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 Rhode 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 1 billion+ 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. 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.
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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 $1,000,000 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.
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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.