain certain licenses, approvals or permits and if we are not able to obtain the necessary licenses, approvals or permits for financial reasons or otherwise and/or any such license, approval or permit is determined to be overly burdensome to us then we may be required to cease sales and distribution of our products to those states, which would have a material adverse effect on our business, results of operations and financial condition.
We may face the same governmental actions aimed at conventional cigarettes and other tobacco products.
Tobacco industry expects significant regulatory developments to take place over the next few years, driven principally by the World Health Organization’s Framework Convention on Tobacco Control (“FCTC”). The FCTC is the first international public health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. Regulatory initiatives that have been proposed, introduced or enacted include:
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The levying of substantial and increasing tax and duty charges;
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Restrictions or bans on advertising, marketing and sponsorship;
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The display of larger health warnings, graphic health warnings and other labeling requirements;
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Restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions
or bans on cigarette vending machines;
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Requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels;
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Requirements regarding testing, disclosure and use of tobacco product ingredients;
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Increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;
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Elimination of duty free allowances for travelers; and
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Encouraging litigation against tobacco companies.
If electronic cigarettes are subject to one or more significant regulatory initiates enacted under the FCTC, our business, results of operations and financial condition could be materially and adversely affected.
Limitation by states and cities on sales of e-cigarettes may have a material adverse effect on our ability to sell our products in the United States.
Certain states and cities have enacted laws which preclude the use of e-cigarettes where traditional tobacco-burning cigarettes cannot be used and others have proposed legislation that would categorize e-cigarettes as tobacco products, which if enacted, would be regulated in a manner equivalent to their tobacco burning counterparts. For example, San Francisco, California has passed legislation that includes e-cigarettes under its anti-smoking laws, including only allowing the use of e-cigarettes in areas where traditional cigarettes may be smoked and requiring a tobacco permit to sell e-cigarettes. Chicago, Illinois has passed legislation prohibiting the use of e-cigarettes in most public indoor places and requires that e-cigarettes may only be sold from “behind the counter.” New York City has amended its Smoke Free Air Act to ban the use of e-cigarettes anywhere that traditional cigarettes may not be used, such as bars, parks, restaurants and beaches. Similarly, Boston, Massachusetts has banned the use of e-cigarettes in the workplace and restricted the use of e-cigarettes to adults. Additionally, New Jersey, North Dakota and Utah have included bans on the use of e-cigarettes in designated smoke-free areas such as restaurants and bars, and New York has proposed law that will prohibit the sale or provision of any quantity of e-liquid used to fill e-cigarettes or cartridges. Several states and cities are currently considering similar initiatives and if such states and cities pass or further legislate to ban the use of e-cigarettes anywhere the use of traditional tobacco burning cigarettes are banned, e-cigarettes may lose their appeal as an alternative to traditional cigarettes; which may have the effect of reducing the demand for our products and as a result have a material adverse effect on our business, results of operations and financial condition.
Restrictions on the public use of e-cigarettes may reduce the attractiveness and demand for our e-cigarettes.
Certain states, cities, businesses, providers of transportation and public venues in the U.S. have already banned the use of e-cigarettes, while others are considering banning the use of e-cigarettes. If the use of e-cigarettes is banned anywhere the use of traditional tobacco burning cigarettes is banned, e-cigarettes may lose their appeal as an alternative to traditional tobacco burning cigarettes, which may reduce the demand for our products and, thus, have a material adverse effect on our business, results of operations and financial condition
We may not be able to establish sustainable relationships with large retailers or national chains.
We believe the best way to develop brand and product recognition and increase sales volume is to establish relationships with large retailers and national chains. We currently do not have established relationships with any retailers or national chains Any agreement that we reach, we may have to pay “slotting fees”, to carry and offer our products for sale based on the number of stores our products will be carried in.
We face a risk of product liability claims and may not be able to obtain adequate insurance, and any such claims could materially and adversely affect our reputation and brand image.
Our business exposes us to potential liability risks that may arise from the clinical testing, manufacture, and sale of our products. Substantial damage awards have been issued in certain jurisdictions against pharmaceutical and tobacco companies based on claims for injuries allegedly caused by the use of pharmaceutical and tobacco products, and similar claims may be brought against manufacturers and distributors of e-cigarette products. Liability claims may be expensive to defend and result in large judgments against us. We currently carry liability insurance, however there is no assurance that it will continue to be available to us at an affordable price if at all. Our insurance may not reimburse us, or the coverage may not be sufficient to cover claims made against us. We cannot predict any or all of the possible harms or side effects that may result from the use of our current products or any future products and, therefore, the amount of insurance coverage we currently hold may not be adequate to cover all liabilities we might incur. If we are sued for any injury allegedly caused by our products, our liability could exceed our ability to pay the liability. Whether or not we are ultimately successful in any adverse litigation, such litigation could consume substantial amounts of our financial and managerial resources, all of which could have a material adverse effect on our business, financial condition, results of operations, prospects and stock price. In addition, even if a product liability claim is found to be without merit or is otherwise unsuccessful, the negative publicity surrounding such assertions regarding our products or processes could materially and adversely affect our reputation and brand image. Any loss of consumer confidence in the safety and quality of our products would be difficult and costly to overcome.
If we have improperly marketed and distributed certain of our products in violation of governmental regulations we may be subject to fines, sanctions, administrative actions, penalties and other liability, either civil and or criminal.
We may be subject to disciplinary, administrative, regulatory and or legal actions if the FDA, or any regulatory agencies in either the United Sates or any foreign jurisdiction in which our products are sold determines that our products or the means by which we marketed and sold our products was effected without the proper regulatory approvals. As a distributor and marketer of a product that a government or regulatory agency may assert is a smoking cessation device and or a tobacco product, the Company faces potential fines, sanctions, administrative actions, penalties, and other liability for: improper sales, labeling, making improper claims, referencing or publishing to its websites, marketing materials, advertisements, testimonials or representations that certain of our products have the ability or potential to treat, cure or otherwise improve a medical condition, and or provide a healthier alternative to other more traditional tobacco products.
Moreover, in light of the FDA’s recently issued proposed rule seeking to regulate various deemed tobacco products such as e-cigarettes, we may be required to follow federal and state tobacco labeling laws, and could face potential fines, sanctions, administrative actions, penalties and other liability, either civil and or criminal, for any violations thereof.
Any violation of law with respect to the Company’s marketing materials and or labeling could expose our company to liability including but not limited to fines, sanctions, administrative actions, penalties, civil actions and or criminal prosecution. And although our company maintains general liability insurance, our company’s insurance may not cover potential claims of this type or may not be adequate to indemnify our company for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on our company’s business, results of operations and financial condition.
Risks Related To Our Securities
As an “emerging growth company” under the JOBS Act, we are permitted to rely on exemptions from certain disclosure requirements.
We qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
Report pursuant to Section 404(b) of the Sarbanes-Oxley Act;
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Comply with all requirements that may be adopted by the Public Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and financial statements;
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Submit certain execute compensation matters to shareholder advisory votes, such as “say-on-pay” and “say on frequency;”
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Disclose certain executive compensation related items such as the correlation between executive compensation and performance.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
Our financial statements may not be comparable to those of companies that comply with new or revised accounting standards.
We have elected to take advantage of the benefits of the extended transition period that Section 107 of the JOBS Act provides an emerging growth company, as provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
Our status as an “emerging growth company” under the JOBS Act OF 2012 may make it more difficult to raise capital when we need to do it.
Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and because we will have an extended transition period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.
We will incur increased costs and demands upon management as a result of complying with the laws and regulations that affect public companies, which could materially adversely affect our results of operations, financial condition, business and prospects.
As a public company and particularly after we cease to be an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. These requirements include compliance with Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules implemented by the SEC and NASDAQ. In addition, our management team will also have to adapt to the requirements of being a public company. We expect that compliance with these rules and regulations will substantially increase our legal and financial compliance costs and will make some activities more time-consuming and costly.
The increased costs associated with operating as a public company will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. Additionally, if these requirements divert our management’s attention from other business concerns, they could have a material adverse effect on our results of operations, financial condition, business and prospects.
However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.”
We will not be required to comply with certain provisions of the Sarbanes-Oxley Act for as long as we remain an “emerging growth company.”
Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company.” At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.
Reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.
As an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
In the event that your investment in our shares is for the purpose of deriving dividend income or in expectation of an increase in market price of our shares from the declaration and payment of dividends, your investment will be compromised because we do not intend to pay dividends.
We have never paid a dividend to our shareholders. We intend to retain cash for the continued development of our business. As a result, your return on investment will be solely determined by your ability to sell your shares in a secondary market.
The market valuation of our business may fluctuate due to factors beyond our control and the value of your investment may fluctuate correspondingly.
The market valuation of developmental stage companies, such as us, frequently fluctuate due to factors unrelated to the past or present operating performance of such companies. Our market valuation may fluctuate significantly in response to a number of factors, many of which are beyond our control, including:
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changes in securities analysts’ estimates of our financial performance, although there are currently no analysts covering our stock;
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fluctuations in stock market prices and volumes, particularly among securities of emerging growth companies;
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changes in market valuations of similar companies;
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announcements by us or our competitors of significant contracts, new technologies, acquisitions commercial relationships, joint ventures or capital commitments;
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variations in our quarterly operating results;
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fluctuations in related commodities prices; and
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additions or departures of key personnel.
Currently there is no established public market for our common stock, and there can be no assurances that any established public market will ever develop or that our common stock will be quoted for trading.
There is currently no established public market whatsoever for our securities. A market maker has submitted an application with FINRA on our behalf so as to be able to quote the shares of our common stock on the OTCBB maintained by FINRA. The Company has been issued a symbol “DNAP”. There can be no assurances as to whether;
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any market will develop;
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the prices at which our common stock will trade; or
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the extent to which investor interest in us will lead to the development of an active, liquid trading markets generally result in lower price volatility and more efficient execution of buy and sell orders for investors.
In addition, our common stock is unlikely to be followed by any market analysts, and there may be few institutions acting as market makers for our common stock. Either of these factors could adversely affect the liquidity and trading price of our common stock. Until our common stock is fully distributed and an orderly market develops in our common stock, if ever, the price at which it trades is likely to fluctuate significantly. Prices for our common stock will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for shares of our common stock, developments affecting our business, including the impact of the factors referred to elsewhere in these Risk Factors, investor perception of exploratory stage mining companies and general economic and market conditions.
Because the SEC imposes additional sales practice requirements on brokers who deal in penny stocks, some brokers may be unwilling to trade them. This means that you may have difficulty reselling your shares.
Our common stock is classified as a penny stock and will be covered by Section 15(g) of the Securities Exchange Act of 1934. These rules impose additional sales practice requirements on brokers/dealers who sell our securities in this offering or in the aftermarket. For sales of our securities, the broker/dealer must make a special suitability determination and receive from you a written agreement prior to making a sale for you. Because of the imposition of the foregoing additional sales practices, it is possible that brokers will not want to make a market in our shares. This could prevent you from reselling your shares and may cause the price of the shares to decline.
FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our stock.
FINRA has adopted rules that require broker-dealer to have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may have the effect of reducing the level of trading activity and liquidity of our common stock. Further, many brokers charge higher transactional fees for penny stock transactions. As a result, fewer broker-dealers may be willing to make a market in our common stock, which may limit your ability to buy and sell our stock.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains “forward-looking statements”. Such forward-looking statements concern our anticipated results and developments in our operations in future periods, planned exploration and development of its properties, plans related to its business and other matters that may occur in the future. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of our management.
Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors which could cause actual events or results to differ from those expressed or implied by the forward-looking statements
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as required by law.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties.
During 2015 our corporate headquarters was an approximately 1,289 square foot space at 322 Nancy Lynn Lane, Suite 7, Knoxville, TN 37919. The monthly rent was approximately $1,200. With the resignation of Joshua Kimmel, CEO, the Company vacated this location.
The Company’s inventory is handled by a third party and no inventory was held on Company premises.
Item 3.
Item 3. Legal Proceedings
Typenex Dispute
On May 18, 2015, Typenex Co-Investment, LLC (“Typenex”) filed a binding arbitration notice against the Company in the State of Utah, Case No. 150903317 (the “Utah Lawsuit”) regarding a certain Warrant to Purchase Shares of Common Stock (the “Warrant”) issued by the Company to Typenex on April 28, 2014 (the “Arbitration”) in connection with a Convertible Promissory Note of the same date (the “Note”). On April 29, 2015, Typenex sent a Notice of Exercise to the Company for the issuance of 7,541,511 shares of the Company’s common stock (the “Initial Shares”) based on a cashless exercise provision contained in the Warrant along with an opinion letter indicating the shares should be issued without restrictive legend pursuant to Rule 144 under the Securities Act of 1933, as amended. The Company immediately filed for an emergency injunction in the State of New Jersey, the location of the Company’s transfer agent. The injunction was granted The Company has filed a response and counterclaim to the Arbitration notice alleging, among other things, that Typenex did not fulfill its obligations under the original Note and failed to disclose material matters regarding Typenex and its principal to the Company and requested damages and attorneys’ fees be paid by Typenex to the Company.
On September 8, 2015, the Company’s transfer agent was required to release the Initial Share to Typenex as a result of the Company failing to maintain the bond requirement agreed to by the Company and Typenex as part of the injunction. The number of Initial Shares is based on a price reset to equal the conversion price associated with the Note. The price reset which resulted in the partial conversion to 7,541,511 common shares based on the difference between the current market value (market price of $0.25 multiplied by exercise shares of 690,625) and the exercise price ($0.0375) multiplied by number of exercise shares (690,625.) This number is then divided by the adjusted price of the common stock ($0.01946.)
On October 13, 2015, Typenex and the Company participated in a mediation in an attempt to resolve the Utah Lawsuit without either party having to incur additional legal and court fees. As a result of the mediation and in order to resolve the Utah Lawsuit and the Arbitration and all other disputes between, on November 17, 2015 (the “Typenex Effective Date”), the Company and Typenex entered into a Settlement Agreement, Waiver and Release of Claims (the “Settlement Agreement”) and related Exchange Agreement (the “Exchange Agreement”), Pursuant to the terms of the Settlement Agreement and Exchange Agreement, the Company agreed to issue to Typenex 8,000,000 shares of the Company’s common shares of stock in exchanges for any rights Typenex may or may not have had under the Warrant. The Company will deliver the shares to Typenex in two installments: (i) 4,000,000 Shares with five trading days of the Effective Date (the “First Installment Shares”) and (ii) 4,000,000 Shares on or before January 1, 2016 (the “Second Installment Shares”). The First Installment Shares and the Second Installment Shares are collectively referred to herein as the Typenex Shares.
Additionally, pursuant to the Settlement Agreement, beginning on January 1, 2016, Typenex shall have the right to put the Typenex Shares back to the Company (the “Put Right”) at the following prices: (a) for Typenex Shares put to the Company from January 1, 2016 to April 30, 2016 the price will be $0.01 per share; (b) for Typenex Shares put to the Company from May 1, 2016 to August 31, 2016 the price will be at $0.02 per share; and (c) any Typenex Shares put to Company between September 1, 2016 and December 31, 2016 the price will be at $0.03 per share. Typenex shall have the right to put up to 666,667 Typenex Shares per month to Company (the “Monthly Put Amount”) per month. If the number of Typenex Shares put to Company in a given month is less than the Monthly Put Amount such difference, the “Rollover Shares”, Typenex shall have the right to put such Typenex Shares to Company at any time in the same or immediately succeeding period. In addition to the Monthly Put Amount, Typenex shall also have the right to put up to 666,667 Rollover Shares per month to Company. At such time that Typenex’s Net Sales (gross proceeds of sales of the Typenex Shares sold in a minus any trading commissions or costs associated with clearing and selling such Typenex Shares minus the purchase price paid for any shares of Common Stock purchased on the open market) of Typenex Shares is equal to or greater than $200,000, Typenex’s Put Right shall automatically terminate and Typenex shall have no further rights to put Typenex Shares or Rollover Shares.
Additionally, Typenex agreed that during any calendar week it would not sell more Typenex Shares than the greater of (i) 10% of the weekly trading volume of the Common Stock as reported on Bloomberg, L.P. or (ii) an aggregate market value of $5,000.
Upon execution of the Settlement Agreement and Exchange Agreement, both parties released all claims each may have against the other relating to any other agreements to which both may be party except for any disputes that may arise under the Settlement Agreement, Exchange Agreement and the documents ancillary to both. Under the Settlement Agreement, the Company executed a Confession of Judgment in the amount of $500,000 (the “Confession of Judgment”). In the event the Company commits a material breach of the Settlement Agreement which is not cured within five trading days, Typenex shall have the right to enforce the Confession of Judgment. The Confession of Judgment, if filed as set forth above, would carry an interest rate of 12% until paid.
On March 25, 2016, the Company paid $55,000 to Typenex to settle all claims and obligations resulting from these agreements between the parties.
Trademark dispute
On August 5, 2015, the Company received a notice from Breathe, LLC, a Florida limited liability company (“Breathe LLC”), that the Company was violating Breathe LLC’s trademark rights under U.S. Trademark Registration No. 4,633,887 for the name “Breathe” filed on September 27, 2013 and a demand for the Company to immediately cease and desist from such use. The Company believes that it has rights of prior use to the name “Breathe” under the federal trademark laws. As such, on August 10, 2015, the Company filed (i) a Petition for Cancellation with the United States Patent and Trademark Office regarding U.S. Trademark Registration No. 4,633,887 and (ii) a Complaint against Breathe LLC in the United States District Court of Eastern District of Tennessee (the "Tennessee Court"), Civil Action No. 3:15-cv-00345 requesting a declaratory judgment regarding the Company’s rights to use the trademark. A default judgment is currently pending in the Tennessee Court against Breathe LLC for failure to respond to the Tennessee Court complaint. Breathe LLC has requested the default judgment not be entered and that it be given an extension of time to respond. The Tennessee Court has not ruled on Breathe LLC’s request as of the date of the filing of this Form 10-Q. On August 16, 2015, the Company was notified that on August 12, 2015 Breathe LLC filed a Complaint in the United States Southern District Court of New York (the “New York Court”), Civil Action N. 1:15-cv-06403, against the Company and its Chief Executive Officer, Joshua Kimmel, demanding, among other things, damages of $5,000,000 and an injunction restraining the Company from using the name “Breathe”. On November 8, 2015, the New York Court held a hearing regarding Breathe LLC’s request for a preliminary injunction. On the same day, the New York Court entered an order denying Breathe LLC’s request for a preliminary injunction finding "uncontroverted evidence showing that Kimmel began distributing, promoting and advertising electronic cigarettes with the "Breathe" mark prior to September 27, 2013". Despite the New York Court’s denial, the overall litigation continues. Although the Company believes it will prevail on the merits, there can be no guaranty that it will do so. If the Company is unable to prevail, it may be required to market its products under a different name.
As of March 30, 2016, pursuant to a settlement agreement under trademark litigation with plaintiff, Breathe LLC (a Florida organization), the Company has ceased its continuing operations in the eCigarette business (the effective date of the discontinuance of operations in that industry). In accordance with the settlement agreement, the Company will pay two cash payments ($10,000 immediately and $15,000 due by July 31, 2016) and issue 50 million restricted common shares of Company stock (which was issued April 15, 2016) in addition to the transfer of 5,000,000 common shares which it holds in Tauriga Sciences, Inc.. The Company further agrees to split 50/50 any future sales of its held inventory. The sale of inventory shall be a joint effort by the two companies and shall last for a duration of one year from April 1, 2016. After such period, the Company will dispose of any remaining inventory.
On April 15, 2016 the Company issued 50,000,000 shares of common stock pursuant to this agreement to be recorded at the closing price of the stock as of the day the Company entered into the settlement agreement in the amount of $50,000 (at par value.)
Comito’s Intellectual Property Lawsuit
On December 18, 2015, Giovanni & Peter Comito ("Comitos") filed suit in United States District Court, in the Southern District of Florida (Case No. 15-cv-62653-BB) against the Company and Joshua Kimmel. The Comitos were asserting claims of specific performance, breach of contract and fraud arising out of a contract for sale and purchase of certain patent assets and common stock owed. The Comitos funded directly or through third parties $1,000,000 (see NOTE 7 - Related Party Transactions) for consideration of the purchase of intellectual property assets. 3476863 Canada Inc. (Peter Comito) also funded $50,000 pursuant to a stock purchase agreement on August 24, 2015 that was not fulfilled at the time of filing.
On March 9, 2016, the Company Entering into a Comprehensive Settlement Agreement in Federal Lawsuit Concerning the Transfer of Intellectual Property and the Retirement of $1,000,000 in Outstanding Promissory Notes.
Specifically, the execution of a comprehensive settlement agreement ("the Settlement") with Giovanni Comito and Peter Comito ("Plaintiffs") with respect to Case No, 15-cv-62653-BB filed in United States District Court for the Southern District of Florida. Under terms of the Settlement, the Company will transfer its portfolio of Intellectual Property ("IP" or "Patents") to the Plaintiffs in exchange for the termination of all pending litigation. The Company will retain ownership of the name "Breathe" and related trademarks, which later were relinquished as part of the settlement agreement with Breathe LLC on March 30, 2016.
Additionally, the Company agreed to issue to the Plaintiffs and their affiliated parties 85,832,640 shares of common stock (the "Settlement Shares"). The Settlement Shares will be "restricted securities" as defined by the Securities Act of 1933, as amended.
On March 28, 2016 the Company issued 85,832,640 common shares to satisfy this term and provision of settlement agreement with Comitos.
In addition, as a result of the Settlement, the Company has retired $1,000,000 in promissory notes due the plaintiffs.
Item 4.
Item 4. Mine Safety Disclosure
n/a
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities.
A. Market Information
Our common stock does not trade on any Exchange or electronic quotation system and there can be no assurance that our common stock will trade on any Exchange or electronic quotation system. Moreover, even if a market in our common stock develops there can be no assurance that an active trading market will be sustained.
Our common stock is quoted on the OTC Bulletin Board under the symbol “BVAP.” Trading in our common stock in the over-the-counter market has been very limited and the quotations set forth below are not necessarily indicative of actual market conditions. The high and low sales prices for our common stock for each quarter of the fiscal years ended December 31, 2015 and 2014, according to OTC Markets Group Inc., were as follows:
From the period of April 1, 2016 and May 5, 2016 the Company’s Common Stock traded in a range of $0.0004 and $.003.
B. Holders.
As of December 31, 2015 there were 131 shareholders of record of our Common Stock.
Our transfer agent is Olde Monmouth Stock Transfer Co., Inc. Their telephone number is (732) 872-2727 and there mailing address is 200 Memorial Parkway, Atlantic Highlands, NJ 07716.
C. Dividends.
Holders of our common stock are entitled to receive such dividends as our board of directors may declare from time to time from any surplus that we may have. We have not paid dividends on our common stock since the date of our incorporation and we do not anticipate paying any common stock dividends in the foreseeable future. We anticipate that any earnings will be retained for development and expansion of our businesses and we do not anticipate paying any cash dividends in the foreseeable future. Future dividend policy will depend upon our earnings, financial condition, contractual restrictions and other factors considered relevant by our Board of Directors and will be subject to limitations imposed under Nevada law.
D. Equity Compensation Plan.
None.
E. Sale of Unregistered Securities
We have issued shares of our common stock for services rendered, capital formation and corporate acquisitions. We relied on the exemptive provisions of Section 4(2) of the Securities Act. We have also offered shares pursuant to the exemptive provisions of Regulation S.
On or about January 14, 2014, the Company we issued a total of 1,000,000 restricted common stock shares valued at US$340,000 to Fayz Yacoub and Ramy Yacoub for the purchase of the St. Anne Claims. We valued the shares at $0.34 per share.
On or about April 3, 2014 the Company issued 50,000 restricted common stock shares valued at $0.25 per share to G.E(Ted) Creber for the purchase of warrants.
On or about June 03, 2014, the Company issued a total of 400,000 restricted common stock shares to Momentum Public Relations Inc. and Agoracom Investor Relations Co. in return for investor relations’ services. We valued the shares at $0.31 per share.
On or about November 04, 2014, the Company issued 250,000 restricted common stock shares valued at $ 0.08 per share to Tony Giuliano in relation to his termination package.
On or about November 10, 2014, the Company sold an aggregate of 4,810,000 restricted common stock shares to 4 persons and 4 corporate entities for $0.05 per share for an aggregate purchase price of $240,500. In addition we issued 500 000 common stock shares to Michel Lebeuf for consulting services in connection with an agreement in which he agreed to serve as V.P Legal and Corporate Development. In 2015 these shares were cancelled.
On or about December 18, 2014 the Company sold an aggregate of 4,800,000 restricted common stock shares to 5 persons and 4 corporate entities for $0.05 per share for an aggregate purchase price of $240,000.
On or about December 26, 2014, the Company sold an aggregate of 4,700,000 restricted common stock shares to 6 persons and 2 corporate entities for $0.05 per share for an aggregate purchase price of $235,000
On March 12, 2015, the Company received $50,000 at $0.03 per share (1,666,667 shares) under a subscription agreement with a company. The common shares were issued as on April 23, 2015.
On May 4, 2015, the Company issued 14,833,999 common shares to fourteen individual investors at $0.03 per share for funds in the amount of $445,020.
On June 2, 2015, the Company issued 1,999,999 common shares to five individual investors at $0.075 per share for funds in the amount of $150,000.
On June 10, 2015, the Company issued 250,000 common shares to an investor at $0.075 per share for funds in the amount of $18,750.
On July 14, 2015, the Company issued 333,333 common shares to an investor at $0.075 per share for funds in the amount of $25,000.
On July 14, 2015, the Company issued 4,000,000 common shares to an investor under a subscription agreement at $0.06 per share for funds in the amount of $240,000 less $6,500 for legal fees.
On August, 24 2015, the Company issued 3,150,000 common shares to two investors at $0.03 per share for funds in the amount of $105,000.
With respect to the sale of the securities identified above, we relied on the exemptions of Section 4(2), Regulation S or Section 3(a) 10 of the Securities Act.
●
At all times relevant the securities were offered subject to the following terms and conditions:
●
The sale was made to a sophisticated or accredited investor, as defined in Rule 502 or were issued pursuant to a specific exemption;
●
we gave the purchaser the opportunity to ask questions and receive answers concerning the terms and conditions of the offering and to obtain any additional information which we possessed or could acquire without unreasonable effort or expense that is necessary to verify the accuracy of information furnished;
●
at a reasonable time prior to the sale of securities, we advised the purchaser of the limitations on resale in the manner contained in Rule 502(d)2; and
●
neither we nor any person acting on our behalf sold the securities by any form of general solicitation or general advertising.
We used these proceeds of these securities sales for working capital purposes including but not limited to infrastructure build-out, purchase of machines and equipment, mill construction and professional fees.
Sale of Registered Stock:
During the fiscal year ended December 31, 2015, we issued 26,983,998 shares of our registered common stock for a total of $1,047,270. We used the proceeds for general working capital expenses, payments of outstanding notes, exploration expenses including infrastructure build-out.
ITEM 5.02 - Departure of directors or principal officers; election of directors; appointment of principal officers.
On January 22, 2016, Joshua Kimmel resigned as a director and CEO. Mr. Seth M. Shaw replaced Mr. Joshua Kimmel as Chief Executive Officer of the Company. Mr. Kimmel resigned. On April 5, 2016, Mr. Shinsuke Nakano was appointed CEO of the Company. Simultaneously, Mr. Shaw was appointed Interim Chief Financial Officer and Director. The outgoing CEO, Mr. Seth M. Shaw, continues to serve the Company as its Interim Chief Financial Officer ("Interim CFO") and as a Director.
Mr. Shinsuke Nakano has assumed the positions of Director, Chairman of the Board ("Chairman") and Chief Executive Officer ("CEO"); and the Company appointed Mr. Takehiro Abe to the positions of Chief Operating Officer ("COO") and Director ("Board Member").
Shinsuke Nakano, 33, is based in Tokyo, Japan and is the founder of AXS Company, Ltd., a successful company dedicated to production of infomercials and TV programs. Thereafter, Mr. Nakano focused on venture capital, and founded White Fox, Co. Ltd. in Japan and launched the Alternative Wall Street Academy ('AWA"), in September, 2015. Mr. Nakano currently has academies in nine cities throughout Japan and is now looking to replicate this business model in the US.
Mr. Takehiro Abe, 33, obtained his Master of Engineering Degree from Nagoya University in 2007, specializing in micro-nano systems. He was then a system engineer at Hitachi, Ltd. In 2009, he left Hitachi and started his independent practice as a financial planner. Currently, as the president of LDSQUARE Co., Ltd., Mr. Abe provides institutional financial consulting and services. He also identifies suitable investment opportunities on both domestic and overseas emerging markets.
Item 6.
Item 6. Selected Financial Data
The following consolidated financial data has been derived from and should be read in conjunction with our audited interim financial statements for the years ended December 31, 2015 and 2014.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with, and is qualified in its entirety by, our financial statement, and certain other financial information included elsewhere in this prospectus.
It should be noted that during the year ended December 31, 2015 we were a development stage-eCigarette company.
As of March 30, 2016, pursuant to a settlement agreement under trademark litigation with plaintiff, Breathe LLC (a Florida organization), the Company has ceased its continuing operations in the eCigarette business (the effective date of the discontinuance of operations in that industry).
The Company further agrees to split 50/50 any future sales of its held inventory. The sale of inventory shall be a joint effort by the two companies and shall last for a duration of one year from April 1, 2016. After such period, the Company will dispose of any remaining inventory.
Management’s Discussion and Analysis
Results of Operations for Fiscal Years Ended December 31, 2015 and 2014
Since our inception, we have not generated $77,194 and $0 for the years ended December 31, 2015 and 2014. Operating expenses for the years ended December 31, 2015 and 2014 totaled $7,880,194 and $6,939 respectively. Our Net Loss for 2015 and 2014 was $9,401,145 and $6,939, respectively. Our Accumulated Deficit since Inception totaled $9,438,405.
Our single largest expenses during 2015 was for professional fees paid for stock issued for consulting fees and legal and accounting fees. Professional fees, primarily for consulting fees totaled $6,554,312 in 2015 as compared to $0 in 2014. General and administrative expenses totaled $562,974 in 2015 as compared to $6,939 in 2014.
Liquidity and Capital Resources
Assets and Liabilities.
To date, our operations have been funded through revenue of $77,194 debt and equity financing. We have secured approximately $1,047,270 in equity financing and $857,513 in debt financing. We will continue to rely on debt and equity financing for our ongoing operations.
At December 31, 2015 we had cash of $10,955, prepaid expenses of $52,051. Total current assets were $177,073. Total assets were $177,073. At December 31, 2014 we had cash totaling $13,346. Total assets were $13,346. The primary reason for the increase in our assets is attributable to the acquisition of inventory and increase in prepaid expense associated with operations.
Current liabilities at December 31, 2015 totaled $2,271,674 as compared to $50,606 at December 31, 2014. We had no long term liabilities for the years ended December 31, 2015 and 2014.
We had a working capital deficit at December 31, 2015 of $2,094,601 as compared to a working capital deficit of December 31, 2014 of $37,260. Most of our funds have been invested to development of distribution channel and sales promotions. Unless we secure additional financing, or generate sufficient cash flow, we will not have sufficient liquidity to continue operations for the next twelve months.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements. We do not anticipate entering into any off-balance sheet arrangements during the next 12 months.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosure.
Interest Rate Risk
The Company’s investment policy for its cash and cash equivalents is focused on the preservation of capital and supporting the liquidity requirements of the Company. The Company’s interest earned on its cash balances is impacted on the fluctuations of U.S. and Canadian interest rates. We do not use interest rate derivative instruments to manage exposure to interest rate changes. We do not believe that interest rate fluctuations will have any effect on our operations
Item 8.
Item 8. Financial Statements and Supplementary Data.
Our financial statements have been examined to the extent indicated in their reports by KBL, LLP. and have been prepared in accordance with generally accepted accounting principles and pursuant to Regulation S-K as promulgated by the Securities and Exchange Commission and are included herein, on Page hereof.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, to allow timely decisions regarding required disclosure. Our chief executive officer and chief financial officer, with assistance from other members of our management, have reviewed the effectiveness of our disclosure controls and procedures as of December 31, 2015 based on their evaluation, have concluded that the disclosure controls and procedures were not effective.
Changes in Internal Control over Financial Reporting
There were changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the year ended December 31, 2015 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. With the Company involved in multiple law suits and the ongoing negotiations to settle outstanding liabilities the Company could no longer afford staff and had a very limited ability to obtain capital through the issuance of more debt or common stock. With the departure of the former CEO and the resignation of all of the other board members, Joshua Kimmel was the last remaining employee and board member making it impossible to have a system of effective internal control.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our principal executive and principal financial officers, we assessed, as of December 31, 2015, the effectiveness of our internal control over financial reporting. This assessment was based on criteria established in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment using those criteria, management concluded that our internal control over financial reporting as of December 31, 2015 were not effective.
Internal control over financial reporting is defined as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
·
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
·
provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
·
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
This Annual Report on Form 10-K does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this Annual Report on Form 10-K.
Evaluation of Changes in Internal Controls over Financial Reporting
There was no change in the internal control over financial reporting that occurred during the fiscal year ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors and Executive Officers and Corporate Governance.
The following information sets forth the names of our Officers and Directors during 2015 and our current. Officers and Directors, their present positions, and some brief information about their background.
Background of Officers and Directors
Former officers and directors serving during the year ended December 31, 2015:
Anthony Danieli
On June 29, 2015, Anthony Danieli was appointed as a member of the Board of Directors. Mr. Danieli was not appointed to serve as a member of any of the committees of the Board. Mr. Danieli was granted 2,000,000 shares of the Company’s Common Stock. All such shares are “restricted securities” as such term is defined by the Securities Act of 1933, as amended.
Since October 2011, Mr. Danieli has been a broker with KGS Alpha Capital Markets, L.P., a New York-based institutional income broker-dealer, in its Fixed Income Sales department. Prior to his position with KGS, Mr. Danieli served as a Senior District Manager in sales at ADP, LLC, a large comprehensive payroll services company since 2010. Mr. Danieli graduated from Florida State University in May of 2010 with a Bachelor of Arts in Finance and Entrepreneurship.
Mr. Danieli resigned November 29, 2015.
Yves Gagnon
Yves Gagnon is a former Vice-President of Operations and a Director. He is a geological engineer with a master degree in geochemistry from the Polytechnic School of the Montréal University (1983). He has been actively working for the last 35 years within the mining industry, recently acting as professional consultant developing junior companies in the process of becoming public through the startup of small mining/milling operations (Sep. 2009 to Feb. 2013). Prior to that, he was President/Chief Executive Officer of C2C Inc., a public mining company involved in the startup of a gold mine in Ecuador (Jul. 2007 to Aug. 2009). Mr. Gagnon has expertise in exploration, in mining management and in environmental mine closure planning. He acted as president/director/manager or consultant for other public and private companies: Yorbeau Resources (1984-89), Géospex Sciences Inc. (1989-96), Espalau Corp. (1996-99), Abcourt Mines (2000-07) and Métanor Resources (2001-07). He managed multi-disciplinary teams of up to 400 peoples and multi-million dollar projects, both nationally and internationally. He was instrumental in the discovery of the Bell Allard South copper-zinc deposit (for Noranda), in the return to life of the Bachelor Mining Complex (with Espalau and then with Métanor), and in the closure and reclaim of the Goldfields Mining Complex (for Barrick).
Mr. Gagnon resigned on January, 16, 2015
James Chandik
James Chandik is our former Executive Vice-President/Chief Operating Officer having resigned these positions in January 2015. Since June 2011 through the present, he has served as a director of the Company and currently retains his position as a director. Mr. Chandik received an Economic Degree from McGill University in 1977. Since our inception until March 14, 2013, Mr. Chandik was our President/Chief Executive Officer. Mr. Chandik has served as a General Manager for Disaster Kleenup Canada from February 2009 to April 2010 and prior to that position, he was the General Manager of Datacom Wireless Corporation from September 2004 to October 2008. Mr. Chandik also served as a Manager from 1997 to 2001, with Navigata Communications, Metaphor Communications, Axxent Communication.
On June 29, 2015, James Chandick submitted his resignation as a member of the Board of the Company effective as of June 29, 2015. Mr. Chandick did not hold any positions on any committees of the Board at the time of his resignation. The resignation was not the result of any disagreements with the Company.
Chris Clark
Mr. Clark has since January 2015 served as the chief legal counsel and head of business affairs for companies in the television, telecommunications, media, new technology and global security consultancy sectors. Since August 2014, Chris has served the role as General Counsel of a global security consultancy firm, Red Alert Group, Inc., based in Atlanta Georgia. Mr. Clark provides legal and business advisory counsel to the Chief Executive Officer on matters concerning the firm’s operational, financial and media content sources that it has developed over the past ten years. Additionally, through his work as General Counsel to a private equity affiliate charged with media acquisitions, Mr. Clark has been responsible for structuring special financing to launch new media properties, establish joint ventures with existing television networks and affiliates, and creating a multi-video programming distribution platform.
From January 2012 to July 2014, Mr. Clark served as the Executive Vice President of Business and Legal Affairs of a startup media and technology company in Little Rock, Arkansas, Soul of the South Television where he coordinated approximately $20 million in public and private financing to launch its television network operations. Mr. Clark was also involved in the day to day operations of the business, from overseeing contracts, human resources, managing outside counsel and vendor relationships, and ensuring that the company reached both short and long term management objectives.
From September 2008 to December 2011, Mr. Clark served as an associate in the general litigation practice of Dewey & LeBoeuf, LLP. Mr. Clark’s work focused on sports, antitrust, and labor and employment law, with rewarding experience representing multinational technology companies, players unions, and international figures.
Mr. Clark is a graduate of Columbia Law School, Class of 2008, and the University of Miami, Class of 2005.
Mr. Clark resigned May 6 2015.
David Schweizer
Mr. Schweizer was appointed as a member of the Board of Directors on May 11, 2016. Mr. Schweizer was not appointed to serve as a member of any of the committees of the Board at this time.
Mr. Schweizer, age 35, has considerable experience as both an entrepreneur and a business development expert. He has a passion for working with emerging growth companies, in such capacity he focuses on building development stage companies into revenue generating growth companies. He has successfully leveraged his skills and industry knowledge to assist businesses in commercializing proprietary technologies as well as identifying potential market opportunities.
Mr. Schweizer also has experience in raising capital from both institutional and accredited individual investors, specifically over the period of the past two and a half years. In his 20s, Mr. Schweizer built his management skills by managing a successful Mercedes Benz dealership in the suburbs of the New York City Metropolitan area. In this position, Mr. Schweizer learned to both manage and grow a multi-million dollar business, with a focus on fiscal responsibility and operating the business day to day.
Since 2009, Mr. Schweizer has held an important position within the operations department of a major United States based nuclear power plant, owned and operating by a multi-billion dollar NYSE listed energy conglomerate. Mr. Schweizer is also active in the charitable community, most notably with the Israeli based charity Save a Child's Heart.
Mr. Schweizer resigned as a member of the Board of Directors on October 16, 2015.
Background of Officers and Directors
Current officers and directors:
Joshua Kimmel
Mr. Kimmel was appointed our president, chief executive officer and a director in 2015. Has an extensive experience at the management level with companies primarily focused in the hospitality arena.
Since October of 2013, as the President and Founder of Breathe, Mr. Kimmel has developed an innovative entry into the E-cigarette market, possessing unique features not found in other market entries. He has patents pending that focus on consumer safety, including child lock features. Having worked as an advanced level sommelier and chef for almost two decades, Mr. Kimmel created proprietary handcrafted flavors manufactured in his hometown of Knoxville, Tennessee.
From September 2013 through present, Mr. Kimmel has also served on the Board of Directors of Electronic Magnetic Power Solutions, which implements disruptive patented technology licensed from Virginia Tech University for the express purpose of alternative energy use in the consumer space.
Mr. Kimmel resigned on On January 22, 2016 as a director and officer of the Company at that time.
Seth Shaw
On January 22, 2016 Mr. Seth M. Shaw was appointed as the Chairman of the Board of Directors and its new Chief Executive Officer and Chief Financial Officer.
On April 5, 2016, Mr. Shaw was appointed Interim Chief Financial Officer and Director with the appointment of, Mr. Shinsuke Nakano as CEO of the Company.
Mr. Shaw has extensive experience building companies and securing financing from a broad range of both domestic and international institutional investors. Over the past seven years, he has been instrumental in securing more than $60 million in capital, in aggregate, for several companies. Mr. Shaw started his career at American International Group (AIG) Global Investment Group, after which he gained further experience working at a prestigious Manhattan based hedge fund. In 2005, he founded Novastar Resources Ltd, a natural resources exploration company focused on the exploration and acquisition of mineral properties containing the element thorium. During this period, Mr. Shaw secured more than $17 million in financing from top tier institutional investors. Mr. Shaw served as the founding CFO of Los Angeles based Biotech firm Physician Therapeutics LLC (“PTL”) in 2004. Subsequently PTL merged with Targeted Medical Pharma (“TMP”), which announced plans for a $118 million NASDAQ IPO in February of 2011. Mr. Shaw graduated from Cornell University in 2001, with a degree in Policy Analysis Management and a concentration in Econometrics. Mr. Shaw currently serves on the Board of Directors of the Jewish Community Center (JCC) of Dutchess County (New York) and has been active in numerous charities
Shinsuke Nakano
Upon the agreement to treat $196,557 contributed to the Company in the form of payment of various settlements and invoices outstanding as private placement at $0.0001, whereby the Company, on May 10, 2016, issued to Nakano and designees 1,965,570,000 shares of common stock and simultaneous with this agreement name Mr. Nakano Chief Executive Officer of the Company and the Chairman of the Board.
Mr. Nakano, is based in Tokyo, Japan and is the founder of AXS Company, Ltd., a successful company dedicated to production of infomercials and TV programs. Thereafter, Mr. Nakano focused on venture capital, and founded White Fox, Co. Ltd. in Japan and launched the Alternative Wall Street Academy ('AWA"), in September, 2015. Mr. Nakano currently has academies in nine cities throughout Japan and is now looking to replicate this business model in the US.
Takehiro Abe
Under agreement of the private placement sale of 1,965,570,000 share for $196,557 for expenses paid on behalf of the Company Mr. Abe was appointed to the positions of Chief Operating Officer ("COO") and Director ("Board Member".)
Mr. Abe (“Abe”), 33, obtained his Master of Engineering Degree from Nagoya University in 2007, specializing in micro-nano systems. He was then a system engineer at Hitachi, Ltd. In 2009, he left Hitachi and started his independent practice as a financial planner. Currently, as the president of LDSQUARE Co., Ltd., Mr. Abe provides institutional financial consulting and services. He also identifies suitable investment opportunities on both domestic and overseas emerging markets.
Family Relationships
Anthony Danieli (Director served from June 29, 2015 until November 24, 2016) is the brother-in-law of Joshua Kimmel, a member of the Board of the Company as well as its Chief Executive Officer and Chief Financial Officer (Resigned January 22, 2016).
Committees of the Board of Directors
We presently do not have an Audit Committee, compensation committee, nominating committee, corporate governance committee or any other committee of our Board of Directors. Our entire Board of Directors meets to undertake the responsibilities which would otherwise be delegated to a committee of our Board of Directors. As of December 31, 2015 our only board member was the CEO, Joshua Kimmel.
Compensation of Directors
Our Directors do not receive cash compensation for their services as Directors but are reimbursed for their reasonable expenses incurred in attending board or committee meetings. Mr. Danieli and Mr. Schweizer were each granted 2,000,000 shares of the Company’s Common Stock.
Terms of Office
Our Directors are appointed for one-year terms to hold office until the next annual general meeting of shareholders or until removed from office in accordance with our by-laws. Our Officers are appointed by our Board of Directors and hold office until removed by our Board of Directors or terminated pursuant to their employment agreements. However, pursuant to the Share Exchange Agreement between DNA Precious Metals, Inc. and Breathe LLC James Chandick was to tender his resignation upon the spin-off of DNA Canada, Inc. On June 29, 2015, James Chandick submitted his resignation as a member of the Board of the Directors.
Involvement in Certain Legal Proceedings
During the past ten years:
1)
No petition pursuant to the federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of any of our officers or directors, or any partnership in which any such officer or director was a general partner at or within 2 years before the time of such filing, or any corporation or business association of which any such officer or director was an executive officer at or within 2 years before the time of such filing;
2)
None of our Officers or Directors has been convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);
3)
None of our Officers or Directors has been the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining any such officer or director from, or otherwise limiting, the following activities:
(i)
Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
(ii)
Engaging in any type of business practice; or
(iii)
Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws;
4)
None of our Officers or Directors has been the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of any such officer or director to engage in any activity described in paragraph (f) (3) (i) of Item 401(f) of Regulation S-K, or to be associated with persons engaged in any such activity;
5)
None of our Officers or Directors has been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission to have violated any federal or state securities law, and the judgment in such civil action or finding by the Securities and Exchange Commission has not been subsequently reversed, suspended, or vacated;
6)
None of our Officers or Directors has been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;
7)
None of our Officers or Directors has been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:
(i)
Any federal or state securities or commodities law or regulation; or
(ii)
Any law or regulation respecting financial institutions or insurance companies, including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or
(iii)
Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
8)
None of our Officers or Directors has been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3 (a) (26) of the Exchange Act (15 U.S.C. 78c (a) (26)), any registered entity (as defined in Section 1 (a) (29) of the Commodity Exchange Act (7 U.S.C. 1 (a) (29)), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Code of Ethics
Code of Ethics for Senior Executive Officers and Senior Financial Officers
We have adopted a Code of Ethics for our Officers. The code provides as follows:
▪
Each Officer is responsible for full, fair, accurate, timely and understandable disclosure in all periodic reports and financial disclosures required to be filed by us with the Securities and Exchange Commission or disclosed to our stockholders and/or the public.
▪
Each Officer shall immediately bring to the attention of the Audit Committee, or disclosure compliance officer, any material information of which the officer becomes aware that affects the disclosures made by us in our public filings and assist the audit committee or disclosure compliance officer in fulfilling its responsibilities for full, fair, accurate, timely and understandable disclosure in all periodic reports required to be filed with the Securities and Exchange Commission.
▪
Each Officer shall promptly notify our general counsel, if any, or the president or chief executive officer as well as the audit committee of any information he may have concerning any violation of our Code of Business Conduct or our Code of Ethics, including any actual or apparent conflicts of interest between personal and professional relationships, involving any management or other employees who have a significant role in our financial reporting, disclosures or internal controls.
▪
Each Officer shall immediately bring to the attention of our general counsel, if any, the president or the chief executive officer and the audit committee any information he may have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to us and the operation of our business, by us or any of our agents.
▪
Any waiver of this Code of Ethics for any officer must be approved, if at all, in advance by a majority of the independent directors serving on our board of directors. Any such waivers granted will be publicly disclosed in accordance with applicable rules, regulations and listing standards.
Section 16(a) Beneficial Ownership Reporting Compliance
Compliance with Section 16(a) of the Securities Exchange Act of 1934
For companies registered pursuant to section 12(g) of the Exchange Act, Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who beneficially own more than ten percent of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. When the Company becomes subject to section 12(g) of the Securities Act, it is the intent of all officers, directors and 5% shareholders to comply with this requirement.
Item 11.
Item 11. Executive Compensation.
Overview of Compensation Program
Our compensation philosophy is based on our belief that our compensation programs should: be aligned with stockholders’ interests and business objectives; reward performance; and be externally competitive and internally equitable. We seek to achieve three objectives, which serve as guidelines in making compensation decisions:
▪
Providing a total compensation package which is competitive and therefore enables us
to attract and retain, high-caliber executive personnel;
▪
Integrating compensation programs with our short-term and long-term strategic plan
and business objectives; and
▪
Encouraging achievement of business objectives and enhancement of stockholder
Value by providing executive management long-term incentive through equity ownership.
We may compensate our Officers with cash compensation, common stock and common stock options. We have not established any quantifiable criteria with respect to the level of compensation, stock grants or options. Rather, the Board of Directors will evaluate cash, stock grants and stock options paid by similar mining companies. We do not have a Compensation Committee of the Board of Directors.
With respect to stock grants and options which may be issued to the Company’s Officers and Directors, the Board will consider an overall compensation package that includes both cash and stock based compensation which would be in line with the Company’s overall operations and compensation levels paid to similar mining companies. On August 12, 2013, the Company approved and enacted the 2013 Stock Incentive Plan (the “Plan”). Under the 2013 Stock Incentive Plan, the Company may grant options or share awards to its full-time employees, executive officers, directors and consultants up to a maximum of 8,000,000 common shares. Under the Plan, the exercise price of each option has been established at $0.25. Stock options vest as stipulated in the stock option agreement and their maximum term is 8 years.
The following table sets forth the compensation paid by us to our Officers for the fiscal years ended December 31, 2014, 2013, 2012 and 2011. This information includes the dollar value of base salaries, bonus awards and number of stock options granted, and certain other compensation, if any. The compensation discussed addresses all compensation awarded to, earned by, or paid or named executive officers.
Executive Officer Compensation Table
* In accordance with the rules promulgated by the Securities and Exchange Commission, certain
columns relating to information that is not applicable have been omitted from this table.
(1)
Chief Executive Officer, President and Founder of Breathe since October of 2013 until his resignation January 22, 2016.
(2)
Chief Financial Officer from March 15, 2013 to October 20, 2014. Chief Executive Officer from February 21, 2014 to March 27 2014. The value of the stock awards includes 1,000,000 common shares of stock at a value of $0.25 per share of which 750,000 common shares were subsequently cancelled.
(3)
Chief Executive Officer from March 15, 2013 to February 19, 2014. The value of the stock awards includes 2,000,000 common shares of stock at a value of $0.25 per share of which 1,500,000 common shares were subsequently cancelled.
(4)
Chief Executive Officer from June 1, 2011 until March 15, 2013 and from March 27 2014 to January 16, 2015. COO from March 15, 2013 to March 27, 2014.The value of the stock awards includes 2,000,000 shares of stock at a value of $0.003 per share.
(5)
Vice-President from November 10, 2012 to January 16, 2015. The value of the stock awards includes 2,000,000 common shares of stock at a value of $0.25 per share. These shares were subsequently cancelled.
The compensation discussed herein addresses all compensation awarded to, earned by, or paid to our named executive officers through December 31, 2015.
Employment Agreements-
James Chandik - Mr. Chandik signed an employment agreement with the Company commencing June 1, 2011. The agreement was terminated when he stepped down as a corporate officer in January 2015. Effective June 1, 2011 he received an annual salary of $120,000. He was issued 2,000,000 shares of the Company’s common stock in consideration for agreeing to serve as our Chief Executive Officer at that time. His annual salary commencing June 1, 2012 and June 1, 2013 remained at $120,000 per year and no additional shares of common stock were issued.
There are currently no employment agreements.
Compensation of Directors
Mr. Danieli was granted 2,000,000 shares of the Company’s common stock. Mr. Schweizer was granted 2,000,000 shares of the Company's common stock. All such shares are “restricted securities” as such term is defined by the Securities Act of 1933, as amended. The Board of Directors has not awarded any options to our Directors. There are no contractual arrangements with any member of the Board of Directors. We have no Director’s service contracts.
Long-Term Incentive Plan Awards
We do not have any long-term incentive plans that provide compensation intended to serve as incentive for performance.
Indemnification
Under our Articles of Incorporation and Bylaws of the Company, we may indemnify an Officer or Director who is made a party to any proceeding, including a lawsuit, because of his position, if he acted in good faith and in a manner he reasonably believed to be in our best interest. We may advance expenses incurred in defending a proceeding. To the extent that the officer or director is successful on the merits in a proceeding as to which he is to be indemnified, we must indemnify him against all expenses incurred, including attorney’s fees. With respect to a derivative action, indemnity may be made only for expenses actually and reasonably incurred in defending the proceeding, and if the officer or director is judged liable, only by a court order. The indemnification is intended to be to the fullest extent permitted by the laws of the State of Nevada.
Regarding indemnification for liabilities arising under the Securities Act of 1933, which may be permitted to directors or officers under Nevada law, we are informed that, in the opinion of the Securities and Exchange Commission, indemnification is against public policy, as expressed in the Act and is, therefore, unenforceable.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information as of May 5, 2016 with respect to the beneficial ownership of the Company's Common Stock by: (i) all persons known by the Company to be beneficial owners of more than 5% of the Company's Common Stock, (ii) each director and Named Executive Officer, and (iii) by all executive officers and directors as a group.
(1)
Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares
(2)
Based on 774,813,917 issued and outstanding shares of common stock on May 5, 2016.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Except as described below, none of the following persons has any direct or indirect material interest in any transaction to which we are a party during the past two years, or in any proposed transaction to which the Company is proposed to be a party:
●
any director or officer;
●
any proposed nominee for election as a director;
●
any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to our common stock; or
●
any relative or spouse of any of the foregoing persons, or any relative of such spouse, who has the same house as such person or who is a director or officer of any parent or subsidiary.
We issued shares of our common stock to our officers and directors for services rendered.
Related Party Transactions
On August 24, 2015, the Company, received funds from 3476863 Canada Inc. (Peter Comito) in the amount of $50,000 under a Stock Purchase Agreement. The Company intended to convert these funds into equity through the issuance of common shares of stock. On March 28, 2016, the Company issued common shares under a settlement agreement to satisfy this obligation.
On September 22, 2015, Giovanni Comito purchased 10,400,000 shares of the Company’s common stock, par value $0.001, from Joshua Kimmel, the Company’s Chief Executive Officer, Chief Financial Officer and member of the Board of Directors, for an aggregate purchase price of $75,000. All such shares were “restricted securities” at the time of the purchase and will continue to be “restricted securities” as such term is defined under Rule 144 of the Securities Act of 1933, as amended.
On September 22, 2015, the Company issued an unsecured promissory note to Kimmel in consideration for gross proceeds to the Company of $75,000 (for which constitutes all proceeds received by Kimmel as part of the Comito Purchase). The Kimmel Note accrues interest at 4.5% per annum unless there is an event of default, in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the Kimmel Note will be due and payable by the Company no later than September 22, 2016.
On September 30, 2015, the Company, issued an unsecured promissory note to Giovanni Comito in consideration for gross proceeds to the Company of $400,000 pursuant to a letter of intent (“LOI”) purchase agreement for the sale of intellectual property held by the Company. The Giovanni Comito Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the Giovanni Comito Note will be due and payable by the Company no later than March 31, 2016. Accrued interest as of December 31, 2015 was $4,537. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On October 7, 2015, the Company, issued an unsecured promissory note to Bureauicom Inc. (Peter Comito) in consideration for gross proceeds to the Company of $100,000 pursuant to the LOI. The Bureauicom Inc. Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the Bureauicom Inc. Note will be due and payable by the Company no later than April 7, 2016. Accrued interest as of December 31, 2015 was $1,048. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On October 14, 2015, the Company, issued an unsecured promissory note to 3476863 Canada Inc. (Peter Comito) in consideration for gross proceeds to the Company of $100,000 pursuant to the LOI. The 3476863 Canada Inc. (Peter Comito) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the 3476863 Canada Inc. (Peter Comito) Note will be due and payable by the Company no later than April 14, 2016. Accrued interest as of December 31, 2015 was $962. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On October 16, 2015, the Company, issued an unsecured promissory note to Natter Investments (Peter Comito) in consideration for gross proceeds to the Company of $50,000 pursuant to a letter of intent (“LOI”) purchase agreement for the sale of intellectual property held by the Company. The Natter Investments (Peter Comito) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the Natter Investments (Peter Comito) Note will be due and payable by the Company no later than April 16, 2016. Accrued interest as of December 31, 2015 was $468. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On October 20, 2015, the Company, issued an unsecured promissory note to Peter Comito Family Trust in consideration for gross proceeds to the Company of $50,000 pursuant to the LOI. The Peter Comito Family Trust Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the Peter Comito Family Trust Note will be due and payable by the Company no later than April 20, 2016. Accrued interest as of December 31, 2015 was $444. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On October 28, 2015, the Company, issued an unsecured promissory note to 9138-1095 Quebec Inc. (Angelo Chiapetta) in consideration for gross proceeds to the Company of $50,000 pursuant to the LOI. The 9138-1095 Quebec Inc. (Angelo Chiapetta) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the 9138-1095 Quebec Inc. (Angelo Chiapetta) will be due and payable by the Company no later than April 28, 2016. Accrued interest as of December 31, 2015 was $395. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On November 4, 2015, the Company, issued an unsecured promissory note to 7091061 Canada Inc. (Carmine D'Argenio) in consideration for gross proceeds to the Company of $50,000 pursuant to the LOI. The 7091061 Canada Inc. (Carmine D'Argenio) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the 7091061 Canada Inc. (Carmine D'Argenio) will be due and payable by the Company no later than May 4, 2016. Accrued interest as of December 31, 2015 was $351. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On November 18, 2015, the Company, issued an unsecured promissory note to Gabriella Trust (Peter Comito) in consideration for gross proceeds to the Company of $100,000 pursuant to the LOI. The Gabriella Trust (Peter Comito) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the Gabriella Trust (Peter Comito) will be due and payable by the Company no later than May 18, 2016. Accrued interest as of December 31, 2015 was $530. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On November 18, 2015, the Company, issued an unsecured promissory note to 3482286 Canada Inc. (Peter Comito) in consideration for gross proceeds to the Company of $25,000 pursuant to the LOI. The 3482286 Canada Inc. (Peter Comito) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the 3482286 Canada Inc. (Peter Comito) will be due and payable by the Company no later than May 18, 2016. Accrued interest as of December 31, 2015 was $133. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On November 18, 2015, the Company, issued an unsecured promissory note to 3931731 Canada Inc. (Peter Comito) in consideration for gross proceeds to the Company of $25,000 pursuant to the LOI. The 3931731 Canada Inc. (Peter Comito) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the 3931731 Canada Inc. (Peter Comito) will be due and payable by the Company no later than May 18, 2016. Accrued interest as of December 31, 2015 was $133. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On November 18, 2015, the Company, issued an unsecured promissory note to 8141185 Canada Inc. (Peter Comito) in consideration for gross proceeds to the Company of $25,000 pursuant to the LOI. The 8141185 Canada Inc. (Peter Comito) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the 8141185 Canada Inc. (Peter Comito) will be due and payable by the Company no later than May 18, 2016. Accrued interest as of December 31, 2015 was $133. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On November 18, 2015, the Company, issued an unsecured promissory note to Natter Investments (Peter Comito) in consideration for gross proceeds to the Company of $25,000 pursuant to the LOI. The Natter Investments (Peter Comito) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the Natter Investments (Peter Comito) will be due and payable by the Company no later than May 18, 2016. Accrued interest as of December 31, 2015 was $133. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
At December 31, 2015, Joshua Kimmel, CEO was the only Director of the Company.
Director Independence.
We do not have an independent Board of Directors. Each of our Directors also serves as an Officer of the Company.
Item 14.
Item 14. Principal Accounting Fees and Services. - KBL, LLP
AUDIT FEES. The aggregate fees billed for professional services rendered was $45,000 and $18,000 for the audit of our annual financial statements for the fiscal years ended December 31, 2015 and 2014, respectively, and $13,000 and $12,000 for the reviews of the financial statements included in our Forms 10-Q for the fiscal years ended 2015 and 2014 respectively.
AUDIT-RELATED FEES. No fees were billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit or review of our financial statements and not reported under the caption "Audit Fee."
TAX FEES. No fees were billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning services.
ALL OTHER FEES. Other than the services described above, there were no other services provided by our principal accountants for the fiscal years ended December 31, 2015 and 2014.
We do not have an Audit Committee. Therefore, our entire Board of Directors (the "Board") serves in the capacity of the Audit Committee. In discharging its oversight responsibility as to the audit process, our Board obtained from the independent auditors a formal written statement describing all relationships between the auditors and us that might bear on the auditors' independence as required by Independence Standards Board Standard No. 1, "Independence Discussions with Audit Committees."
Our Board discussed with the auditors any relationships that may impact their objectivity and independence, including fees for non-audit services, and satisfied itself as to the auditors' independence. The Board also discussed with management and the independent auditors the quality and adequacy of its internal controls. The Board reviewed with the independent auditors their management letter on internal controls.
Our Board discussed and reviewed with the independent auditors all matters required to be discussed by auditing standards generally accepted in the United States of America, including those described in Statement on Auditing Standards No. 61, as amended, "Communication with Audit Committees." Our entire Board, acting in the capacity of the Audit Committee reviewed the audited consolidated financial statements of the Company as of and for the year ended December 31, 2014 with the independent auditors. Management has the responsibility for the preparation of the Company's financial statements and the independent auditors have the responsibility for the examination of those statements. Based on the above-mentioned review and discussions with the independent auditors our Board of Directors approved the Company's audited consolidated financial statements and recommended that they be included in its Annual Report on Form 10-K for the year ended December 31, 2015, for filing with the Securities and Exchange Commission.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
a)
The following report and consolidated financial statements are filed together with this Annual Report.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2015 and 2014
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2015 AND DECEMBER 31, 2014
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b)
Index to Exhibits
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BREATHE ECIG CORP.
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Directors of
Breathe eCig Corp.
We have audited the accompanying consolidated balance sheets of Breathe eCig Corp. (the "Company") as of December 31, 2015 and 2014, and the related consolidated statements of operations, changes in stockholders' deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Breathe eCig Corp. as of December 31, 2015 and 2014, and the results of its consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the years ended December 31, 2015 and 2014 in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the lack of profitable operations to date raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in this regard are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
KBL, LLP
/s/KBL, LLP
New York, NY
May 19, 2016
BREATHE ECIG CORP. (FORMERLY DNA PRECIOUS METALS, INC.)
CONSOLIDATED BALANCE SHEETS
* Represents members equity of Breathe LLC prior to reverse merger
See accompanying notes to consolidated financial statements.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
See accompanying notes to consolidated financial statements.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
See accompanying notes to consolidated financial statements.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
See accompanying notes to consolidated financial statements.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1 -
ORGANIZATION AND BASIS OF PRESENTATION
On June 2, 2006, Celtic Capital, Inc. was incorporated in the State of Nevada. On October 20, 2008, Celtic Capital, Inc. changed its name to Entertainment Educational Arts Inc. On May 12, 2010, the Company changed its name to DNA Precious Metals, Inc. (the “Company”). On October 29, 2010, the Company formed DNA Canada Inc., a Canadian (Province of Quebec) incorporated company, as a wholly-owned subsidiary. The Company operated all of its exploration operations through this Canadian entity.
The Company acquired certain mining claims on June 9, 2011 located in the Montauban and Chavigny townships near Grondines-West in the Portneuf County of Quebec, Canada (“Montauban Mine Property” or “Property”).
On October 30, 2013 and November 27, 2013, the Company entered into binding agreements for the asset acquisitions of an undivided one hundred percent (100%) interest in certain mineral claims and mining assets located in the Province of Quebec’s Montauban and Chavigny townships near Grondines West, in the county of Portneuf, specifically Mining Lease BM 748 and Mining Concession Miniere CM 410. The purchase price was CDN$75,000 together with the issuance of 1,050,000 common shares of the Company. The common shares for the acquisition were valued at their fair market value on the day they were issued which totaled $496,860. In connection with the asset purchase, the Company also issued 40,000 shares of common stock to a former supplier of the vendor for mining related information of the assets purchased valued at $20,000 along with cash consideration of CDN$20,000. The Company had been awaiting confirmation of the contemplated transaction from a bankruptcy court in Montreal, Quebec overviewing the financial restructuring of the vendor. The bankruptcy court approved the transaction on April 17, 2014.
On January 10, 2014, the Company entered into an asset purchase agreement for an undivided one hundred percent (100%) interest in certain mineral claims located in the Province of Quebec’s Montauban and Chavigny townships near Grondines West, in the county of Portneuf, including claims, rights, concessions and leases. The purchase price was CDN$70,000, 1,000,000 common shares of the Company and a one percent (1%) net smelter return (“NSR”). The Company paid CDN$10,000 upon the signing of the asset purchase agreement with the cash balance due, along with the common shares, upon the closing of the asset purchase agreement and transfer of the mineral claims in the name of the Company. The transfer of the mineral claims was completed in February 2014 whereby the remaining cash balance due and the common shares were released to the vendor.
The common shares for the acquisition will be valued at their fair market value on the day they were issued which totaled $340,000. The total cost of the acquisition amounted to $403,840.
On April 14, 2014, the Company entered into an asset purchase agreement for an undivided one hundred percent (100%) interest in fifty-seven (57) mining claims located in the Province of Quebec’s Montauban and Chavigny townships near Grondines West, in the county of Portneuf. The purchase price was CDN$5,000 (US $4,547). The transfer of the mining claims has been completed by the Province of Quebec in the name of the Company.
On December 4, 2014, the Company presented a renewal request with the Government of the Province of Quebec to renew all 122 claims and this has been granted through a decision dated February 23, 2015.
On January 16, 2015, Breathe eCigs Corp., a Tennessee corporation (“Breathe”), entered into a Share Exchange Agreement (the “Exchange Agreement”) with the Company, whereby the Company acquired all of the issued and outstanding membership interests Breathe LLC in consideration for the issuance of 150,000,000 shares of the Company’s common stock to the members of Breathe, LLC.
As a result of the transaction effected by the Exchange Agreement, at closing Breathe became a wholly owned subsidiary of the Company, with the former Breathe shareholders owning approximately 56% of the then issued and outstanding common stock of the Company. The Company accounted for this acquisition as a reverse merger, whereby Breathe became the accounting acquirer. As a result, the comparative figures are those of Breathe.
In connection with the acquisition of Breathe LLC, on March 5, 2015 the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which the Company merged with its wholly owned subsidiary, Breathe eCig Corp., the sole purpose of the Merger was to effect a change of the Company's name from DNA Precious Metals, Inc. to Breathe eCig Corp. This name change more accurately reflects the Company’s current operations.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1-
ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
With the acquisition of Breathe LLC, it was contemplated that the Company would spin-off the operations of its mining operations, which were being conducted through the Company’s wholly owned subsidiary, DNA Canada, Inc (“DNAC”). Effective February 3, 2015, the Company declared a stock dividend whereby each of the Company’s shareholders on the record date (February 3, 2015) would receive one share of DNAC for every two shares of the Company’s common stock owned.
On February 3, 2015, the Company declared a stock dividend of its wholly owned subsidiary, DNA Canada, Inc. (“DNAC”) to the shareholders of record on February 3, 2015 whereby each shareholder of record received one share of DNAC for every two shares of DNA owned as of the record date. The former members of Breathe LLC tendered their shares of DNAC for redemption by the Company.
With the completion of the spin-off, the Company was no longer in the mining field and its sole and exclusive business operations was the marketing of its electronic cigarettes and related vapor devices.
The Company in March 2015 entered into Distribution Agreements with various distributors for the distribution of the Company’s products.
On May 11, 2015 the Company formed two wholly owned subsidiaries to conduct non-eCigarette related business by way of holding medical device and other related intellectual property for the future development of for-profit activates and/or partnerships. Currently these entities are inactive, and neither holds any assets, carry any liabilities nor hold any intellectual property.
On March 15, 2016, the Company had their DEF 14A approved by the SEC. As a result of this, the authorized common stock increased from 500,000,000 to 8,000,000,000 shares. The common share increase was approved by the Company’s board of Directors on February 1, 2016. In lieu of calling a special meeting of our stockholders, our Board of Directors had elected to obtain stockholder approval of the Authorized Share Increase Amendment by written consent (“Written Consent”) pursuant to Article II, Section 12 of our Bylaws and Section 78.370 of the Nevada Revised Statues. The close of business on February 18, 2016 was fixed as the record date for the determination of holders of our Common Stock entitled to receive notice of and discretion to approve the Authorized Share Increase Amendment.
As of March 30, 2016, pursuant to a settlement agreement under trademark litigation with plaintiff, Breathe LLC (a Florida organization), the Company has ceased its continuing operations in the eCigarette business (the effective date of the discontinuance of operations in that industry). In accordance with the settlement agreement, the Company will pay two cash payments ($10,000 immediately and $15,000 due by July 31, 2016) and issue 50 million restricted common shares of Company stock (which was issued April 15, 2016) in addition to the transfer of 5,000,000 common shares which it holds in Tauriga Sciences, Inc. The Company further agrees to split 50/50 any future sales of its held inventory. The sale of inventory shall be a joint effort by the two companies and shall last for a duration of one year from April 1, 2016. After such period, the Company will dispose of any remaining inventory. As of March 30, 2016, the Company re-entered the development stage.
On April 5, 2016, the Company announced its intention to give White Fox Ventures, Inc. (“White Fox”) a majority controlling interest in the Company pursuant to an Acquisition Agreement by which White Fox was to be acquired for an undetermined amount of shares equating 85% of the total authorized capital of the Company. The deal was to be effective April 15, 2016. On May 5, 2016, the Company announced that the deal will be rescinded based on the due diligence on this acquisition. It was determined that the agreement and acquisition were not in the best interests of the Company at this time. The parties are working on an alternative structure at this time. The principal of White Fox, Shinsuke Nakano (“Nakano”), and investors had invested $196,557 into the Company in the form of payment of various settlements and invoices outstanding. The investment will be treated as private placement at $0.0001, whereby the Company, on May 10, 2016, issued to Nakano and investors 1,965,570,000 shares of common stock. In addition, for their investments Nakano was named as the Chief Executive Officer of the Company and the Chairman of the Board and Abe was appointed to the positions of Chief Operating Officer ("COO") and Director ("Board Member".)
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 1-
ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
Going Concern
The consolidated financial statements have been prepared on a going concern basis. The going concern basis of presentation assumes that the Company will continue in operation for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business. The Company has generated revenue of $77,194 and $0 for the years ended December 31, 2015 and 2014, respectively and has generated losses totaling $9,401,145 and $6,939 for the years ended December 31, 2015 and 2014, respectively.
The Company’s continuation as a going concern is dependent upon, amongst other things, continued financial support from its shareholders, attaining a satisfactory revenue level, attainment of profitable operations and the generation of cash from operations and the ability to secure new financing arrangements and new capital to carry out its business plan. These matters are dependent on a number of items outside of the Company’s control and there exists material uncertainties that may cast significant doubt about the Company’s ability to continue as a going concern.
On March 30, 2016, the Company discontinued the operations of its eCigarette business as a result of the settlement agreement they entered into with Breathe LLC. The agreement was the result of the difficulties of past management to operate that business effectively and profitable. With the departure of the past CEO, Joshua Kimmel, the Company was able to convert over $1,000,000 in debt in exchange for the intellectual property the Company owned in this industry, and agreed to exit this industry and sell off all remaining inventory during the next fiscal year.
The Company can give no assurance that it will achieve profitability in its new business or be capable of sustaining profitable continuing operations. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of the carrying amounts of assets or the amount and classification of liabilities that might result if the Company is unable to continue as a going concern. These factors raise substantial doubt regarding the ability of the Company to continue as a going concern.
The Company raised $1,047,270 for the year ended December 31, 2015, through the issuance of common stock and was able to raise capital in the form of convertible notes in the amount of $857,513 with substantially all of the funds raised subsequent to the acquisition of Breathe LLC to assist Breathe in completing the transaction and the cost of startup operations including the acquisition of product. In addition, the Company borrowed $1,175,000 from related parties to help fund operations.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 2-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
These consolidated financial statements are prepared in conformity with United States generally accepted accounting principles (“U.S. GAAP”) and are presented in U.S. dollars.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Estimates include but are not limited to stock-based compensation and tax valuation allowances.
Principles of Consolidation
The consolidated financial statements included the accounts of the Company and Breathe as the acquisition of Breathe was accounted for as a reverse merger and Breathe is the accounting acquirer, from the date that the Merger occurred between the Company and Breathe eCigs Corp. All intercompany transactions and accounts had been eliminated on consolidation. Effective March 11, 2015, the financial statements were no longer consolidated until April 2015 and the establishment of two new wholly-owned subsidiaries.
Business Combination
On January 16, 2015, Breathe entered the Exchange Agreement with the Company, whereby the Company acquired all of the issued and outstanding shares of common stock of Breathe in consideration for the issuance of 150,000,000 shares of common stock. This business combination was accounted for as a reverse merger whereby Breathe is the accounting acquirer as the former Breathe shareholders now control greater than 50% of the voting control of the Company.
In November 2014, the FASB issued ASU No. 2014-17, “Business Combination.” The provisions of ASU No. 2014-17 require management to determining whether and at what threshold an acquiree (acquired entity) can reflect the acquirer’s accounting and reporting basis (pushdown accounting) in its separate financial statements. The entities of the transaction were under common control from January 16, 2015 until February 3, 2015. Since neither unit of this business combination is in the development stage, nor had recognizable revenues during this period the application of push down accounting would not be of significant value to the readers of these condensed consolidated financial statements. The Company has not elected to apply pushdown accounting in its separate financial statements upon occurrence of this event.
Stock Based Compensation
The Company estimates the fair value of stock based payment awards made to officers and directors related to the Company’s stock incentive plan, on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service periods. The Company uses the Black-Scholes option pricing model to determine the fair value of the stock-based compensation that it grants to officers and directors. The Company is required to make certain assumptions in connection with this determination, the most important of which involves the calculation of volatility with respect to the price of its common stock. The computation of volatility is intended to produce a volatility value that is representative of the Company’s expectations about the future volatility of the price of its common stock over an expected term. Shares of the Company commenced trading on August 22, 2013. As a result, the volatility value that the Company calculated may differ from the future volatility of the price of its shares of common stock.
Upon the exercise of stock options, any consideration received and the amounts previously recorded under stock-based compensation are credited to share capital. Upon the issuance of shares resulting from share awards, amounts previously recorded under stock based compensation are credited to share capital.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 2-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income (Loss)
The Company adopted ASC 220-10, “Reporting Comprehensive Income,” (formerly SFAS No. 130). ASC 220-10 requires the reporting of comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of information that historically has not been recognized in the calculation of net income.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments and other short-term investments with maturity of three months or less, when purchased, to be cash equivalents.
The Company maintains cash and cash equivalent balances at one major United States bank.
Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation. Depreciation will be provided using the straight-line method over the estimated useful lives of the related assets when those assets are placed into service. Costs of maintenance and repairs will be charged to expense as incurred.
Trade and Other Payables
Trade and other payables and accrued liabilities are obligations to pay for goods or services that have been acquired in the normal course of business. Trade and other payables and accrued liabilities are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities.
Recoverability of Long-Lived Assets
Although the Company does not have any long-lived assets at this point, for any long-lived assets acquired in the future, the Company will review their recoverability on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment will be based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale will be carried at the lower of the then current carrying value or fair value less estimated costs to sell.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 2-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
The carrying amount reported in the consolidated balance sheets for cash and cash equivalents, accounts payable, and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The Company does not utilize derivative instruments.
Income Taxes
The Company uses the liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted or substantially enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as part of the provision for income taxes in the period that includes the enactment date. Deferred tax liabilities are always provided for in full. Deferred tax assets are recognized to the extent that it is probable that they will be able to be utilized against future taxable income. Deferred tax assets and liabilities are offset only when the Company has a right and intention to set off current tax assets and liabilities from the same taxation authority. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that are expected to be realized.
The Company accounts for income taxes pursuant to the provision of ASC 740-10, “Accounting for Income Taxes” (“ASC 740-10”) which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
The Company follows the provision of ASC 740-10 related to Accounting for Uncertain Income Tax Position. When tax returns are filed, there may be uncertainty about the merits of positions taken or the amount of the position that would be ultimately sustained.
In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions.
Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits.
The Company has adopted ASC 740-10-25, “Definition of Settlement”, which provides guidance on how an entity should determine whether a tax position is effectively settled for the purposes of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion and examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities generally for three years after they were filed.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 2-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company recognizes revenues from the sale of the Company’s products when the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or determinable; and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss have passed to the customer. Revenue is deferred in all instances where the earnings process is incomplete. Payments received before all of the relevant criteria for revenue recognition are satisfied will be recorded as deferred revenue. Revenues and costs of revenues from consulting contracts will be recognized during the period in which the service will be performed. All revenues will be reported net of any sales discounts or taxes.
Trade Receivables and Allowance for Doubtful Accounts
The Company was engaged up until March 30, 2016 in the sales and distribution in the consumer products market through sales to distributors, wholesalers and direct to consumers via e-commerce sales of eCigarettes for use by consumers. Trade receivables consisted primarily of amounts due to the Company from their normal business activities whereby approved distributors and wholesalers are extended terms after down payments on orders. The Company controlled credit risk related to the trade receivables through credit approvals, credit limits and monitoring procedures, and perform ongoing credit evaluations of the customers. In assessing the carrying value of its trade receivables, the Company estimated the recoverability by making assumptions based on factors such as current overall and industry-specific economic conditions, historical and anticipated customer performance, historical write-off and collection experience, the level of past-due amounts, and specific risks identified in the accounts receivable portfolio. Additional changes to the allowance could be necessary in the future if a customer’s creditworthiness deteriorates, or if actual defaults are higher than the Company’s historical experience. Any difference could result in an increase or decrease in the allowance for doubtful accounts.
Inventory
Finished Goods Inventory - Finished goods inventory is stated at the lower of cost or market determined by the first-in, first-out method, and include salable eCigarette product items and supplies that are sale ready to ship to consumers, wholesalers or distributers. Shipping and handling costs (consisting of all costs to warehouse, pick, pack and deliver inventory to customers) will be included in cost of goods sold. Samples are included in marketing expenses which are a component of general and administrative costs. The Company in March 2015 entered into Distribution Agreements with various distributors for the distribution of the Company’s products. The Company placed an initial order for merchandise in the amount of $437,750 on March 27, 2015. The Company has outsourced the assembly and production of its products held for resale and will not hold any of the product in its possession. The Company’s inventory is received, housed and distributed by a third party fulfillment provider. As of December 31, 2015 the inventory held by the third party fulfillment provider has a value of $228,134.
As of March 30, 2016, pursuant to a settlement agreement under trademark litigation, the Company has ceased its continuing operations in the eCigarette business (the effective date of the discontinuance of operations in that industry). In accordance with the settlement agreement, the Company will pay two cash payments ($10,000 immediately and $15,000 due by July 31, 2016) and issue 50 million restricted common shares of Company stock (which was issued April 15, 2016) in addition to the transfer of 5,000,000 common shares which it holds in Tauriga Sciences, Inc.. The Company further agrees to split 50/50 any future sales of its held inventory. The sale of inventory shall be a joint effort by the two companies and shall last for a duration of one year from April 1, 2016. After such period, the Company will dispose of any remaining inventory.
As a result of the settlement agreement and the resultant discontinuance of this operation, management feels that it could sell the current inventory at $.50 for each $1 of inventory therefore an allowance has been recorded to recognize the current expected net realizable value of the on-hand inventory in the amount of $114,067.
Loss Per Share of Common Stock
Basic net loss per share (“Basic EPS”) is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding for the period.
Diluted earnings per share is computed by dividing adjusted net income available to common shareholders by the weighted average number of common shares outstanding adjusted for the effects of all dilutive common share issuances.
Dilutive common share issuances shall be deemed to have been converted into ordinary shares at the beginning of the period.
For the purpose of calculating diluted earnings per share, the Company shall assume the exercise of dilutive stock options and warrants, as well as shares reserved for the conversion of certain notes payable. The assumed proceeds from these instruments shall be regarded as having been received from the issue of common shares at the average market price of common shares during the period. Dilutive common share issuances are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for the periods presented.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 2-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.
The accounting treatment of derivative financial instruments may require that the Company for various instruments record the conversion option and related warrants at their fair values as of the inception date of the agreements, and at fair value as of each subsequent balance sheet date, should the characteristics of these instruments warrant the need to record the derivative liability.
During the year ended December 31, 2014, as a result of entering into the convertible notes, the Company was required to classify certain non-employee warrants as derivative liabilities and record them at their fair values at each balance sheet date. Any change in fair value was recorded as a change in the fair value of derivative liabilities for each reporting period at each balance sheet date. The Company reassessed the classification at each balance sheet date. If the classification changed as a result of events during the period, the contract was reclassified as of the date of the event that caused the reclassification.
The fair value of conversion options at a fixed number of shares are recorded using the intrinsic value method. Conversion options at variable rates and any options and warrants with ratchet provisions are deemed to contain a “down-round protection”. Accordingly, they do not meet the scope exception for treatment as a derivative under ASC 815 since “down-round protection” is not an input into the calculation of the fair value of the equity instruments and cannot be considered “indexed to the Company’s own stock”, which is a requirement for the scope exception as outlined under ASC 815.
The Company signed convertible notes and warrants and has determined that a conversion option is embedded in the note and it is required to bifurcate the conversion option from the host contract under ASC 815 and account for the derivatives at fair value. The estimated fair value of the conversion option was determined using the binomial model. The fair value of the conversion option was classified as a liability until the debt was converted by the note holders or paid back by the Company. The fair value was affected by changes in inputs to that model including the stock price, expected stock price volatility, the contractual term, and the risk-free interest rate. The Company continued to classify the fair value of the conversion option as a liability until the conversion option was exercised, expired or amended in a way that would no longer require these conversion options to be classified as a liability, whichever comes first. The Company has adopted a sequencing policy that reclassifies contracts (from equity to assets or liabilities) with the most recent inception date first. Thus any available shares are allocated first to contracts with the most recent inception date.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 2-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivative Financial Instruments (Continued)
For the binomial lattice options pricing model, the Company used the following assumptions and weighted average fair value ranges as at the transaction date, April 28, 2014, and for the period ended December 31, 2015:
The Company had repaid the debt associated with the derivative liability in December 2014, however carried the warrants through the conversion of those warrants in September 2015. As a result of the conversion of the warrants, the entire derivative liability was extinguished as of September 30, 2015. The Company has no other instruments that contain embedded derivatives.
Prior to the effective date of the DEF 14A (March 15, 2016) which included the amendment to the Certificate of Incorporation increasing the authorized common shares of the Company from 500,000,000 to 8,000,000,000 shares, the Company did not have sufficient authorized shares to effectuate any conversion of convertible notes outstanding with either of the two noteholders. The Company remained in constant negotiations with the noteholders resulting in amended agreements dated March 25, 2016 and March 29, 2016, respectively, and the noteholders did not exercise their right to issue the Company a notice of default. At no time, did the Company consider that the notes outstanding could not be fully settled, with the DEF 14A progressing towards effectiveness. As the 14A was effective, prior to the issuance of this report, the Company in effect, cured any default under the note agreements, and as a result, no derivative liability was recorded by the Company. The amended note agreements reflect the current amount of common shares needed to settle the remaining convertible note agreements and there is sufficient shares available to settle these agreements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifications had no effect on the net loss or cash flows of the Company.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 2-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Issued Accounting Standards
In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The new guidance will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period and is applied retrospectively. Early adoption is permitted. We are currently in the process of assessing the impact the adoption of this guidance will have on the Company’s consolidated financial statements.
In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-02 (ASU 2015-02) "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We are currently in the process of evaluating the impact of the adoption of ASU 2015-02 on our consolidated financial statements.
In November 2014, the FASB issued ASU No. 2014-17, “Business Combination.” The provisions of ASU No. 2014-17 require management to determining whether and at what threshold an acquiree (acquired entity) can reflect the acquirer’s accounting and reporting basis (pushdown accounting) in its separate financial statements. Since neither unit of this business combination is in the development stage, nor had recognizable revenues during this period the application of push down accounting would not be of significant value to the readers of these condensed consolidated financial statements. The Company has not elected to apply pushdown accounting in its separate financial statements upon occurrence of this event.
During August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements-Going Concern.” The provisions of ASU No. 2014-15 require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
During June 2014, the FASB issued an Accounting Standards Update No. 2014-10, "Development Stage Entities (Topic 915) - Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation ("ASU 2014-10")". The objective of ASU 2014-10 is to improve financial reporting by reducing the cost and complexity associated with the incremental reporting requirements for development stage entities. ASU 2014-10 is effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. The Company has elected early implementation, as permitted by the standard, for the interim period ending June 30, 2014. All exploration stage language disclosures and amounts have been removed as a result of the adoption of ASU 2014-10.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 2-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Issued Accounting Standards (Continued)
The changes permit businesses and other organizations to first use subjective criteria to determine if an intangible asset has lost value. The amendments to U.S. GAAP will be effective for fiscal years starting after September 15, 2012. The Company’s adoption of this accounting guidance does not have a material impact on the consolidated financial statements and related disclosures.
There were other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
NOTE 3-
ACQUISITION
Breathe Acquisition and Spin-off of DNA Canada, Inc.
On January 16, 2015, Breathe eCigs Corp., a Tennessee corporation (“Breathe”), entered into a Share Exchange Agreement (the “Exchange Agreement”) with the Company, whereby the Company acquired all of the issued and outstanding shares of common stock of Breathe in consideration for the issuance of 150,000,000 shares of common stock.
As a result of the transaction effected by the Exchange Agreement, at closing Breathe became a wholly owned subsidiary of the Company, with the former Breathe shareholders owning approximately 56% of the then issued and outstanding common stock of the Company. The Company accounted for this acquisition as a reverse merger, whereby Breathe became the accounting acquirer. As a result, the comparative figures are those of Breathe.
The Company declared a stock dividend to its shareholders of record as of February 3, 2015 of its wholly owned subsidiary, DNA Canada, Inc. Each shareholder of record on this date will receive one share of DNA Canada, Inc. for every two shares of DNA Precious Metals Inc. owned by the shareholder on this date. All stock dividends will be rounded down to the next whole number. With the completion of the stock dividend, the Company, no longer has an equity interest in DNA Canada, Inc.
The former shareholders of Breathe participating in the stock dividend were required to tender for redemption any shares of DNA Canada, Inc. common stock received pursuant to the stock dividend in accordance with the Exchange Agreement.
With the acquisition of Breathe, management determined that it would be in the best interest of the Company and its shareholders to operate each company separate and independently of each other. The operation of DNA Canada, Inc. and Breathe were inconsistent. Breathe is a manufacturer and distributor of e-cigarette and related products while DNA Canada, Inc. is an exploration stage mining company. The spin-off of DNA Canada, Inc. will allow each company to focus on its principal business activity and facilitate capital formation.
On March 5, 2015, the Company and Breathe entered into an Agreement and Plan of Merger pursuant to which the Company merged with its wholly owned subsidiary, Breathe. Upon the consummation of the Merger on March 11, 2015, the separate existence of Breathe ceased, and the shareholders of the Company became shareholders of the surviving company, named Breathe eCig Corp. As permitted under Nevada law, the sole purpose of the Merger was to effect a change to the Company’s name from DNA Precious Metals, Inc. to Breathe eCig Corp. This change to the Amended Articles of Incorporation and name change took effect on March 11, 2015.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 4-
CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES
The following summary of convertible notes payable and the related derivative liabilities associated with the convertible notes payable prior to the date of the reverse merger relate to the predecessor entity DNA Precious Metals, Inc. As a result of the reverse merger, Breathe assumed responsibility of these DNA Precious Metals, Inc. notes, which were paid off prior to the reverse merger, and any related derivative liability that exists under these notes related to the warrant agreements. Therefore, a full discussion has been provided for clarification.
On August 6, 2014, the Company entered into an agreement with a U.S.-based private equity fund (“Investor”) under which the Company issued an unsecured Convertible Note (“Convertible Note”) in the principal amount of $250,000. The funds to be issued under the Convertible Note is $225,000 (“Consideration”). The Convertible Note includes an original issue discount of $25,000 (“OID”), calculated at 10% of the principal amount ($250,000). The initial Consideration paid to the Company on August 6, 2014 was $66,000. The Investor was able to pay additional Consideration to the Company in such amounts and at such dates as the Investor may choose in its sole discretion. The principal sum due to the Investor was prorated based on the Consideration actually paid by the Investor plus a 10% OID, as well as any other interest or fees, such that the Company is only required to repay the amounts funded and the Company is not required to repay any unfunded portions of the Convertible Note. The Company was able to repay the Convertible Note at any time on or before 90 days from the transaction date after which the Company was not permitted to make further payments on the Convertible Note prior to the Maturity Date without written approval from the Investor. If the Company made a payment of Consideration on or before 90 days from the transaction date, the interest rate on that payment of Consideration was to be at zero percent (0%). If the Company did not repay a payment of Consideration on or before 90 days from the transaction date, a one-time interest was to be a charge of 12% shall be applied to the principal amount. Any interest payable is in addition to the OID and that OID (or prorated OID, if applicable) remained payable regardless of time and manner of payment by the Company. The maturity date was two years from the transaction date of each payment ("Maturity Date") and was the date upon which the principal amount of the Convertible Note, as well as any unpaid interest and other fees, were due and payable. The Investor had the right, at any time after the transaction date, at its election, to convert all or part of the outstanding and unpaid principal amount and accrued interest (and any other fees) into fully paid and non-assessable shares of common stock of the Company.
The conversion price was the lesser of $0.16 or 60% of the lowest trade price in the 25 trading days prior to the conversion. Unless otherwise agreed in writing by both parties, at no time was the Investor convert any amount of the Convertible Note into common stock that would result in the Investor owning more than 4.99% of the common stock outstanding of the Company. At the time that this Convertible Note is outstanding, the Company agreed to reserve at least 10,000,000 shares of common stock for conversion. On October 30, 2014, the Company and the Investor entered into an amendment (“Amendment #1”), whereby the Company paid a partial note repayment in the amount of $33,333 on November 5, 2014 which equaled 50% of the note balance which includes $3,333 in interest, with the remaining balance due by January 6, 2015, which was repaid on December 29, 2014.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 4-
CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES (CONTINUED)
On April 28, 2014, the Company entered into a Securities Purchase Agreement (“SPA”), with a U.S.-based private equity fund, under which the Company issued a Secured Convertible Promissory Note (the “Convertible Note”) in the amount of $552,500. The Convertible Note included an original issue discount of $50,000 (“OID”), calculated at 10% of the principal amount ($500,000), plus an additional $2,500 (“Transaction Expense Amount”) to cover the investor’s due diligence and legal fees in connection therewith. The principal amount was to be paid to the investor in six (6) tranches of an initial amount under the Convertible Note of $250,000 and five (5) additional amounts of $50,000, with each of the additional amounts represented by Investor Notes (the Convertible Note and the Investor Notes are collectively referred to herein as the “Notes”). The initial $250,000 in cash was paid to the Company on April 29, 2014. Payment of the Notes were to be made on a monthly basis, beginning six months after the issue date when the Company received the initial $250,000, in the amount of $34,531 per month plus all accrued but unpaid interest and other costs, fees or charges payable, for sixteen (16) months until the balance is paid in full. The Notes were convertible into common stock, at the option of the investor, at a price of $0.40 per share subject to adjustment in the case of a default, reorganization or recapitalization. In the event the Company elected to prepay all or any portion of the Notes, the Company was required to pay to the investor an amount in cash equal to 125% of the outstanding balance of the Notes, plus accrued interest and any other amounts owing. Interest accrued at the rate of 10% per annum. If the Company failed to repay the Notes when due, or if other events of default thereunder apply, a default interest rate of 22% per annum would apply. In addition, if the Company failed to issue stock to the investor within three trading days of receipt of a notice of conversion, the Company must pay a penalty equal to the greater of greater of $500 per day and 2% of the applicable conversion amount or installment amount, as applicable (but, in any event, the cumulative amount of such late fees shall not exceed the applicable conversion amount or installment amount). The Notes were secured by an interest in all right, title, interest, claims and demands of the Company in and to the property described in the Security Agreement, and all replacements, proceeds, products, and accessions thereof.
The Notes were convertible into shares of our common stock in six tranches, consisting of (i) an initial tranche in an amount equal to $277,500 and any interest, costs, fees or charges accrued thereon or added thereto under the terms of this Note and the other Transaction Documents (as defined in the Securities Purchase Agreement), and (ii) five (5) additional tranches, each in the amount of $55,000, plus any interest, costs, fees or charges accrued thereon or added thereto under the terms of this Note and the other Transaction Documents. Except in the case of a Company default, the Notes are convertible by the investor at a price of $.40 per share. Concurrently with the Securities Purchase Agreement, the Company also issued to the investor warrants (the "Warrants") to purchase 690,625 shares of the Company’s common stock at an exercise price of $.75 per share subject to adjustment as more fully set forth in the warrant agreement. The Warrants also contained a cashless exercise provision. The Warrants were for a term of two (2) years. In accordance with the warrant agreement as described in Note 5, the warrant price was reset to equal the conversion price associated with these new debt agreements from the stated strike price of $0.75.
On May 18, 2015, Typenex Co-Investment, LLC (“Typenex”) filed a binding arbitration notice against the Company in the State of Utah, Case No. 150903317 (the “Utah Lawsuit”) regarding a certain Warrant to Purchase Shares of Common Stock (the “Warrant”) issued by the Company to Typenex on April 28, 2014 (the “Arbitration”) in connection with a Convertible Promissory Note of the same date (the “Note”). On April 29, 2015, Typenex sent a Notice of Exercise to the Company for the issuance of 7,541,511 shares of the Company’s common stock (the “Initial Shares”) based on a cashless exercise provision contained in the Warrant along with an opinion letter indicating the shares should be issued without restrictive legend pursuant to Rule 144 under the Securities Act of 1933, as amended. The Company immediately filed for an emergency injunction in the State of New Jersey, the location of the Company’s transfer agent. The injunction was granted The Company has filed a response and counterclaim to the Arbitration notice alleging, among other things, that Typenex did not fulfill its obligations under the original Note and failed to disclose material matters regarding Typenex and its principal to the Company and requested damages and attorneys’ fees be paid by Typenex to the Company.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 4-
CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES (CONTINUED)
On September 8, 2015, the Company’s transfer agent was required to release the Initial Share to Typenex as a result of the Company failing to maintain the bond requirement agreed to by the Company and Typenex as part of the injunction. The number of Initial Shares is based on a price reset to equal the conversion price associated with the Note. The price reset which resulted in the partial conversion to 7,541,511 common shares based on the difference between the current market value (market price of $0.25 multiplied by exercise shares of 690,625) and the exercise price ($0.0375) multiplied by number of exercise shares (690,625.) This number is then divided by the adjusted price of the common stock ($0.01946.)
On October 13, 2015, Typenex and the Company participated in a mediation in an attempt to resolve the Utah Lawsuit without either party having to incur additional legal and court fees. As a result of the mediation and in order to resolve the Utah Lawsuit and the Arbitration and all other disputes between, on November 17, 2015 (the “Typenex Effective Date”), the Company and Typenex entered into a Settlement Agreement, Waiver and Release of Claims (the “Settlement Agreement”) and related Exchange Agreement (the “Exchange Agreement”), Pursuant to the terms of the Settlement Agreement and Exchange Agreement, the Company agreed to issue to Typenex 8,000,000 shares of the Company’s common shares of stock in exchanges for any rights Typenex may or may not have had under the Warrant. The Company will deliver the shares to Typenex in two installments: (i) 4,000,000 Shares with five trading days of the Effective Date (the “First Installment Shares”) and (ii) 4,000,000 Shares on or before January 1, 2016 (the “Second Installment Shares”). The First Installment Shares and the Second Installment Shares are collectively referred to herein as the Typenex Shares.
Additionally, pursuant to the Settlement Agreement, beginning on January 1, 2016, Typenex shall have the right to put the Typenex Shares back to the Company (the “Put Right”) at the following prices: (a) for Typenex Shares put to the Company from January 1, 2016 to April 30, 2016 the price will be $0.01 per share; (b) for Typenex Shares put to the Company from May 1, 2016 to August 31, 2016 the price will be at $0.02 per share; and (c) any Typenex Shares put to Company between September 1, 2016 and December 31, 2016 the price will be at $0.03 per share. Typenex shall have the right to put up to 666,667 Typenex Shares per month to Company (the “Monthly Put Amount”) per month. If the number of Typenex Shares put to Company in a given month is less than the Monthly Put Amount such difference, the “Rollover Shares”, Typenex shall have the right to put such Typenex Shares to Company at any time in the same or immediately succeeding period. In addition to the Monthly Put Amount, Typenex shall also have the right to put up to 666,667 Rollover Shares per month to Company. At such time that Typenex’s Net Sales (gross proceeds of sales of the Typenex Shares sold in a minus any trading commissions or costs associated with clearing and selling such Typenex Shares minus the purchase price paid for any shares of Common Stock purchased on the open market) of Typenex Shares is equal to or greater than $200,000, Typenex’s Put Right shall automatically terminate and Typenex shall have no further rights to put Typenex Shares or Rollover Shares.
Additionally, Typenex agreed that during any calendar week it would not sell more Typenex Shares than the greater of (i) 10% of the weekly trading volume of the Common Stock as reported on Bloomberg, L.P. or (ii) an aggregate market value of $5,000.
Upon execution of the Settlement Agreement and Exchange Agreement, both parties released all claims each may have against the other relating to any other agreements to which both may be party except for any disputes that may arise under the Settlement Agreement, Exchange Agreement and the documents ancillary to both. Under the Settlement Agreement, the Company executed a Confession of Judgment in the amount of $500,000 (the “Confession of Judgment”). In the event the Company commits a material breach of the Settlement Agreement which is not cured within five trading days, Typenex shall have the right to enforce the Confession of Judgment. The Confession of Judgment, if filed as set forth above, would carry an interest rate of 12% until paid.
On March 25, 2016, the Company paid $55,000 to Typenex to settle all obligations resulting from these agreements.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 4-
CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES (CONTINUED)
Convertible Note dated February 4, 2015
On February 4, 2015, the Company entered into a convertible note in an amount up to $250,000 with an investor. The initial funding was in the gross amount of $27,500, with net proceeds received of $25,000. The $2,500 represents Original Issue Discount. The maturity date of this note is two years from the date that each tranche is paid. The note was convertible at the lesser of $0.065 or 60% of the lowest trade price in the 25 trading days previous to the conversion.
The Company was able to repay this note at any time on or before 90 days from the effective date (the date the Company receives the cash) of the note at no additional interest charge. If the note remained outstanding beyond the 90 days, there would have been a one-time 12% interest charge applied in addition to the Original Issue Discount recognized at the onset of the note. The investor had the right to convert at any time after the effective date of this note. The Company repaid this note on April 22, 2015 with accrued interest in the amount of $27,778. The maturity date of this note was two years from the date that each tranche is paid.
Convertible Note dated February 9, 2015
On February 9, 2015, the Company entered into a convertible note in an amount of $110,000 with an investor. The gross amount of the note is $110,000, with net proceeds received of $100,000. The $10,000 represents Original Issue Discount. The note will also bear interest at 4%, compounded annually. The maturity date of this note is one year from execution. The note may be converted, in whole or in part, into shares of the Company’s common stock. The conversion price will be 60%, equivalent to a 40% discount, of the lowest trading price of the Company’s common stock during the 25 trading days prior to conversion. For defaults, the note is immediately due and payable and subject to a penalty interest rate of 20%. On May 7, 2015 this note was assigned to M Capital Partners LLC in consideration for a payment of $145,000 by M Capital Partners LLC to the original note holder. The Company still owes the entire $110,000 note, however, the noteholder is M Capital Partners LLC. As a result of this assignment, the Company as noted above issued 300,000 shares of common stock to Iconic. The Company never reserved shares in the name of the noteholder and failing to maintain proper share reserves is a default event. In the event of default, the noteholder is permitted to declare all of the then outstanding principal amount of this note, including any interest due thereon, to be due and payable immediately without further action or notice. In the event of such acceleration, the amount due and owing to the holder shall be increased to 150% of the outstanding principal amount of the note held by the Holder plus all accrued and unpaid interest, fees, and liquidated damages, if any. Additionally, this note shall accrue interest on any unpaid principal from and after the occurrence and during the continuance of an event of default at a rate of 20%. The note would also accrue liquidated damages of $1,000 per day from and after the occurrence and during the continuance of an Event of Default. Since notice was not delivered to the Company prior to full settlement no such accelerated clauses were enacted nor were any related expenses incurred.
The note was permitted to be prepaid according to the following schedule: Between 1 and 45 days from the date of execution, the note may be prepaid for 105% of face value plus accrued interest. Between 46 and 90 days from the date of execution, the note may be prepaid for 110% of face value plus accrued interest. Between 91 and 135 days from the date of execution, the note may be prepaid for 125% of face value plus accrued interest. Between 136 and 180 days from the date of execution, the note may be prepaid for 135% of face value plus accrued interest. After 180 days from the date of execution, the note may not be prepaid without written consent from the investor.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 4-
CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES (CONTINUED)
Convertible Note dated February 9, 2015 (Continued)
On August 10, 2015, The Company entered into a share exchange agreement with the assignee noteholder to settle this note in full in exchange for 3,625,000 shares of the common stock. The stock was issued on June 2, 2015 at a value of $293,625 ($0.081 per share) and at the time was recorded to stock for services rendered, debt financing note incentive. The Company reclassified this amount from professional fees to Notes Payable, current portion in the amount of $110,000, interest paid (classified as a reduction to accrued interest) in the amount of $2,857, Interest expense, net of $6,016 and the loss from conversion of debt to equity in the amount of $174,752.
Convertible Note dated March 6, 2015
On March 6, 2015, the Company entered into an 8% convertible redeemable note with an investor in the amount of $31,500. The gross amount of the note is $31,500, with net proceeds received of $30,000. The $1,500 represents legal fees. This note matures on March 6, 2016. The investor is entitled, at its option, at any time, to convert all or any amount of the principal face amount of the note, then outstanding into shares of the Company’s common stock at a price for each share of common stock equal to 58% of the lowest trading price of the Company’s common stock as reported on the OTCQB for the fifteen prior trading days including the day upon which a notice of conversion is delivered.
The note may be prepaid according to the following schedule: Between 1 and 30 days from the date of execution, the note may be prepaid for 110% of face value plus accrued interest. Between 31 and 60 days from the date of execution, the note may be prepaid for 116% of face value plus accrued interest. Between 61 and 90 days from the date of execution, the note may be prepaid for 122% of face value plus accrued interest. Between 91 and 120 days from the date of execution, the note may be prepaid for 128% of face value plus accrued interest. Between 121 and 150 days from the date of execution, the note may be prepaid for 134% of face value plus accrued interest. Between 151 and 180 days from the date of execution, the note may be prepaid for 135% of face value plus accrued interest. After 180 days from the date of execution, the note may not be prepaid.
On October 2, 2015 the Company paid $34,000 in cash to a noteholder on an 8% convertible note with an original face value of $31,500 dated March 6, 2015. At the time of payment, the note had an unconverted principal balance of $17,000 and accrued unpaid interest of $779. The Company recognized a loss on this debt conversion in the amount of $16,221.
In September 2015, this noteholder converted $14,500 in principal and $620 in interest in exchange for 2,886,503 shares of common stock. The Company paid this note in full October 2, 2015. The Company realized a loss on extinguishment of debt in the amount of $16,221. The total payment to this noteholder was $34,000.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 4-
CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES (CONTINUED)
Convertible Note dated March 11, 2015
On March 11, 2015, the Company entered into an 8% convertible redeemable note with an investor in the amount of $52,500. The gross amount of the note is $52,500, with net proceeds received of $50,000. The $2,500 represents legal fees. This note matures on March 11, 2016. The investor is entitled, at its option, at any time, to convert all or any amount of the principal face amount of the note, then outstanding into shares of the Company’s common stock at a price for each share of common stock equal to 55% of the lowest trading price of the Company’s common stock as reported on the OTCQB for the fifteen prior trading days including the day upon which a notice of conversion is delivered.
The note may be prepaid according to the following schedule: Between 1 and 30 days from the date of execution, the note may be prepaid for 105% of face value plus accrued interest. Between 31 and 60 days from the date of execution, the note may be prepaid for 115% of face value plus accrued interest. Between 61 and 90 days from the date of execution, the note may be prepaid for 120% of face value plus accrued interest. Between 91 and 120 days from the date of execution, the note may be prepaid for 130% of face value plus accrued interest. Between 121 and 150 days from the date of execution, the note may be prepaid for 135% of face value plus accrued interest. Between 151 and 180 days from the date of execution, the note may be prepaid for 140% of face value plus accrued interest. After 180 days from the date of execution, the note may not be prepaid.
In September 2015, this note holder converted $15,000 in principal and $640 in interest in exchange for 4,062,781 shares of common stock. On October 14, 2015, the noteholder converted $10,501 in principal and $499 of accrued interest. The Company paid this note in full for cash, with remaining accrued interest of $1,277 on October 14, 2015. The Company realized a loss on extinguishment of debt in the amount of $36,724. The total payment to this noteholder was $65,000.
Convertible Note dated March 13, 2015
On March 13, 2015, the Company entered into an 8% convertible redeemable note with an investor in the amount of $52,500. The gross amount of the note was $52,500, with net proceeds received of $50,000. The $2,500 represents legal fees. This note matures on March 13, 2016.
The investor was entitled, at its option, at any time, to convert all or any amount of the principal face amount of the note, then outstanding into shares of the Company’s common stock at a price for each share of common stock equal to 55% of the lowest trading price of the Company’s common stock as reported on the OTCQB for the fifteen prior trading days including the day upon which a notice of conversion is delivered.
The note was allowed to be prepaid according to the following schedule: Between 1 and 30 days from the date of execution, the note may be prepaid for 105% of face value plus accrued interest. Between 31 and 60 days from the date of execution, the note may be prepaid for 115% of face value plus accrued interest. Between 61 and 90 days from the date of execution, the note may be prepaid for 120% of face value plus accrued interest. Between 91 and 120 days from the date of execution, the note may be prepaid for 130% of face value plus accrued interest. Between 121 and 150 days from the date of execution, the note may be prepaid for 135% of face value plus accrued interest. Between 151 and 180 days from the date of execution, the note may be prepaid for 140% of face value plus accrued interest. After 180 days from the date of execution, the note may not be prepaid.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 4-
CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES (CONTINUED)
Convertible Note dated March 13, 2015 (Continued)
On September 25, 2015, the Company paid this note face value in full with accrued interest in the amount of $2,246. The Company recognized a loss on debt extinguishment in the amount of $36,254. This note was satisfied with $75,000 in cash and 1,500,000 common shares of stock, issued in three equal blocks of free trading stock. These conversion shares are scheduled to be issued November 1, 2015; December 1, 2015 and January 1, 2016 and shall not have a value of less than $5,000 each. As of December 31, 2015, the Company has recorded a liability to issue stock in the amount of $15,000.
Convertible Note dated March 31, 2015
On March 31, 2015, the Company entered into an 8% convertible redeemable note with an investor in the amount of $105,000. The gross amount of the note is $105,000, with net proceeds received of $100,000. The $5,000 represents legal fees. This note matures on March 31, 2016.
The investor was entitled, at its option, at any time, to convert all or any amount of the principal face amount of the note, then outstanding into shares of the Company’s common stock at a price for each share of common stock equal to 55% of the lowest trading price of the Company’s common stock as reported on the OTCQB for the fifteen prior trading days including the day upon which a notice of conversion is delivered.
The note was permitted to be prepaid according to the following schedule: Between 1 and 30 days from the date of execution, the note may be prepaid for 105% of face value plus accrued interest. Between 31 and 60 days from the date of execution, the note may be prepaid for 115% of face value plus accrued interest. Between 61 and 90 days from the date of execution, the note may be prepaid for 120% of face value plus accrued interest. Between 91 and 120 days from the date of execution, the note may be prepaid for 130% of face value plus accrued interest. Between 121 and 150 days from the date of execution, the note may be prepaid for 135% of face value plus accrued interest. Between 151 and 180 days from the date of execution, the note may be prepaid for 140% of face value plus accrued interest. After 180 days from the date of execution, the note may not be prepaid.
On September 30, 2015, the Company paid this note face value in full for cash with accrued interest in the amount of $4,202. The Company recognized a loss on debt extinguishment in the amount of $41,986. The total payment to this noteholder was $151,188.
Convertible Note dated April 8, 2015
On April 8, 2015, the Company entered into a 10% convertible redeemable note payable with an investor in the amount of $53,000. The gross amount of the note is $53,000, with net proceeds received of $50,000. The $3,000 represents legal fees. This note matures on April 8, 2016. This note was funded on April 22, 2015, at which point the Company began to accrue interest.
The investor is entitled, at its option, at any time, to convert all or any amount of the principal face amount of the note, then outstanding into shares of the Company’s common stock at a price for each share of common stock equal to 60% of the lowest trading price of the Company’s common stock as reported on the OTCQB for the twenty prior trading days including the day upon which a notice of conversion is delivered.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 4-
CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES (CONTINUED)
Convertible Note dated April 8, 2015 (Continued)
The note may be prepaid at any time during the period beginning on the Issue Date and ending on the date which is three (3) months following the Issue Date (“Prepayment Termination Date”), Borrower shall have the right, exercisable on not less than five (5) Trading Days prior written notice to the Holder of this Note, to prepay the outstanding balance on this Note (principal and accrued interest), in full.
After the Prepayment Termination Date, the Borrower shall have no right to prepay this Note. For purposes hereof, the “Prepayment Factor” shall equal one hundred and fifty percent (150%), provided that such Prepayment factor shall equal one hundred and twenty percent (120%) if the Optional Prepayment Date occurs on or before the date which is three (3) months following the Issue Date hereof. During the month of October 2015, the Company paid $83,638 in cash to this noteholder representing the face value of $53,000 and accrued interest of $2,740. The Company recognized a loss on the debt conversion in the amount of $27,898.
Convertible Note 1 dated May 22, 2015
On May 22, 2015, the Company entered into an 8% convertible redeemable note payable with an investor in the amount of $137,500. The gross amount of the note is $137,500, with net proceeds received of $118,750. The $18,750 represents legal fees of $6,250 and Original Issue Discount of $12,500. This note matures on May 22, 2016. The note will also bear interest at 8%, compounded annually. The maturity date of this note is one year from execution. The note may be converted, in whole or in part, into shares of the Company’s common stock. The conversion price will be 68%, equivalent to a 32% discount, of the lowest trading price of the Company’s common stock during the 15 trading days prior to conversion. For defaults, the note is immediately due and payable and subject to a penalty interest rate of 24%.
The note may be prepaid according to the following schedule: Between 1 and 30 days from the date of execution, the note may be prepaid for 105% of face value plus accrued interest. Between 31 and 60 days from the date of execution, the note may be prepaid for 115% of face value plus accrued interest. Between 61 and 90 days from the date of execution, the note may be prepaid for 120% of face value plus accrued interest. Between 91 and 120 days from the date of execution, the note may be prepaid for 135% of face value plus accrued interest. Between 121 and 180 days from the date of execution, the note may be prepaid for 140% of face value plus accrued interest. After 180 days from the date of execution, the note may not be prepaid.
On November 8, 2015, the Company paid this note face value in full for cash with accrued interest in the amount of $5,104. The Company recognized a loss on debt extinguishment in the amount of $55,351. The total payment to this noteholder was $197,955.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 4-
CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES (CONTINUED)
Convertible Note 2 dated May 22, 2015
On May 22, 2015, the Company entered into a 12% convertible redeemable note payable with an investor in the amount of $82,500. The gross amount of the note is $82,500, with net proceeds received of $75,000. The $7,500 represents an Original Issue Discount. This note matures on May 22, 2016. The note will also bear interest at 12%, compounded annually. The maturity date of this note is one year from execution. The note may be converted, in whole or in part, into shares of the Company’s common stock. The conversion price will be the lower of 60%, equivalent to a 40% discount, of the lowest trading price of the Company’s common stock as of the date of conversion notice or $0.10 per share. For defaults, the note is immediately due and payable and subject to a penalty interest rate of 18%.
The note may be prepaid according to the following schedule: Between 1 and 30 days from the date of execution, the note may be prepaid for 125% of face value plus accrued interest. Between 31 and 180 days from the date of execution, the note may be prepaid for 135% of face value plus accrued interest. After 180 days from the date of execution, the note may be prepaid for 145% of face value plus accrued interest.
As consideration for the holder’s commitment to purchase this debenture, borrower issued to holder 400,000 shares of the Company’s common stock. These commitment fee shares have been earned in full upon holder’s purchase of this debenture; none of the commitment fee shares will be returned in the event of prepayment of the note.
On October 14, 2015, the Company paid this note face value in full for cash with accrued interest in the amount of $3,960. The Company recognized a loss on debt extinguishment in the amount of $30,224. The total payment to this noteholder was $116,684.
Convertible Note dated June 8, 2015
On June 8, 2015, the Company entered into a 12% convertible redeemable note payable with an investor in the amount of $100,000. The gross amount of the note is $100,000, with net proceeds received of $96,500. The $3,500 represents legal fees. This note matures on June 8, 2016. The note will also bear interest at 12%, compounded annually. The maturity date of this note is one year from execution. The note may be converted, in whole or in part, into shares of the Company’s common stock. The conversion price will be the lower of closing price of the common stock on the principle market on the training day immediately preceding the closing date or 35%, equivalent to a 65% discount, of the lowest trading price of the Company’s common stock during the 20 trading days prior to conversion and the closing sale price of the common stock on the principal market on the trading day immediately preceding the closing date. Under terms of the convertible note agreement, if the closing sale price at any time falls below $0.05, then such 35% figure specified above shall be reduced to 20%, equivalent to an 80% discount. The stock closing price went below $0.05 per share in the three months ended September 30, 2015. For defaults, the note is immediately due and payable and subject to a penalty interest rate of 24%.
The note may be prepaid according to the following schedule: Between 1 and 90 days from the date of execution, the note may be prepaid for 120% of face value plus accrued interest. Between 91 and 180 days from the date of execution, the note may be prepaid for 140% of face value plus accrued interest. After 180 days from the date of execution, the note may not be prepaid.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 4-
CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES (CONTINUED)
Convertible Note dated June 8, 2015 (Continued)
As prescribed in the convertible note agreement, the Company was required to maintain a sufficient number of shares, free from preemptive rights, to provide for the issuance of common stock upon conversion. The Company was required at all times to authorize a reserve of five times the number of shares that are actually issuable upon full conversion of this note. The Company initially instructed the transfer agent to reserve 16,500,000 shares of common stock for the noteholder for issuance upon conversion. The noteholder waived the requirement of the reserve shares above and beyond what was needed to convert through the maturity date, not withstanding the initial reserve amount. At September 30, 2015 the number of share that were necessary and issuable upon full conversion of then outstanding principal and accrued unpaid interest was 74,094,286. The shares needed to convert was based on 20% of the lowest trading price of the Company’s common stock as reported on the OTCQB for the twenty prior trading days including the day upon which a notice of conversion is delivered ($0.007.) Under terms of the convertible note contract, if the closing sale price at any time falls below $0.05, then such 35% figure specified above shall be reduced to 20%, equivalent to an 80% discount. The stock closing price was below $0.05 per share at December 31, 2015.
As of December 31, 2015, the Company has $30,000 outstanding on this note as well as accrued default interest fees of $20,002 for a total of $50,002.
On January 4, 2016 the Company issued 16,670,000 shares of common stock to holder of a convertible note dated June 8, 2015. The noteholder converted $10,002 of principal only for the shares. The applicable conversion price was $0.0006. Upon this conversion, the note had a remaining balance including default interest fees of $40,000.
On March 29, 2016, the Company entered into an agreement with this noteholder to amend this convertible note to cure the default clause of the original agreement (no notice of default was provided). The event of default was due to the Company’s inability to reserve sufficient shares required by the convertible note agreement based on the total authorized and unissued shares, which was subsequently cured with the increase of the authorized shares to 8,000,000,000 on March 15, 2016. The holder agreed to reset the total balance due to the “Adjust Current Balance” of $40,000. Also, under the agreement the price of future conversions will be set at $0.001. The Company was further required to reserve common shares of not less than 40,000,000. From the date of this agreement, the note shall not be subject to interest.
On April 11, 2016 the Company issued 20,000,000 shares of common stock (of the 40,000,000) to the noteholder. The noteholder converted $2,030 of principal only for the shares. The applicable conversion price was $0.0001015. Upon this conversion, the note had a balance of $37,970. Upon the issuance of the remaining 20,000,000 shares, any applicable loss on conversion will be recorded at that time
Convertible Note dated June 10, 2015
On June 10, 2015, the Company entered into a 12% convertible redeemable note payable with an investor in the amount of $82,500. The gross amount of the note is $82,500, with net proceeds received of $75,000. The $7,500 represents an Original Issue Discount. This note matures on May 22, 2016. The note will also bear interest at 12%, compounded annually. The maturity date of this note is one year from execution. The note may be converted, in whole or in part, into shares of the Company’s common stock. The conversion price will be the lower of 60%, equivalent to a 40% discount, of the lowest trading price of the Company’s common stock as of the date of conversion notice or $0.06 per share. For defaults, the note is immediately due and payable and subject to a penalty interest rate of 18%.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 4-
CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES(CONTINUED)
Convertible Note dated June 10, 2015 (Continued)
The note may be prepaid according to the following schedule: Between 1 and 30 days from the date of execution, the note may be prepaid for 125% of face value plus accrued interest. Between 31 and 180 days from the date of execution, the note may be prepaid for 135% of face value plus accrued interest. After 180 days from the date of execution, the note may be prepaid for 145% of face value plus accrued interest.
Under terms of this agreement, the Company was required to set up an initial reserve of 15,000,000 common shares of stock for the potential conversion of convertible note principal and interest. This amount was duly reserved with transfer agent. The note holder is permitted under contract to request increases to this reserve of up to five times the amount of shares required for the note to be fully converted. No such requests were made of the Company by the noteholder.
As consideration for the holder’s commitment to purchase this debenture, borrower issued to holder 600,000 shares of the Company’s common stock. These commitment fee shares have been earned in full upon holder’s purchase of this debenture; none of the commitment fee shares will be returned in the event of prepayment of the note.
In December 2015, the noteholder in three (3) separate conversions, converted $47,250 into 60,000,000 shares of common stock. Two of these note conversions were performed at a price below par value. The result was that $22,500 represented a discount to the common stock (which is reflected net in APIC). After these conversions, the balance outstanding on this note at December 31, 2015 is $35,250, net of an OID of $2,151, plus $118,938 in accrued default penalties, representing a total outstanding of $152,037.
In March 2016, the noteholder in three (3) separate conversions converted $11,188 of principal and accrued fees into 76,500,000 shares of stock leaving a balance due under this note including interest and fees of $143,000.
On March 25, 2016, the Company entered into an agreement with the noteholder to amend the clauses in the original note agreement. As a result, the Company was required to pay $20,000 in cash to the noteholder on or before March 31, 2016, which it did, and the noteholder agreed to reset the total balance due to the “Adjust Current Balance” of $123,000 representing 123,000,000 shares to be issued at $0.001. The Company is yet to issue these shares.
Convertible Note dated December 23, 2015
On December 23, 2015, the Company entered into a 12% convertible redeemable note payable with an investor in the amount of $72,263. This note matures on December 23, 2016. The note will also bear interest at 12%, compounded annually. The maturity date of this note is one year from execution. Any amount of principal or interest on this note which is not paid when due shall bear an interest rate of 24% per year (“default interest”.) The note may be converted, in whole or in part, into shares of the Company’s common stock. The conversion price will be the lower of 55%, equivalent to a 45% discount, of the lowest trading price of the Company’s common stock during the 20 consecutive training days immediately preceding the conversion date and the closing sale price of the common stock on the principal market on the trading day immediately preceding the closing date. If the Company share price at any time loses the bid (ex: 0.0001 on the “ask” and zero market makers on the bid on level 2), then the conversion price may, in the holder’s sole and absolute discretion, be reduced to a fixed conversion price of 0.00001 (If lower than the conversion price otherwise.)
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 4-
CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES (CONTINUED)
Convertible Note dated December 23, 2015 (Continued)
Under terms of this agreement, the Company was required to set up an initial reserve of 5,000,000 common shares of stock for the potential conversion of convertible note principal and interest with an additional reserve of 245,000,000 shares of common stock in the name of the holder for issuance upon conversion as soon as a sufficient number of on issued shares become authorized, no later than January 25, 2016. This amount was duly reserved with transfer agent. The Company is required to have authorized and reserved five times the number of shares that are actually issuing a ball upon full conversion of this note.
As of December 31, 2015, the outstanding total of $72,263 along with accrued interest of $12,374, or $84,637 remains.
On March 29, 2016, the Company entered into an agreement with the noteholder to amend this convertible note. As a result, the Company was required to pay $6,271 in cash to the noteholder on or before March 31, 2016, which it did and the noteholder agreed to reset the total balance due to the “Adjust Current Balance” of $78,366. Also, under the agreement the price of future conversions will be set at $0.001. No shares have been issued to the noteholder subsequent to this agreement.
Convertible Note dated December 24, 2015
On December 24, 2015, the Company entered into an 11% convertible redeemable note payable with an investor in the amount of $43,000. This note matures on December 24, 2016. The note will also bear interest at 11%, compounded annually. The maturity date of this note is one year from execution. Any amount of principal or interest on this note which is not paid when due shall bear an interest rate of 24% per year (“default interest”.) OID was recognized on this note in the amount of $18,000. Deducted from the cash proceeds of this note were $10,000 to cover legal and miscellaneous expenses. $15,000 was paid in cash to the Company.
The note may be converted, in whole or in part, into shares of the Company’s common stock. The conversion price will be the lower of 55%, equivalent to a 45% discount, of the lowest trading price of the Company’s common stock during the 20 consecutive training days immediately preceding the conversion date and the closing sale price of the common stock on the principal market on the trading day immediately preceding the closing date. If the company share price at any time loses the bid (ex: 0.0001 on the “ask” and zero market makers on the bid on level 2), then the conversion price may, in the holder’s sole and absolute discretion, be reduced to a fixed conversion price of 0.00001(If lower than the conversion price otherwise.)
If the closing price at any time falls below $0.0012 the conversion price will be the lower of 40%, equivalent to a 45% discount, of the lowest trading price of the Company’s common stock during the 20 consecutive training days immediately preceding the conversion date and the closing sale price of the common stock on the principal market on the trading day immediately preceding the closing date.
Under terms of this agreement, the Company was required to set up an initial reserve of 245,000,000 common shares of stock for the potential conversion of convertible note principal and interest as soon as a sufficient number of on issued shares become authorized, no later than January 25, 2016.
Under terms of this note, the Company was required to have a sufficient number of shares reserved to allow full conversion as of the test date of January 25, 2016. This subsequently triggered an event of default, although no formal notice of default was provided and reset the balance to an “Adjusted Principal Amount” which was defined as double the amount of outstanding principal on the test date.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 4-
CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES (CONTINUED)
Convertible Note dated December 24, 2015 (Continued)
As of December 31, 2015, the amount outstanding under this note was $43,000, less OID interest of $17,678, plus accrued interest and default fees of $7,363 for a total outstanding of $32,685.
On March 29, 2016, the Company entered into an agreement with the noteholder to amend this convertible note. As a result, the Company was required to pay $3,729 in cash to the noteholder on or before March 31, 2016, which it did, and the noteholder agreed to reset the total balance due to the “Adjust Current Balance” of $46,634. Also, under the agreement the price of future conversions will be set at $0.001. The Company has not issued any shares under this agreement.
All convertible notes payable are due within one year and are reflected as current liabilities in the consolidated balance sheet at December 31, 2015.
The Company had $19,829 remaining in discount of the original issue discount with respect to these notes. Amortization of the original issue discount for the years ended December 31, 2015 and 2014 was $38,171 and $0, respectively. Interest expense on the convertible notes for the years ended December 31, 2015 and 2014 was $36,237 and $0, respectively. Accrued interest on these convertible notes for the years ended December 31, 2015 was $5,948 and $0, respectively.
Derivative Liability - Warrants
In accordance with Financial Accounting Standards Board (“FASB”) ASC 815, Derivatives and Hedging, the embedded conversion option in the Convertible Note, as well as the Warrants issued by the Company, are required to be accounted for as derivative instrument liabilities. Such liabilities are initially and continuously carried at fair value with changes in their fair value reported in income in each reporting period. Accounting for the conversion option in the Convertible Note and for the Warrants as derivative instruments is required because both the Convertible Note and the Warrants have down-round anti-dilution protection, or ratchet exercise prices, whereby the conversion or exercise price is reduced if the Company subsequently issues common stock, convertible securities or stock options or stock warrants at a lower price or with a lower exercise or conversion price. Such a provision is inconsistent with the “fixed for fixed” nature of an equity option and therefore the instruments do not meet one of the required tests for equity classification. In addition, because the Convertible Note and the Warrants are denominated in a currency (U.S. dollars) that is different from the Company’s functional currency (Canadian dollars), they do not meet the test of being indexed only to the Company’s common stock. When one or more instruments are accounted for as derivative liabilities at fair value, the proceeds received are first allocated to the initial fair value of those derivative instruments, with any remaining proceeds allocated to the initial carrying value of the Convertible Note, which is accounted for at amortized cost. Interest is accrued on the initial carrying value of the Convertible Note at whatever effective interest rate is required in order to equate the present value of the expected future cash flows associated with the Convertible Note with their initial carrying value. Stated interest on the Note (10% per annum) is not accrued separately but is included in the effective interest rate on the Convertible Note.
The fair value of the embedded conversion option in the Note and the fair value of the Warrants have been calculated using the call option value output from a binomial Lattice model. A binomial Lattice model assumes that the price of the stock that underlies an option follows a probability distribution in which the underlying event only has one of two possible outcomes - the market price of the stock can either go up or go down in the future.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 4-
CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES (CONTINUED)
Derivative Liability - Warrants (Continued)
The Lattice valuation model takes into account all of the assumptions that market participants would likely consider in negotiating the transfer of the embedded conversion option and the Warrants, namely, stock price, exercise price, time to expiration, volatility, risk-free rate and dividends.
The Company between November 26, 2014 and December 31, 2014, repaid the entire convertible note balance of $277,500 thus extinguishing the note. Upon the initial recording of the convertible note and warrants associated with the convertible note, a derivative liability was recorded as the convertible note and warrant each contained embedded derivatives as determined under ASC 815. Since the warrants associated with the convertible note has been exercised there is no outstanding liability as of December 31, 2015. The Company recognized a loss on the fair value of the derivative liabilities of $60,193 during the year ended December 31, 2015. Prior to the exercise of warrants, the derivative liability balance was $257,233. The balance at December 31, 2015 was $0.
NOTE 5-
STOCKHOLDERS’ DEFECIT
Preferred Stock
The Company was established on June 2, 2006 with 10,000,000 shares of preferred stock authorized with a par value of $0.001. The Company has not issued any preferred stock.
Common Stock
The Company was established on June 2, 2006 with 100,000,000 shares of common stock authorized with a par value of $0.001. On December 8, 2011, the Company amended the authorized stock to 150,000,000 shares. On March 17, 2014, the Company amended the authorized stock to 500,000,000 shares. On March 15, 2016 the Company’s shareholders ratified managements restructuring plan by approving the increase in authorized shares to 8,000,000,000
In 2014, the Company issued:
During November and December 2014, 14,310,000 private placement shares were issued to investors for an amount totaling $715,500 ($0.05 per share).
On January 10, 2014, the Company issued 1,000,000 common shares in connection with an asset purchase valued at $340,000.
50,000 shares of common stock upon the exercise of 50,000 stock options by a Director of the Company, at an exercise price of $0.25, for total proceeds of $12,500.
400,000 shares were issued for services rendered evaluated at an amount of $121,500.
Also, 4,250,000 shares previously issued to directors or administrators were cancelled.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 5-
STOCKHOLDERS’ DEFICIT (CONTINUED)
Common Stock (Continued)
In 2015, the Company issued:
On January 20, 2015 150,000,000 shares were issued in the acquisition of Breathe which was accounted for as reverse merger.
On March 31, 2015 the Company issued 2,666,667 shares for $100,000 in an investment into Tauriga Sciences, Inc (“TAUG”). The Company entered into a commercialization/license agreement with TAUG to jointly develop a new line of business involving CBD oil cartridges in on March 31, 2015. The Company received from TAUG 10,869,565 shares of TAUG common stock (with a value of $100,000) in exchange for their shares (reflected as an investment). Due to the very low stock value of both companies and with the Company exiting the eCigarette business both companies have impaired their respective investment to $0 as December 31, 2015.
On May 10, 2015 the Company issued a supplier 750,000 shares of common stock at a value of $22,500 for the payment of inventory ($0.03 per share) and 300,000 shares of common stock valued at $9,000 ($0.03 per share) to a former noteholder ("Iconic") as part of an Assignment and Assumption Agreement dated May 7, 2015.
26,983,998 common shares were issued for cash in the amount of $1,047,270 at an average share price of $0.039.
71,858,817 shares of common stock for consulting services rendered and to be rendered accrued as of December 31, 2015 in the amount of $5,547,305 including the cost of 6,500,000 shares to be issued. ($0.077 per share) including an agreement with Maxim Group LLC ("Maxim") to provide general financial advisory and investment banking services in exchange for 2.5% of the then issued and outstanding stock at the date of execution. The number of shares of common stock issued and outstanding at the time of this agreement was 276,352,667. At that date 2.5% of the issued and outstanding common stock equaled 6,908,817 shares. The Company, on May 18, 2015 canceled shares in the amount of 3,150,000 shares due to services never provided at a value of $157,500 ($0.05 per share).
85,074,284 common shares were issued for the conversion of principal and accrued interest by the holders of convertible notes at a value of $406,385 having and average share price of $0.005 at conversion.
17,150,000 common shares of stock to noteholders as commitment and assignment shares and recorded as debt financing cost at a value of $176,050 (average price $0.01.)
Under the first tranche of a July 2, 2015 securities purchase agreement whereby $240,000 was committed for purchase of common stock and warrants. Cash was received associated with this offering was $233,500, with $6,500 credited to the purchaser for legal fees. Under the second tranche of this agreement the amount to be funded will be $200,000. Second tranche closing date was to be a trading date no later than five (5) Business Days following the effective date of the Registration Statement. on which all of the transaction documents have been executed and delivered by the applicable parties thereto, and all conditions precedent to (i) the Purchasers’ obligations to pay the Subscription Amount for the Second Tranche and (ii) the Company’s obligations. The Company filed Form S-1 “Registration Statement Under the Securities Act of 1933” (“S1”) on August 17, 2015. On October 2, 2015 the Company pursuant to Rule 477 promulgated under the Securities Act of 1933, as amended (the “Securities Act”) submitted a request for withdrawal of the previously file S-1.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 5-
STOCKHOLDERS’ DEFICIT (CONTINUED)
Common Stock (Continued)
Under this agreement, the Company was obligated to issued 4,000,000 common shares of its stock at $0.06 per share subject to adjustment for reverse and forward stock splits, stock dividends, stock combinations and other similar transactions of the common stock that occur after the date of agreement. Final purchase price is subject to adjustment based on the closing price of the common stock on first adjustment date that is six (6) months immediately following the closing date (or if such date is not a trading day, the trading day immediately preceding such six (6) month period). Final purchase price is also subject to adjustment based on the second adjustment date based on the closing price of the common stock on thirty (30) days following the first adjustment date (or if such date is not a trading day, the Trading Day immediately preceding such date).
Under the agreement, at any time while warrants are outstanding, if the Company sold or grants any option to purchase, or sell or any common stock or common stock equivalents, at an effective price per share less than the exercise price then in effect but greater than $0.10 (price adjusted) will be considered a “dilutive issuance” and the holder of the warrant will be entitled to receive shares of common stock at an effective price per share that is less than the exercise price.
Cashless warrants registered in the name of such purchaser to purchase up to a number of shares of common stock equal to 100% of such purchaser shares for the first tranche, with an exercise price equal to $0.20, subject to adjustments whereby the Company may issue without further consideration. In the event that the first adjusted price is higher than the per-share purchase price but lower than $.08 cents per share, 10% of the aggregate number of shares issued or issuable or 15% if equal to or lower than the per-share price. The Company must file Form S-1 with the SEC under terms of this agreement.
Under this agreement, the Company reserved 25 million shares of common stock to provide for the issuance of common shares, the adjustment shares and warrant shares. In the event that the company’s stock falls below $0.04 per share for three consecutive training days the Company will immediately add an additional 15 million shares to this reserve. In the event that the stock falls below $.02 per share the three consecutive trading days the Company will immediately add an additional 20 million shares of the reserve.
On August 25, 2015, the Company consented to an assignment agreement whereby the assignor received $265,000 cash in exchange for the transfer of rights pursuant to the securities purchase agreement dated July 2, 2015. As part of this agreement, the Company directly paid to assignee $180,000 in exchange for the assignee waiving all rights under the original agreement related to price adjustments, second tranche issuance and warrants.
On September 8, 2015 the cashless warrants to purchase 690,625 common shares were exercised to convert to 7,541,511 common shares based on a price reset to equal the conversion price associated with the debt agreements from the stated strike price of $0.75. The price reset which resulted in the conversion to 7,541,511 common shares based on the the difference between the current market value (market price of $0.25 multiplied by exercise shares of 690,625) and the exercise price ($0.0375) multiplied by number of exercise shares (690,625.) This number is then divided by the adjusted price of the common stock ($0.01946.)
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 5-
STOCKHOLDERS’ DEFICIT (CONTINUED)
Common Stock (Continued)
As of December 31, 2015, the Company has 470,811,277 shares of common stock issued and outstanding. As of December 31, 2015 the Company had a liability for stock of $82,710 for stock to be issued as conversion shares under the note settlement agreement of the March 13, 2015 8% convertible note. Share are to be issued in three issuances of 500,000 each not to have a value less than $5,000 each. Issuances are scheduled November 1, 2015; December 1, 2015 and January 1, 2015. The Company reversed liability for stock issuable under a distribution agreement in the amount of five million common shares which had a value of $37,500 ($0.0075 per share) due to that agreement no longer being in effect. The Company further has a liability for stock to be issued under a consulting agreement to issue 1,400,000 shares in the amount of $17,710 ($0.013 per share.) These shares do not include the shares owed to the noteholders as described in Note 4. The liability for those shares is included with the note payable balances.
The Company initiated payments in the amount of $180,000 to buy back price adjustment rights, warrants and additional issuance rights transferred to assignee under original stock purchase agreement dated July 2, 2015. The Company has the 4,000,000 share stock certificate in its possession pending the stock reissuance to a new certificate to assignee.
Authorized Reserved Shares
Under terms of several of the Company’s convertible notes it was required under those note agreements at all times to authorize and reserve four and in some cases five times the number of shares that are actually issuable upon full conversion of said notes (based on the conversion price of the notes in effect from time to time.) The noteholders waived the requirement of the reserve shares above and beyond what was needed to convert through the maturity date, not withstanding the initial reserve amount. The Company is required to make proper provisions so that there after there shall be a sufficient number of shares of common stock authorized and reserved, free from preemptive rights. The Company is further obligated to make any changes to its capital structure which would change the number shares of common stock into which said notes shall be convertible at the then current conversion price. Based on this calculation, the Company did not have sufficient authorized common shares to convert all convertible notes, and exercise all outstanding warrants from the unissued common shares as of December 31, 2015, however, cured any deficiency related to these provisions on March 15, 2016, upon the approval of the DEF 14A and amendments to the Certificates of Incorporation. As noted herein, the noteholders waived this requirement to the Company as they knew the Company was amending their charter to increase the authorized number of common shares to accommodate any conversions.
Stock Options
On August 12, 2013, the Company approved and enacted the 2013 Stock Incentive Plan (the “Plan”). Under the 2013 Stock Incentive Plan, the Company may grant options or share awards to its full-time employees, executive officers, directors and consultants up to a maximum of 8,000,000 common shares. Under the Plan, the exercise price of each option has been established at $0.25. Stock options vest as stipulated in the stock option agreement and their maximum term is 8 years.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 5-
STOCKHOLDERS’ DEFICIT (CONTINUED)
Stock Options (Continued)
The following table summarizes information about the Company’s stock options:
Under the Plan, the exercise price of each option has been established at $0.25. Stock options vest as stipulated in the stock option agreement and their maximum term is 8 years. In the year ended December 31, 2015 the last of these options expired. There are no outstanding options as of December 31, 2015.
The following table summarizes the ranges of exercise prices of outstanding and exercisable options held by officers and directors as of December 31, 2015:
There were no stock options issued in 2015 or 2014 by the Company. The latest options issued in 2013 were determined using the Black-Scholes option-pricing model using the following weighted-average assumptions:
Stock options-based compensation expense included in the consolidated statements of operations and comprehensive loss for the year ended December 31, 2015 and 2014 was $0.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 5-
STOCKHOLDERS’ DEFICIT (CONTINUED)
Warrants
The following table summarizes the Company’s share warrants outstanding as of December 31, 2015 and 2014:
On September 8, 2015 the cashless warrants to purchase 690,625 common shares were exercised to convert to 7,541,511 common shares based on a price reset to equal the conversion price associated with the debt agreements from the stated strike price of $0.75. The price reset which resulted in the conversion to 7,541,511 common shares based on the the difference between the current market value (market price of $0.25 multiplied by exercise shares of 690,625) and the exercise price ($0.0375) multiplied by number of exercise shares (690,625.) This number is then divided by the adjusted price of the common stock ($0.01946.)
On August 12, 2013, the Company approved and enacted the 2013 Stock Incentive Plan (the “Plan”). Under the 2013 Stock Incentive Plan, the Company may grant options or share awards to its full-time employees, executive officers, directors and consultants up to a maximum of 8,000,000 common shares. Under the Plan, the exercise price of each option has been established at $0.25. Stock options vest as stipulated in the stock option agreement and their maximum term is 8 years. 850,000 options were issued in 2013 which expired in 2015.
As of December 31, 2015, there are no warrants outstanding.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 6-
LICENSE AGREEMENT AND INVESTMENT
On March 31, 2015, BVAP and TAUG entered into a non-exclusive license agreement, whereby TAUG will provide CBD oil cartridges to be used in the BVAP e-cigarette. In accordance with the agreement, TAUG will receive a royalty of 50% of the net revenues associated with the sale of specified list of products listed in the agreement. In addition, there was a share swap between TAUG and BVAP to equate to $100,000. BVAP issued 2,666,667 shares at $0.0375 for the commercialization of the products. TAUG issues 10,869,565 shares of its stock to acquire the license agreement (investment).
At December 31, 2015 it was determined by management of both companies that the value of the investment based on stock value and no business venture will be pursued was valueless. Therefore, the entire investment and commercialization fees recorded were written off completely.
NOTE 7-
RELATED PARTY TRANSACTIONS
On August 24, 2015, the Company, received funds from 3476863 Canada Inc. (Peter Comito) in the amount of $50,000 under a Stock Purchase Agreement. The Company intended to convert these funds into equity through the issuance of common shares of stock. On March 28, 2016, the Company issued common shares under a settlement agreement to satisfy this obligation.
On September 22, 2015, Giovanni Comito purchased 10,400,000 shares of the Company’s common stock, par value $0.001, from Joshua Kimmel, the Company’s Chief Executive Officer, Chief Financial Officer and member of the Board of Directors, for an aggregate purchase price of $75,000. All such shares were “restricted securities” at the time of the purchase and will continue to be “restricted securities” as such term is defined under Rule 144 of the Securities Act of 1933, as amended.
On September 22, 2015, the Company issued an unsecured promissory note to Kimmel in consideration for gross proceeds to the Company of $75,000 (for which constitutes all proceeds received by Kimmel as part of the Comito Purchase). The Kimmel Note accrues interest at 4.5% per annum unless there is an event of default, in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the Kimmel Note will be due and payable by the Company no later than September 22, 2016.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 7-
RELATED PARTY TRANSACTIONS (CONTINUED)
On September 30, 2015, the Company, issued an unsecured promissory note to Giovanni Comito in consideration for gross proceeds to the Company of $400,000 pursuant to a letter of intent (“LOI”) purchase agreement for the sale of intellectual property held by the Company. The Giovanni Comito Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the Giovanni Comito Note will be due and payable by the Company no later than March 31, 2016. Accrued interest as of December 31, 2015 was $4,537. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On October 7, 2015, the Company, issued an unsecured promissory note to Bureauicom Inc. (Peter Comito) in consideration for gross proceeds to the Company of $100,000 pursuant to the LOI. The Bureauicom Inc. Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the Bureauicom Inc. Note will be due and payable by the Company no later than April 7, 2016. Accrued interest as of December 31, 2015 was $1,048. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On October 14, 2015, the Company, issued an unsecured promissory note to 3476863 Canada Inc. (Peter Comito) in consideration for gross proceeds to the Company of $100,000 pursuant to the LOI. The 3476863 Canada Inc. (Peter Comito) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the 3476863 Canada Inc. (Peter Comito) Note will be due and payable by the Company no later than April 14, 2016. Accrued interest as of December 31, 2015 was $962. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On October 16, 2015, the Company, issued an unsecured promissory note to Natter Investments (Peter Comito) in consideration for gross proceeds to the Company of $50,000 pursuant to a letter of intent (“LOI”) purchase agreement for the sale of intellectual property held by the Company. The Natter Investments (Peter Comito) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the Natter Investments (Peter Comito) Note will be due and payable by the Company no later than April 16, 2016. Accrued interest as of December 31, 2015 was $468. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On October 20, 2015, the Company, issued an unsecured promissory note to Peter Comito Family Trust in consideration for gross proceeds to the Company of $50,000 pursuant to the LOI. The Peter Comito Family Trust Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the Peter Comito Family Trust Note will be due and payable by the Company no later than April 20, 2016. Accrued interest as of December 31, 2015 was $444. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 7-
RELATED PARTY TRANSACTIONS (CONTINUED)
On October 28, 2015, the Company, issued an unsecured promissory note to 9138-1095 Quebec Inc. (Angelo Chiapetta) in consideration for gross proceeds to the Company of $50,000 pursuant to the LOI. The 9138-1095 Quebec Inc. (Angelo Chiapetta) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the 9138-1095 Quebec Inc. (Angelo Chiapetta) will be due and payable by the Company no later than April 28, 2016. Accrued interest as of December 31, 2015 was $395. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On November 4, 2015, the Company, issued an unsecured promissory note to 7091061 Canada Inc. (Carmine D'Argenio) in consideration for gross proceeds to the Company of $50,000 pursuant to the LOI. The 7091061 Canada Inc. (Carmine D'Argenio) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the 7091061 Canada Inc. (Carmine D'Argenio) will be due and payable by the Company no later than May 4, 2016. Accrued interest as of December 31, 2015 was $351. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On November 18, 2015, the Company, issued an unsecured promissory note to Gabriella Trust (Peter Comito) in consideration for gross proceeds to the Company of $100,000 pursuant to the LOI. The Gabriella Trust (Peter Comito) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the Gabriella Trust (Peter Comito) will be due and payable by the Company no later than May 18, 2016. Accrued interest as of December 31, 2015 was $530. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On November 18, 2015, the Company, issued an unsecured promissory note to 3482286 Canada Inc. (Peter Comito) in consideration for gross proceeds to the Company of $25,000 pursuant to the LOI. The 3482286 Canada Inc. (Peter Comito) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the 3482286 Canada Inc. (Peter Comito) will be due and payable by the Company no later than May 18, 2016. Accrued interest as of December 31, 2015 was $133. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On November 18, 2015, the Company, issued an unsecured promissory note to 3931731 Canada Inc. (Peter Comito) in consideration for gross proceeds to the Company of $25,000 pursuant to the LOI. The 3931731 Canada Inc. (Peter Comito) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the 3931731 Canada Inc. (Peter Comito) will be due and payable by the Company no later than May 18, 2016. Accrued interest as of December 31, 2015 was $133. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 7-
RELATED PARTY TRANSACTIONS (CONTINUED)
On November 18, 2015, the Company, issued an unsecured promissory note to 8141185 Canada Inc. (Peter Comito) in consideration for gross proceeds to the Company of $25,000 pursuant to the LOI. The 8141185 Canada Inc. (Peter Comito) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the 8141185 Canada Inc. (Peter Comito) will be due and payable by the Company no later than May 18, 2016. Accrued interest as of December 31, 2015 was $133. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
On November 18, 2015, the Company, issued an unsecured promissory note to Natter Investments (Peter Comito) in consideration for gross proceeds to the Company of $25,000 pursuant to the LOI. The Natter Investments (Peter Comito) Note accrues interest at 4.5% per annum unless there is an event of default in which case the interest rate increases to 9.0% per annum. The entire principal amount and all accrued but unpaid interest under the Natter Investments (Peter Comito) will be due and payable by the Company no later than May 18, 2016. Accrued interest as of December 31, 2015 was $133. On March 28, 2016 this obligation was satisfied with the collective issuance of 85,832,640 to settle a total of $1,050,000 related party notes related to the purchase of the Company’s intellectual property.
NOTE 8-
DEFERRED FINANCING FEES
Deferred financing fees result from the issuance of share warrants as finders’ fees in connection with flow-through financing completed on December 23, 2013. The fair value of the warrants amounted to $25,431 and was determined using the Black-Scholes option-pricing model. The deferred financing fees are being amortized over the life of the warrants which is 2 years. Amortization of deferred financing fees for the years ended December 31, 2015 and 2015 was $12,366 and $13,065. Breathe assumed this asset as part of the reverse merger. As of December 31, 2015 the fees have been fully amortized.
NOTE 9-
PROVISION FOR INCOME TAXES
As of December 31, 2015, there is no provision for income taxes, current or deferred.
The Company has approximately $9,401,000 in net operating losses as of December 31, 2015 available to offset future taxable income through 2035. The Company has established a valuation allowance equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.
A reconciliation of the Company’s effective tax rate as a percentage of income before taxes and the statutory rate for year ended December 31, 2015 is summarized below:
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 10-
CURRENT LITIGATION
Typenex Dispute
On May 18, 2015, Typenex Co-Investment, LLC (“Typenex”) filed a binding arbitration notice against the Company in the State of Utah, Case No. 150903317 (the “Utah Lawsuit”) regarding a certain Warrant to Purchase Shares of Common Stock (the “Warrant”) issued by the Company to Typenex on April 28, 2014 (the “Arbitration”) in connection with a Convertible Promissory Note of the same date (the “Note”). On April 29, 2015, Typenex sent a Notice of Exercise to the Company for the issuance of 7,541,511 shares of the Company’s common stock (the “Initial Shares”) based on a cashless exercise provision contained in the Warrant along with an opinion letter indicating the shares should be issued without restrictive legend pursuant to Rule 144 under the Securities Act of 1933, as amended. The Company immediately filed for an emergency injunction in the State of New Jersey, the location of the Company’s transfer agent. The injunction was granted The Company has filed a response and counterclaim to the Arbitration notice alleging, among other things, that Typenex did not fulfill its obligations under the original Note and failed to disclose material matters regarding Typenex and its principal to the Company and requested damages and attorneys’ fees be paid by Typenex to the Company.
On September 8, 2015, the Company’s transfer agent was required to release the Initial Share to Typenex as a result of the Company failing to maintain the bond requirement agreed to by the Company and Typenex as part of the injunction. The number of Initial Shares is based on a price reset to equal the conversion price associated with the Note. The price reset which resulted in the partial conversion to 7,541,511 common shares based on the difference between the current market value (market price of $0.25 multiplied by exercise shares of 690,625) and the exercise price ($0.0375) multiplied by number of exercise shares (690,625.) This number is then divided by the adjusted price of the common stock ($0.01946.)
On October 13, 2015, Typenex and the Company participated in a mediation in an attempt to resolve the Utah Lawsuit without either party having to incur additional legal and court fees. As a result of the mediation and in order to resolve the Utah Lawsuit and the Arbitration and all other disputes between, on November 17, 2015 (the “Typenex Effective Date”), the Company and Typenex entered into a Settlement Agreement, Waiver and Release of Claims (the “Settlement Agreement”) and related Exchange Agreement (the “Exchange Agreement”), Pursuant to the terms of the Settlement Agreement and Exchange Agreement, the Company agreed to issue to Typenex 8,000,000 shares of the Company’s common shares of stock in exchanges for any rights Typenex may or may not have had under the Warrant. The Company will deliver the shares to Typenex in two installments: (i) 4,000,000 Shares with five trading days of the Effective Date (the “First Installment Shares”) and (ii) 4,000,000 Shares on or before January 1, 2016 (the “Second Installment Shares”). The First Installment Shares and the Second Installment Shares are collectively referred to herein as the Typenex Shares.
Additionally, pursuant to the Settlement Agreement, beginning on January 1, 2016, Typenex shall have the right to put the Typenex Shares back to the Company (the “Put Right”) at the following prices: (a) for Typenex Shares put to the Company from January 1, 2016 to April 30, 2016 the price will be $0.01 per share; (b) for Typenex Shares put to the Company from May 1, 2016 to August 31, 2016 the price will be at $0.02 per share; and (c) any Typenex Shares put to Company between September 1, 2016 and December 31, 2016 the price will be at $0.03 per share. Typenex shall have the right to put up to 666,667 Typenex Shares per month to Company (the “Monthly Put Amount”) per month. If the number of Typenex Shares put to Company in a given month is less than the Monthly Put Amount such difference, the “Rollover Shares”, Typenex shall have the right to put such Typenex Shares to Company at any time in the same or immediately succeeding period. In addition to the Monthly Put Amount, Typenex shall also have the right to put up to 666,667 Rollover Shares per month to Company. At such time that Typenex’s Net Sales (gross proceeds of sales of the Typenex Shares sold in a minus any trading commissions or costs associated with clearing and selling such Typenex Shares minus the purchase price paid for any shares of Common Stock purchased on the open market) of Typenex Shares is equal to or greater than $200,000, Typenex’s Put Right shall automatically terminate and Typenex shall have no further rights to put Typenex Shares or Rollover Shares.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 10-
CURRENT LITIGATION (CONTINUED)
Typenex Dispute (Continued)
Additionally, Typenex agreed that during any calendar week it would not sell more Typenex Shares than the greater of (i) 10% of the weekly trading volume of the Common Stock as reported on Bloomberg, L.P. or (ii) an aggregate market value of $5,000.
Upon execution of the Settlement Agreement and Exchange Agreement, both parties released all claims each may have against the other relating to any other agreements to which both may be party except for any disputes that may arise under the Settlement Agreement, Exchange Agreement and the documents ancillary to both. Under the Settlement Agreement, the Company executed a Confession of Judgment in the amount of $500,000 (the “Confession of Judgment”). In the event the Company commits a material breach of the Settlement Agreement which is not cured within five trading days, Typenex shall have the right to enforce the Confession of Judgment. The Confession of Judgment, if filed as set forth above, would carry an interest rate of 12% until paid.
On March 25, 2016, the Company paid $55,000 to Typenex to settle all claims and obligations resulting from these agreements between the parties.
Trademark dispute
On August 5, 2015, the Company received a notice from Breathe, LLC, a Florida limited liability company (“Breathe LLC”), that the Company was violating Breathe LLC’s trademark rights under U.S. Trademark Registration No. 4,633,887 for the name “Breathe” filed on September 27, 2013 and a demand for the Company to immediately cease and desist from such use. The Company believes that it has rights of prior use to the name “Breathe” under the federal trademark laws. As such, on August 10, 2015, the Company filed (i) a Petition for Cancellation with the United States Patent and Trademark Office regarding U.S. Trademark Registration No. 4,633,887 and (ii) a Complaint against Breathe LLC in the United States District Court of Eastern District of Tennessee (the "Tennessee Court"), Civil Action No. 3:15-cv-00345 requesting a declaratory judgment regarding the Company’s rights to use the trademark. A default judgment is currently pending in the Tennessee Court against Breathe LLC for failure to respond to the Tennessee Court complaint. Breathe LLC has requested the default judgment not be entered and that it be given an extension of time to respond. The Tennessee Court has not ruled on Breathe LLC’s request as of the date of the filing of this Form 10-Q. On August 16, 2015, the Company was notified that on August 12, 2015 Breathe LLC filed a Complaint in the United States Southern District Court of New York (the “New York Court”), Civil Action N. 1:15-cv-06403, against the Company and its Chief Executive Officer, Joshua Kimmel, demanding, among other things, damages of $5,000,000 and an injunction restraining the Company from using the name “Breathe”. On November 8, 2015, the New York Court held a hearing regarding Breathe LLC’s request for a preliminary injunction. On the same day, the New York Court entered an order denying Breathe LLC’s request for a preliminary injunction finding "uncontroverted evidence showing that Kimmel began distributing, promoting and advertising electronic cigarettes with the "Breathe" mark prior to September 27, 2013". Despite the New York Court’s denial, the overall litigation continues. Although the Company believes it will prevail on the merits, there can be no guaranty that it will do so. If the Company is unable to prevail, it may be required to market its products under a different name.
As of March 30, 2016, pursuant to a settlement agreement under trademark litigation with plaintiff, Breathe LLC (a Florida organization), the Company has ceased its continuing operations in the eCigarette business (the effective date of the discontinuance of operations in that industry). In accordance with the settlement agreement, the Company will pay two cash payments ($10,000 immediately and $15,000 due by July 31, 2016) and issue 50 million restricted common shares of Company stock (which was issued April 15, 2016) in addition to the transfer of 5,000,000 common shares which it holds in Tauriga Sciences, Inc.. The Company further agrees to split 50/50 any future sales of its held inventory. The sale of inventory shall be a joint effort by the two companies and shall last for a duration of one year from April 1, 2016. After such period, the Company will dispose of any remaining inventory.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 10-
CURRENT LITIGATION (CONTINUED)
Trademark dispute (Continued)
On April 15, 2016 the Company issued 50,000,000 shares of common stock pursuant to this agreement to be recorded at the closing price of the stock as of the day the Company entered into the settlement agreement in the amount of $50,000 (at par value.)
Comito’s Intellectual Property Lawsuit
On December 18, 2015, Giovanni & Peter Comito ("Comitos") filed suit in United States District Court, in the Southern District of Florida (Case No. 15-cv-62653-BB) against the Company and Joshua Kimmel. The Comitos were asserting claims of specific performance, breach of contract and fraud arising out of a contract for sale and purchase of certain patent assets and common stock owed. The Comitos funded directly or through third parties $1,000,000 (see NOTE 7 - Related Party Transactions) for consideration of the purchase of intellectual property assets. 3476863 Canada Inc. (Peter Comito) also funded $50,000 pursuant to a stock purchase agreement on August 24, 2015 that was not fulfilled at the time of filing.
On March 9, 2016, the Company Entering into a Comprehensive Settlement Agreement in Federal Lawsuit Concerning the Transfer of Intellectual Property and the Retirement of $1,000,000 in Outstanding Promissory Notes
Specifically, the execution of a comprehensive settlement agreement ("the Settlement") with Giovanni Comito and Peter Comito ("Plaintiffs") with respect to Case No, 15-cv-62653-BB filed in United States District Court for the Southern District of Florida. Under terms of the Settlement, the Company will transfer its portfolio of Intellectual Property ("IP" or "Patents") to the Plaintiffs in exchange for the termination of all pending litigation. The Company will retain ownership of the name "Breathe" and related trademarks, which later were relinquished as part of the settlement agreement with Breathe LLC on March 30, 2016.
Additionally, the Company agreed to issue to the Plaintiffs and their affiliated parties 85,832,640 shares of common stock (the "Settlement Shares"). The Settlement Shares will be "restricted securities" as defined by the Securities Act of 1933, as amended.
On March 28, 2016 the Company issued 85,832,640 common shares to satisfy this term and provision of settlement agreement with Comitos. In addition, as a result of the Settlement, the Company has retired $1,000,000 in promissory notes due the plaintiffs.
NOTE 11-
CONCENTRATION OF RISK
Any customer or vendor representing greater than 10% of that total sales or cost of sales is considered a major customer or major vendor.
During the year ended December 31, 2015 the Company had sales through two distributors which operate regionally and respectively in the New York City and the Knoxville, Tennessee markets. Nearly all of the Company's current revenue were derived from two distributor relationships. The total sales to distributors in the year ended December 31, 2015 was $74,669. For the year ended December 31, 2015 the Company had associated cost of goods sold of $69,694. For the year ended December 31, 2015 the Company recognized its first online sales through its website with gross sales of $1,325 with associated cost of goods of $557. Being that nearly all sales were only sales to two distributors with very minimal online transaction made being and that the Company is in the initial phase of business development there is a very strong risk that the Company would not be able to gain sufficient market penetration to generate enough revenue to support continuing operations. The Company's failure to maintain these relationships in the future would materially and adversely impact future operating results.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 11-
CONCENTRATION OF RISK (CONTINUED)
The Company had certain vendors whose billings individually represented 10% or more of the Company’s total outstanding payables, as follows:
The Company had two major vendors as of December 31, 2015. The Company does not see this as a significant risk because neither of these vendors would be considered suppliers to the ongoing operation.
As of March 30, 2016, pursuant to a settlement agreement under trademark litigation with plaintiff, Breathe LLC (a Florida organization), the Company has ceased its continuing operations in the eCigarette business (the effective date of the discontinuance of operations in that industry).
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 12-
FAIR VALUE MEASUREMENTS
The Company adopted certain provisions of ASC Topic 820. ASC 820 defines fair value, provides a consistent framework for measuring fair value under generally accepted accounting principles and expands fair value financial statement disclosure requirements. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:
Level 1 inputs: Quoted prices for identical instruments in active markets.
Level 2 inputs: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 inputs: Instruments with primarily unobservable value drivers.
The following table represents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2015:
NOTE 13-
SUBSEQUENT EVENTS
Corporate Matters
On January 25, 2016, Mr. Seth M. Shaw succeeded Mr. Joshua Kimmel as Chief Executive Officer of the Company. Mr. Kimmel resigned as a director and officer of the Company at that time. On April 5, 2016, Mr. Shinsuke Nakano was appointed CEO of the Company. Simultaneously, Mr. Shaw was appointed Interim Chief Financial Officer and Director.
On February 5, 2016 the Company filed a definitive Form 14A ("shareholder proxy") to amend the authorized issuable common shares from 500,000,000 with a par value of $0.001 per share to 8,000,000,000 common shares with a par value of $0.001 per share. This Authorized Share Increase Amendment was approved by the Board of Directors on February 1, 2016. The Board of Directors elected to obtain stockholder approval of the Authorized Share Increase Amendment by written consent (“Written Consent”) pursuant to Article II, Section 12 of our Bylaws and Section 78.370 of the Nevada Revised Statues. The close of business on February 4, 2016 has been fixed as the record date for the determination of holders of our Common Stock entitled to receive notice of and discretion to approve the Authorized Share Increase Amendment.
On March 15, 2016 the Company’s shareholders ratified managements restructuring plan by approving the increase in authorized shares to 8,000,000,000 (Quorum was achieved with 50.9% of outstanding shares having voted.)
On April 6, 2016, Mr. Shinsuke Nakano assumed the position of Director, Chairman of the Board ("Chairman") and Chief Executive Officer ("CEO"); and the Company appointed Mr. Takehiro Abe to the position of Chief Operating Officer ("COO") and Director ("Board Member"). The outgoing CEO, Mr. Seth M. Shaw, continues to serve the Company as its Interim Chief Financial Officer ("Interim CFO") and as a Director.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 13-
SUBSEQUENT EVENTS (CONTINUED)
Shinsuke Nakano, 33, is based in Tokyo, Japan and is the founder of AXS Company, Ltd., a successful company dedicated to production of infomercials and TV programs. Thereafter, Mr. Nakano focused on venture capital, and founded White Fox, Co. Ltd. in Japan and launched the Alternative Wall Street Academy ('AWA"), in September, 2015. Mr. Nakano currently has academies in nine cities throughout Japan and is now looking to replicate this business model in the US.
Legal Matters
Comito’s Intellectual Property Lawsuit
On March 9, 2016, the Company Entering into a Comprehensive Settlement Agreement in Federal Lawsuit concerning the transfer of intellectual property and the retirement of $1,000,000 in outstanding promissory notes pursuant to December 18, 2015 lawsuit filed by the Comitos in United States District Court, in the Southern District of Florida (Case No. 15-cv-62653-BB) against the Company and Joshua Kimmel. The Comitos funded directly or through third parties $1,000,000 (see NOTE 7 - Related Party Transactions) for consideration of the purchase of intellectual property assets. 3476863 Canada Inc. (Peter Comito) also funded $50,000 pursuant to a stock purchase agreement on August 24, 2015 that was not fulfilled at the time of filing.
Specifically, the execution of a comprehensive settlement agreement ("the Settlement") with Giovanni Comito and Peter Comito ("Plaintiffs") with respect to Case No, 15-cv-62653-BB filed in United States District Court for the Southern District of Florida. Under terms of the Settlement, the Company will transfer its portfolio of Intellectual Property ("IP" or "Patents") to the Plaintiffs in exchange for the termination of all pending litigation. The Company will retain ownership of the name "Breathe" and related trademarks, which later were relinquished as part of the settlement agreement with Breathe LLC on March 30, 2016.
Additionally, the Company agreed to issue to the Plaintiffs and their affiliated parties 85,832,640 shares of common stock (the "Settlement Shares"). The Settlement Shares will be "restricted securities" as defined by the Securities Act of 1933, as amended.
On March 28, 2016 the Company issued 85,832,640 common shares to satisfy this term and provision of settlement agreement with Comitos.
In addition, as a result of the Settlement, the Company has retired $1,000,000 in promissory notes due the plaintiffs.
On March 25, 2016, the Company made final payment to Typenex to extinguish all remaining financial obligations in the amount of $55,000.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 13-
SUBSEQUENT EVENTS (CONTINUED)
Convertible Note Matters
On March 25, 2016, the Company entered into an agreement with the noteholder to amend the clauses in the original note agreement. As a result, the Company was required to pay $20,000 in cash to the noteholder on or before March 31, 2016, which it did, and the noteholder agreed to reset the total balance due to the “Adjust Current Balance” of $123,000 representing 123,000,000 shares to be issued at $0.001. The Company is yet to issue these shares.
On March 29, 2016, the Company entered into an agreement with this noteholder to amend this convertible note to cure the default clause of the original agreement (no notice of default was provided). The event of default was due to the Company’s inability to reserve sufficient shares required by the convertible note agreement based on the total authorized and unissued shares, which was subsequently cured with the increase of the authorized shares to 8,000,000,000 on March 15, 2016. The holder agreed to reset the total balance due to the “Adjust Current Balance” of $40,000. Also, under the agreement the price of future conversions will be set at $0.001. The Company was further required to reserve common shares of not less than 40,000,000. From the date of this agreement, the note shall not be subject to interest.
On March 29, 2016, the Company entered into an agreement with the noteholder to amend this convertible note. As a result, the Company was required to pay $6,271 in cash to the noteholder on or before March 31, 2016, which it did and the noteholder agreed to reset the total balance due to the “Adjust Current Balance” of $78,366. Also, under the agreement the price of future conversions will be set at $0.001. No shares have been issued to the noteholder subsequent to this agreement.
On March 29, 2016, the Company entered into an agreement with the noteholder to amend this convertible note. As a result, the Company was required to pay $3,729 in cash to the noteholder on or before March 31, 2016, which it did, and the noteholder agreed to reset the total balance due to the “Adjust Current Balance” of $46,634. Also, under the agreement the price of future conversions will be set at $0.001. The Company has not issued any shares under this agreement.
Other Note Payable Matters
On February 22, 2016, the Company issued a 30-day promissory note with an investor in the amount of $20,000 at an interest rate of 20% per year. This note carries a default interest rate of 30%. Proceeds received were contractually required to be used for legal settlement and legal and accounting fees. This note was fully settled as part of the March 29, 2016 settlement for stock.
On March 29, 2016, the Company settled certain vendor payables and outstanding notes payable with a third party in the amount of $79,200 in exchange for the issuance of 39,500,000 shares of stock. As of this report date the issuance is still pending.
Trademark Settlement/Disposal of eCigarette Operations
As of March 30, 2016, pursuant to a settlement agreement under trademark litigation with plaintiff, Breathe LLC (a Florida organization), the Company has ceased its continuing operations in the eCigarette business (the effective date of the discontinuance of operations in that industry). In accordance with the settlement agreement, the Company will pay two cash payments ($10,000 immediately and $15,000 due by July 31, 2016) and issue 50 million restricted common shares of Company stock (which was issued April 15, 2016 at a value of $50,000) in addition to the transfer of 5,000,000 common shares which it holds in Tauriga Sciences, Inc. (at a value of $0 as this had been written off). The Company further agrees to split 50/50 any future sales of its held inventory. The sale of inventory shall be a joint effort by the two companies and shall last for a duration of one year from April 1, 2016. After such period, the Company will dispose of any remaining inventory.
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 13-
SUBSEQUENT EVENTS (CONTINUED)
Trademark Settlement/Disposal of eCigarette Operations (Continued)
As a result of the disposal of the business and the discontinuance of the eCigarette operations, the following chart reflects the pro-forma effect of the consolidated financial statements as if this transaction occurred on January 1, 2014:
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 13-
SUBSEQUENT EVENTS (CONTINUED)
Trademark Settlement/Disposal of eCigarette Operations (Continued)
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
BALANCE SHEET FROM DISCONTINUED OPERATIONS
White Fox Ventures, Inc.
In an agreement dated as of April 1, 2016, the Company acquired White Fox Ventures, Inc. ("White Fox") for in an undetermined amount of shares equating 85% of the total authorized capital of the Company. White Fox, a Nevada Corporation possesses an exclusive License Agreement with White Fox Co. Ltd, Japan. Since the license agreement only stipulated a royalty fee on sales, White Fox did not record a value to the agreement. When the Company was completing its due diligence on this acquisition, they determined that the agreement and acquisition were not in the best interests of the Company at this time. The parties are working on an alternative structure at this time. As a result of this, the agreement has been rescinded on May 6th, 2016. The principal of White Fox, Mr. Shinsuke Nakano and investors had invested $196,557 into the Company in the form of payment of various settlements and invoices outstanding. The investment is treated as private placement at $0.0001, whereby the Company, on May 10, 2016, issued to Mr. Nakano and the investors 1,965,570,000 shares of common stock, which will represent about 71.7% of the shares issued and outstanding at the time the agreement was rescinded. In addition, Mr. Nakano for his investment was named as the Chief Executive Officer of the Company and the Chairman of the Board and Mr. Abe was appointed to the positions of Chief Operating Officer ("COO") and Director ("Board Member".)
BREATHE ECIG CORP.
(FORMERLY DNA PRECIOUS METALS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
NOTE 13-
SUBSEQUENT EVENTS (CONTINUED)
Accounts Payable Settlements
On April 1, 2016, the Company agreed to terms and paid two vendors to settle a combined outstanding balance of $38,449 for $9,496.
Share Issuances
On January 4, 2016, the Company issued 16,670,000 shares of common stock to holder of a convertible note dated June 8, 2015. The noteholder converted $10,002 of principal only for the shares. The applicable conversion price was $0.0006.
On March 15, 2016, the Company issued 24,000,000 shares of common stock to holder of a convertible note dated June 10, 2015. The noteholder converted $6,000 of principal only for the shares. The applicable conversion price was $0.00025.
On March 17, 2016, the Company issued 25,000,000 shares of common stock to holder of a convertible note dated June 10, 2015. The noteholder converted $3,125 of principal only for the shares. The applicable conversion price was $0.000125.
On March 21, 2016 the Company issued 85,832,640 shares of common stock were issued to the Comitos and their affiliates pursuant to the Comprehensive Settlement Agreement entered into on March 9, 2016 to convert $1,000,000 in notes payable and acquire the intellectual property of the Company.
On March 22, 2016, the Company issued 27,500,000 shares of common stock to holder of a convertible note dated June 10, 2015. The noteholder converted $2,063 of principal only for the shares. The applicable conversion price was $0.000075.
On April 4, 2016, the Company issued 55,000,000 shares to settled an outstanding note of $50,000 owed to a related party.
On April 11, 2016 the Company issued 20,000,000 shares of common stock to holder of a convertible note dated June 8, 2015. The noteholder converted $2,030 of principal only for the shares. The applicable conversion price was $0.0001015.
On April 15, 2016, the Company issued 50,000,000 common shares pursuant to a settlement agreement entered into on March 30, 2016, concerning trademark litigation with plaintiff, Breathe LLC (a Florida organization.) Share issuance to be recorded at the closing price of the stock as of the day the Company entered into the settlement agreement in the amount of $50,000 (at par value.)
On May 10, 2016, the Company issued 1,965,570,000 shares of common stock to the principal of White Fox, Mr. Shinsuke Nakano and investors who had invested $196,557 into the Company in the form of payment of various settlements and invoices outstanding. The investment was treated as a private placement at $0.0001, whereby the Company issued shares to Nakano and the investors which represents about 71.7% of the shares issued and outstanding.