Form 10-K for VAPOR HUB INTERNATIONAL INC.
13-Oct-2015
Annual Report
General Overview
On February 14, 2014, we entered into a Share Exchange Agreement with Vapor Hub Inc., a California corporation (“Vapor”), Delite Products, Inc., a California corporation (“Delite”) and the shareholders of both companies (the “Exchange Agreement”). Pursuant to the terms of Exchange Agreement, we agreed to acquire all 30,000 of the issued and outstanding shares of Vapor’s common stock, as well as all 30,000 of the issued and outstanding shares of Delite’s common stock in exchange for the issuance by our company of 38,000,001 shares of our common stock to the shareholders of both companies. On March 14, 2014, we completed the acquisition of Vapor and issued all of the 38,000,001 shares of our stock to the shareholders of Vapor, who are also the shareholders of Delite. On March 26, 2014, we completed the acquisition of Delite. As a result of the closing of the transactions contemplated by the Exchange Agreement, Vapor and Delite became our wholly owned subsidiaries and we now carry on the business of developing, producing, marketing and selling vaping devices and related accessories. The transaction with Vapor was accounted for as a reverse acquisition (recapitalization) where Vapor was deemed to be the accounting acquirer, and us the legal acquirer. The transaction with Delite was accounted for as a business acquisition and we assumed the assets and liabilities of Delite at historical basis as of March 26, 2014 and the activity of Delite was included from that date forward. Prior to our acquisition of Vapor, we existed as a “shell company” with nominal assets whose sole business was to identify, evaluate and investigate various companies to acquire or with which to merge. On May 18, 2015, Vapor and Delite were merged with and into the Company, ending the separate existences of Vapor and Delite. This had no impact on the historical consolidated financial statements
Upon our acquisition of Vapor, Robin Looban resigned as our sole director, president, secretary, treasurer, Chief Financial Officer and Chairman of the Board of Directors and management members from Vapor and Delite were appointed to serve as directors and officers of our company. To reflect our acquisition of Vapor, on March 14, 2014 we changed our corporate name from Doginn, Inc. to Vapor Hub International Inc., and our stock symbol from “DOGI” to “VHUB”. We also changed our fiscal year end from December 31 to June 30.
Going Concern
Our capital requirements for the next twelve months will not be able to be funded in their entirety from our operating cash flows. As of June 30, 2015, we had a cash balance of $351,081. We believe it will be necessary to raise additional funds to finance our operations, and intend to do so through equity financings, debt financings, or from other sources. The extent of our future capital requirements will depend on many factors, including results of operations and the growth rate of our business.
Our consolidated financial statements have been presented on the basis that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Our cash balance as of June 30, 2015 along with other factors including our loss from operations raises doubt about our ability to continue as a going concern. 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 classification of liabilities that may result from the possible inability of the company to continue as a going concern.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. Please refer to Note 3 “BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for further discussion.
Recently Issued Accounting Pronouncements
In August 2014, FASB issued Accounting Standards Update (ASU) No. 2014-15 Preparation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under generally accepted accounting principles (GAAP), continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation of Financial Statements-Liquidation Basis of Accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in the update should be followed to determine whether to disclose information about the relevant conditions and events. The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company will evaluate the going concern considerations in this ASU, however, at the current period, management does not believe that it has met conditions which would subject the company’s consolidated financial statements to additional disclosure.
On April 7, 2015, the FASB issued ASU 2015-03 Interest – Imputations of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, to simplify presentation of debt issuance costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. We are evaluating the effect, if any, on its financial statements of the amendment.
We have reviewed other recent accounting pronouncements issued prior to the date of issuance of our financial statements included in this report, and do not believe any of these pronouncements will have a material impact on the Company’s consolidated financial statements.
Result of Operations for Year Ended June 30, 2015 and for the period from Inception (July 12, 2013) to June 30, 2014
The following table sets forth, for the periods indicated, consolidated statements of operations information:
From
Inception
(July 12,
Year Ended 2013) to
June 30, June 30, Change Change
2015 2014 (Dollars) (Percentage)
$ $ $
Revenue 5,296,342 1,202,663 4,093,679 340.38
Cost of revenue 3,202,067 647,287 2,554,780 394.69
Gross Profit 2,094,275 555,376 1,538,899 277.09
General and
administrative
expenses 2,510,360 984,776 1,525,584 154.92
Net Loss from
Operations (416,085) (429,400) 13,315 (3.10)
Other income
(expense) (195,512) 12,873 (208,385) (1618.78)
Net Loss (613,997) (423,606) (190,391) 44.95
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Revenues are comprised of gross sales less returns and discounts. In the year ended June 30, 2015, we generated revenues of $5,296,342 (net of returns and discounts of $133,500) and from the period from our inception on July 12, 2013 to June 30, 2014, we generated revenues of $1,202,663 (net of returns and discounts of $23,740). The increase in revenues compared to the prior year period primarily results from growth of our wholesale distribution and direct distribution to retail store sales. We expect revenues derived from our wholesale distribution, direct distribution to retail stores and sales through our websites, which collectively account for approximately 90% of our revenue, to increase as we increase our marketing initiatives. We also expect our sales growth to be driven by sales of our new Limitless Mods and our Binary Premium e-Liquid line, which have been well received in the marketplace and collectively account for a majority of our sales. We anticipate that retail sales will remain relatively flat in subsequent periods.
Cost of Revenue:
Our cost of revenue primarily represents the cost of our outsourced manufacturing of our products and also the cost of purchasing products from third parties for resale. Generally, our cost of revenue is lower on products that we directly source and is higher when we purchase products for resale from third parties. Our cost of revenue for the year ended June 30, 2015 was $3,202,067 and for the period from our inception (July 12, 2013) to June 30, 2014 was $647,287. The increase in cost of revenues during the year ended June 30, 2015 compared to the prior year period is primarily attributable to the period-over-period increase in our revenues. In addition, for the year ended June 30, 2015, our directly sourced products comprised approximately 60% of our sales, which is approximately a 15% decrease from the previous fiscal year.
Gross Profit: Gross profit represents revenue less the cost of revenue. During the year ended June 30, 2015, our gross profit was $2,094,275 and for the period from our inception to June 30, 2014 our gross profit was $555,376. The increase in gross profit during the year ended June 30, 2015 compared to the prior year period is primarily attributable to the period-over-period increase in our revenues. Our gross margin (which is gross profit as a percentage of revenue) for the year ended June 30, 2015 was 39.5% compared to 46.2 % for the prior year period. The decrease in our gross profit during our year ended June 30, 2015 results primarily from the sale of a greater percentage of third party products in our fiscal year ended June 30, 2015 compared to the prior year period, as described in the previous paragraph. We expect our gross profit and profit margins to increase in subsequent periods as we sell more of our proprietary products, including, without limitation our Limitless Mods and Binary Premium e-Liquids and our newly launched Limitless Atomizer, which have higher margins than products we purchase for resale.
General and Administrative Expense: General and administrative expenses consist primarily of payroll and related costs, sales and marketing costs, infrastructure costs and costs associated with being a public reporting company.
During the year ended June 30, 2015, we incurred general and administrative expenses of $2,510,360 and in the comparable prior year period ending June 30, 2014 we incurred general and administrative expenses of $984,776. The increase in general and administrative expense during the year ended June 30, 2015 compared to the prior year period is attributable to increased sales and marketing costs, the hiring of 10 additional employees and costs associated with being a public reporting company. Although our general and administrative expenses as a percentage of sales decreased to 47.4% for the year ended June 30, 2015 compared to 81.9% for the prior year period, we are continuing to evaluate our general and administrative expenses in an effort to reduce costs and improve our future profitability and cash flow. In October of 2015, we took steps to lower our general and administrative expenses by dismissing 4 full time and 2 part time employees.
Other Income: Other Income (expense) for the year ended June 30, 2015 was $195,512 and primarily consists of interest expense of $163,016 incurred in connection with our credit facilities and an increase in derivative liability of $19,609 associated with our credit facility with Typenex Co-Investment, LLC.
For the period from our inception to June 30, 2014, we had other income of $12,873.
Net Loss: Net loss was $613,997 for the year ended June 30, 2015 and $423,606 for the period from our inception to June 30, 2014. The increase in net loss from the prior year period primarily results from lower gross margins and higher general and administrative expenses and other expenses.
Seasonality
Our operating results and operating cash flows historically have not been subject to seasonal variations and we do not anticipate this changing.
Liquidity and Capital Resources
As of June 30, 2015, we had cash and cash equivalents of $351,081 and a working capital deficit of $539,496. On June 30, 2014, we had cash and cash equivalents of $307,567 and a working capital deficit of $520,396. We depend on cash from financing activities to fund our operating and investing activities, and we expect this trend to continue as we continue to grow our operations. A summary of our net working capital as of June 30, 2015 and 2014 and our cash flows for the year ended June 30, 2015 and the period from our inception to June 30, 2014 from our operating, investing and financing activities are summarized in the following tables:
Net Working Capital
As of As of
June 30, 2015 June 30, 2014
Current Assets $ 794,377 667,973
Current Liabilities 1,333,873 1,188,369
Net Working Capital (deficit) $ (539,496) (520,396)
Cash Flows
From Inception
Year Ended (July 12, 2013)
June 30, to
2015 June 30, 2014
Net cash used in Operating (437,359) $
Activities $ (207,111)
Net cash used in Investing (39,890)
Activities (130,684)
Net cash provided by Financing 520,763
Activities 645,362
Increase (Decrease) in Cash during 43,514
the Year 307,567
Cash, Beginning of Period 307,567 0
Cash, End of Year 351,081 307,567
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Net cash used in operating activities was $437,359 for the year ended June 30, 2015 compared to $207,111 for the period from our inception to June 30, 2014.
For the year ended June 30, 2015, net operating cash used in operations primarily results from our net loss, increases in inventory and a decrease in deferred income offset by an increase in accounts payable and accrued expenses.
For the period from our inception to June 30, 2014, net cash used in operations primarily results from our net loss, costs incurred to purchase inventory and prepaid expenses, offset by increased accounts payable and deferred income.
Investing Activities
Net cash used in investing activities was $39,890 for the year ended June 30, 2015 compared to $130,684 for the period from our inception to June 30, 2014.
For the year ended June 30, 2015, net cash used in investing activities consists of the purchase of equipment. For the period from our inception to June 30, 2014, net cash used in investing activities consists of the purchase of equipment for approximately $118,522 and approximately $12,162 paid as a security deposit in relation to one of our leased properties.
Financing Activities
Net cash provided by financing activities was $520,763 for the year ended June 30, 2015 and $645,362 for the period from our inception to June 30, 2014. For the year ended June 30, 2015, net cash provided by financing activities includes proceeds from convertible promissory notes payable of $272,008, proceeds from short term notes payable of $483,071, proceeds from affiliate loans of $80,543 offset by payments on affiliate loans of $85,608, payments on convertible notes payable of $70,313 and payments on short term notes payable of $152,291.
For the period from our inception to June 30, 2014, net cash provided by financing activities includes proceeds of approximately $101,378 from affiliate loans and proceeds of $534,881 from the sale of convertible promissory notes.
As of June 30, 2015, we had a balance of approximately $96,312 outstanding as related party loans from Kyle Winther, our CEO, Lori Winther, our CFO and Winther & Company (an entity owned by Lori Winther and her husband, Niels Winther, who is a director of the company). The outstanding balances are non-interest bearing and repayable upon demand.
First Facility with Typenex Co-Investment, LLC
On November 4, 2014, we entered into a securities purchase agreement (the “Purchase Agreement”) with Typenex Co-Investment, LLC, a Utah limited liability company (the “Investor”), pursuant to which we concurrently issued to Investor a Secured Convertible Promissory Note in a principal amount of $1,687,500 (the “Company Note”). The principal amount includes an original issue discount of $80,000 plus an additional $7,500 to cover Investor’s due diligence and legal fees in connection with the transaction. In consideration for the Company Note, Investor paid an aggregate purchase price of $1,600,000 (the “Purchase Price”), consisting of an initial cash purchase price of $200,000 and the issuance to us of ten promissory notes, the first two promissory notes in a principal amount of $100,000 and the remaining eight promissory notes in a principal amount of $150,000 (each an “Investor Note” and collectively, the “Investor Notes”). The Company Note and the Investor Notes each bear interest at the rate of 10% per annum and mature on April 4, 2019 and our obligations under the Company Note are secured by liens on the Investor Notes pursuant to the terms of a Security Agreement entered into by us in favor of the Investor. Subject to certain conditions, we may prepay the Company Note by making a payment equal to 125% of the then outstanding balance (including interest and other fees and amounts due). Each of the Investor Notes may be prepaid only upon the mutual agreement of the parties.
On January 16, 2015, upon the mutual agreement of the parties, Typenex paid to us the sum of $102,028 as a prepayment of all of its obligations owed to us under the first Investor Note in the original principal amount of $100,000 dated November 4, 2014, issued by Typenex in favor of the company.
Beginning on May 4, 2015, we are required to repay the outstanding balance on the Note in monthly installments of approximately $35,000 per month plus all unpaid interest and other costs, fees or charges under the Company Note. Payment may be made in cash or, subject to certain conditions, in shares of our common stock or any combination of cash and shares. If payments are made in shares, such installments or portions thereof are, subject to certain conditions, convertible into shares of our common stock at the lesser of (i) a conversion price of $0.10, subject to adjustment or (ii) a price that is equal to 70% of the average of the three lowest closing bid prices of our common stock in the twenty trading days immediately preceding such conversion, subject to a floor of $0.01. In addition, on the date that is twenty trading days from the date we deliver installment shares to Investor, there is a true-up where we are required to deliver additional shares if the installment conversion price as of the true-up date is less than the installment conversion price used to deliver the initial shares.
Beginning on May 4, 2015, all or any amount of a conversion eligible tranche (as described below) under the Company Note is convertible, at the option of the Investor, into shares of our common stock at a conversion price of $0.10 per share, subject to customary anti-dilution adjustments and other adjustments described in the Company Note (the “Conversion Price”). The Company Note is convertible into shares of our common stock by Investor in eleven tranches consisting of an initial tranche of $217,500 plus interest and other amounts due which may be converted into shares of our common stock at the Conversion Price at any time on or after May 4, 2015 and ten additional tranches (each a “Subsequent Tranche”), two of which are in the amount of $105,000 plus interest and other amounts due and eight of which are in the amount of $157,500 plus interest and other amounts due. Each Subsequent Tranche may not be converted into shares of our common stock unless the Investor has paid in full the Investor Note corresponding to such tranche, which payment requires our consent.
On January 16, 2015, the Investor paid to the Company the sum of $102,028 as a prepayment of all of its obligations owed to the Company under the first Investor Note and consequently the first Subsequent Tranche of $105,000 plus interest and other amounts due may be converted into shares of the Company’s common stock at the Conversion Price at the option of the Investor at any time on or after May 4, 2015. Subject to certain conditions based on the trading volume and trading price of our common stock, we may also elect to convert the entire outstanding balance under the Company Note into shares of our common stock at the Conversion Price.
If we fail to repay the Company Note when due, or if we are otherwise in default under the Company Note, at the option of Investor a default interest rate of 22% per annum will apply on all conversion eligible portions of the Company Note while the default continues. In the event we are in default under the Company Note, the Investor also has the option to accelerate the note with the outstanding balance becoming immediately due and payable or increase the outstanding balance of the note by an amount of 5% or 15% depending on the particular default. In addition, if we fail to issue stock to the Investor within three trading days of receipt of a notice of conversion, we must pay a penalty equal to the greater of (i) $500 per day; or (ii) 2% of the product of (A) the number of shares to which Investor was entitled that were not issued on a timely basis; and (B) the closing sale price of the common stock on the trading day immediately preceding the last day for us to timely issue the shares.
The Company Note provides that the Investor maintains a right of offset that, under certain circumstances, permits the Investor to deduct amounts owed by us under the Company Note from amounts otherwise owed by Investor under the Investor Notes. In addition, we are permitted at any time to deduct and offset any amount owing by the Investor under the Investor Notes from any amount owed by us under the Company Note.
On June 30, 2015 pursuant to the terms of the Company Note, the Company elected to deduct and offset the principal amount of $1,300,000 and all accrued interest thereon owing by the Investor under the remaining nine Investor Notes from the amount owed by the Company under the Company Note, leaving an outstanding balance of approximately $252,000 under the Company Note as of June 30, 2015 and approximately $158,000 as of October 1, 2015.
The Company Note provides that Investor may not convert the Company Note in an amount which would cause Investor to own more than 4.99%, or if our market capitalization (as defined in the Company Note) is less than $10,000,000, more than 9.99%, of our outstanding common stock.
In connection with the first and second closings of the financing, we paid Pyrenees Investments $20,000 and $10,020, respectively, as a finder’s fee (equal to 10% of the gross proceeds).
The foregoing descriptions of the Purchase Agreement, the Company Note, the Investor Notes and the Security Agreement do not purport to be complete and are qualified in their entirety by reference to the full text of the documents, which are filed as exhibits to our Current Report on Form 8-K filed on November 10, 2014 with the Securities and Exchange Commission.
Second Facility with Typenex Co-Investment, LLC
On June 4, 2015, we entered into a Note Purchase Agreement (the “Purchase Agreement”) with Typenex Co-Investment, LLC, a Utah limited liability company, pursuant to which we concurrently issued to the investor an unsecured non-convertible Promissory Note in a principal amount of $245,000 (the “June Note”). The principal amount includes an original issue discount of $40,000 plus an additional $5,000 to cover the investor’s legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the transaction. In consideration for the June Note, the investor paid an aggregate cash purchase price of $200,000, computed as follows: $245,000 original principal balance, less the original issue discount of $40,000, and less the transaction costs. The June Note matures on December 4, 2015. We may prepay all or a portion of the amount owed earlier than it is due without penalty.
Interest does not accrue on the unpaid principal balance of the June Note unless an event of default occurs. Upon the occurrence of an event of default, the outstanding balance of the June Note will bear interest at the lesser of the rate of 18% per annum or the maximum rate permitted by applicable law. In addition, if an event of default occurs under the June Note, the investor may declare all unpaid principal, plus all accrued interest and other amounts due under the June Note to be immediately due and payable at an amount equal to 115% of the outstanding balance of the June Note as of the date of the applicable event of default, plus all interest, fees and charges that may accrue on such outstanding balance thereafter.
We paid MSC-BD, LLC $16,000 as a finder’s fee (equal to 8% of the net proceeds) in connection with financing from the investor.
Iliad Research and Trading Note
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MAPH Enterprises, LLC | (305) 414-0128 | 1501 Venera Ave, Coral Gables, FL 33146 | new@marijuanastocks.com
