Item 1. Business
Nhale Inc. (“NHLE” or the “Company”) was incorporated as GankIt Corporation in the state of Nevada on March 8, 2012, with a fiscal year end of May 31. Until May 12, 2014, we were an e-commerce business focused on selling a diverse set of products through a website that could either be won through a bidding process or purchased at a discount to the suggested retail price.
On May 12, 2014, Riverview Heights, LLC purchased 20,000,000 shares of common stock of the 30,000,000 total issued and outstanding shares common stock of Company, thus becoming the Majority Shareholder (hereafter the “Majority Shareholder”). The Majority Shareholder purchased 12,500,000 shares of common stock from Clark Rohde and 7,500,000 shares of common stock from John Arnold.
On May 13, 2014 the Majority Shareholder appointed Lance Williams as Sole Director, Chief Executive Officer and President of the Company; and concurrently therewith accepted the resignation of John Arnold from his positions of Sole Director, Chief Executive Officer and President of the Company. Concurrently the Company filed with the State of Nevada to change its name to Nhale, Inc. to better reflect its revised business model.
We have refocused the business plan to production of herbal vaporizer pens and other legal products in the consumer space focusing on the decriminalization of marijuana for medicinal purposes, a significant trend occurring in the U.S. and around the world.
OUR PRODUCT
Nhale is an herbal vaporizer pen in a convenient multi-use kit. The multi-purpose kit includes everything needed for vaporizing dry leaf herbs, waxes, oils and e-liquids.
The company began development of the Nhale brand in June 2014, obtaining the product through and outsourced manufacturer selected and engaged by the Company.
The Nhale vaporizer pen uses vaporizer technology. The unit is discreet, and we believe it may be a healthier alternative to traditional smoking. The Nhale vaporizer pen allows the user to consumer to consume the herbal product without the harmful effects and toxins produced by combustion, and eliminates the danger of second hand smoke. It produces much less odor and can be used in public places. The major benefit of the pen is that it allows the consumer to receive the effects or benefits of smoking the herbal product without the health and social risks involved with smoking. Oils and other viscous liquids can also be used with the optional glass chamber that comes with the kit. The parts are contained in an attractive case for maximum portability.
Vaporizer pens consist of three components: A battery, an atomizer and a loadable cartridge or chamber. The battery transfers energy to the atomizer. The atomizer heats the air drawn into the electronic device to a temperature high enough that it vaporizes the active ingredient in the chamber. The vapor is then inhaled into the mouth and lungs simulating the smoking experience and delivering the essential components. The simulated “smoke” is simply water vapor that evaporates in a few seconds with little lingering odor.
The Nhale vaporizer pen kit is priced competitively with the industry.
BUSINESS STRATEGY
The company recognizes two major trends: The increasing adoption of vaporizing and electronic cigarettes, or ecigs, by the world’s 1billion+ smokers, and the decriminalization of marijuana for medical use. Our efforts are centered on introducing innovative new technologies focusing on both of these market trends.
SALES AND MARKETING STRATEGY
Nhale is committed to developing key partnerships and relationships to help it establish market presence and provided full service marketing, including Internet and social media marketing in support of the product rollout. We are currently working with established retail distributors who will perform the majority of the direct product marketing as part of our agreement with them. The major distributor is Evaps Distribution and Promotions, who has signed several retailers, including 12 retail locations in Houston, Texas.
CHARACTERISTICS AND MAKE UP OF TARGET MARKET
Our current market is made up of smokers who are looking for an alternative to traditional cigarettes. In addition, there are currently 23 states that have decriminalized medical marijuana in the U.S. Both trends provide us a large pool of potential customers within two market segments.
BRAND RECOGNITION AND CHARACTERISTICS
The Nhale vaporizer is pen comes in a convenient, easy to use multi-use kit. This all-purpose set includes everything needed to vaporize dry herd, waxes, e-liquids, and oils in a convenient carrying case.
Comparable to much higher priced vape pens the Nhale vaporizer features interchangeable parts for dry leaf herbs and a glass chamber for essential oils and concentrates in an elegant, lightweight pen-style vape.
COMPETITION
There are many ecig companies on the market, many of which are made in China that compete directly in the U.S. market. This creates challenging issues as the manufacturers of these devices are also directly marketing to the customers in our market sector.
Major tobacco companies are currently moving to get ahead of the potential shift in the market by selling e-cigarettes themselves. With deep pockets, intimate knowledge of the market, powerful research and development capability and massive sales and distribution networks, they are in a position to quickly seize the majority of the market. Experts believe that the big companies will market devices that will be likely to win over more smokers.
Examples of the major competitive brands that Nhale competes against are:
Atmos
Grenco Science
Vaped
Cloud
EMPLOYEES AND EMPLOYMENT AGREEMENT
As of the date of this report, we have no employees other than Mr. Williams, our sole officer and director
Mr. Williams entered into an employment agreement with the Company on May 13, 2014 that has been ratified by the Majority Shareholder. Under the employment agreement, Mr. Williams will receive $7,500 per month to serve in the capacities of Sole Director, Chief Executive Officer and President of the Company. Mr. Williams does not own any securities of the Company, and has not entered into any compensation agreements with the Company that would provide for the issuance of common stock or stock options in exchange for services rendered.
We do not presently have pension, health, annuity, insurance, stock options, profit sharing, or similar benefit plans; however, we may adopt plans in the future. There are presently no personal benefits available to our sole director and officer.
In the early stages of our business, we intend to hire independent consultants to assist in its development and execution.
GOVERNMENT REGULATIONS
The Food and Drug Administration (FDA)’s Center for Tobacco Products currently does not have authority to regulate the sale or use of e-cigarette devices as tobacco products.
Even though the FDA is not regulating e-cigarettes, local and state governments may still adopt laws regulating e-cigarettes, including restrictions on their sale or use.
Item 1A.
Item 1A. Risk Factors
Our business involves a high degree of risk. The following risk factors should be considered carefully in addition to the other information contained in this Form 10-K.
Risks Related to Our Business
We are an early stage company, our business is evolving and our business prospects are difficult to evaluate.
We are an early stage company with a limited operating history. We have a limited operating history that you can rely on in evaluating the Company. Our prospects must be carefully considered in light of our history, our high capital costs, our exposure to operating losses and the other risks, uncertainties and difficulties that are typically encountered by companies that are implementing new business models. Some of the principal risks and difficulties we expect to encounter include our ability to:
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Raise substantial capital to finance our planned expansion, together with the losses we may incur in our early stage of development;
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Develop new products at the cost and on the timetable we project. We may encounter unexpected technical and legal challenges that may delay our implementation time line and/or increase our costs;
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Develop, implement and maintain systems to ensure compliance with a variety of governmental and quasi-governmental rules, regulations and policies;
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Adapt and successfully execute our rapidly evolving and inherently unpredictable business plan and respond to competitive developments and changing market conditions; and
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Attract, retain and motivate qualified personnel.
Because of our lack of operating history and our early stage of development, we have limited insight into trends and conditions that may exist or might emerge and affect our business. There is no assurance that our business strategy will be successful or that we can or will successfully address these risks.
We will need to raise additional capital to continue our business operations.
We need to raise additional capital to implement our business plan over the next 24 months. If we are unable to obtain additional financing, our future growth, if any, could be impaired. If we fail to raise additional funding in the future, we may not have enough money to pay our legal and accounting expenses and we could be forced to curtail or abandon our business plan, causing our securities to become worthless. Additionally, even if we do raise additional funding, there can be no assurance that additional capital from outside sources will be available for our marketing and future growth, if any, or if such financing is available, that it will not involve issuing securities senior to our common stock or equity financings which are dilutive to holders of our common stock. In addition, in the event we do not raise additional capital, we may be limited in our ability to grow our Company.
The repayment of our notes payable is secured by a security interest in substantially all of our assets.
Private investors have loaned us $525,000 which was evidenced by promissory notes. These notes range in interest from 12% to 15% per annum. In the event default occurs under these notes, the interest rate increases to a range from 18% to 25%%, or the highest rate permitted by applicable law. The notes are secured by security interests in substantially all of our assets and we do not currently have sufficient funds to repay the note. If we default on the repayment of the note, the holder thereof may enforce the security interest over the assets of the Company, which if enforced could leave us without any assets, and as a result, we could be forced to curtail or abandon our current business plans and operations. If that were to happen, the value of our shares may decline or become worthless.
Our business and the success of our services could be harmed if we are unable to establish and maintain a brand image.
We believe that establishing a brand is critical to achieving acceptance of our product and to establishing key strategic relationships. As a new company with a new brand, we believe that we have little to no brand recognition with the public. We may experience difficulty in establishing a brand name that is well-known and regarded, and any brand image that we may be able to create may be quickly impaired. The importance of brand recognition will increase when and if our competitors create services that are similar to our services. Even if we are able to establish a brand image and react appropriately to changes in customer preferences, customers may consider our brand image to be less prestigious or trustworthy than those of our larger competitors. Our results of operations may be affected in the future from our brand image.
We may not be able to keep up with rapid technological and other changes.
The markets in which we will compete are characterized by rapidly changing technology, evolving industry standards, consolidation, frequent new service announcements, introductions and enhancements and changing consumer demands. We may not be able to keep up with these rapid changes.
Our lack of an operating history gives no assurance that our future operations will result in material revenues, which could result in the suspension or end of our operations.
We were incorporated on March 8, 2012, and although we have realized minimal operating revenues to date, we have very little operating history upon which an evaluation of our future success or failure can be made. Our ability to achieve and maintain profitability and positive cash flow is dependent upon our ability to generate revenues in excess of our expenses in the future.
Based upon current plans, we expect to incur operating losses in future periods because we will likely incur expenses that exceed our revenues. We cannot guarantee that we will be successful in generating a profit in the future. Failure to generate a profit may cause us to go out of business.
We are a new company with a limited operating history and we face a high risk of business failure.
We are a early stage company formed recently to carry out the activities described in this report and thus have only a limited operating history upon which an evaluation of our prospects can be made. We were incorporated on March 8, 2012, and to date have been involved primarily in the development of our business plan and early-stage operations. Because we have a limited operating history there is little internal or industry-based historical financial data upon which to estimate our planned operating expenses.
We expect that our results of operations may also fluctuate significantly in the future as a result of a variety of market factors including, among others, the entry of new competitors; the availability of motivated and qualified personnel; the initiation, renewal or expiration of our customer base; pricing changes by the Company or its competitors, specific economic conditions in retail markets and general economic conditions. Accordingly, our future sales and operating results are difficult to forecast.
Adverse developments in the global economy restricting the credit markets may materially and negatively impact our business.
The recent downturn in the world's major economies and the constraints in the credit markets have heightened or could continue to heighten a number of material risks to our business, cash flows and financial condition, as well as our future prospects. Continued issues involving liquidity and capital adequacy affecting lenders could affect our ability to access credit facilities or obtain debt financing and could affect the ability of lenders to meet their funding requirements when we need to borrow. Further, in the uncertain event that a public market for our stock develops, the volatility in the equity markets may make it difficult in the future for us to access the equity markets for additional capital at attractive prices, if at all. The recent credit crisis in other countries, for example, and concerns over debt levels of certain other European Union member states, has increased volatility in global credit and equity markets. If we are unable to obtain credit or access capital markets, our business could be negatively impacted.
Because we are small and do not have much capital, we must limit our marketing activities. As a result, our sales may not be enough to operate profitably. If we do not make a profit, we may have to suspend or cease operations.
Due to the fact we are small and do not have much capital, we must limit our marketing and advertising activities. We intend to increase our marketing and advertising efforts provided that we have ample working capital to invest in such activities. Because we will be limiting the duration of our marketing and advertising activities, due to a constrained budget, we may not be able to generate enough sales to operate profitably. If we cannot operate profitably, we may have to suspend or cease operations.
We have generated limited revenues from our operations which poses substantial risk to any investor.
An investment in our Company is characterized by a high degree of risk. Investors should take caution when considering our limited revenues, lack of earnings, and lengthy plans for business development and expansion. Our current operations reside entirely in the development of our products which has generated limited revenue to date (none in the case of the e-cigarette business). Although we believe that future capital investment in our website will grow our business, there can be no assurance that we will be able to effectively develop our business in a profitable manner. The success of our business depends on the ability of management to successfully develop, market, and sell new products; and generate revenues and earnings therefrom. The inability of our website to generate net income may adversely affect our financial performance and stock price.
We have limited assets that may be used to execute our business plan. Our lack of assets may have an adverse impact on our ability to grow our business and generate revenues and earnings.
We have limited financial and operational assets as well as limited long-term assets such as property, facilities and equipment to fully develop our business plan. We will need to raise additional capital to provide for a facility, purchase equipment and inventory, and fund the labor required to appropriately develop our website. Our lack of financial and operational assets may impair our ability to generate future revenues and earnings which could cause the value of our securities to decline.
We face significant inventory risk
We may be exposed to significant inventory risks that may adversely affect our operating results as a result of seasonality, new product launches, rapid changes in product cycles and pricing, defective merchandise, changes in consumer demand and consumer spending patterns, changes in consumer tastes with respect to products we offer for sale and for auction on our website. We plan to endeavor to accurately predict these trends and avoid overstocking or understocking products. Demand for products, however, can change significantly between the time inventory is ordered and the date of sale. In addition, when we begin selling a new product, it may be difficult to determine appropriate product selection, and accurately forecast demand. The acquisition of certain types of inventory in the future may not be returnable. Any one of the inventory risk factors set forth above may adversely affect our operating results.
We do not collect sales or consumption taxes in some jurisdictions
U.S. Supreme Court decisions restrict the imposition of obligations to collect state and local sales taxes with respect to remote sales. However, an increasing number of states have considered or adopted laws that attempt to impose obligations on out-of-state retailers to collect taxes on their behalf. Currently, we do not collect sales or consumption taxes in some jurisdictions. A successful assertion by one or more states or foreign countries requiring us to collect taxes where we do not do so could result in substantial tax liabilities, including for past sales, as well as penalties and interest.
We may incur substantial losses in the future as we expand our operations and invest in our inventory.
We will incur costs related to advertising our new product lines for sale. When making investments to grow our membership base and to expand our website's capabilities, it is likely that we will incur costs for a prolonged period prior to generating revenues, if any. The foregoing costs and expenses will likely give rise to substantial near-term operating losses and may prevent the Company from achieving profitability for an extended period of time. We expect to rely on equity and debt financing to fund potential operating losses and other cash requirements until we are able to generate larger profits from operations. We may experience negative cash flow, which will hamper current operations and prevent the Company from expanding. We may be unable to attain, sustain or increase profitability on a quarterly or annual basis in the future, which could require us to scale back or terminate our operations.
We will be a small player in an intensely competitive industry and may be unable to compete.
The e-cigarette industry is large and intensely competitive. Many of our competitors have substantially more financial and operational resources than we do.
Our business may be subject to new laws and regulations, a reinterpretation of existing laws, or face permitting, certification, or approval mandates from regulatory agencies.
The methods we use to sell and distribute products may be subject to oversight and/or approval from certain regulatory agencies. Should we fail to meet future regulatory standards our ability to operate may be impaired, our financial and operational performance could be adversely affected and you could lose your entire investment. The value of our shares may decline in value or become worthless.
If the company is dissolved, it is unlikely that there will be sufficient assets remaining to distribute to our shareholders.
In the event of the dissolution of the Company, the proceeds realized from the liquidation of our assets, if any, will be used primarily to pay the claims of our creditors, if any, before there can be any distribution to the shareholders. In that case, the ability of equity investors to recover all or any portion of their investment will depend on the amount of funds realized and the claims to be satisfied therefrom.
If we are forced to incur unanticipated costs or expenses, we may have to suspend or cease our activities entirely which could result in a total loss of your investment.
Because we are a small business, with limited assets, we are not in a position to bear unanticipated costs and expenses. If we have to make changes in our structure or are faced with circumstances that are beyond our ability to afford, we may have to suspend or cease our activities entirely which could result in a total loss of your investment the value of our shares declining in value or becoming worthless.
Key management personnel may leave the company which could adversely affect the ability of the company to continue its development.
Because we are almost entirely dependent on the efforts of our sole officer and director, Lance Williams, his departure or the loss of other key personnel in the future, could have a material adverse effect on our business. We do not maintain key man life insurance on Mr. Williams. Mr. Williams may terminate his employment with us at any time for any reason.
Riverview Heights, LLC (the “Majority Shareholder”) owns 66.67% of the outstanding shares of common stock and has considerable influence over the board of directors of the company. Shareholders may find that the majority shareholder’s decisions are contrary to their interests and you should not purchase shares unless you are willing to entrust all aspects of management to our largest shareholder or his successors.
Riverview Heights, LLC (the “Majority Shareholder”) owns 20,000,000 shares of common stock representing 66.67% of our outstanding common stock. As such, the Majority Shareholder will have significant control over who serves as directors of the Company and subsequently who serves as officers of the Company and in determining the outcome of all corporate transactions or other matters, including the election of directors, mergers, consolidations, the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. His interests may differ from the interests of other stockholders. All decisions regarding the management of our affairs will be made by our sole officer and director Lance Williams. Accordingly, no person should invest in the Company’s shares unless they are willing to entrust all aspects of management and control of the Company to Lance Williams and/or the Majority Shareholder.
We currently do not have agreements with any product vendors to sell products. In the event that we are not able to purchase inventory from suppliers with favorable prices and terms, it could adversely affect our operations.
In the event that we are unable to develop relationships and favorable agreements with product suppliers, we may not be able to operate our business. Even if we do establish these relationships, we may be subject to supplier price increases, unfavorable trade terms, problems with quality control, lack of scalability, inadequate shipping and logistics, or simply a vendor's refusal to sell its products to us. In the event that we face any of these common vendor problems, our financial and operational results could be materially, adversely affected.
Because we only have one primary supplier of products, we have a concentration in our supply chain. In the event that we are not able to continue to purchase inventory from our supplier, it could adversely affect our operations.
In the event that our primary supplier increases its prices, presents unfavorable trade terms, experiences problems with quality control, becomes insolvent, or simply decides to no longer sell its products to us, our financial and operational results will be materially, adversely affected. As a result, the value of our securities may decline in value or become worthless.
A reduction in spending due to economic downturns could result in a decrease in demand for our products.
If national retail sales levels decrease due to a broader economic downturn, discretionary spending and as a result, the demand for our services and products would likely decline. This decrease could reduce our opportunity for growth, increase our marketing and sales costs, and reduce our sales volume and force us to reduce the prices we can charge for products, which could reduce our revenue and operating results, if any.
We face corporate governance risks and negative perceptions of investors associated with the fact that we currently have only one officer and director.
Lance Williams is our sole officer and director. As such, he has significant control over our business direction. Additionally, as he is our only director, there are no other members of the Board of Directors available to second and/or approve related party transactions involving Mr. Williams, including the compensation Mr. Williams may be paid and the employment agreements we may enter into with Mr. Williams. Additionally, there is no segregation of duties between officers because Mr. Williams is our sole officer, and as such, he is solely responsible for the oversight of our accounting functions. Therefore, investors may perceive that because no other directors are approving related party transactions involving Mr. Williams and no other officers are approving our financial statements that such transactions are not fair to the Company and/or that such financial statements may contain errors. The price of our common stock may be adversely affected and/or devalued compared to similarly sized companies with multiple officers and directors due to the investing public’s perception of limitations facing our Company due to the fact that we only have one officer and director.
Risks Related To Our Industry
Competition from new and existing competitors within our industry could have an adverse effect on our results of operation
The e-cigarette and vaporizer industry is highly competitive. Our principal competitors include local and international companies capable of competing effectively in our markets; many of them possess substantially greater financial and other resources than we do. Additionally, our larger competitors may be able to devote greater resources to developing, promoting and selling their products and services. We may also face increased competition due to the entry of new competitors. As a result of this competition, we may experience lower sales if our prices are undercut or advanced technology is brought to market, which would likely have an adverse effect on our results of operations and force us to curtail or abandon our current business plan.
Our results of operations may be negatively affected by sustained downturns or sluggishness in the economy, which are beyond our control
Declines in demand for consumer products as a result of economic downturns may reduce our potential cash flows, especially if our customers experience a reduction in disposable income or a shift in their spending patterns.
Demand for retail goods can change as a result of a number of microeconomic and macroeconomic factors:
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The cost and availability of consumer credit is directly correlated with consumer demand. As interest rates for consumer credit increase, and as credit availability is constrained, demand for retail goods and services declines.
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General economic conditions, including downturns in the United States, Canada or other economies that affect consumer buying could negatively affect the demand for our products; and
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Federal, state and foreign regulations and legislation, which could increase our cost of doing business, could in turn reduce the demand for our products and cause our ability to generate revenues.
The long-term financial condition of our businesses is dependent on the continued and secure use of the internet
Our business is dependent upon the continued availability of the internet to users in a secure environment. Should the infrastructure that provides the essential functions necessary for the operation of the internet experience temporary or prolonged failure, our business will not be able to operate. Furthermore, should the security of making online purchases become compromised, consumer confidence in making online transactions could decrease, and as a result, our business operations and financial condition could be adversely affected.
Risks Related to Our Financial Condition
There is substantial uncertainty about our ability to continue as a going concern.
In their audit report, our auditors have expressed an opinion that substantial doubt exists as to whether we can continue as an ongoing business. We have limited revenues and continue to require substantial capital to develop our business. Because our activities have been financed from a small group of private investors, we have a concentration of sources of funding. Failure to receive future capital from our private investors, or to replace that funding with new investment capital, may require us to suspend or cease our activities altogether which could result in the loss of your investment.
We have significant weaknesses in our system of internal controls that could subject us to regulatory scrutiny or impair investor confidence, which could adversely affect our business.
We have insufficient personnel to allow us to segregate duties, a limitation we have deemed a “material weakness”.
Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to perform a comprehensive evaluation of their internal controls. In connection with our on-going assessment of the effectiveness of our internal control over financial reporting, we have and may in the future discover "material weaknesses" in our internal controls as defined in standards established by the Public Company Accounting Oversight Board, or the PCAOB. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The PCAOB defines "significant deficiency" as a deficiency that results in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented or detected.
In the event that a material weakness is identified, we will attempt to adopt and implement policies and procedures to address any material weaknesses that we identify. However, the process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that the measures we will take will remediate any material weaknesses that we may identify or that we will implement and maintain adequate controls over our financial process and reporting in the future. We may not have the financial or other resources to maintain effective internal control.
Future efforts to bring our system of internal controls into compliance with Section 404 and related regulations will likely require the commitment of significant financial and managerial resources. If we fail in that effort, we could be subject to regulatory scrutiny or suffer a loss of investor confidence, which could adversely affect our business.
Risks Related to Our Securities
We do not anticipate paying dividends in the foreseeable future.
We have never paid dividends and do not intend to pay any dividends for the foreseeable future. To the extent that we may require additional funding currently not provided for in our financing plan, our funding sources may prohibit the declaration of dividends.
We may issue additional shares of common stock or derivative securities that will dilute the percentage ownership interest of our existing shareholders and may dilute the book value per share of our common stock and adversely affect the terms on which the company may obtain additional capital.
Our authorized capital consists of 100,000,000 shares of common stock. Our sole director has the authority, without action by or vote of our shareholders, to issue all or part of the authorized shares of common and preferred stock for any corporate purpose, including for the conversion or retirement of debt. We are likely to seek additional equity capital in the future as we develop our business and expand our operations. Any issuance of additional shares of common stock or derivative securities, such as convertible promissory notes, will dilute the percentage ownership interest of our shareholders and may dilute the book value per share of our common stock. Additionally, the exercise or conversion of derivative securities could adversely affect the terms on which the Company can obtain additional capital. Holders of derivative securities are most likely to voluntarily exercise or convert their derivative securities when the exercise or conversion price is less than the market price for the underlying common stock. Holders of derivative securities will have the opportunity to profit from any rise in the market value of our common stock or any increase in our net worth without assuming the risks of ownership of the underlying shares of our common stock. It is possible that, due to additional share issuance, the value of our securities may decline in value or become worthless.
Our sole director may attempt to use non-cash consideration to satisfy obligations, which would likely consist of restricted shares of our common stock. Our sole director has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares of common stock. In addition, if a trading market develops for our common stock, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market. These actions will result in dilution of the ownership interests of existing shareholders, may further dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to maintain control of the Company because the shares may be issued to parties or entities committed to supporting existing management.
Our shares trade under $5.00 per share and thus are considered to be a penny stock. Trading in penny stocks has many restrictions and these restrictions could severely affect the price and liquidity of our shares.
As our stock trades below $5.00 per share, our stock is known as a "penny stock," which is subject to various regulations involving disclosures to be given to you prior to the purchase of any penny stock. The U.S. Securities and Exchange Commission (the "SEC") has adopted regulations which generally define a "penny stock" to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Depending on market fluctuations, our common stock could be considered to be a "penny stock." A penny stock is subject to rules that impose additional sales practice requirements on broker/dealers who sell these securities to persons other than established customers and accredited investors. For transactions covered by these rules, the broker/dealer must make a special suitability determination for the purchase of these securities. In addition, he must receive the purchaser's written consent to the transaction prior to the purchase. He must also provide certain written disclosures to the purchaser. Consequently, the "penny stock" rules may restrict the ability of broker/dealers to sell our securities, and may negatively affect the ability of holders of shares of our common stock to resell them. Penny stocks are low priced securities that do not have a very high trading volume. Consequently, the price of the stock is often volatile and you may not be able to buy or sell the stock when you want to.
Financial industry regulatory authority ("FINRA") sales practice requirements may also limit your ability to buy and sell our common stock, which could depress the price of our shares.
FINRA rules require broker-dealers to have reasonable grounds for believing that an investment is suitable for a customer before recommending that investment to the 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 and investment objectives, among other things. Under interpretations of these rules, FINRA believes that there is a high probability such speculative low-priced securities will not be suitable for at least some customers. Thus, FINRA requirements may make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our shares, have an adverse effect on the market for our shares, and thereby depress our share price.
We incur significant increased costs as a result of operating as a fully reporting company as well as in connection with Section 404 of The Sarbanes Oxley Act.
We incur legal, accounting and other expenses in connection with our status as a fully reporting public company. The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and rules subsequently implemented by the SEC have imposed various requirements on public companies, including requiring changes in corporate governance practices. As such, our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and make some activities more time-consuming and costly. The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure of controls and procedures. In particular, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 and our status as a publicly reporting company will require that we incur substantial accounting, legal and filing expenses and expend significant management efforts. We currently do not have an internal audit group, and we may 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, the market price of our stock, if any, 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.
While we currently qualify as an “emerging growth company” under the Jumpstart of Business Startups Act of 2012, or the JOBS Act, when we lose that status the costs and demands placed upon our management will increase.
Once we are required to publicly report, we will continue to be deemed an emerging growth company until the earliest of (i) the last day of the fiscal year during which we had total annual gross revenues of $1 billion (as indexed for inflation); (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of common stock under this registration statement; (iii) the date on which we have, during the previous 3-year period, issued more than $1 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer, ” as defined by the Securities and Exchange Commission, which would generally occur upon our attaining a public float of at least $700 million. Once we lose emerging growth company status, we expect the costs and demands placed upon our management to increase, as we would have to comply with additional disclosure and accounting requirements, particularly if we would also no qualify as a smaller reporting company.
We are an “emerging growth company” and we cannot be certain that the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
The JOBS Act permits “emerging growth companies” like us, upon becoming a publicly-reporting company, to rely on some of the reduced disclosure requirements that are already available to smaller reporting companies. As long as we qualify as an emerging growth company or a smaller reporting company, we would be permitted to omit the auditor’s attestation on internal control over financial reporting that would otherwise be required by the Sarbanes-Oxley Act, as described above, and are also exempt from the requirement to submit “say-on-pay”, “say-on-pay frequency” and “say-on-parachute” votes to our stockholders and may avail ourselves of reduced executive compensation disclosure that is already available to smaller reporting companies.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, as long as we are an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of the benefits of this until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of this exemption. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
We will cease to be an emerging growth company at such time as described in the risk factor immediately above. Until such time, however, 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 and could cause our stock price to decline.
We believe that that our securities will be listed on the OTC Bulletin Board, our securities holders may face significant restrictions on the resale of our securities due to state “Blue Sky” laws.
Each state has its own securities laws, often called “blue sky” laws, which (i) limit sales of securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration, and (ii) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or the transaction must be exempt from registration. The applicable broker must be registered in that state. We do not know whether our common stock will be registered or exempt from registration under the laws of any state. Since our common stock is reported by the OTC Markets OTCQB, a determination regarding registration will be made by those broker-dealers, who serve as the market-makers for our common stock. There may be significant state blue sky law restrictions on the ability of investors to sell, and on purchasers to buy, our common stock. The resale market for our common stock may be limited, as holders may be unable to resell their shares of common stock without the significant expense of state registration or qualification.
Our common stock is not registered under the Securities Exchange Act of 1934, as amended, and as a result we will have limited reporting duties which could make our common stock less attractive to investors.
Our common stock is not registered under the Securities Exchange Act of 1934, as amended, We will be required to register our common stock under the Exchange Act if we have, after the last day of our fiscal year, more than either (i) 2,000 shareholders of record; or (ii) 500 shareholders of record who are not accredited investors, in accordance with Section 12(g) of the Securities Exchange Act of 1934, as amended. As a result, we will be required to file annual, quarterly, and current reports pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended. So long as our common stock is not registered under the Securities Exchange Act of 1934, as amended, we will not be subject to Section 14 of the Securities Exchange Act of 1934, as amended, which, among other things, prohibits companies that have securities registered under the Securities Exchange Act of 1934, as amended, from soliciting proxies or consents from shareholders without furnishing to shareholders and filing with the Securities and Exchange Commission a proxy statement and form of proxy complying with the proxy rules. In addition, so long as our common stock is not registered under the Securities Exchange Act of 1934, as amended, our directors and executive officers and beneficial holders of 10% or more of our outstanding shares of common stock will not be subject to Section 16 of the Securities Exchange Act of 1934, as amended. Section 16(a) of the Securities Exchange Act of 1934, as amended, requires executive officers and directs, and persons who beneficially own more than 10% of a registered class of equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of common stock and other equity securities, on Forms 3, 4 and 5, respectively. Our limited reporting duties, as compared to issuers with common stock registered under Section 12(g) of the Securities Exchange Act of 1934, as amended, may make our common stock less attractive to the investing public.
Until we register our securities under Section 12(g) of the Securities Exchange Act of 1934, as amended, we will continue to voluntarily comply with the registration requirements of Section 12(g) of the Securities Exchange Act of 1934, as amended.
Item 2.
Item 2. Properties
We maintain our business office at 8300 FM 1960 West, Suite 450, Houston, Texas 77070. Our telephone number is (281) 671-6877.
On May 14, 2014, we entered into a lease agreement for our business office with Regus Management Group. The material terms of the lease agreement are as follows:
·
The agreement with Bayou on the Bend commenced on May 14, 2014 and expires on May 31, 2015.
·
Monthly rent of $169 is due in advance on the first day of each month.
·
Regus Management Group will provide customary utilities to us including, electricity, air conditioning and heating, hot and cold water, janitorial services, and lighting in common areas.
·
We agreed to indemnify, defend and hold harmless Regus Management Group from any loss, attorney's fees, court and other costs, or claims arising out of use of the premises.
Item 3.
Item 3. Legal Proceedings
We currently have no legal proceedings pending nor have any legal proceeding been threatened against us or any of our officers, directors or control persons of which we are aware.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted on the Over the Counter Bulletin Board under the symbol “NHLE”. From June 3, 2013 to June 12, 2014 our stock traded under the symbol GANK. The following table sets forth, for the respective periods indicated, the prices of the common stock in the over-the-counter market, as reported and summarized by the OTC Bulletin Board. Such prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.
* Our stock began trading on November 21, 2013.
The Company's common stock is considered a "penny stock" as defined in the Commission's rules promulgated under the Exchange Act (the “Rules”). The Commission's rules regarding penny stocks impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally persons with net worth in excess of $1,000,000, exclusive of their residence, or an annual income exceeding $200,000 or $300,000 jointly with their spouse). For transactions covered by the rules, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Thus the Rules affect the ability of broker-dealers to sell the Company's shares should they wish to do so because of the adverse effect that the Rules have upon liquidity of penny stocks. Unless the transaction is exempt under the Rules, under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, broker-dealers effecting customer transactions in penny stocks are required to provide their customers with (i) a risk disclosure document; (ii) disclosure of current bid and ask quotations if any; (iii) disclosure of the compensation of the broker-dealer and its sales personnel in the transaction; and (iv) monthly account statements showing the market value of each penny stock held in the customer's account. As a result of the penny stock rules, the market liquidity for the Company's securities may be severely adversely affected by limiting the ability of broker-dealers to sell the Company's securities and the ability of purchasers of the securities to resell them.
Holders
As of the date of this report, we had 4 shareholders of record, not including shares held at brokerage firms, and 30,000,000 shares of common stock issued and outstanding.
Dividend Policy
We have not declared or paid any dividends on our common stock to date. We anticipate that any future earnings will be retained as working capital and used for business purposes. Accordingly, it is unlikely that we will declare or pay any such dividends in the foreseeable future.
Recent Sales of Unregistered Securities
None
Stock Plans
The Company does not have any stock plans or outstanding options or warrants.
Use of Proceeds From Sale of Registered Securities
Our Registration Statement on Form S-1 (Reg. No. 333-182761) in connection with the sale by us of up to 10 million shares of common stock for $0.01 per share, was declared effective by the SEC on November 28, 2012. We filed a final Rule 424(b)(3) prospectus relating to the offering on January 7, 2013. During the nine months ended February 28, 2013, the Company received $1,500 in connection with the sale of 150,000 shares of common stock and during the three months ended May 31, 2013, we received an additional $98,500 in cash in connection with the sale of 9,850,000 shares of common stock in connection with the offering.
No payments for our expenses were made directly or indirectly to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates with the funds raised in the offering, which funds we have not yet officially accepted or used to date.
There has been no material change in the planned use of proceeds from our offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b).
Item 6.
Item 6. Selected Financial Data
Because the Company is a smaller reporting company, it is not required to provide the information required by this Item 6.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This section of the report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like: "believe", "expect", "estimate", "anticipate", "intend", "project" and similar expressions, or words that, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions.
Overview
We are an early-stage company, incorporated in the State of Nevada on March 8, 2012, as a for-profit company, and an established fiscal year of May 31. We previously operated under the name Gankit Corporation while we operated a retail penny auction site. On May 12, 2014, Riverview Heights, LLC purchased 20,000,000 shares of common stock of the 30,000,000 total issued and outstanding shares common stock of Gankit Corporation becoming the Majority Shareholder and changed the nature of the business from a penny auction site to a seller of e-cigarettes.
Plan of Operation
Our plan of operation revolves around the development and commercialization of technologies related to the medical marijuana market. As more states legalize medical marijuana there will be increasing opportunities for us to commercialize new technologies designed to for this sector. The first product we have commercialized is the Nhale.
The Nhale is a herbal vaporizer pen in a convenient multi-use kit. The multi-purpose kit includes everything needed for vaporizing dry leaf herbs, waxes, oils and e-liquids.
The company began development of the Nhale brand in June 2014, obtaining the product through and outsourced manufacturer selected and engaged by the Company.
The Nhale vaporizer pen uses vaporizer technology. The unit is discreet, and we believe it may be a healthier alternative to traditional smoking. The Nhale vaporizer pen allows the user to consumer to consume the herbal product without the harmful effects and toxins produced by combustion, and eliminates the danger of second hand smoke. It produces much less odor and can be used in public places. The major benefit of the pen is that it allows the consumer to receive the effects or benefits of smoking the herbal product without the health and social risks involved with smoking. Oils and other viscous liquids can also be used with the optional glass chamber that comes with the kit. The parts are contained in an attractive case for maximum portability.
Vaporizer pens consist of three components: A battery, an atomizer and a loadable cartridge or chamber. The battery transfers energy to the atomizer. The atomizer heats the air drawn into the electronic device to a temperature high enough that it vaporizes the active ingredient in the chamber. The vapor is then inhaled into the mouth and lungs simulating the smoking experience and delivering the essential components. The simulated “smoke” is simply water vapor that evaporates in a few seconds with little lingering odor.
The Nhale vaporizer pen kit is priced competitively with the industry.
BUSINESS STRATEGY
The company recognizes two major trends: The increasing adoption of vaporizing and electronic cigarettes, or ecigs, by the world’s 1billion+ smokers, and the decriminalization of marijuana for medical use. Our efforts are centered on introducing innovative new technologies focusing on both of these market trends.
SALES AND MARKETING STRATEGY
Nhale is committed to developing key partnerships and relationships to help it establish market presence and provided full service marketing, including Internet and social media marketing in support of the product rollout. We are currently working with established retail distributors who will perform the majority of the direct product marketing as part of our agreement with them. The major distributor is Evaps Distribution and Promotions, who has signed several retailers, including 12 retail locations in Houston, Texas.
CAPITAL REQUIREMENTS
If we do not raise any additional capital we will not be able to implement any facets of our business plan.
We intend to pursue capital through public or private financing as well as borrowings and other sources, such as our equity backed loans in order to finance our business activities. We cannot guarantee that additional funding will be available on favorable terms, if at all. If adequate funds are not available, then our ability to continue our operations may be significantly hindered.
We cannot guarantee we will be successful in our business operations. Our business is subject to risks inherent in the establishment of an early stage business enterprise, including the financial risks associated with the limited capital resources currently available to us for the implementation of our business strategies (See "Risk Factors", above). To become profitable and competitive over the long run, we must develop our business and marketing plan and execute such plan. Our management will attempt to secure financing through various means including borrowing and investment from institutions and private individuals.
Results of Operations
The following depiction of results of operations reflects the change in business model from Gankit Corp’s penny auction website to our current business model. The results of operations for Gankit are reflected in discontinued operations.
For the Year Ended May 31, 2014 versus 2013
We operated Nhale, Inc. for the two weeks before the end of the fiscal year and have few transactions. For all items discussed, there were no counterparts during the year ended May 31, 2013.
Sales and marketing expenses amounted to $13,490 and was comprised of promotional e-cigarette pens we purchased as promotional items.
General and administrative expenses amounted to $41,251 and consisted of consulting and contract labor.
Interest expense amounted to $3,317 and was comprised of interest on debts from May 12, 2014 to May 31, 2014.
Liquidity and Capital Resources
As of May 31, 2014
As of May 31, 2014, the Company had total assets of $17,255, comprised of cash of $16,957, and prepaid expenses of $298. Our liabilities, all of which are current liabilities, consist of $111,649 of accounts payable and accrued expenses, $16,157 of liabilities to customers who purchased bids from us during the penny auction site operations who, as of the balance sheet date, had not used them, shareholder advances of $100,500 and notes payable in the amount of $525,000.
Cash flows from Operating Activities
For the year ended May 31, 2014, we had net cash used in operations of $479,546, principally due to our net loss from operations, both continuing and discontinued. During the previous year, we had net cash used in operating activities of $188,781, all of which has been reclassified to discontinued operations.
Cash flows from Investing Activities
For the year ended May 31, 2014, we had net cash used in investing activities of $2,495, due to purchases of computer equipment. During the previous year ended May 31, 2013, we had net cash used in investing activities of $1,995, all of which has been reclassified to discontinued operations.
Cash flows from Financing Activities
For the year ended May 31, 2014, we had net cash provided by financing activities of $475,000, all of which represents the proceeds from promissory notes. Of that amount $75,000 represents promissory notes issued by Nhale, Inc. All previous promissory notes were issued by Gankit Corporation and are included in discontinued operations.
During the year ended May 31, 2013, we had $200,500 of cash provided by financing activities which have been reclassified to discontinued operations.
Capital Requirements
Currently available cash is not sufficient to allow us to commence full execution of our business plan. Our business expansion will require significant capital resources that may be funded through the issuance of common stock or of notes payable or other debt arrangements that may affect our debt structure. Despite our current financial status we believe that we may be able to issue debt and equity in order to continue executing our business plan. However, there can be no assurance that we will be able to raise money in this fashion and have not entered into any agreements that would obligate a third party to provide us with capital.
If the Company is unable to raise the funds needed to support its operations, the Company will seek alternative financing through means such as borrowings from institutions or private individuals. There can be no assurance that the Company will be able to keep costs from being more than these estimated amounts or that the Company will be able to raise such funds. The Company may not be able to obtain additional capital or generate sufficient revenues to fund our operations. If we are unsuccessful at raising sufficient funds, for whatever reason, to fund our operations, the Company may be forced to seek a buyer for our business or another entity with which we could create a joint venture
Our independent auditor has expressed substantial doubt about our ability to continue as a going concern and believes that our ability is dependent on our ability to implement our business plan, raise capital and generate revenues. See Note 2 of our financial statements.
Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
We are evaluating the impact that recently adopted accounting pronouncements discussed in the notes to the financial statements will have on our financial statements but do not believe their adoption will have a significant impact.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).
Item 8.
Item 8. Financial Statements and Supplementary Data
Our financial statements for the years ended May 31, 2014 and 2013 and the reports thereon of Harris & Gillespie CPAs, PLLC are included following the signature page of this Form 10-K.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our chief executive officer Lance Williams, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of May 31, 2014. Based on that evaluation, Mr. Williams concluded that as of May 31, 2014, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended, because we do not have adequate personnel to properly segregate duties. Presuming that the Company is able to raise adequate capital for its needs (see Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of estimated capital requirements), management will endeavor to take the necessary steps to correct deficiencies over the next six months including deploying an adequate system of internal controls.
This annual report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of the Company's registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for emerging growth companies.
There were no changes in our internal control over financial reporting during our most recent fiscal quarter that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth the name and age of our current sole officer and director. Our Board of Directors, currently consisting solely of Mr. Arnold, appoints our executive officer(s). Our director will serve until the earlier occurrence of the election of his successor at the next meeting of stockholders, death, resignation or removal by the majority consent of our shareholders.
Lance Williams, age 44, Chief Executive Officer, President, and Sole Director
As President and CEO of Nhale, Inc., Lance Williams is responsible for all aspects of the company’s operations, including strategic planning, sales and sales channel creation, product development, customer care, cost control/reduction and technology strategies.
Prior to joining Nhale, Williams was engaged in executive roles at leading companies with responsibility for financial administration, sales growth, marketing, and corporate strategy and planning. During his 13-year management career, Williams successfully led a variety of projects that created long-term growth and profitability in the fields of financial operations, marketing and sales.
In earlier experiences, Williams was a partner in a construction firm where he joined the management team with responsibility for financial operations.
Williams attended University of Houston Downtown and Houston Baptist University, focusing on Accounting and Business Administration.
Qualifications as Director
The Company believes that Mr. Williams' 13 plus years of experience in business development and operational management make him an extremely valuable member of our Board of Directors.
Involvement in Certain Legal Proceedings
Our sole director and executive officer has not been involved in any of the following events during the past ten years:
·
Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
·
Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
·
Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
·
Being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Risk Oversight
Effective risk oversight is an important priority of the Board of Directors. Because risks are considered in virtually every business decision, the Board of Directors discusses risks throughout the year generally or in connection with specific proposed actions. The Board of Directors’ approach to risk oversight includes understanding the critical risks in the Company’s business and strategy, evaluating the Company’s risk management processes, allocating responsibilities for risk oversight among the Board of Directors, and fostering an appropriate culture of integrity and compliance with legal responsibilities.
Conflicts of Interest
As of the date of this filing, we have no employees, other than Mr. Williams, who currently devotes approximately 40 hours per week to our business as required from time to time.
In general, officers and directors of a corporation are required to present business opportunities to the corporation if:
●
the corporation could financially undertake the opportunity;
●
the opportunity is within the corporation's line of business; and
●
it would be unfair to the corporation and its stockholders not to bring the opportunity to the attention of the corporation.
Board of Directors Meetings
The Company had zero formal meetings of the Board of Directors of the Company during the last fiscal year ending May 31, 2014 and instead took all actions via written consent of the sole director.
Committees of the Board of Directors
Our sole director has not established any committees, including an Audit Committee, a Compensation Committee or a Nominating Committee, or any committee performing similar functions. The functions of those committees are being undertaken by our sole director. Because we do not have any independent directors, our sole director believes that the establishment of committees of the Board would not provide any benefits to our Company and could be considered more form than substance.
We do not have a policy regarding the consideration of any director candidates that may be recommended by our stockholders, including the minimum qualifications for Director Candidates, nor has our sole director established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of Director Candidates by our stockholders, including the procedures to be followed. Our sole director has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors.
Given our relative size and lack of directors and officers insurance coverage, we do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all current members of our Board will participate in the consideration of Director Nominees.
Our sole director is not an "audit committee financial expert" within the meaning of Item 407(d) of Regulation S-K. In general, an "audit committee financial expert" is an individual member of the audit committee or Board of Directors who:
·
understands generally accepted accounting principles and financial statements;
·
is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves;
·
has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements;
·
understands internal controls over financial reporting; and
·
understands audit committee functions.
Our Board of Directors is comprised solely of Mr. Williams who was integral to our development and who is involved in our day to day operations. While we would prefer to have an audit committee financial expert on our Board of Directors, Mr. Williams does not have a professional background in finance or accounting. He does however have considerable education in finance. As with most small, early stage companies, until such time as our Company further develops its business, achieves a stronger revenue base and has sufficient working capital to purchase directors and officers insurance, the Company does not have any immediate prospects to attract independent directors. When the Company is able to expand its Board of Directors to include one or more independent directors, the Company intends to establish an Audit Committee of our Board of Directors. It is our intention that one or more of these independent directors will also qualify as an audit committee financial expert. Our securities are not quoted on an exchange that has requirements that a majority of our Board members be independent and the Company is not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include "independent" directors, nor are we required to establish or maintain an Audit Committee or other committee of our Board of Directors.
Term of Office
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the Board of Directors.
There are no agreements or understandings for any director or officer to resign at the request of another person and none of the directors or officers is acting on behalf of or will act at the direction of any other person. The activities of each director and officer are material to the operation of the Company. No other person’s activities are material to the operation of the Company.
WE DO NOT HAVE ANY INDEPENDENT DIRECTORS AND THE COMPANY HAS NOT VOLUNTARILY 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.
CORPORATE GOVERNANCE
The Company promotes accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with the Securities and Exchange Commission (the “SEC”) and in other public communications made by the Company; and strives to be compliant with applicable governmental laws, rules and regulations. On July 13, 2012, the Board of Directors of the Company adopted a Code of Ethics for the Company’s senior officers (currently consisting solely of Mr. Williams). Mr. Williams, as the sole director, believes that these individuals must set an exemplary standard of conduct, particularly in the areas of accounting, internal accounting control, auditing and finance. This code sets forth ethical standards to which the designated officers must adhere and other aspects of accounting, auditing and financial compliance.
In lieu of an Audit Committee, the Company’s sole director is responsible for reviewing and making recommendations concerning the selection of outside auditors, reviewing the scope, results and effectiveness of the annual audit of the Company's financial statements and other services provided by the Company’s independent public accountants. The sole director reviews the Company's internal accounting controls, practices and policies.
Risk Oversight
Effective risk oversight is an important priority of the sole director. Because risks are considered in virtually every business decision, the sole director discusses risk throughout the year generally or in connection with specific proposed actions. The sole director’s approach to risk oversight includes understanding the critical risks in the Company’s business and strategy, evaluating the Company’s risk management processes, allocating responsibilities for risk oversight, and fostering an appropriate culture of integrity and compliance with legal responsibilities. The sole director exercises direct oversight of strategic risks to the Company.
Item 11.
Item 11. Executive Compensation
The table set forth below summarizes the annual and long-term compensation for services in all capacities to us payable to our officer and sole director for the fiscal years ended May 31, 2014 and 2013.
___________________
(1)
Includes $49,000 of unpaid salary at May 31, 2014.
(2)
Does not include any compensation to Mr. Lance Williams as he accrued no salary during the year ended May 31, 2014.
Does not include perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is more than $10,000. No executive officer earned any non-equity incentive plan compensation or nonqualified deferred compensation during the periods reported above. The value of the Stock Awards and Option Awards in the table above, if any, were calculated based on the aggregate grant date fair value of such securities calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. No other officers of the Company received any consideration for services rendered to the Company since incorporation, other than as described above presented. There are no annuity, pension or retirement benefits proposed to be paid to officers, directors or employees. No other officers of the Company received any consideration for services rendered to the Company since incorporation, other than as described above presented. There are no annuity, pension or retirement benefits proposed to be paid to officers, directors or employees. No other officers of the Company received any consideration for services rendered to the Company since incorporation, other than as described above.
Employment Agreements
As of the date of this filing, we have no employees other than Mr. Williams, our sole officer and director. Mr. Williams works on our business approximately 40 hours per week. On May 13, 2014, we signed an employment agreement with Mr. Williams to serve as our President and Chief Executive Officer, which provides him with compensation of $7,500 per month.
Outstanding Equity Awards since Inception:
We have not issued any equity awards since inception.
Long-Term Incentive Plans
We have no Long-Term Incentive Plans.
Director Compensation
None of our directors have ever received compensation from the Company (other than executive directors who received consideration for serving as an executive officer of the Company, as described in greater detail above) for services to the Company as a director.
Code of Ethics
The Company has adopted a Code of Ethics applicable to its directors and officers (including its principal executive officer and principal financial officer). The Company’s Code of Ethics is incorporated by reference as an exhibit to this filing.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information at August 26, 2013, with respect to the beneficial ownership of shares of common stock by (i) each person known to us who owns beneficially more than 5% of the outstanding shares of common stock (based upon reports which have been filed and other information known to us), (ii) each of our directors, (iii) each of our Executive Officers and (iv) all of our Executive Officers and directors as a group. Unless otherwise indicated, each stockholder has sole voting and investment power with respect to the shares shown. As of August 26, 2013, we had 30,000,000 shares of common stock issued and outstanding.
Under Rule 13d-3 promulgated under the Exchange Act, 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 is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights.
Item 13.
Item 13. Certain Relationships and Related Party Transactions, and Director Independence
There have been no other transactions, or any currently proposed transactions in which we are, or plan to be, a participant and in which any related person had or will have a direct or indirect material interest.
Given our small size and limited financial resources, we have not adopted formal policies and procedures for the review, approval or ratification of transactions, such as those described above, with our executive officer, director and significant stockholder. However, all of the transactions described above were approved and ratified by our sole director. In connection with the approval of the transactions described above, our director took into account various factors, including his fiduciary duty to the Company; the relationships of the related parties described above to the Company; the material facts underlying each transaction; the anticipated benefits to the Company and related costs associated with such benefits; whether comparable products or services were available; and the terms the Company could receive from an unrelated third party.
We intend to establish formal policies and procedures for the approval of related party transactions in the future, once we have sufficient resources and have appointed additional directors, so that such transactions will be subject to the review, approval or ratification of our Board of Directors, or an appropriate committee thereof. On a moving forward basis, our sole director will continue to approve any related party transaction based on the criteria set forth above.
Director Independence
The Over-The-Counter Bulletin Board does not have rules regarding director independence. The Company will seek to appoint independent directors, if and when it is required to do so.
Item 14.
Item 14. Principal Accountant Fees and Services
Audit Fees
The aggregate fees billed by the Company’s auditors for professional services rendered in connection with the audit of the Company’s annual financial statements associated with the Company’s Registration statement on Form S-1, and review of the financial statements included in the Company’s Form S-1 and Form 10-Qs and for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the year ended May 31, 2014 was $26,190 and for the year ended May 31, 2013, was $14,690. LBB & Associates Ltd., LLP, was our independent registered public accounting firm until September 2, 2014. After that date, our independent registered public accounting firm is Harris & Gillespie, CPAs, PLLC.
Tax Compliance Services
None.
No other services were received or paid for to/by the Independent Auditor.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
____________
* Filed herewith.
(1) Filed as an exhibit to the Company’s Registration Statement on Form S-1, filed with the Commission on July 20, 2012, and incorporated herein by reference.
(2) XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of this report for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized.
Nhale, Inc.
By:
/s/ Lance Williams
Name:
Lance Williams
Title:
Chief Executive Officer (Principal Executive Officer)
Chief Financial Officer (Principal Financial Officer)
(Principal Accounting Officer), President, and Sole Director
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Lance Williams
Chief Executive Officer (Principal Executive Officer),
September 15, 2014
Lance Williams
Chief Financial Officer (Principal Financial Officer), (Principal Accounting Officer), President, and Sole Director
FINANCIAL STATEMENTS
NHALE, INC. (FORMERLY GANKIT CORPORATION)
CONTENTS
HARRIS & GILLESPIE, CPAs PLLC
3901 Stone Way N., Suite 202
Seattle, Washington 98103
Phone: (206) 547-6050 Fax: (206) 548-8132
Report of Independent Public Accounting Firm
To the Board of Directors of Nhale, Inc.
(Formerly Gankit Corporation)
Houston, Texas
We have audited the accompanying balance sheets of Nhale, Inc., formerly Gankit Corporation (the “Company”) as of May 31, 2014 and 2013, and the related statements of operations, stockholders' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the management. Our responsibility is to express an opinion on these 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal controls 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 controls 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 financial statements referred to above present fairly, in all material respects, the financial position of Nhale, Inc. as of May 31, 2014 and 2013 and the results of its operations and cash flows for the periods then ended in conformity with generally accepted accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note #2 to the financial statements, the company has had significant operating losses; a working capital deficiency and its need for new capital raise substantial doubt about its ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note #2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Harris & Gillespie CPAs PLLC
HARRIS & GILLESPIE, CPAs PLLC
Seattle. Washington
September 2, 2014
NHALE INC.
(FORMERLY GANKIT CORPORATION)
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements
NHALE INC.
(FORMERLY GANKIT CORPORATION)
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements
NHALE INC.
(FORMERLY GANKIT CORPORATION)
STATEMENTS OF STOCKHOLDERS’ DEFICIT
The accompanying notes are an integral part of these financial statements
NHALE INC.
(FORMERLY GANKIT CORPORATION)
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements
NHALE INC.
(FORMERLY GANKIT CORPORATION)
Notes to Financial Statements
NOTE 1. DESCRIPTION OF COMPANY
Nhale, Inc. (“Nhale” or the “Company”) was incorporated in Nevada on March 8, 2012 as Gankit Corporation, an e-commerce website selling a multitude of consumer products including electronics, appliances, clothing, accessories, sporting goods and gift cards.
On May 12, 2014, Riverview Heights, LLC (the “Majority Shareholder”) purchased 20,000,000 shares of common stock of the 30,000,000 total issued and outstanding shares representing 66.67% of the total equity of the Company. On May 13, 2014, John Arnold resigned as Chief Executive Officer and Sole Director and the majority shareholder appointed Lance Williams as Sole Director, Chief Executive Officer and President of the Company.
The Company then ceased to operate its e-commerce website and abandoned that business model, and re-focused on the development, branding and distribution of non-flame smoking devices.
NOTE 2. GOING CONCERN
The Company sustained losses of $849,301 for the period from March 8, 2012 (inception) through May 31, 2014, and does not have the resources at this time to repay its credit and debt obligations, make any payments in the form of dividends to its shareholders or fully implement its business plan. Without additional capital, the Company will not be able to remain in business.
These factors raise substantial doubt about the Company’s ability to continue as a going concern.
In addition to operational expenses, as the Company executes its business plan, it is incurring expenses related to complying with its public reporting requirements. In order to finance these expenditures, the Company has raised capital in the form of debt, which will have to be repaid, as discussed in detail below. The Company has depended on loans from private investors for much of its operating capital. The Company will need to raise capital or have positive cash flows from operations in the next twelve months in order to remain in business.
Management anticipates that significant dilution will occur as a result of any future sales of the Company’s common stock and this will reduce the value of its outstanding shares. The Company cannot project the future level of dilution that will be experienced by investors as a result of its future financings, but it will significantly affect the value of its shares.
The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The Company’s financial statements are presented in accordance with accounting principles generally accepted (GAAP) in the United States. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the periods presented have been reflected herein.
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.
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 financial institution that is insured by the FDIC.
INTANGIBLE ASSETS - As Gankit Corporation, the Company’s policy was to capitalize intellectual property related to its website. Upon change of control and change in business model, the Company’s intangible assets were impaired during the year ended May 31, 2014 to zero.
The Company reviews the recoverability of it long-lived assets 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount reported in the balance sheet 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 - Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB ASC 740, Income Taxes. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
The Company applies the authoritative guidance in accounting for uncertainty in income taxes recognized in the financial statements. This guidance prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.
BASIC AND DILUTED LOSS PER COMMON SHARE - We report both basic and diluted net loss per share. Basic net loss per common share is computed by dividing net loss for the period by the weighted average number of common shares outstanding for the period. Diluted net loss per common share is computed by dividing the net loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive.
REVENUE RECOGNITION - During the period from inception to May 12, 2014 (the date of change of control and business plan), the Company recognized revenue from the sale of its website products using the following criteria:
1.
Revenue from auction and gank sales - revenue from products purchased in auctions and ganks is recognized when payment has been received and the product has been shipped.
2.
Revenue from bids - bid revenue is recognized when bids are placed in an auction or when unused bids reach their expiration date of six months from the date of purchase. Unused bids that have not reached expiration are carried on the balance sheet as a current liability.
Post May 12, 2014 (after implementation of the new business model), the Company will recognize revenues when:
1.
Risks and rewards have been transferred to our customer
2.
We have no control over goods sold
3.
Collection is reasonably assured
4.
The amount of revenue can be reasonable measured
5.
Costs of earning the revenue can be reasonably measured
In some cases, we intend to send product free of charge for promotional reasons and to place portions of our inventory with retail outlets on consignment. For promotional shipments, we will charge the cost of products to Promotional Expense when shipped. In the case of consignments of our inventories, we will count sales as revenues when cash payments are received.
RECENTLY ADOPTED AND RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS - Recent accounting pronouncements issued by the FASB (including its EITF), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future financial statements.
NOTE 4. NOTES PAYABLE
On April 11, 2012, the Company signed a promissory note with Hillsmere S.A. in the amount of $50,000. The note bears interest at a rate of 15%, and was due and payable on April 4, 2014, but has been extended until April 14, 2015, and is collateralized by all of the assets of the Company. As of May 31, 2014, the principal balance was $50,000 and accrued interest expense was $16,042.
On June 21, 2013, the Company signed a Master Credit Agreement with Levantera, SA, a company formed under the laws of the Marshall Islands, to provide a lending facility of up to $1 million. The Company has the right to periodically prepare a Borrowing Certificate (a “Certificate”) drawing upon this facility. At the end of each fiscal quarter, the Lender may prepare an Evidence of Indebtedness, setting forth advances, payments and interest accruals made during that quarter. Each Certificate and the interest accrued thereon is due one year after the date of the Evidence of Indebtedness. Interest accrued on un-matured amounts is 12% per year. Matured, unpaid amounts accrue interest at 18% per year. As of May 31, 2014, we have borrowed $150,000 on this facility and accrued $14,367 in interest. No interest or principal payments have been made as of May 31, 2014. Subsequent to our most recent borrowing tranche cash receipt on November 30, 2013, we have requested additional funds on this facility which have not arrived. We conclude therefore, that no additional funds are likely to be received pursuant to this financing facility.
During the year ended May 31, 2014, we signed six separate Promissory Notes to Shield Investments, Inc. (the “Shield Notes”). The aggregate proceeds from the Shield Notes is $325,000. All of them have interest rates of 15% with default rates (rates applied upon default) of 25% and mature according to the table below.
As of May 31, 2014, the aggregate amount of accrued but unpaid interest was $11,743 on the Shield notes.
NOTE 5. COMMON STOCK
The Company has authorized capital consisting of 100,000,000 shares of common stock with a par value of $0.0001 per shares. On May 31, 2012, there were 20,000,000 shares of common stock issued and outstanding.
During the year ended May 31, 2013, we issued an additional 10,000,000 shares in exchange for $100,000 in cash.
No shares were issued during the year ended May 31, 2014.
Change in Control
On May 12, 2014 Riverview Heights, LLC purchased 20,000,000 shares of common stock of the 30,000,000 total issued and outstanding shares common stock of Gankit Corporation (hereafter the “Company”) becoming the Majority Shareholder (hereafter the “Majority Shareholder”). The Majority Shareholder purchased 12,500,000 shares of common stock from Clark Rohde and 7,500,000 shares of common stock from John Arnold.
The Company then ceased to operate its e-commerce website and abandoned that business model, and re-focused on the development, branding and distribution of non-flame smoking devices.
NOTE 6. INCOME TAXES
At May 31, 2012, there was no provision for income taxes, current or deferred. Components of deferred tax assets are as follows:
As of May 31, 2012, the Company had net operating loss carry forwards in the amount of approximately $261,000. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.
Because of the change in control described in Note 5, Internal Revenue Code Section 382 limits the amount of net operating loss carry-forwards that can be used in periods subsequent to the change in control. Specifically, Section 382(c) limits the carry-forward to zero if the new corporation does not continue the business enterprise of the old corporation. We believe that Nhale, Inc. does not satisfy the criteria of continuity of business requirements set forth in IRC 382(c). We have therefore reset the carry-forwards to zero as of May 31, 2014.
NOTE 7. INTANGIBLE ASSETS
At May 31, 2013, the Company had a net carrying value of $15,667 in intangible assets ($20,000 of historical cost with accumulated amortization of $4,333). Intangible assets consisted of domain names, source code and databases, trademarks and customer lists.
During the year ended May 31, 2014, we amortized an additional $3,333 to amortization expense.
Because of the change in control and business plan described in Note 5, the remaining carrying value of $12,334 was impaired and is included in Asset Impairments.
NOTE 8. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
Employment Agreement
On May 13, 2014, Riverview Heights, LLC, the Majority Shareholder subsequent to the change in control (see Note 5), appointed Lance Williams as Sole Director, Chief Executive Officer and President of the Company. Mr. Williams entered into an employment agreement with the Company on that date that has been ratified by the Majority Shareholder. Under the employment agreement, Mr. Williams will receive $7,500 per month to serve in the capacities of Sole Director, Chief Executive Officer and President of the Company. Mr. Williams’ compensation did not begin until after the balance sheet date.
NOTE 9. RELATED-PARTY TRANSACTIONS
For the period from March 8, 2012 (inception) through May 31, 2012, Clark Rohde, the Company's majority shareholder, was paid $2,660 for contract labor. Additionally, Mr. Rohde was paid $27,020 during the year ended May 31, 2013 and $37,830 for the year ended May 31, 2014. Work performed was primarily related to product listings, order processing, shipping and fulfillment, and customer service.
During the year ended May 31, 2013, our then Chief Executive Officer and Chairman, John Arnold, made advances of $100,500 to the Company. The advances are unsecured, non-interest bearing, and have no specific terms for repayment.
Also during the year ended May 31, 2013 and 2014, we incurred $49,000 and $84,000 in compensation to Mr. Arnold, our then CEO and Chairman, for compensation pursuant to our employment agreement with him. During those periods, we paid Mr. Arnold $21,000 and $63,000 in cash, respectively, with $28,000 and $49,000 of compensation still due as of May 31, 2013 and 2014, respectively.
NOTE 10. SUBSEQUENT EVENTS
Subsequent to May 31, 2014, we signed three additional promissory notes with Shield Investments, receiving an aggregate of $200,000.
We have evaluated subsequent events through the date of this report.