UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2016.
or
[ ]
Transition Report Pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________________ to ______________________.
Commission file number 000-55363
VAPOR HUB INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
|
|
Nevada | 27-3191889 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
1871 Tapo Street
Simi Valley, CA 93063
(Address of principal executive offices) (zip code)
(805) 309-0530
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
|
|
|
| ||
Large accelerated filer [ ] | Accelerated filer [ ] | ||||
Non-accelerated filer [ ] (Do not check if smaller reporting company) | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 16, 2016, the issuer had 81,262,934 shares of common stock issued and outstanding.
1
VAPOR HUB INTERNATIONAL INC.
TABLE OF CONTENTS
Part I. Financial Information
|
|
|
| March 31, |
| June 30, |
|
|
|
| 2016 |
| 2015 |
|
|
|
| (unaudited) |
|
|
Assets | ||||||
Current assets |
|
|
| |||
| Cash |
| $ 168,050 |
| $ 351,081 | |
| Accounts receivable | 7,682 |
| 9,511 | ||
| Inventory | 442,648 |
| 323,784 | ||
| Prepaid expenses and other current assets | 134,300 |
| 61,269 | ||
| Deferred finance costs | 205,189 |
| 39,258 | ||
| Other current assets | - |
| 9,474 | ||
Total current assets | 957,869 |
| 794,377 | |||
Fixed assets, net | 141,988 |
| 159,546 | |||
Deposits | 14,341 |
| 6,895 | |||
| Total assets | $ 1,114,198 |
| $ 960,818 | ||
|
|
|
|
|
|
|
Liabilities and Stockholders' Deficit | ||||||
Current liabilities |
|
|
| |||
| Accounts payable and accrued expenses | $ 295,036 |
| $ 509,618 | ||
| Deferred income | 218,553 |
| 82,499 | ||
| Notes payable - short term | 291,723 |
| 384,769 | ||
| Loans from related parties | 84,804 |
| 96,312 | ||
| Equipment leases payable | 2,059 |
| - | ||
| Current portion of convertible notes payable, net of unamortized debt discount | 154,628 |
| 192,091 | ||
| Derivative liabilities | 382,929 |
| 68,584 | ||
| Total current liabilities | 1,429,732 |
| 1,333,873 | ||
Long term liabilities |
|
|
| |||
| Equipment leases payable | - |
| 5,440 | ||
| Notes payable- long term | 24,673 |
| 29,189 | ||
| Convertible notes payable, net of current portion and unamortized debt discount | 190,161 |
| - | ||
| Derivative liabilities | 226,272 |
| - | ||
| Long term liabilities | 441,106 |
| 34,629 | ||
|
| Total liabilities | 1,870,838 |
| 1,368,502 | |
Stockholders' deficit |
|
|
| |||
| Preferred stock, $0.001 par value, 10,000,000 authorized, 0 issued and outstanding as of March 31, 2016 and June 30, 2015, respectively | - |
| - | ||
| Common stock, $0.001 par value, 1,010,000,000 shares authorized; 78,102,378 and 72,455,606 issued outstanding as of March 31, 2016 and June 30, 2015, respectively | 78,102 |
| 72,456 | ||
| Additional paid-in-capital | 684,687 |
| 557,463 | ||
| Accumulated deficit | (1,519,429) |
| (1,037,603) | ||
|
| Total stockholders' deficit | (756,640) |
| (407,684) | |
|
| Total liabilities and stockholders' deficit | $ 1,114,198 |
| $ 960,818 |
The accompanying notes are integral part of these condensed consolidated financial statements
3
VAPOR HUB INTERNATIONAL INC.
Unaudited Condensed Consolidated Statements of Operations
Revenue | Three Months Ended March 31, 2016 | Three Months Ended March 31, 2015 | Nine Months Ended March 31, 2016 | Nine Months Ended March 31, 2015 | |||||
$ 1,199,450 | $ 1,091,021 | $4,456,933 | $ 3,590,044 | ||||||
Cost of revenue |
| 726,918 | 739,243 |
| 2,530,710 | 2,152,729 | |||
Gross profit |
| 472,532 | 351,778 |
| 1,926,223 | 1,437,315 | |||
General and administrative expenses |
| 611,125 | 563,510 |
| 2,057,553 | 1,756,124 | |||
Net loss from operations |
| (138,593) | (211,732) |
| (131,330) | (318,809) | |||
Other income (expense) |
|
|
|
|
|
| |||
Investor settlement |
| (15,000) | - |
| (15,000) | - | |||
Interest expense |
| (44,180) | (58,137) |
| (132,666) | (95,681) | |||
Finance fees |
| (41,733) | (2,681) |
| (62,007) | (2,681) | |||
Interest expense-amortization of debt discount |
| (183,534) | - |
| (296,661) | - | |||
Loss on extinguishment of debt |
| - | - |
| (93,336) | - | |||
Change in fair value of derivative liability |
| 349,809 | 18,935 |
| 249,974 | 18,935 | |||
Other income (expense) |
| 65,362 | (41,883) |
| (349,696) | (79,427) | |||
Loss before taxes |
| (73,231) | (253,615) |
| (481,026) | (398,236) | |||
Income tax provision |
| - | 1,600 |
| 800 | 2,400 | |||
Net loss |
| (73,231) | (255,215) |
| (481,826) | (400,636) | |||
Net loss per share: |
|
|
|
|
|
| |||
Basic |
| $(0.00) | $(0.00) |
| $(0.01) | $(0.01) | |||
Diluted |
|
|
|
|
|
| |||
| (0.00) | (0.00)) |
| (0.01) | (0.01) | ||||
Weighted average shares outstanding: |
|
|
|
|
|
| |||
Basic |
| 76,911,504 | 68,360,001 |
| 72,639,656 | 65,158.902 | |||
Diluted |
|
|
|
|
|
| |||
| 76,911,504 | 68,060,001 |
| 72,639,656 | 65,158,902 |
The accompanying notes are integral part of these condensed consolidated financial statements
4
VAPOR HUB INTERNATIONAL INC.
Unaudited Condensed Consolidated Statements of Cash Flows
|
|
|
|
| |
|
|
| Nine Months Ended March 31, 2016 | Nine Months Ended March 31, 2015 | |
Operating Activities |
|
| |||
| Net loss | $ (481,826) | $ (400,636) | ||
| Adjustments to reconcile net loss to net cash provided used in operating activities: |
|
| ||
|
| Depreciation | 23,292 | 13,174 | |
|
| Amortization of debt discount | 296,661 | 5,349 | |
|
| Amortization of deferred finance costs | 62,007 | - | |
|
| Loss on extinguishment | 93,336 | - | |
|
| Change in derivative liability | (249,974) | (18,935) | |
| Changes in operating assets and liabilities: |
|
| ||
|
| Accounts receivable | 1,828 | (37,280) | |
|
| Inventory | (118,864) | (21,683) | |
|
| Prepaid expenses and other current and long term assets | 9,602 | 61,711 | |
|
| Security deposit | (7,446) | 5,267 | |
|
| Deferred income | 136,053 | (305,135) | |
|
| Accounts payable and accrued expenses | (214,580) | 136,751 | |
Net cash used in operating activities | (449,911) | (561,417) | |||
|
|
| |||
Investing Activities |
|
| |||
Purchase of property and equipment | (5,734) | (7,387) | |||
Net cash used in investing activities | (5,734) | (7,387) | |||
|
|
| |||
Financing Activities |
|
| |||
| Payments on leased property loans | (3,381) | (2,753) | ||
| Payments on financed insurance premiums | (120,398) | - | ||
| Proceeds from related party loans | - | 30,000 | ||
| Payments on related party loans | (11,508) | (63,688) | ||
| Proceeds from convertible notes payable | 699,350 | 272,008 | ||
| Payments on convertible notes payable | (338,278) | - | ||
| Proceeds from short term notes payable | 330,000 | 200,000 | ||
| Payments on short term notes payable | (278,654) | (82,073) | ||
| Payments on auto loan payable | (4,517) | - | ||
Net cash provided by financing activities | 272,614 | 353,494 | |||
|
|
| |||
Net change in cash | (183,031) | (215,310) | |||
Cash at beginning of period | 351,081 | 307,567 | |||
Cash at end of period | $ 168,050 | $ 92,257 | |||
|
|
|
|
| |
Supplemental disclosure of cash flow information: |
|
| |||
| Cash paid for: |
|
| ||
|
| Interest | $ 113,453 | $ 45,458 | |
|
| Income taxes | $ 800 | $ 2,400 | |
Non-cash transactions: |
|
| |||
|
| Common stock issued for prepaid services | $ - | $ 6,000 | |
|
| Common stock issued for convertible note payable | $ 30,000 | $ - | |
|
| Insurance premium financing | $ 146,909 | $ 173,016 | |
|
| Advisory fee paid in common stock | $ 102,870 | $ - | |
|
| Derivative liability | $ 790,591 | $ 48,975 |
The accompanying notes are integral part of these unaudited condensed consolidated financial statements
5
VAPOR HUB INTERNATIONAL INC.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1- INCORPORATION, NATURE OF OPERATIONS AND ACQUISITION
Vapor Hub International Inc. (formerly DogInn, Inc.) (hereinafter known as the Company) was incorporated in the State of Nevada on July 15, 2010. On February 14, 2014, the Company 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). As a result of the closing of the transactions contemplated by the Exchange Agreement, Vapor and Delite became the Companys wholly owned subsidiaries (which subsidiaries have subsequently been merged into the Company) and the Company now carries on the business of developing, producing, marketing and selling the next generation of electronic cigarettes, known as vaping devices, and related accessories, including e-liquids, batteries and atomizers.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying (a) condensed consolidated balance sheet at June 30, 2015 has been derived from audited statements and (b) the condensed consolidated unaudited financial statements as of and for the periods ended March 31, 2016 and 2015, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and related footnotes included in the Companys Annual Report on Form 10-K for the year ended June 30, 2015 (the 2015 Annual Report), filed with the Securities and Exchange Commission (the SEC) on October 13, 2015. It is managements opinion, however, that all material adjustments (consisting of normal recurring adjustments), have been made which are necessary for a fair financial statements presentation. The financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the financial statements not misleading as required by Regulation S-X, Rule 10-01. Operating results for the three months and nine months ended March 31, 2016 are not necessarily indicative of the results of operations expected for the year ending June 30, 2016.
This summary of significant accounting policies of the Company is presented to assist in understanding the Companys unaudited condensed consolidated financial statements. The unaudited condensed consolidated financial statements and notes are representations of the Companys management, which is responsible for their integrity and objectivity. These accounting policies conform to US GAAP and have been consistently applied in the preparation of the unaudited condensed consolidated financial statements.
The Company operates in one segment in accordance with accounting guidance Financial Accounting Standards Board (FASB) ASC Topic 280, Segment Reporting. The Companys Chief Executive Officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
6
Going Concern
The Companys unaudited condensed consolidated financial statements have been presented on the basis that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Companys cash balance as of March 31, 2016 along with its net loss and negative cash flow from operations, raise substantial doubt about its ability to continue as a going concern. The accompanying unaudited condensed consolidated 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.
The Company continues to face liquidity and capital resources constraints and does not believe that the proceeds from its debt facilities (see Note 7) along with its operating cash flows will be sufficient to meet its financing needs for the next twelve months. The extent of the Companys future capital requirements will depend on many factors, including the Companys results from operations and the growth rate of the Companys business. The Companys near term objective is to raise debt or equity capital to fund its immediate cash needs and to finance its longer term growth. The Company is also pursuing various means to increase revenues, reduce operating costs and to improve overall cash flow.
The Company presently does not have any arrangements for additional financing. However, the Company continues to evaluate various financing strategies to support its current operations and fund its future growth.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates significant estimates and assumptions related to its accounts receivable allowance, accounts payable, deferred income tax asset valuation allowances, fair value of derivative liability, fair value of stock options, useful life of fixed assets, inventory reserves, estimates of sales return and accrual for potential liabilities. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Companys estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Concentration of Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash. The Company places its cash with high quality banking institutions.
The Company relied on one manufacturer to make all of the Companys Mods during the three month period ended March 31, 2016.
Financial Instruments and Fair Value Measurement
Pursuant to ASC 820, Fair Value Measurements and Disclosures, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:
Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-
7
derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Companys financial instruments consist principally of cash, accounts payable, accrued liabilities, amounts due to related parties, derivative liabilities and convertible notes payable. Pursuant to ASC 820, the fair value of the Companys cash is determined based on Level 1 inputs, which consist of quoted prices in active markets for identical assets. Pursuant to ASC 820, the fair value of the Companys derivative liability is determined based on Level 3 inputs, which consist of unobservable inputs. The Company believes that the recorded values of all of its other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.
Revenue Recognition
The Company recognizes revenues when delivery of goods or completion of services has occurred provided there is persuasive evidence of an agreement, acceptance has been approved by its customers, the fee is fixed or determinable based on the completion of stated terms and conditions, and collection of any related receivable is probable.
For retail transactions, revenue is recognized at the point of sale. For wholesale and online transactions, revenue is recognized at the time goods are shipped.
Deferred Revenue
The Company accrues deferred revenue when customer payments are received, but product has not yet shipped. As of March 31, 2016 and June 30, 2015, the Company had recorded $218,553 and $82,499, respectively for deferred income as a result of prepayments for product made by customers. Those prepayments are recognized into revenue at the point those prepaid products have subsequently shipped. The Company has recognized the $82,499 during the nine months ended March 31, 2016 and expects to recognize the $218,553 into revenue during the fiscal year ending June 30, 2016.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expense for the nine months ended March 31, 2015 and 2016 were $56,258 and $72,601, respectively and are included in general and administrative expenses.
Deferred Finance Costs, Net
Costs with respect to the issuance of common stock, warrants, stock options or debt instruments by the Company are initially deferred and ultimately offset against the proceeds from such equity transactions or amortized to interest expense over the term of any debt funding, if successful, or expensed if the proposed equity or debt transaction is unsuccessful.
For the nine months ended March 31, 2016, the Company incurred $250,400 in costs in connection with the negotiation of a financing transaction with TCA Global Credit Master Fund, LP which amount is included in deferred finance costs as of March 31, 2016 (see Note 7). The unamortized finance costs for the nine months ended March 31, 2016 were $205,189.
Basic and Diluted Net Loss per Share
The Company computes net income per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of
8
shares assumed to be purchased from the exercise of stock options, warrants or debentures. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As of March 31, 2016 and 2015, there were no dilutive securities.
Recent Accounting Pronouncements
In January 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This update impacts the accounting for financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01 is to be applied prospectively and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company has not yet determined the impact of ASU 2016-01 on its consolidated results of operations, financial condition, or cash flows.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This update is intended to simplify the presentation of debt issuance costs and requires 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 this update. AUS 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company does not believe this will have a material impact on it consolidated results of operations, financial condition, or cash flows.
The Company has reviewed all other recent accounting pronouncements issued to date of the issuance of these unaudited condensed consolidated financial statements, and does not believe any of those pronouncements will have a material impact on the Companys unaudited condensed consolidated financial statements.
NOTE 3 OFFICERS LOANS PAYABLE
As of March 31, 2016 and June 30, 2015, the Company had a balance of $84,804 and $96,312 respectively, outstanding as related party loans from Kyle Winther, the Companys CEO, Lori Winther, the Companys CFO and Winther & Company, CPAs (an entity owned by Lori Winther, and her husband, Niels Winther, CPA, who is a director of the Company), as well as a Chase Bank Line of Credit (which was extended to the Company, though owed personally by Niels & Lori Winther). The outstanding balances are unsecured, non-interest bearing and repayable upon demand.
NOTE 4 INVENTORIES
As of March 31, 2016 and June 30, 2015, the Company had a balance of $442,648 and $323,784, respectively, as inventories which consist of vaping devices, electronic cigarettes, e-liquid, related supplies, and accessories. There is no reserve for inventory obsolescence as of March 31, 2016 and June 30, 2015.
NOTE 5 LEASE COMMITMENTS
The Company entered into a lease agreement with S. J. Real Estate Group, LLC to lease a retail space in Chatsworth, California, effective September 13, 2013. The lease term was for two years with a monthly lease payment of $2,214. Effective October 15, 2015, the Company and the landlord agreed to terminate the lease and the Company closed its retail store located at the location. The Company has no further obligation due under the lease agreement.
On February 28, 2015, the Company entered into a lease agreement with landlord Samantha Carrington to provide retail space for its Simi Valley retail location and on April 1, 2015, the Simi Valley retail location opened at the new premises. The lease term extends through March 31, 2017 with a monthly lease payment of $3,190. The Company has a commitment under this lease of $38,280 and a security deposit of $6,380 was paid to the landlord in relation to this lease.
The Company entered into a lease agreement with S.B.P.W., LLC to lease warehouse and office space in Simi Valley, California effective August 5, 2013 which agreement was subsequently amended on February 20, 2014. The lease term extended through April 30, 2015 with a monthly lease payment of $2,035 which increased to $4,070 effective July 1, 2014. On September 1, 2015, the Company terminated this lease and surrendered its facility at 67 W Easy St., Unit 115, Simi Valley, CA 93065 in favor of entering into a lease with Winther Family Trust for
9
executive, sales, and warehouse space at 1871 Tapo Street, Simi Valley, CA 93063. The trustees of the trust are Niels Winther, CPA, a director of the Company, as well as Lori Winther, the Chief Financial Officer, a shareholder and director of the Company. The lease term extends through August 31, 2020 with a monthly lease payment of $5,650. The Company has a commitment under this lease of $299,450 and a security deposit of $5,650 was paid to the landlord in relation to this lease.
On September 15, 2015, the Company entered into a lease agreement with Santa Susana Business Center, LLC to lease warehouse and office space at 4685 Runway Street, Unit D, Simi Valley, CA 93063. The lease term extends through September 30, 2016 with a monthly lease payment of $1,716. The Company has a commitment under this lease of $10,296 and a security deposit of $1,716 was paid to the landlord in relation to this lease.
NOTE 6 RELATED PARTIES
As of March 31, 2016 and June 30, 2015, the Company had a balance of $84,804 and $96,312, respectively, outstanding as related party loans from Kyle Winther, the Companys CEO, Lori Winther, the Companys CFO and Winther & Company, CPAs (an entity owned by Lori Winther, and her husband, Niels Winther, CPA, who is a director of the Company), as well as Chase Bank Line of Credit (which was extended to the Company, though owed personally by Niels & Lori Winther). The outstanding balances are unsecured, non-interest bearing and repayable upon demand.
From time to time the Company will engage the services of Winther & Co. an accounting firm owned by the husband of the Companys CFO. Winther & Co. provides bookkeeping, accounting and tax services to the Company. For the nine months ended March 31, 2016 the Company incurred approximately $43,000 in fees with Winther & Co. As of March 31, 2016 and June 30, 2015 the Company had Accounts Payable outstanding to related parties for accounting fees of $0 and $12,369, respectively.
The Company leases its headquarters from the Winther Family Trust. See Note 5 for further discussion.
NOTE 7 CONVERTIBLE NOTES PAYABLE
Note Holder |
| Balance |
| Unamortized Original |
| Convertible Notes |
| March 31, 2016 | Derivative Discount | Net of Derivative Discount | |||
Modified November Notes |
| - |
| - |
| - |
Modified June Note |
| 184,674 |
| (89,603) |
| 95,072 |
TCA Global Loan Payable |
| 320,229 |
| (260,672) |
| 59,557 |
Total Convertible Notes Payable, current portion |
| 504,903 |
| (350,275) |
| 154,628 |
|
|
|
|
|
|
|
TCA Global Loan Payable |
| 429,771 |
| (239,610) |
| 190,161 |
Total Convertible Notes Payable, net of current portion |
| 934,674 |
| (589,885) |
| 344,789 |
Typenex Co-Investment November 2014 Note
On November 4, 2014, the Company entered into a securities purchase agreement (the Purchase Agreement) with Typenex Co-Investment, LLC, a Utah limited liability company (the Investor), pursuant to which the Company concurrently issued to Investor a Secured Convertible Promissory Note in a principal amount of $1,687,500 (the Company Note). The principal amount included 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 issued a series of promissory notes aggregating to the sum of $1,600,000 (the Purchase Price), consisting of an initial cash disbursement of $200,000 and the issuance to the Company of ten promissory notes, the
10
first two promissory notes in a principal amount of $100,000 each 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 bore interest at the rate of 10% per annum and were scheduled to mature on April 4, 2019 and the Companys obligations under the Company Note were secured by liens on the Investor Notes pursuant to the terms of a Security Agreement entered into by the Company in favor of the Investor. Subject to certain conditions, the Company could 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 could be prepaid (and the Company could receive additional funds under the facility in excess of the initial $200,000 cash proceeds) only upon the mutual agreement of the parties.
On January 16, 2015, upon the mutual agreement of the parties, 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 in the original principal amount of $100,000 dated November 4, 2014, issued by the Investor in favor of the Company.
The first two tranches (the November Notes) were issued with an original issue discount of $20,472, of which $2,137 was amortized to interest expense during the nine months ended March 31, 2016. As of March 31, 2016 the unamortized balance was $0.
The Company recognized an additional debt discount of $48,975 on the first two tranches for the original fair value recognition of the derivative liability (discussed further below), of which $5,201 was amortized to interest expense during the nine months ended March 31, 2016. As of March 31, 2016 the unamortized balance was $0.
Beginning on May 4, 2015, the Company was required to repay the outstanding balance on the Company 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 could be made in cash or, subject to certain conditions, in shares of the Companys common stock or any combination of cash and shares. If payments were made in shares (each, an Installment Conversion), such installments or portions thereof were, subject to certain conditions, convertible into shares of the Companys 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 the Companys 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 the Company delivered installment shares to Investor, there was a true-up where the Company was required to deliver additional shares if the installment conversion price as of the true-up date was 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 was convertible, at the option of the Investor (each, a Lender Conversion), into shares of the Companys 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 was convertible into shares of the Companys common stock by Investor in eleven tranches consisting of an initial tranche of $217,500 plus interest and other amounts due which could be converted into shares of the Companys 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 were in the amount of $105,000 plus interest and other amounts due and eight of which were in the amount of $157,500 plus interest and other amounts due. Each Subsequent Tranche could not be converted into shares of the Companys common stock unless the Investor paid in full the Investor Note corresponding to such tranche, which payment required the Companys 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 could be converted into shares of the Companys 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 the Companys common stock, the Company could also elect to convert the entire outstanding balance under the Company Note into shares of the Companys common stock at the Conversion Price.
If the Company failed to repay the Company Note when due, or if the Company was otherwise in default under the Company Note, at the option of Investor a default interest rate of 22% per annum would apply on all conversion eligible portions of the Company Note while the default continues. In the event the Company was in default under the Company Note, the Investor also had 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 the Company failed to issue stock to the Investor within three trading days of receipt of a notice of conversion, the Company was required to 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
11
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 provided that the Investor maintained a right of offset that, under certain circumstances, permitted the Investor to deduct amounts owed by the Company under the Company Note from amounts otherwise owed by Investor under the Investor Notes. In addition, the Company was permitted at any time to deduct and offset any amount owing by the Investor under the Investor Notes from any amount owed by the Company under the Company Note. Since the Company Note and the Investor Notes could be offset against each other, they are recorded on a net basis in the Consolidated Balance Sheet.
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 $252,188 under the Company Note as of June 30, 2015 and total unamortized debt discount of $60,096.
The Company Note provided that Investor could not convert the Company Note in an amount which would cause Investor to own more than 4.99%, or if the Companys market capitalization (as defined in the Company Note) is less than $10,000,000, more than 9.99%, of the Companys outstanding common stock.
The Company paid MSC-BD, LLC $20,000 as a finders fee (equal to 10% of the gross proceeds) in connection with the first closing and $10,020 in connection with the second closing and paid additional finders fees of $16,000 to MSC-BD, LLC in connection with the June Note discussed below. The total finders fee of $46,020 was capitalized as deferred finance costs and amortized over the term of the respective notes. As of March 31, 2016 unamortized deferred finance costs related to these instruments were $0.
On December 15, 2015 the Company entered into a Note Settlement Agreement modifying the terms of the November Notes and the June Note (discussed below). This modification was treated as a debt extinguishment under ASC 470-50-40. See Note 10 for further discussion.
The Company also determined that the Lender Conversion feature of the modified November Notes meets the definition of an embedded derivative that should be separated and accounted for as a derivative liability. See Note 11.
Typenex Co-Investment June 2015 Note
On June 4, 2015, the Company entered into a Note Purchase Agreement (the Purchase Agreement) with Typenex Co-Investment, LLC, a Utah limited liability company, pursuant to which the Company 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 investors legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the transaction. The original issue discount was recorded as debt discount and amortized to interest expense over the life of the note. 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 matured on December 4, 2015 and, as further described below, on December 15, 2015 the company entered into a Note Settlement Agreement relating to the June Note (see Note 10). As of March 31, 2016 the outstanding balance of the Modified June Note was $184,674 and unamortized debt discount was $89,603.
The June Note provided that 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.
The Company paid MSC-BD, LLC $16,000 as a finders fee (equal to 8% of the net proceeds) in connection with financing from the investor.
On December 15, 2015 the Company entered into a Note Settlement Agreement modifying the terms of the November Notes (discussed above) and the June Note. This Note Settlement Agreement modified the terms of the
12
June Note to mirror the terms of the November Notes, thus making it a convertible instrument. This modification was treated as a debt extinguishment under ASC 470-50-40. See Note 10 for further discussion.
The Company also determined that the Lender Conversion feature of the modified June Note meets the definition of an embedded derivative that should be separated and accounted for as a derivative liability. See Note 11.
TCA Global Credit Master Fund, LP Note December 2015
On December 24, 2015, the Company entered into a Senior Secured Credit Facility Agreement with TCA Global Credit Master Fund, LP (TCA). At the initial closing on December 24, 2015, the Company received gross proceeds of $750,000 and issued to TCA a Convertible Promissory Note in the principal amount of $750,000 (the TCA Note). The TCA Note is scheduled to mature on June 24, 2017 (the Maturity Date). At any time prior to the Maturity Date or the earlier termination of the Loan Agreement, the Company can request up to $9,250,000 of additional loans, which additional loans may be made in the sole discretion of TCA. The Company may prepay borrowings at any time, in whole or in part, without penalty.
The loan will accrue interest on the unpaid principal balance at an annual rate of 18%. The Company will make interest only payments of $11,250 on each of January 24, February 24 and March 24, 2016, and thereafter, will make payments of approximately $56,208 of principal and interest per month until the Maturity Date. In the event the Company is in default under the loan agreement with TCA or any related transaction document, including as a result of a default in the Companys payment obligations, any amount due to TCA under the facility will, at TCAs option, bear interest from the date due until such past due amount is paid in full at an annual rate of 22%. In addition, upon the occurrence and during the continuance of an event of default under the transaction documents, TCA may terminate its commitments to the Company and declare all of the Companys obligations to TCA to be immediately due and payable.
While the Note is outstanding, but only upon the occurrence of (i) an event of default under the loan agreement with TCA or any related transaction document or (ii) the Companys mutual agreement with TCA, TCA may convert, subject to certain beneficial ownership limitations, all or any portion of the outstanding principal, accrued and unpaid interest and any other sums due and payable under the Note or any other transaction document (such total amount, the Conversion Amount) into a number of shares of the Companys common stock equal to: (i) the Conversion Amount divided by (ii) eighty-five percent (85%) of the lowest of the daily volume weighted average price of the Companys common stock during the five business days immediately prior to the conversion date (the Conversion Shares). Upon liquidation by TCA of Conversion Shares, if TCA realizes a net amount from such liquidation equal to less than the Conversion Amount, the Company is obligated to issue to TCA additional shares of the Companys common stock equal to: (a) the Conversion Amount minus the net realized amount, divided by (b) the average volume weighted average price of the Companys common stock during the five business days immediately prior to the date upon which TCA requests additional shares.
The payment and performance of all the Companys indebtedness and other obligations to TCA, including all borrowings under the loan agreement and related agreements, are secured by liens on substantially all of the Companys assets pursuant to a Security Agreement.
Of the proceeds received at the initial closing, approximately $106,000 was used to pay in full all indebtedness outstanding under the Companys Business Loan and Security Agreement with B of I Federal Bank (the Bank), entered into on November 3, 2015. Upon repayment of the Companys indebtedness under the Business Loan and Security Agreement, the Bank released its liens on the Companys assets. After the payment of approximately $51,000 of fees and cash expenses to TCA in connection with the loan transaction, the Company received net proceeds of approximately $593,000. As of March 31, 2016 the outstanding balance of TCA Note was $750,000 and unamortized debt discount of $500,282.
In connection with the Loan Agreement, the Company agreed to pay to TCA a fee for advisory services provided to the Company prior to the entry into the loan agreement in the amount of $126,000 (the Advisory Fee). As partial payment of the Advisory Fee, the Company issued to TCA 3,810,000 shares of the Companys common stock on December 24, 2015 (the Advisory Fee Shares), representing 4.99% of the Companys issued and outstanding shares of common stock on such date. In the event that TCA receives net proceeds from the sale of such shares that are less than the Advisory Fee, TCA may require the Company to issue additional shares of common stock in an amount sufficient such that, when sold and the net proceeds from such sale are added to the net proceeds from the sale of any of the previously issued and sold Advisory Fee Shares, TCA shall have received total net funds equal to the Advisory Fee. Notwithstanding the foregoing, subject to certain conditions, the Company has the right to redeem the Advisory Fee Shares then in TCAs possession for an amount payable in cash equal to the Advisory Fee,
13
less any net cash proceeds received by TCA from previous sales of Advisory Fee Shares. In the event TCA has not realized net proceeds from the sale of Advisory Fee Shares equal to at least the Advisory Fee by the earlier to occur of: (i) December 24, 2016; (ii) the occurrence of an event of default under the transaction documents; or (iii) the Maturity Date, then at any time thereafter, TCA has the right to require the Company to redeem all of the Advisory Fee Shares then in TCAs possession for cash equal to the Advisory Fee, less any cash proceeds received by TCA from any previous sales of Advisory Fee Shares.
The Company also determined that the Conversion feature of the TCA Note and the Advisory Fee meets the definition of an embedded derivative that should be separated and accounted for as a derivative liability. See Note 11.
14
NOTE 8 NOTES PAYABLE
Note Holder |
| Balance March 31, 2016 |
| Unamortized Original Issue Discount |
| Balance, net of Discount March 31, 2016 |
Iliad Unsecured Short Term |
| 245,000 |
| - |
| 245,000 |
Capital Premium |
| 10,953 |
| - |
| 10,953 |
AFCO Insurance |
| 28,560 |
| - |
| 28,560 |
Bank of the West - short term portion |
| 7,210 |
| - |
| 7,211 |
Total Short Term Notes Payable |
| 291,723 |
| - |
| 291,724 |
|
|
|
|
|
|
|
Bank of the West - long term |
| 24,673 |
| - |
| 24,673 |
Total Long Term Notes Payable |
| 24,673 |
| - |
| 24,673 |
Bank of the West
On December 29, 2014, Kyle Winther, the Companys CEO, entered into a vehicle financing agreement with the Bank of the West. Pursuant to the agreement, the amount financed was $39,275, payable in 48 monthly payments plus accrued interest at a rate of 3.9%. In January 2015, the Company agreed to assume the payments on this loan and capitalized the vehicle. As of March 31, 2016 the outstanding balance was $31,883, with $7,210 classified as short term and $24,673 classified as long term.
Terminated Facilities with B of I Federal Bank
On January 2, 2015, the Company entered into a Business Loan and Security Agreement with B of I Federal Bank (the Bank). Pursuant to the agreement, the Company borrowed $200,000 from the Bank and received net proceeds of $195,000 USD after deducting an origination fee of $5,000. The loan was payable in 147 payments of $1,728 due each business day beginning on and after January 5, 2015, with the initial total repayment amount (subject to certain exceptions) being equal to $254,000.
On June 2, 2015, the Company entered into a new Business Loan and Security Agreement with the Bank. Pursuant to the agreement, the Company borrowed $175,000 from the Bank and received net proceeds of $104,071 after deducting an origination fee of $1,875 and the repayment of $69,054 in full satisfaction of the Companys remaining obligations under that certain Business Loan and Security Agreement entered into with the Bank on January 2, 2015. The new loan was payable in 126 payments of $1,708 due each business day beginning on June 3, 2015, with the total repayment amount (subject to certain exceptions) being equal to $215,249 (the Total Repayment Amount). As of March 31, 2016, the outstanding balance was $0.
On November 3, 2015, the Company entered into a new Business Loan and Security Agreement with the Bank. Pursuant to the agreement, the Company borrowed $125,000 from the Bank and received net proceeds of $93,615 after deducting an origination fee of $3,023 and the repayment of $28,361 in full satisfaction of the Companys remaining obligations under that certain Business Loan and Security Agreement entered into with the Bank on June 2, 2015. The new loan was payable in 126 payments of $1,220 due each business day beginning on November 4, 2015, with the total repayment amount (subject to certain exceptions) being equal to $153,750. On December 24, 2015, the loan balance of $106,000 was paid off upon the closing of the financing transaction with TCA Global Credit Master Fund, LP.
Iliad Co-Investment Note
15
On August 12, 2015, the Company entered into a Note Purchase Agreement (the Purchase Agreement) with Iliad Research & Trading, L.P, a Utah limited liability partnership, pursuant to which the Company concurrently issued to the investor an unsecured non-convertible Promissory Note in a principal amount of $245,000 (the August Note). The principal amount includes an original issue discount of $40,000 plus an additional $5,000 to cover the investors legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the transaction. In consideration for the August 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 August Note was originally scheduled to mature on February 12, 2016 and was extended to April 12, 2016 (see discussion below) and subsequently further extended to July 15, 2016 (see Note 13). The Company may prepay all or a portion of the amount owed earlier than it is due without penalty. The original issue discount and issuance costs for both the June Note (see Note 7) and the August Note were recorded as debt discount and amortized to interest expense over the life of the notes. As of March 31, 2016, the outstanding balance of the August Note was $245,000 and the unamortized debt discount was $0.
Interest does not accrue on the unpaid principal balance of the August Note unless an event of default occurs. Upon the occurrence of an event of default, the outstanding balance of the August 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 August Note, the investor may declare all unpaid principal, plus all accrued interest and other amounts due under the August Note to be immediately due and payable at an amount equal to 115% of the outstanding balance of the August 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.
On February 19, 2016, the Company entered into an Amendment to Promissory Note with Iliad Research & Trading, L.P which extended the maturity date of the August Note to April 12, 2016 and increased the principal amount of the note by $2,500 as consideration for the extension. The Company evaluated the Amendment to Promissory Note under ASC 470-50-40 Extinguishments of Debt (ASC 470), noting it did not meet the criteria for substantial modification under ASC 470, and accordingly treated the amendment as a modification Note Settlement Agreement, adding $2,500 to the balance and extending the due date under the modified terms.
Other short term facilities
Effective May 29, 2015, the Company entered into an Agreement to finance its annual Workers Compensation insurance coverage. The insurance coverage is provided through The Hartford. The amount of the policy is $18,871 with $18,871 being financed at 2.2% over 12 months with an initial payment of $4,425 and 10 monthly payments of $1,444. The Company cancelled the policy with the Hartford Group and started the new policy as of October 1, 2015. At March 31, 2016, the premium obligation due under the Agreement was $0.
Effective July 10, 2014, the Company entered into an Agreement to finance its annual General Liability insurance coverage. The insurance coverage is provided through Lloyds of London. The amount of the policy is $52,359 with $43,953 being financed at 11% over 10 months with a monthly payment of $4,620. At June 30, 2015, the remaining premium obligation due under the Agreement was $0. Effective July 10, 2015 the Company entered into a new agreement to finance its General Liability insurance coverage. The amount of the policy is $70,848 with $53,159 financed over 10 months at 9% interest with a monthly payment of $5,538. At March 31, 2016, the remaining premium obligation was $10,953.
As of August 22, 2015, the Company entered into an insurance contract with AFCO for Directors and Officers insurance coverage. The amount of the policy is $129,000 with $93,750 being financed at 5.3% over 10 months with a monthly payment of $9,604. At March 31, 2016, the remaining balance was $28,560.
NOTE 9 LOSS PER COMMON SHARE
A summary of the net loss and shares used to compute net loss per share for the nine months ended March 31, 2016 and 2015 is as follows:
NOTE 10 DEBT EXTINGUISHMENT
On December 18, 2015, the Company and Typenex Co-Investment, LLC (the Investor) entered into a Note Settlement Agreement. The Note Settlement Agreement relates to the November Notes and the June Note (collectively, the Modified Notes) (see Note 7).
The Note Settlement Agreement restructures the payment provision of the Notes, including the June Note which was due and payable in full on December 4, 2015. The agreement provides that the Company is to make the following payments to Investor notwithstanding the terms of the Modified Notes (the Restructure): (a) a payment in the amount of $50,000 on or before December 15, 2015; (b) a payment in the amount of $50,000 on or before January 15, 2016; (c) a payment in the amount of $50,000 on or before February 15, 2016; and (d) a payment equal to the remaining aggregate outstanding balance of the Modified Notes on or before March 15, 2016 (collectively, the Note Payments). Unless specified otherwise by Investor in a written notice delivered to Company, all Note Payments shall be applied first against the outstanding balance of the November Note until the November Note has been paid in full and thereafter against the June Note until the June Note is paid in full. Note Payments may be made in cash or, subject to certain conditions, shares of the Companys Common Stock.
As consideration for Investors agreement to enter into the Note Settlement Agreement, the Company agreed to increase the outstanding balance of each Note by 15% (the Restructure Effect). Following the application of the Restructure Effect and including a $5,000 transaction expense fee, the outstanding balance of the November Note was $107,528 and the outstanding balance of the June Note was $281,750.
Upon satisfaction of the Companys obligations under the Note Settlement Agreement, the Company shall be deemed to have paid the entire outstanding balance of each of the Modified Notes in full and shall have no further obligations under either Note. In addition, subject to the Companys compliance with the terms and conditions of the Note Settlement Agreement, the Investor waives the default caused by the non-payment of the June Note on December 4, 2015.
In the event that the Company fails to comply with the conditions of the Note Settlement Agreement, the Restructure, the waiver of the June Note default, and all other accommodations given in the Note Settlement Agreement will be deemed withdrawn and the Investor will be entitled to all remedies available to it as provided in the Modified Notes, the other Transaction Documents, and the Note Settlement Agreement.
The Company evaluated the Note Settlement Agreement under ASC 470-50-40 Extinguishments of Debt (ASC 470). ASC 470 requires modifications to debt instruments to be evaluated to assess whether the modifications are considered substantial modifications. A substantial modification of terms shall be accounted for like an extinguishment. For extinguished debt, a difference between the re-acquisition price and the net carrying amount of the extinguished debt shall be recognized currently in income of the period of extinguishment as losses or gains. The Company noted the change in terms per the Note Settlement Agreement, met the criteria for substantial modification under ASC 470, and accordingly treated the modification as extinguishment of the original November Notes and June Note, replaced by the new convertible notes under the modified terms. The Company recorded a loss on extinguishment of debt of $93,336 during the nine months ended March 31, 2016.
Amendment to Note Settlement Agreement
On February 19, 2016, the Company entered into an Amendment to Note Settlement Agreement (the Settlement Agreement Amendment) with Investor. The Settlement Agreement Amendment relates to the Note Settlement Agreement (the Original Agreement) entered into between the parties on December 18, 2015.
The Original Agreement, as amended by the Settlement Agreement Amendment, restructures the payment provision of the Modified Notes. The Settlement Agreement Amendment restructures the payment provisions contained in the Original Agreement and provides that the Company is to make the following payments to Investor, in lieu of the previously agreed to $50,000 cash payments, notwithstanding the terms of the Modified Notes (the Restructure): (a) a cash payment in the amount of $35,000 payable upon execution of the Settlement Agreement Amendment together with 918,386 shares of the Companys common stock (subject to adjustment as described in the Settlement Agreement Amendment) based on a note conversion amount of $15,000 and a conversion price of $0.016333, which shares are to be issued and delivered pursuant to the terms of the Settlement Agreement Amendment and (b) a cash payment on or before March 15, 2016 in the amount of $35,000 together with shares of the Companys common stock based on a note conversion amount of $15,000 and a conversion price of $0.016333, which 918,386 shares were issued and delivered pursuant to the terms of the Settlement Agreement Amendment; and (c) a payment equal
17
to the remaining aggregate outstanding balance of the Modified Notes on or before April 15, 2016, which payment must be made in cash (collectively, the Note Payments). Unless specified otherwise by Investor in a written notice delivered to Company, all Note Payments shall be applied first against the outstanding balance of the November Note until the November Note has been paid in full and thereafter against the June Note until the June Note is paid in full.
As consideration for Investors agreement to enter into the Settlement Agreement Amendment, the Company agreed to pay Investor a restructuring fee of $2,500.00.
The Company evaluated the Settlement Agreement Amendment under ASC 470-50-40 Extinguishments of Debt (ASC 470). The Company noted the change in terms per the Settlement Agreement Amendment did not meet the criteria for substantial modification under ASC 470, and accordingly treated the amendment as a modification to the Note Settlement Agreement, adding $2,500 to the balance and extending the due date under the modified terms.
NOTE 11 DERIVATIVE LIABILITIES
The Company evaluated the Modified Notes, the TCA Note and the TCA Advisory Fee under the requirements of ASC 480 Distinguishing Liabilities from Equity and concluded that the notes and advisory fee do not fall within the scope of ASC 480.
The Company then evaluated the Modified Notes, the TCA Note and the TCA Advisory Fee under the requirements of ASC 815 Derivatives and Hedging.
Due to the existence of the anti-dilution provisions in the Modified Notes, which reduces the Lender Conversion Price in the event of subsequent dilutive issuances by the Company, the Company determined that the Lender Conversion feature does not meet the definition of indexed to the Companys stock, and the scope exception to ASC 815s derivative accounting provisions does not apply. The Company also determined that the Lender Conversion feature in the Modified Notes meets the definition of an embedded derivative that should be separated from the Modified Notes and accounted for as a derivative liability.
Due to the conversion provisions of the TCA Note and the TCA Advisory Fee, the Company determined that the Conversion feature does not meet the definition of indexed to the Companys stock, and the scope exception to ASC 815s derivative accounting provisions does not apply. The Company also determined that the Conversion feature of the TCA Note and the TCA Advisory Fee meets the definition of an embedded derivative that should be separated from the TCA Note and TCA Advisory Fee, respectively and accounted for as a derivative liability.
The Company recorded an original valuation for the Modified Notes of $194,596 for the derivative liability. As of March 31, 2016, the Company had a derivative liability of $120,038.
The Company recorded an original valuation for the TCA Note of $610,514 for the derivative liability. As of March 31, 2016, the Company had a derivative liability for the TCA Note of $397,456.
The Company recorded an original valuation for the TCA Advisory Fee of $80,280 for the derivative liability. As of March 31, 2016, the Company had a derivative liability for the TCA Advisory Fee of $91,710.
The Company has recorded the fair value of each derivative as described above as a current liability as of March 31, 2016. The change in fair value was recorded as other income (expense) in operations for the nine months ended March 31, 2016.
In arriving at fair-value estimates, the Company utilizes the most observable inputs available for the valuation technique employed. If a fair-value measurement reflects inputs at multiple levels within the fair value hierarchy, the fair-value measurement is characterized based upon the lowest level input. For the Company, recurring fair-value measurements are performed for the derivative liability.
The Company does not have any liabilities that reduce risk associated with hedging exposure and has not designated the derivative liability as a hedge instrument.
The Company did not have any derivatives valued using Level 1 and Level 2 inputs as of March 31, 2016. The Company categorized the derivative liability as Level 3 using the Black-Scholes pricing model with a fair value of $609,201 as of March 31, 2016.
18
The Company used the following input ranges: stock price $0.0260-$0.0283; expected term 0.33-1.21 years; risk-free rate 0.21%-0.59%; and volatility 134.8%-155.6%. Unobservable inputs were the prevailing interest rates, the Companys stock volatility and the expected term.
There have been no transfers between Level 1, Level 2, or Level 3 categories. Level 3 balance at March 31, 2015 was $68,584. Level 3 activity for the nine months ended March 31, 2016 were additions of $885,390 for the original valuation of three derivatives, deletions of $94,799 for the elimination of an original derivative related to debt extinguishment, and decrease of $249,974 for the valuation adjustments during the period.
NOTE 12 EQUITY
Unregistered Sales of Equity Securities
Pursuant to the TCA Note, the Company issued to TCA 3,810,000 Advisory Fee Shares on December 24, 2015 as partial consideration for advisory services provided by TCA and the Company may be required to issue an unknown number of additional Advisory Fee Shares and/or Conversion Shares in accordance with the terms of the transaction documents. These shares were valued at $0.027 per share, which was the closing market price the Companys shares at December 24, 2015. The initial valuation of these shares was recorded to deferred finance fees and is being amortized to expense over the life of the related instrument.
Pursuant to the Settlement Agreement Amendment (see Note 10), the Company issued to Investor 918,386 shares of the Companys common stock on or about February 19, 2016 and 918,386 shares of the Companys common stock on or about March 15, 2016. These shares were valued at $0.01633 as per the Settlement Agreement Amendment.
NOTE 13 SUBSEQUENT EVENTS
Amendment to Note Settlement Agreement
On May 12, 2016 but effective as of April 15, 2016, the Company entered into Amendment #2 to Note Settlement Agreement (the Second Amendment) with Typenex Co-Investment, LLC (the Investor). The Second Amendment relates to the Note Settlement Agreement entered into between the parties on December 18, 2015, as previously amended on February 19, 2016 (as previously amended, the Original Agreement).
The Original Agreement, as amended by the Second Amendment, restructures the payment provision of the Modified Notes. The Second Amendment restructures the payment provisions contained in the Original Agreement and provides that the Company is to make the following payments to Investor notwithstanding the terms of the Modified Notes (the Restructure): (a) a cash payment in the amount of $35,000payable on or before April 15, 2016 together with 3,160,556 shares of the Companys common stock (subject to adjustment as described in the Settlement Agreement Amendment) based on a note conversion amount of $50,000 and a conversion price of $0.015820, which shares are to be issued and delivered pursuant to the terms of the Settlement Agreement Amendment and (b) a cash payment on or before May 15, 2016 in the amount of $35,000 together with shares of the Companys common stock based on a note conversion amount of $50,000 and a conversion price to be determined in accordance with the Notes, which shares are to be issued and delivered pursuant to the terms of the Settlement Agreement Amendment; and (c) a payment equal to the remaining aggregate outstanding balance of the Notes on or before June 15, 2016, which payment must be made in cash (collectively, the Note Payments). Unless specified otherwise by Investor in a written notice delivered to Company, all Note Payments shall be applied first against the outstanding balance of the November Note until the November Note has been paid in full and thereafter against the June Note until the June Note is paid in full. The Second Amendment also provides that outstanding balance on each of the November Note and the June Note will bear interest at the rate of 10% per annum from the effective date of the amendment until such notes are repaid in full; previously, the June Note did not accrue interest on the unpaid principal balance of the note unless an event of default occurred.
As consideration for Investors agreement to enter into the Second Amendment, the Company agreed to pay Investor a restructuring fee of $15,316.
As of the date of this report, the outstanding balance on the November Note is $0 and the outstanding balance on the June Note is $84,363 (which takes into account a cash payment of $35,000 made on May 11, 2016).
Entry into Exchange Agreement and Issuance of Convertible Promissory Note
19
On May 12, 2016 but effective as of April 15, 2016, the Company entered into an Exchange Agreement with Iliad Research and Trading L.P. (Iliad), an affiliate of the Investor (the Exchange Agreement). The Exchange Agreement relates to the Promissory Note issued on August 12, 2015 to Iliad in the original principal amount of $245,000, as previously amended on February 19, 2016 (as amended, the Original Note).
Pursuant to the Exchange Agreement, the Company and Iliad exchanged the Original Note for a new promissory note in the original principal amount of $272,250 (the Exchange Note), which balance includes an exchange fee of $24,750. The Exchange Note was issued in substitution of and not in satisfaction of the Original Note.
The Exchange Note provides that the Company is to make the following payments to Iliad: (a) a payment in shares of the Companys common stock within three trading days of June 15, 2016 based on a note conversion amount of $50,000 and a conversion price that is equal to 70% of the average of the three lowest closing bid prices of the Companys common stock in the twenty trading days immediately preceding such conversion, which shares are to be issued and delivered pursuant to the terms of the Exchange Note; and (b) a payment equal to the remaining aggregate outstanding balance of the Exchange Note on or before July 15, 2016, which payment must be made in cash. On the date that is twenty trading days from the date the Company delivers the conversion shares to Iliad, there is a true-up where the Company is required to deliver additional shares if the conversion price as of the true-up date is less than the conversion price used to deliver the initial shares. Interest accrues on the outstanding balance of the Exchange Note at a rate of 10% per annum; provided, however that if the Company fails to repay the Exchange Note when due, or if the Company is otherwise in default under the Exchange Note, at the option of Iliad a default interest rate of 18% per annum will apply. In the event the Company is in default under the Exchange Note, Iliad also has the option to accelerate the note with the outstanding balance becoming immediately due and payable at an amount equal to 115% of the outstanding balance of the Exchange Note as of the date the event of default occurred. The Exchange Note may be prepaid without penalty. The Exchange Note provides that the Company may not issue shares to Iliad under the Exchange Note if the issuance of such shares would cause Iliad to beneficially own more than 9.99% of the Companys outstanding common stock.
Issuance of Shares of Common Stock
Pursuant to the Settlement Agreement Amendment, the Company issued to Investor 3,160,556 shares of the Companys common stock on April 15, 2016 at a value of $0.01582 and will be required to issue an unknown number of additional shares of common stock in accordance with the terms of the Settlement Agreement Amendment, as amended, and the Exchange Note.
Regulatory Risks
On May 5, 2016, the U.S. Food and Drug Administration (FDA) issued a final rule deeming certain products to be subject to the Federal Food, Drug, and Cosmetic Act and regulations thereunder (the FD&C Act), which products include electronic cigarettes and their component parts, including e-liquids, atomizers, batteries, cartomizers, tank systems, flavors, vials that contain e-liquids and programmable software. The Company is evaluating the potential impact of this new regulation.
20
Item 2
Managements Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with our Unaudited Condensed Consolidated Financial Statements and the related Notes thereto contained in Part I, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report, as well as in our Annual Report on Form 10-K for the year ended June 30, 2015 (Annual Report) and in our other filings with the SEC, which discuss our business in greater detail.
This Quarterly Report contains forward-looking statements that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statements that do not directly relate to historical or current fact. We use words such as anticipates, believes, plans, expects, future, intends, may, should, estimates, predicts, potential, continue, becoming, transitioning, and similar expressions to identify such forward-looking statements. Our forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, capital resources sufficiency, capital expenditures and cash commitments. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those referenced in the subsection entitled Risk Factors herein and in Part I, Item 1A of our Annual Report and similar discussions in our other SEC filings. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
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). 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. 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.
Our principal executive office is located at 1871 Tapo Street Simi Valley, CA 93063. The telephone number at our principal executive office is (805) 309-0533.
Business Overview
Product Description
Vaping devices (as well as electronic cigarettes, also known as e-cigarettes) are battery-powered products that allow users to inhale water vapor instead of the smoke, ash, tar and carbon monoxide associated with traditional cigarettes. In contrast to e-cigarettes, vaping devices are often precision manufactured from metallic materials and do not look like traditional cigarettes. Vaping devices, as compared to e-cigarettes, also offer a unique user experience as a result of greater vapor production, enriched taste, and an ability to highly customize a device with different mechanical components and fashionable accessories, including different colors and finishes.
Sourcing
We use third party contract manufacturers to produce and finish our vaping devices from facilities primarily located in Southern California. Our vaping devices (or Mods), which are made from a metallic material such as steel, brass or copper, are custom machined to meet our design specifications. Once machined, unfinished products are delivered to our location in Simi Valley, or to a third party service provider to be buffed, polished and to add various treatments and embellishments, such as paint and dog tags. Finished products are then held in inventory for distribution and sale. For the nine months ended March 31, 2016, we relied on one manufacturer to machine all of our Mods. Although we relied on one manufacturer to machine our Mods during the quarter, we believe manufacturing capacity is readily available to meet our current and planned needs. We do not currently have any long term agreements in place for the manufacture of our Mods.
21
With respect to our vaping accessories, we purchase batteries from suppliers in China and atomizers from suppliers in the United States, Austria, the Philippines and China. We believe that suppliers for accessories are readily available to meet our current and planned needs.
We source our proprietary E-liquids from an ISO Class 7 certified manufacturer in the United States, which helps ensure their purity and quality. In addition to sourcing our own e-liquids, we also purchase e-liquid from reputable American suppliers for resale through our distribution channels.
Distribution to Retail Stores
We market and sell our vaping devices and related products to end customers through our websites www.vapor-hub.com and www.smokelessdelite.com, to retail stores through direct sales primarily in the United States but also internationally, and through third party wholesalers who then resell our products to retailers in their territory. Retailers of our products include vaping shops throughout the United States as well as convenience stores and several gas stations. Products we distribute include vaping devices and related accessories purchased from third parties for resale as well as our vaping devices and related accessories, which we design and source, including our popular AR Mechanical Mods, newly released and popular Limitless Mechanical Mods, as well as Binary Premium e-Liquid.
Operation of Retail Stores
We also sell our products and those of third parties to end consumers directly through our own 1,500 square foot retail location located in Simi Valley, California. We also operated a second retail location in Chatsworth, CA which store was closed on October 16, 2015.
Through our retail location, we sell and market vaping devices as well as e-liquid, accessories, and supplies relating to vaping devices to both novice users as well as consumers who demand high end technical devices.
We opened our retail locations in order to create brand recognition for our products and also to enable us to gather information about user preferences in the rapidly evolving vaping industry. By learning about user preferences, we believe we are better able to design and source products to meet market demand.
New FDA Regulations
On May 5, 2016, the U.S. Food and Drug Administration (FDA) issued a final rule deeming certain products to be subject to the Federal Food, Drug, and Cosmetic Act and regulations thereunder (the FD&C Act), which products include electronic cigarettes and their component parts, including e-liquids, atomizers, batteries, cartomizers, tank systems, flavors, vials that contain e-liquids and programmable software. On August 8, 2016, the newly deemed products will automatically be subject to all provisions of the FD&C Act and FDA regulations applicable to cigarettes, cigarette tobacco and other tobacco products. However, for certain provisions that require labeling changes or information submission to the FDA, the FDA has provided an extended compliance period. Among other requirements, under the new rules:
·
The sale of covered tobacco products to individuals under the age of 18 is prohibited beginning August 8, 2016;
·
Vending machine sales of covered tobacco products are prohibited unless sold in adult-only facilities beginning August 8, 2016;
·
The newly deemed products will be subject to rules and regulations relating to adulterated or misbranded products beginning August 8, 2016, including rules that prohibit the sale and distribution of products with modified risk descriptors (such as light, low and mild) unless authorized by the FDA;
·
The distribution of free samples of the newly deemed tobacco products is prohibited as of August 8, 2016;
·
Companies that own or operate domestic manufacturing establishments engaged in the manufacturing of newly deemed tobacco products are required to register with the FDA and submit details about their products beginning August 8, 2016;
22
·
Subject to certain exceptions, packaging and advertisements of all covered tobacco product will be required to bear an addictiveness warning beginning May 10, 2018; and
·
Newly deemed tobacco products that were not commercially marketed in the United States as of February 15, 2007 or any modification (including a change in design, any component, any part, or any constituent or in the content, delivery or form of nicotine, or any other additive or ingredient) of a tobacco product where the modified product was commercially marked in the United States after February 15, 2007 are required to have premarket authorization prior to commercial distribution.
The FDA process to obtain pre-market authorization will be phased in. For newly deemed tobacco products that are on the market as of August 8, 2016, but that were not on the market as of February 15, 2007, FDA is providing two compliance periods: one for submission to the FDA of applications and one for obtaining premarket authorization. During these compliance periods, the FDA does not intend to take enforcement action for products remaining on the market without authorization. New products for which no application has been submitted by August 8, 2018 will be subject to enforcement. With certain exceptions, newly deemed tobacco products for which timely premarket submissions have been submitted will be subject to an additional compliance period of twelve months after the initial compliance period for submissions ends. Once the continued compliance period ends, new tobacco products on the market without authorization will be subject to enforcement. For newly deemed tobacco products that are not on the market as of August 8, 2016, the above compliance periods will not apply and the new products must obtain a marketing order from FDA specific to the product prior to commercial distribution.
We cannot predict the impact these new regulations will have on our business and the industry at large and what additional restrictions the FDA may subsequently impose. However, we believe our costs to comply with the new regulations in future periods, particularly the premarket authorization requirement, will be substantial, both in terms of management time and out of pocket expenditures. Moreover, if we are unable to secure pre-market authorization to continue selling our existing products and any new products targeted for introduction, our future sales will be adversely impacted. We plan to further evaluate the impact of the new rules and regulations on our business and modify our business strategies accordingly to comply with the new rules and regulations. However, we cannot guarantee that we will be able to comply with the new rules and regulations, particularly the premarket authorization requirement, and the new legislation (including penalties imposed for failure to comply) could have a material adverse effect on our business, results of operations and financial condition.
23
Going Concern
Our unaudited condensed 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 March 31, 2016 along with continued losses and negative cash flows from operations raises substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated 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 our possible inability to continue as a going concern.
As discussed in Note 7, on December 24, 2015, we entered into a Senior Secured Credit Facility Agreement with TCA Global Credit Master Fund, LP. Notwithstanding the foregoing financing event, we continue to face liquidity and capital resources constraints. We do not believe that the proceeds from our existing financing facilities along with our operating cash flows will be sufficient to meet our financing needs for the next twelve months, and the extent of our future capital requirements will depend on many factors, including results of operations and the growth rate of our business. Our near term objective is to raise debt or equity capital to fund our immediate cash needs and to finance our longer term growth. We are also pursuing various means to increase revenues, reduce operating costs and to improve cash flow.
Critical Accounting Policies and Estimates
We prepare our condensed 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 statements presentation, financial condition, results of operations, and cash flows will be affected. Please refer to Note 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for further discussion.
Recently Issued Accounting Pronouncements
In January 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This update impacts the accounting for financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01 is to be applied prospectively and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We have not yet determined the impact of ASU 2016-01 on our consolidated results of operations, financial condition, or cash flows.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This update is intended to simplify the presentation of debt issuance costs and requires 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 this update. AUS 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company does not believe this will have a material impact on it consolidated results of operations, financial condition, or cash flows.
We have reviewed all other recent accounting pronouncements issued to date of the issuance of these unaudited consolidated financial statements, and do not believe any of these pronouncements will have a material impact on our unaudited condensed consolidated financial statements.
24
Results of Operations
Comparison of the Three Months Ended March 31, 2016 to the Three Months Ended March 31, 2015
The following is a summary of our results from operation for the three month periods ended March 31, 2016 and March 31, 2015:
|
|
|
|
| Three Months Ended, March 31, 2016 |
| Three Months Ended March 31, 2015 |
Revenues | $ 1,199,450 |
| $1,091,021 |
Cost of revenues | 726,918 |
| 739,243 |
Gross profit | 472,532 |
| 351,778 |
General and administrative expenses | 611,125 |
| 563,510 |
Net loss from operations | (138,593) |
| (211,732) |
Other expense | 65,362 |
| (41,883) |
Loss before taxes | (73,231) |
| (253,615) |
Income tax provision | - |
| 1,600 |
Net loss | $ (73,231) |
| $(255,215) |
Revenues: Revenues are comprised of gross sales less returns and discounts. During the three months ended March 31, 2016 and 2015, we generated revenue of $1,199,450 (net of returns and discounts of $18,345) and $1,091,021 (net of returns and discounts of $15,620), respectively. The modest 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 Limitless Mods, our Binary Premium e-Liquid line and our new Limitless Atomizer, which have been well received in the marketplace and collectively account for a majority of our sales. We anticipate that retail sales will remain flat in subsequent periods.
Cost of Revenues: 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. During the three months ended March 31, 2016 and 2015, our cost of revenue was $726,918 (or 60.6% of revenues) and $739,243 (or 67.8% of sales), respectively. The decrease in cost of revenues during the three months ended March 31, 2016 compared to the prior year period is primarily attributable to sourcing and distributing more of our proprietary products as opposed to purchasing products from third parties for resale and also as a result of increased purchasing power in the marketplace.
Gross Profit: Gross profit represents revenue less the cost of revenue. During the three months ended March 31, 2016, our gross profit was $472,532 and during the comparable prior year period ended March 31, 2015 was $351,778. Our gross margin (which is gross profit as a percentage of revenue) for the three months ended March 31, 2016 was 39.4% compared to 32.2% for the prior year period. The increase in our gross profit during the three months ended March 31, 2016 compared to the prior year period is primarily attributable to sourcing and distributing more of our proprietary products as opposed to purchasing products from third parties for resale, 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 three months ended March 31, 2016, we incurred general and administrative expenses of $611,125 and in the comparable prior year period ended March 31, 2015 we incurred general and administrative expenses of $563,510. The increase in general and administrative expense during the three months ended March 31, 2016 compared to the prior year period results primarily from additional wages, insurance and advertising. Our general and administrative expenses as a percentage of sales was 51.0% and 51.6% for each of the three months
25
ended March 31, 2016 and March 31, 2015, respectively. We are continuing to evaluate our general and administrative expenses in an effort to reduce costs and improve our future profitability and cash flow.
Other expense: Other (income) expense of $(65,362) for the three months ended March 31, 2016 consists of change in fair value of derivative liability of $(349,809) associated with our credit facilities with Typenex Co-Investment, LLC and TCA Global Credit Master Fund, LP offset by interest expense of $44,180 incurred in connection with our credit facilities, finance fees of $41,733, interest expense-amortization of debt discount of $183,534 and investor settlement of $15,000 associated with the closing of our Chatsworth retail outlet. During the comparable period in 2015, we had other (income) expense of $(41,883) consisting of $58,137 in interest expense and finance fees of $2,681 offset by a change in fair value of derivative liability of $18,935.
Net Loss: Net loss was $73,231 for the three months ended March 31, 2016 and $255,215 for the three months ended March 31, 2015 for the reasons discussed above.
Comparison of the Nine Months Ended March 31, 2016 to the Nine Months Ended March 31, 2015
The following is a summary of our results from operation for the nine month periods ended March 31, 2016 and March 31, 2015:
|
|
|
|
| Nine Months Ended, March 31, 2016 |
| Nine Months Ended March 31, 2015 |
Revenues | $4,456,933 |
| $3,590,044 |
Cost of revenues | 2,530,710 |
| 2,152,729 |
Gross profit | 1,926,223 |
| 1,437,315 |
General and administrative expenses | 2,057,553 |
| 1,756,124 |
Net Income (loss) from operations | (131,330) |
| (318,809) |
Other expense | (349,696) |
| (79,427) |
Net loss before taxes | (481,026) |
| (398,236) |
Income tax provision | 800 |
| 2,400 |
Net loss | $ (481,826) |
| $(400,636) |
Revenues: Revenues are comprised of gross sales less returns and discounts. During the nine months ended March 31, 2016 and 2015, we generated revenue of $4,456,933 (net of returns and discounts of $32,148) and $3,590,044 (net of returns and discounts of $106,123), respectively. 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 Limitless Mods, our Binary Premium e-Liquid line and our new Limitless Atomizer, which have been well received in the marketplace and collectively account for a majority of our sales. We anticipate that retail sales will remain flat in subsequent periods.
Cost of Revenues: 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. During the nine months ended March 31, 2016 and 2015, our cost of revenue was $2,530,710 and $2,152,729, respectively. The increase in cost of revenues during the nine months ended March 31, 2016 compared to the prior year period is primarily attributable to the period-over-period increase in our revenues.
Gross Profit: Gross profit represents revenue less the cost of revenue. During the nine months ended March 31, 2016, our gross profit was $1,926,223 and during the comparable prior year period ended March 31, 2015 was $1,437,315 The increase in gross profit during the nine months ended March 31, 2016 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 nine months ended March 31, 2016 was 43.2% compared to 40.0% for the prior year period. The modest increase in our gross margin during the nine months ended March 31, 2016 results primarily from the sale of a reduced percentage of third party products purchased for resale in the nine-month period ended March 31, 2016 compared to the prior year period. 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.
26
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 nine months ended March 31, 2016, we incurred general and administrative expenses of $2,057,553 and in the comparable prior year period ended March 31, 2015 we incurred general and administrative expenses of $1,756,124. The increase in general and administrative expense during the nine months ended March 31, 2016 compared to the prior year period is attributable to increased sales and marketing costs, the hiring of additional employees and costs associated with being a public reporting company. Although our general and administrative expenses as a percentage of sales decreased to 46.2% for the nine-month period ended March 31, 2016 compared to 48.9% 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 expense: Other expense of $349,696 for the nine months ended March 31, 2016 consists of investor settlement of $15,000 dealing with the closing of the Chatsworth retail outlet, interest expense of $132,666 incurred in connection with our credit facilities, finance fees of $62,007, interest expense-amortization of debt discount $296,661 and loss on extinguishment of debt of $93,336 offset by a change in fair value of derivative liability of $249,974 associated with our credit facilities with Typenex Co-Investment, LLC and TCA Global Credit Master Fund, LP. We had other expense of $79,427 for the nine months ended March 31, 2015, consisting of $95,681 in interest expense and $2,681 in finance fees, offset by a change in fair value of derivative liability of $18,935.
Net loss: Net loss was $481,826 for the nine months ended March 31, 2016 and $400,636 for the nine months ended March 31, 2015 for the reasons discussed above.
Seasonality
Our operating results and operating cash flows tend to be lower in the three month period ending March 31, compared to other periods. Due to the post-holiday season, the industry as a whole tends to be slower for January and February, with a moderate increase starting into March. This year, our sales for the three month period ending March 31, 2016 were $1,199,450 compared to $1,295,138 for the three month period ending December 31, 2015.
Liquidity and Capital Resources
As of March 31 2016, we had cash of $168,050 and working capital deficit of $471,863 and as of June 30, 2015, we had cash of $351,081 and a working capital deficit of $539,496. We depend on cash from financing activities to fund our operating activities, and we expect this trend to continue as we continue to grow our operations. A summary of our net working capital as of March 31, 2016 and as of June 30, 2015, and our cash flows for the nine months ended March 31, 2016 and 2015 are summarized in the following tables:
|
|
|
|
|
Net Working Capital |
|
|
|
|
|
| As of March 31, 2016 |
| As of June 30, 2015 |
Current Assets | $ | 957,869 |
| 794,377 |
Current Liabilities |
| 1,429,732 |
| 1,333,873 |
Net Working Capital | $ | (471,863) |
| (539,496) |
27
Cash Flows |
|
|
|
| ||
|
| Nine Months Ended March 31, 2016 | Nine Months Ended March 31, 2015 | |||
Net cash used in Operating Activities |
| $ (449,911) | $ (561,417) |
| ||
Net cash provided by (used in) Investing Activities |
| (5,734) | (7,387) |
| ||
Net cash provided by Financing Activities |
| 272,614 | 353,494 |
| ||
Increase/(Decrease) in Cash during period |
| (183,031) | (215,310) |
| ||
Cash, Beginning of Period |
| 351,081 | 307,567 |
| ||
Cash, End of Period |
| $ 168,050 | $ 92,257 |
|
Operating Activities
Net cash used in operating activities was $449,911 for the nine months ended March 31, 2016. Net cash used by operating activities was $561,417 for the nine months ended March 31, 2015. Net cash used in operations for the period ended March 31, 2016 primarily results from our net loss, inventory purchases, change in derivative liability and a decrease in accounts payable and accrued expenses offset by an increase in amortization of debt discount, loss on extinguishment of debt and an increase in deferred income. Net cash used in operations for the nine months ended March 31, 2015 primarily results from our net loss and a decrease in deferred income offset by an increase in accounts payable and accrued expenses.
Investing Activities
Net cash used in investing activities was $5,734 for the nine months ended March 31, 2016. For the nine months ended March 31, 2015, net cash used in investing activities was $7,387. Net cash used by investing activities for the nine months ended March 31, 2016 and March 31, 2015 consists of the purchase of property and equipment.
Financing Activities
Net cash received in financing activities was $272,614 for the nine months ended March 31, 2016 and $353,494 for the nine months ended March 31, 2015. For the nine months ended March 31, 2016, net cash received in financing activities primarily consisted of proceeds from convertible notes payable of $699,350 from our financing with TCA and proceeds from short term notes payable of $330,000 offset by payments on convertible notes payable of $338,278, payments made on short term notes payable of $278,654, payments on affiliate loans of $11,508, payments on auto loan of $4,517, payments on leased property of $3,381 and payments on financed insurance premiums of $120,398. For the nine months ended March 31, 2015, net cash received in financing activities consisted of a convertible loan of $272,008, proceeds from affiliate loans of $30,000 and proceeds from short term notes payable of $200,000 offset by payments on short term notes payable of $82,073, payments on affiliate loans of $63,688 and payments on leased property loans of $2,753.
Description of Financing Facilities
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 November Note). For a further description of the terms of the November Note, please see Note 7. On December 15, 2015 the company renegotiated the terms of the November Note pursuant to the Note Settlement Agreement, which is further described below, and on each of February 19, 2016 and May 12, 2016, the Company entered into amendments to Note Settlement Agreement, which are also described below. The original loan is accounted for as an extinguished loan and the modified loan was recorded as a new instrument. As of May 12, 2016, the remaining balance on the November Note is $0.
Second Facility with Typenex Co-Investment, LLC
28
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 investors 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 matured on December 4, 2015. For a further description of the terms of the June Note, please see Note 7. On December 15, 2015 the company renegotiated the terms of the June Note pursuant to the Note Settlement Agreement, which is further described below, and on each of February 19, 2016 and May 12, 2016, the Company entered into amendments to Note Settlement Agreement, which are also described below. The original loan is accounted for as an extinguished loan and the modified loan was recorded as a new instrument.
Note Settlement Agreement
On December 18, 2015, Typenex Co-Investment, LLC (the Investor) entered into a Note Settlement Agreement with us. The Note Settlement Agreement relates to the November Note and the June Note (collectively, the Modified Notes).
The Note Settlement Agreement restructured the payment provision of the Modified Notes, including the June Note which was due and payable in full on December 4, 2015. The agreement provided that we are to make the following payments to Investor notwithstanding the terms of the Modified Notes: (a) a payment in the amount of $50,000 on or before December 15, 2015; (b) a payment in the amount of $50,000 on or before January 15, 2016; (c) a payment in the amount of $50,000 on or before February 15, 2016; and (d) a payment equal to the remaining aggregate outstanding balance of the Modified Notes on or before March 15, 2016.
As consideration for Investors agreement to enter into the Note Settlement Agreement, we agreed to increase the outstanding balance of each Note by 15% (the Restructure Effect). Following the application of the Restructure Effect and including a $5,000 transaction expense fee, the outstanding balance of the November Note was $107,528 and the outstanding balance of the June Note was $281,750.
First Amendment to Note Settlement Agreement
On February 19, 2016, we entered into an Amendment to Note Settlement Agreement (the Settlement Agreement Amendment) with Investor. The Settlement Agreement Amendment amends the payment terms contained in the Note Settlement Agreement relating to the scheduled February and March 2016 payments, and provides for the following payments: (a) a cash payment in the amount of $35,000 payable on or about February 19, 2016 together with 918,386 shares of our common stock (subject to adjustment as described in the Settlement Agreement Amendment) based on a note conversion amount of $15,000 and a conversion price of $0.016333, which shares are to be issued and delivered pursuant to the terms of the Settlement Agreement Amendment and (b) a cash payment on or before March 15, 2016 in the amount of $35,000 together with shares of our common stock based on a note conversion amount of $15,000 and a conversion price to be determined in accordance with the Modified Notes, which shares are to be issued and delivered pursuant to the terms of the Settlement Agreement Amendment; and (c) a payment equal to the remaining aggregate outstanding balance of the Modified Notes on or before April 15, 2016, which payment must be made in cash.
As consideration for Investors agreement to enter into the Settlement Agreement Amendment, we agreed to pay Investor a restructuring fee of $2,500.
Second Amendment to Note Settlement Agreement
On May 12, 2016 but effective as of April 15, 2016, we entered into Amendment #2 to Note Settlement Agreement (the Second Amendment) with Investor. The Second Amendment amends the payment terms contained in the Settlement Agreement Amendment relating to the scheduled April 2016 payment, and provides for the following payments:: (a) a cash payment in the amount of $35,000 payable on or before April 15, 2016 together with 3,160,556 shares of the Companys common stock (subject to adjustment as described in the Settlement Agreement Amendment) based on a note conversion amount of $50,000 and a conversion price of $0.015820, which shares are to be issued and delivered pursuant to the terms of the Second Amendment and (b) a cash payment on or before May 15, 2016 in the amount of $35,000 together with shares of the Companys common stock based on a note conversion amount of $50,000 and a conversion price to be determined in accordance with the Modified Notes,
29
which shares are to be issued and delivered pursuant to the terms of the Second Amendment; and (c) a payment equal to the remaining aggregate outstanding balance of the Notes on or before June 15, 2016, which payment must be made in cash. The Second Amendment also provides that outstanding balance on each of the November Note and the June Note will bear interest at the rate of 10% per annum from the effective date of the amendment until such notes are repaid in full; previously, the June Note did not accrue interest on the unpaid principal balance of the note unless an event of default occurred.
As consideration for Investors agreement to enter into the Second Amendment, we agreed to pay Investor a restructuring fee of $15,315.86.
As of the date of this report, the outstanding balance on the November Note is $0 and the outstanding balance on the June Note is $84,363.25 (which takes into account a cash payment of $35,000 made on May 11, 2016).
Iliad Research and Trading, L.P. Note Purchase Agreement and Promissory Note
On August 12, 2015, we entered into a Note Purchase Agreement with Iliad Research and Trading, L.P., a Utah limited partnership (Iliad) and an affiliate of Typenex Co-Investment, LLC., pursuant to which we concurrently issued to Iliad a Promissory Note in a principal amount of $245,000 (the August Note). The principal amount includes an original issue discount of $40,000 plus an additional $5,000 to cover Iliads legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the transaction. In consideration for the August Note, Iliad 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 August Note was originally scheduled to mature on February 12, 2016. For a further description of the terms of the August Note, please see Note 8.
On February 19, 2016, we entered into an Amendment to Promissory Note with Iliad which extended the maturity date of the August Note to April 12, 2016 and increased the principal amount of the note by $2,500 as consideration for the extension.
On May 12, 2016 but effective as of April 15, 2016, we entered into an Exchange Agreement with Iliad (the Exchange Agreement) relating to the August Note.
Pursuant to the Exchange Agreement, the Company and Iliad exchanged the August Note for a new convertible promissory note in the original principal amount of $272,250 (the Exchange Note), which balance includes an exchange fee of $24,750. The Exchange Note was issued in substitution of and not in satisfaction of the August Note.
The Exchange Note provides that we are to make the following payments to Iliad: (a) a payment in shares of our common stock within three trading days of June 15, 2016 based on a note conversion amount of $50,000 and a conversion 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, which shares are to be issued and delivered pursuant to the terms of the Exchange Note; and (b) a payment equal to the remaining aggregate outstanding balance of the Exchange Note on or before July 15, 2016, which payment must be made in cash. On the date that is twenty trading days from the date we deliver the conversion shares to Iliad, there is a true-up where we are required to deliver additional shares if the conversion price as of the true-up date is less than the conversion price used to deliver the initial shares. Interest accrues on the outstanding balance of the Exchange Note at a rate of 10% per annum; provided, however that if we fail to repay the Exchange Note when due, or if we are otherwise in default under the Exchange Note, at the option of Iliad a default interest rate of 18% per annum will apply. In the event we are in default under the Exchange Note, Iliad also has the option to accelerate the note with the outstanding balance becoming immediately due and payable at an amount equal to 115% of the outstanding balance of the Exchange Note as of the date the event of default occurred. The Exchange Note may be prepaid without penalty. The Exchange Note provides that we may not issue shares to Iliad under the Exchange Note if the issuance of such shares would cause Iliad to beneficially own more than 9.99% of our outstanding common stock.
Terminated Facilities with B of I Federal Bank
On November 3, 2015, we entered into a Business Loan and Security Agreement with BofI Federal Bank (the Bank). Pursuant to the agreement, we borrowed $125,000 from the Bank and received net proceeds of $93,615.51 after deducting the repayment of $31,384.49 in full satisfaction of our remaining obligations under that certain Business Loan and Security Agreement entered into with the Bank on June 2, 2015 (see Note 7 for further details on the June 2 note). The new loan was payable in 126 payments of $1,220.24 due each business day
30
beginning on November 4, 2015, with the total repayment amount (subject to certain exceptions) being equal to $153,750.24. On December 24, 2015, the loan balance of $106,000 was paid off in connection with the closing of our financing with TCA Global Credit Master Fund, LP.
Prior to its repayment, the loan was secured by all personal property of the Company and was also personally guaranteed by Lori Winther, our Chief Financial Officer and a director of the Company, Kyle Winther, our Chief Executive Officer and a director of the Company, and Gary Perlingos, our President and a director of the Company.
Facility with TCA Global Credit Master Fund, LP Note December 2015
On December 24, 2015, we entered into a Senior Secured Credit Facility Agreement with TCA Global Credit Master Fund, LP (TCA). At the initial closing on December 24, 2015, we received gross proceeds of $750,000 and issued to TCA a Convertible Promissory Note in the principal amount of $750,000 (the TCA Note). The TCA Note is scheduled to mature on June 24, 2017 (the Maturity Date). At any time prior to the Maturity Date or the earlier termination of the Loan Agreement, we can request up to $9,250,000 of additional loans, which additional loans may be made in the sole discretion of TCA. We may prepay borrowings at any time, in whole or in part, without penalty.
The loan will accrue interest on the unpaid principal balance at an annual rate of 18%. We will make interest only payments of $11,250 on each of January 24, February 24 and March 24, 2016, and thereafter, will make payments of approximately $56,208 of principal and interest per month until the Maturity Date. In the event we are in default under the loan agreement with TCA or any related transaction document, including as a result of a default in our payment obligations, any amount due to TCA under the facility will, at TCAs option, bear interest from the date due until such past due amount is paid in full at an annual rate of 22%. In addition, upon the occurrence and during the continuance of an event of default under the transaction documents, TCA may terminate its commitments to us and declare all of our obligations to TCA to be immediately due and payable.
While the Note is outstanding, but only upon the occurrence of (i) an event of default under the loan agreement with TCA or any related transaction document or (ii) our mutual agreement with TCA, TCA may convert, subject to certain beneficial ownership limitations, all or any portion of the outstanding principal, accrued and unpaid interest and any other sums due and payable under the Note or any other transaction document (such total amount, the Conversion Amount) into a number of shares of our common stock equal to: (i) the Conversion Amount divided by (ii) eighty-five percent (85%) of the lowest of the daily volume weighted average price of our common stock during the five business days immediately prior to the conversion date (the Conversion Shares). Upon liquidation by TCA of Conversion Shares, if TCA realizes a net amount from such liquidation equal to less than the Conversion Amount, we are obligated to issue to TCA additional shares of our common stock equal to: (a) the Conversion Amount minus the net realized amount, divided by (b) the average volume weighted average price of our common stock during the five business days immediately prior to the date upon which TCA requests additional shares.
The payment and performance of all our indebtedness and other obligations to TCA, including all borrowings under the loan agreement and related agreements, are secured by liens on substantially all of our assets pursuant to a Security Agreement. For a further description of the terms of the TCA Note, please see Note 7.
Conversion of Gotama Capital S.A. Debt into Common Stock
On June 30, 2015, we converted $614,340, representing the entire principal amount of each of the following promissory notes (collectively, the Notes) and all accrued interest thereon into an aggregate of 4,095,605 shares of our common stock, par value $0.001 per share (the Conversion Shares):
(i)
that certain convertible promissory note issued to Gotama Capital S.A. (Gotama) on March 14, 2014 in the principal amount of $185,000;
(ii)
that certain convertible promissory note issued to Gotama on April 10, 2014 in the principal amount of $200,000; and
(iii)
that certain convertible promissory note issued to Gotama on May 19, 2014 in the original principal amount of $175,000.
31
Pursuant to the terms of the Notes, at our election, the principal amount of each of the Notes and all accrued interest thereon was converted into Conversion Shares at a price of $0.15 per share.
Future Capital Requirements
We continue to face liquidity and capital resources constraints and do not believe that the proceeds from our debt facilities along with our operating cash flows will be sufficient to meet our financing needs for the next twelve months. The extent of our future capital requirements will depend on many factors, including our results from operations and the growth rate of our business. Our near term objective is to raise debt or equity capital to fund our immediate cash needs and to finance our longer term growth. We are also pursuing various means to increase revenues, reduce operating costs and to improve overall cash flow.
Although our near term objective is to raise capital to fund our immediate cash needs and to finance our longer term growth, there can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain additional financing on a timely basis, we may not be able to grow our operations as planned, may not be able to meet our other obligations as they become due and may ultimately be forced to restructure or cease our operations.
If we are successfully able to raise capital, the issuance of additional equity securities by us could result in significant dilution in the equity interests of our current stockholders and if capital is raised through debt facilities, such facilities will increase our liabilities and future cash commitments, and may also impose restrictive covenants relating to the operation of our business.
We presently do not have any arrangements for additional financing and will continue to evaluate various financing strategies to support our current operations and fund our future growth.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, our management, with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal accounting officer and principal financial officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of March 31, 2016, the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were not effective to ensure that information that is required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
The Company's management identified material weaknesses in its internal control over financial reporting related to the following matters:
·
32
A lack of sufficient segregation of duties. Specifically, this material weakness is such that the design over these areas relies primarily on defective controls and could be strengthened by adding preventative controls to properly safeguard company assets.
·
A lack of sufficient personnel in the accounting function due to the Company's limited resources with appropriate skills, training and experience to perform certain tasks as it relates to financial reporting.
The Company's plan to remediate those material weaknesses is as follows:
To improve the effectiveness of the accounting group, the company uses the firm of Winther and Company CPAs to augment existing resources, to improve segregation procedures and to assist in the analysis and recording of complex accounting transactions. The Company also hired a full-time accounting manager to maintain the Companys books and records under the supervision of the CFO. The Company plans to further mitigate its accounting deficiencies by hiring additional personnel in the accounting department once it generates significantly more revenue, or raises significant additional working capital.
The company is also in the process of adopting specific internal control mechanisms with its Board of Directors and executive officers collaboration to ensure effectiveness as the company grows. Future controls, among other things, will include more checks and balances and communication strategies between the management and the Board of Directors to ensure efficient and effective oversight over company activities as well as more stringent accounting policies to track and update the companys financial reporting.
Changes in Internal Controls over Financial Reporting
Other than as described above, there was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the three months ended March 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
33
PART II: OTHER INFORMATION
Item 1A. Risk Factors
Other than described below, during the three months ended March 31, 2016, there have been no material changes to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2015.
Electronic cigarettes become subject to regulation by the FDA
On May 5, 2016, the U.S. Food and Drug Administration (FDA) issued a final rule deeming certain products to be subject to the Federal Food, Drug, and Cosmetic Act and regulations thereunder (the FD&C Act), which products include electronic cigarettes and their component parts, including e-liquids, atomizers, batteries, cartomizers, tank systems, flavors, vials that contain e-liquids and programmable software. On August 8, 2016, the newly deemed products will automatically be subject to all provisions of the FD&C Act and FDA regulations applicable to cigarettes, cigarette tobacco and other tobacco products. However, for certain provisions that require labeling changes or information submission to the FDA, the FDA has provided an extended compliance period. Among other requirements, under the new rules:
·
The sale of covered tobacco products to individuals under the age of 18 is prohibited beginning August 8, 2016;
·
Vending machine sales of covered tobacco products are prohibited unless sold in adult-only facilities beginning August 8, 2016;
·
The newly deemed products will be subject to rules and regulations relating to adulterated or misbranded products beginning August 8, 2016, including rules that prohibit the sale and distribution of products with modified risk descriptors (such as light, low and mild) unless authorized by the FDA;
·
The distribution of free samples of the newly deemed tobacco products is prohibited as of August 8, 2016;
·
Companies that own or operate domestic manufacturing establishments engaged in the manufacturing of newly deemed tobacco products are required to register with the FDA and submit details about their products beginning August 8, 2016;
·
Subject to certain exceptions, packaging and advertisements of all covered tobacco product will be required to bear an addictiveness warning beginning May 10, 2018; and
·
Newly deemed tobacco products that were not commercially marketed in the United States as of February 15, 2007 or any modification (including a change in design, any component, any part, or any constituent or in the content, delivery or form of nicotine, or any other additive or ingredient) of a tobacco product where the modified product was commercially marked in the United States after February 15, 2007 are required to have premarket authorization prior to commercial distribution.
The FDA process to obtain pre-market authorization will be phased in. For newly deemed tobacco products that are on the market as of August 8, 2016, but that were not on the market as of February 15, 2007, FDA is providing two compliance periods: one for submission to the FDA of applications and one for obtaining premarket authorization. During these compliance periods, the FDA does not intend to take enforcement action for products remaining on the market without authorization. New products for which no application has been submitted by August 8, 2018 will be subject to enforcement. With certain exceptions, newly deemed tobacco products for which timely premarket submissions have been submitted will be subject to an additional compliance period of twelve months after the initial compliance period for submissions ends. Once the continued compliance period ends, new tobacco products on the market without authorization will be subject to enforcement. For newly deemed tobacco products that are not on the market as of August 8, 2016, the above compliance periods will not apply and the new products must obtain a marketing order from FDA specific to the product prior to commercial distribution.
We cannot predict the impact these new regulations will have on our business and the industry at large and what additional restrictions the FDA may subsequently impose. However, we believe our costs to comply with the new regulations, particularly the premarket authorization requirement, will be substantial, both in terms of management time and out of pocket expenditures. Moreover, if we are unable to secure pre-market authorization to continue selling our existing products and any new products targeted for introduction, our future sales will be adversely impacted. We plan to further evaluate the impact of the new rules and regulations on our business and
34
modify our business strategies accordingly to comply with the new rules and regulations. However, we cannot guarantee that we will be able to comply with the new rules and regulations, particularly the premarket authorization requirement, and the new legislation (including penalties imposed for failure to comply) could have a material adverse effect on our business, results of operations and financial condition.
35
Item 6
Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Incorporated by Reference |
|
| ||||||
Exhibit |
| Exhibit Description |
| Form |
| File Number |
| Exhibit |
| Filing Date |
| Filed |
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1 |
| Amendment to Note Settlement Agreement dated February 19, 2016 by and between Vapor Hub International Inc. and Typenex Co-Investment, LLC. |
| 8-K |
| 000-55363 |
| 10.1 |
| 02/25/2016 |
|
|
10.2 |
| Amendment to Promissory Note dated February 19, 2016 by and between Vapor Hub International Inc. and Iliad Research and Trading, L.P. |
| 8-K |
| 000-55363 |
| 10.2 |
| 02/25/2016 |
|
|
10.3 |
| Amendment #2 to Note Settlement Agreement entered into on May 12, 2016 but effective as of April 15, 2016 by and between Vapor Hub International Inc. and Typenex Co-Investment, LLC. |
| 8-K |
| 000-55363 |
| 10.1 |
| 05/18/2016 |
|
|
10.4 |
| Exchange Agreement entered into on May 12, 2016 but effective as of April 15, 2016 by and between Vapor Hub International Inc. and Iliad Research and Trading, L.P. |
| 8-K |
| 000-55363 |
| 10.2 |
| 05/18/2016 |
|
|
10.5 |
| Form of Convertible Promissory Note issued by Vapor Hub International Inc. on April 15, 2016 in favor of Iliad Research and Trading, L.P. |
| 8-K |
| 000-55363 |
| 10.3 |
| 05/18/2016 |
|
|
31.1 |
| Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
|
| X |
31.2 |
| Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
|
| X |
32.1 |
| Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
|
|
| # |
101.INS |
| XBRL Instance Document |
|
|
|
|
|
|
|
|
| X |
101.SCH |
| XBRL Taxonomy Extension Schema Document |
|
|
|
|
|
|
|
|
| X |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
|
|
|
|
| X |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
|
|
|
| X |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
|
|
|
| X |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
|
|
|
| X |
_________________________________________
# Furnished herewith
36
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 thereunto duly authorized.
Date: May 23, 2016
Vapor Hub International Inc.
(Registrant)
By: /s/ Kyle Winther
Kyle Winther
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Lori Winther
Lori Winther
Chief Financial Officer
(Principal Financial and Accounting Officer)
37
Exhibit 31.1
Certification of Principal Executive Officer Pursuant To
Exchange Act Rules 13a-14(a) and 15d-14(a),
As Adopted Pursuant To
Section 302 of Sarbanes-Oxley Act of 2002
I, Kyle Winther, certify that:
|
|
|
1. | I have reviewed this quarterly report on Form 10-Q of Vapor Hub International Inc.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; | |
4. | The Registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: | |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): | |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize, and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
Date: May 23, 2016
/s/ Kyle Winther
Kyle Winther
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
Certification of Principal Financial Officer Pursuant To
Exchange Act Rules 13a-14(a) and 15d-14(a),
As Adopted Pursuant To
Section 302 of Sarbanes-Oxley Act of 2002
I, Lori Winther, certify that:
|
|
|
1. | I have reviewed this quarterly report on Form 10-Q of Vapor Hub International Inc.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; | |
4. | The Registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: | |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): | |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize, and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
Date: May 23, 2016
/s/ Lori Winther
Lori Winther
Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 32.1
Certifications of Principal Executive Officer and Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Vapor Hub International Inc. (the Company) on Form 10-Q for the quarter ended March 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the Report), each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the knowledge of the undersigned:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 23, 2016
/s/ Kyle Winther
Kyle Winther
Chief Executive Officer
Date: May 23, 2016
/s/ Lori Winther
Lori Winther
Chief Financial Officer
Document and Entity Information |
9 Months Ended |
---|---|
Mar. 31, 2016
shares
| |
Document and Entity Information: | |
Entity Registrant Name | VAPOR HUB INTERNATIONAL INC. |
Document Type | 10-Q |
Document Period End Date | Mar. 31, 2016 |
Amendment Flag | false |
Entity Central Index Key | 0001515718 |
Current Fiscal Year End Date | --06-30 |
Entity Common Stock, Shares Outstanding | 78,102,378 |
Entity Filer Category | Smaller Reporting Company |
Entity Current Reporting Status | Yes |
Entity Voluntary Filers | No |
Entity Well-known Seasoned Issuer | No |
Document Fiscal Year Focus | 2016 |
Document Fiscal Period Focus | Q3 |
Trading Symbol | vhub |
Vapor Hub International Inc. - Condensed Consolidated Balance Sheets - USD ($) |
Mar. 31, 2016 |
Jun. 30, 2015 |
|||||
---|---|---|---|---|---|---|---|
Current Assets: | |||||||
Cash | $ 168,050 | $ 351,081 | |||||
Accounts Receivable | 7,682 | 9,511 | |||||
Inventory | 442,648 | 323,784 | |||||
Prepaid expenses | 134,300 | 61,269 | |||||
Deferred finance costs | 205,189 | 39,258 | |||||
Other current assets | 9,474 | ||||||
Total Current Assets | 957,869 | 794,377 | |||||
Fixed assets, net | 141,988 | 159,546 | |||||
Deposits | 14,341 | 6,895 | |||||
Total Assets | 1,114,198 | 960,818 | |||||
Current Liabilities: | |||||||
Accounts payable and accrued expenses | 295,036 | 509,618 | |||||
Deferred income | 218,553 | 82,499 | |||||
Notes payable- short term | 291,723 | 384,769 | |||||
Loans from related parties | 84,804 | 96,312 | |||||
Equipment leases payable | 2,059 | 5,440 | |||||
Current portion of, convertible notes payable, net of unamortized debt discount, current | 154,628 | 192,091 | |||||
Derivative liabilities, current | 382,929 | 68,584 | |||||
Total Current Liabilities | 1,429,732 | 1,333,873 | |||||
Long Term Liabilities: | |||||||
Equipment leases payable | 2,059 | 5,440 | |||||
Notes payable- long term | 24,673 | 29,189 | |||||
Convertible notes payable, net of current portion and unamortized debt discount | 190,161 | ||||||
Derivative liabilities | 226,272 | ||||||
Long term liabilities | 441,106 | 34,629 | |||||
TOTAL LIABILITIES | $ 1,870,838 | $ 1,368,502 | |||||
Stockholders' Deficit | |||||||
Preferred stock | [1] | ||||||
Common stock | [2] | $ 78,102 | $ 72,456 | ||||
Additional paid-in capital | 684,687 | 557,463 | |||||
Accumulated deficit | (1,519,429) | (1,037,603) | |||||
Total Stockholders Deficit | (756,640) | (407,684) | |||||
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ 1,114,198 | $ 960,818 | |||||
|
Statement of Financial Position - Parenthetical - $ / shares |
Mar. 31, 2016 |
Jun. 30, 2015 |
---|---|---|
Statement of Financial Position | ||
Preferred Stock, Par Value | $ 0.001 | $ 0.001 |
Preferred Stock, Shares Authorized | 10,000,000 | 10,000,000 |
Preferred Stock, Shares Issued | 0 | 0 |
Preferred Stock, Shares Outstanding | 0 | 0 |
Common Stock, Par Value | $ 0.001 | $ 0.001 |
Common Stock, Shares Authorized | 1,010,000,000 | 1,010,000,000 |
Common Stock, Shares Issued | 78,102,378 | 72,455,606 |
Common Stock, Shares Outstanding | 78,102,378 | 72,455,606 |
Vapor Hub International Inc. - Unaudited Condensed Consolidated Statements of Operations - USD ($) |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
Mar. 31, 2016 |
Mar. 31, 2015 |
|
Income Statement | ||||
Revenue | $ 1,199,450 | $ 1,091,021 | $ 4,456,933 | $ 3,590,044 |
Cost of revenue | 726,918 | 739,243 | 2,530,710 | 2,152,729 |
Gross Profit | 472,532 | 351,778 | 1,926,223 | 1,437,315 |
General and administrative expenses | 611,125 | 563,510 | 2,057,553 | 1,756,124 |
Net loss from operations | (138,593) | (211,732) | (131,330) | (318,809) |
Other income (expense): | ||||
Investor settlement | (15,000) | (15,000) | ||
Interest expense | (44,180) | (58,137) | (132,666) | (95,681) |
Finance fees | (41,733) | (2,681) | (62,007) | (2,681) |
Interest expense- amortization of debt discount | (183,534) | (296,661) | ||
Loss on extinguishment of debt | (93,336) | |||
Change in fair value of derivative liabilities | 349,809 | 18,935 | 249,974 | 18,935 |
Other income (expense): | 65,362 | (41,883) | (349,696) | (79,427) |
Loss before taxes | (73,231) | (253,615) | (481,026) | (398,236) |
Income tax provision | 1,600 | 800 | 2,400 | |
Net loss | $ (73,231) | $ (255,215) | $ (481,826) | $ (400,636) |
Net loss per share: | ||||
Net income per share, basic | $ (0.00) | $ (0.00) | $ (0.01) | $ (0.01) |
Net income per share, diluted | $ (0.00) | $ (0.00) | $ (0.01) | $ (0.01) |
Weighted average shares outstanding: | ||||
Weighted average shares outstanding, basic | 76,911,504 | 68,360,001 | 72,639,656 | 65,158,902 |
Weighted average shares outstanding, diluted | 76,911,504 | 68,060,001 | 72,639,656 | 65,158,902 |
Note 1- Incorporation, Nature of Operations and Acquisition |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Notes | |
Note 1- Incorporation, Nature of Operations and Acquisition | NOTE 1- INCORPORATION, NATURE OF OPERATIONS AND ACQUISITION
Vapor Hub International Inc. (formerly DogInn, Inc.) (hereinafter known as the Company) was incorporated in the State of Nevada on July 15, 2010. On February 14, 2014, the Company 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). As a result of the closing of the transactions contemplated by the Exchange Agreement, Vapor and Delite became the Companys wholly owned subsidiaries (which subsidiaries have subsequently been merged into the Company) and the Company now carries on the business of developing, producing, marketing and selling the next generation of electronic cigarettes, known as vaping devices, and related accessories, including e-liquids, batteries and atomizers. |
Note 2 -summary of Significant Accounting Policies |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Notes | |
Note 2 -summary of Significant Accounting Policies | NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying (a) condensed consolidated balance sheet at June 30, 2015 has been derived from audited statements and (b) the condensed consolidated unaudited financial statements as of and for the periods ended March 31, 2016 and 2015, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and related footnotes included in the Companys Annual Report on Form 10-K for the year ended June 30, 2015 (the 2015 Annual Report), filed with the Securities and Exchange Commission (the SEC) on October 13, 2015. It is managements opinion, however, that all material adjustments (consisting of normal recurring adjustments), have been made which are necessary for a fair financial statements presentation. The financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the financial statements not misleading as required by Regulation S-X, Rule 10-01. Operating results for the three months and nine months ended March 31, 2016 are not necessarily indicative of the results of operations expected for the year ending June 30, 2016. This summary of significant accounting policies of the Company is presented to assist in understanding the Companys unaudited condensed consolidated financial statements. The unaudited condensed consolidated financial statements and notes are representations of the Companys management, which is responsible for their integrity and objectivity. These accounting policies conform to US GAAP and have been consistently applied in the preparation of the unaudited condensed consolidated financial statements.
The Company operates in one segment in accordance with accounting guidance Financial Accounting Standards Board (FASB) ASC Topic 280, Segment Reporting. The Companys Chief Executive Officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
Going Concern
The Companys unaudited condensed consolidated financial statements have been presented on the basis that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Companys cash balance as of March 31, 2016 along with its net loss and negative cash flow from operations, raise substantial doubt about its ability to continue as a going concern. The accompanying unaudited condensed consolidated 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.
The Company continues to face liquidity and capital resources constraints and does not believe that the proceeds from its debt facilities (see Note 7) along with its operating cash flows will be sufficient to meet its financing needs for the next twelve months. The extent of the Companys future capital requirements will depend on many factors, including the Companys results from operations and the growth rate of the Companys business. The Companys near term objective is to raise debt or equity capital to fund its immediate cash needs and to finance its longer term growth. The Company is also pursuing various means to increase revenues, reduce operating costs and to improve overall cash flow.
The Company presently does not have any arrangements for additional financing. However, the Company continues to evaluate various financing strategies to support its current operations and fund its future growth.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates significant estimates and assumptions related to its accounts receivable allowance, accounts payable, deferred income tax asset valuation allowances, fair value of derivative liability, fair value of stock options, useful life of fixed assets, inventory reserves, estimates of sales return and accrual for potential liabilities. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Companys estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Concentration of Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash. The Company places its cash with high quality banking institutions.
The Company relied on one manufacturer to make all of the Companys Mods during the three month period ended March 31, 2016.
Financial Instruments and Fair Value Measurement
Pursuant to ASC 820, Fair Value Measurements and Disclosures, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:
Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Companys financial instruments consist principally of cash, accounts payable, accrued liabilities, amounts due to related parties, derivative liabilities and convertible notes payable. Pursuant to ASC 820, the fair value of the Companys cash is determined based on Level 1 inputs, which consist of quoted prices in active markets for identical assets. Pursuant to ASC 820, the fair value of the Companys derivative liability is determined based on Level 3 inputs, which consist of unobservable inputs. The Company believes that the recorded values of all of its other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.
Revenue Recognition
The Company recognizes revenues when delivery of goods or completion of services has occurred provided there is persuasive evidence of an agreement, acceptance has been approved by its customers, the fee is fixed or determinable based on the completion of stated terms and conditions, and collection of any related receivable is probable.
For retail transactions, revenue is recognized at the point of sale. For wholesale and online transactions, revenue is recognized at the time goods are shipped.
Deferred Revenue
The Company accrues deferred revenue when customer payments are received, but product has not yet shipped. As of March 31, 2016 and June 30, 2015, the Company had recorded $218,553 and $82,499, respectively for deferred income as a result of prepayments for product made by customers. Those prepayments are recognized into revenue at the point those prepaid products have subsequently shipped. The Company has recognized the $82,499 during the nine months ended March 31, 2016 and expects to recognize the $218,553 into revenue during the fiscal year ending June 30, 2016.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expense for the nine months ended March 31, 2015 and 2016 were $56,258 and $72,601, respectively and are included in general and administrative expenses.
Deferred Finance Costs, Net
Costs with respect to the issuance of common stock, warrants, stock options or debt instruments by the Company are initially deferred and ultimately offset against the proceeds from such equity transactions or amortized to interest expense over the term of any debt funding, if successful, or expensed if the proposed equity or debt transaction is unsuccessful.
For the nine months ended March 31, 2016, the Company incurred $250,400 in costs in connection with the negotiation of a financing transaction with TCA Global Credit Master Fund, LP which amount is included in deferred finance costs as of March 31, 2016 (see Note 7). The unamortized finance costs for the nine months ended March 31, 2016 were $205,189.
Basic and Diluted Net Loss per Share
The Company computes net income per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options, warrants or debentures. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As of March 31, 2016 and 2015, there were no dilutive securities.
Recent Accounting Pronouncements
In January 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This update impacts the accounting for financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01 is to be applied prospectively and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company has not yet determined the impact of ASU 2016-01 on its consolidated results of operations, financial condition, or cash flows.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This update is intended to simplify the presentation of debt issuance costs and requires 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 this update. AUS 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company does not believe this will have a material impact on it consolidated results of operations, financial condition, or cash flows.
The Company has reviewed all other recent accounting pronouncements issued to date of the issuance of these unaudited condensed consolidated financial statements, and does not believe any of those pronouncements will have a material impact on the Companys unaudited condensed consolidated financial statements. |
Note 3 - Officers' Loans Payable |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Notes | |
Note 3 - Officers' Loans Payable | NOTE 3 OFFICERS LOANS PAYABLE
As of March 31, 2016 and June 30, 2015, the Company had a balance of $84,804 and $96,312 respectively, outstanding as related party loans from Kyle Winther, the Companys CEO, Lori Winther, the Companys CFO and Winther & Company, CPAs (an entity owned by Lori Winther, and her husband, Niels Winther, CPA, who is a director of the Company), as well as a Chase Bank Line of Credit (which was extended to the Company, though owed personally by Niels & Lori Winther). The outstanding balances are unsecured, non-interest bearing and repayable upon demand. |
Note 4 - Inventories |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Notes | |
Note 4 - Inventories | NOTE 4 INVENTORIES
As of March 31, 2016 and June 30, 2015, the Company had a balance of $442,648 and $323,784, respectively, as inventories which consist of vaping devices, electronic cigarettes, e-liquid, related supplies, and accessories. There is no reserve for inventory obsolescence as of March 31, 2016 and June 30, 2015. |
Note 5 - Lease Commitments |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Notes | |
Note 5 - Lease Commitments | NOTE 5 LEASE COMMITMENTS
The Company entered into a lease agreement with S. J. Real Estate Group, LLC to lease a retail space in Chatsworth, California, effective September 13, 2013. The lease term was for two years with a monthly lease payment of $2,214. Effective October 15, 2015, the Company and the landlord agreed to terminate the lease and the Company closed its retail store located at the location. The Company has no further obligation due under the lease agreement.
On February 28, 2015, the Company entered into a lease agreement with landlord Samantha Carrington to provide retail space for its Simi Valley retail location and on April 1, 2015, the Simi Valley retail location opened at the new premises. The lease term extends through March 31, 2017 with a monthly lease payment of $3,190. The Company has a commitment under this lease of $38,280 and a security deposit of $6,380 was paid to the landlord in relation to this lease.
The Company entered into a lease agreement with S.B.P.W., LLC to lease warehouse and office space in Simi Valley, California effective August 5, 2013 which agreement was subsequently amended on February 20, 2014. The lease term extended through April 30, 2015 with a monthly lease payment of $2,035 which increased to $4,070 effective July 1, 2014. On September 1, 2015, the Company terminated this lease and surrendered its facility at 67 W Easy St., Unit 115, Simi Valley, CA 93065 in favor of entering into a lease with Winther Family Trust for executive, sales, and warehouse space at 1871 Tapo Street, Simi Valley, CA 93063. The trustees of the trust are Niels Winther, CPA, a director of the Company, as well as Lori Winther, the Chief Financial Officer, a shareholder and director of the Company. The lease term extends through August 31, 2020 with a monthly lease payment of $5,650. The Company has a commitment under this lease of $299,450 and a security deposit of $5,650 was paid to the landlord in relation to this lease.
On September 15, 2015, the Company entered into a lease agreement with Santa Susana Business Center, LLC to lease warehouse and office space at 4685 Runway Street, Unit D, Simi Valley, CA 93063. The lease term extends through September 30, 2016 with a monthly lease payment of $1,716. The Company has a commitment under this lease of $10,296 and a security deposit of $1,716 was paid to the landlord in relation to this lease.
|
Note 6 - Related Parties |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Notes | |
Note 6 - Related Parties | NOTE 6 RELATED PARTIES
As of March 31, 2016 and June 30, 2015, the Company had a balance of $84,804 and $96,312, respectively, outstanding as related party loans from Kyle Winther, the Companys CEO, Lori Winther, the Companys CFO and Winther & Company, CPAs (an entity owned by Lori Winther, and her husband, Niels Winther, CPA, who is a director of the Company), as well as Chase Bank Line of Credit (which was extended to the Company, though owed personally by Niels & Lori Winther). The outstanding balances are unsecured, non-interest bearing and repayable upon demand.
From time to time the Company will engage the services of Winther & Co. an accounting firm owned by the husband of the Companys CFO. Winther & Co. provides bookkeeping, accounting and tax services to the Company. For the nine months ended March 31, 2016 the Company incurred approximately $43,000 in fees with Winther & Co. As of March 31, 2016 and June 30, 2015 the Company had Accounts Payable outstanding to related parties for accounting fees of $0 and $12,369, respectively.
The Company leases its headquarters from the Winther Family Trust. See Note 5 for further discussion. |
Note 7 - Convertible Notes Payable |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Notes | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 7 - Convertible Notes Payable | NOTE 7 CONVERTIBLE NOTES PAYABLE
Typenex Co-Investment November 2014 Note
On November 4, 2014, the Company entered into a securities purchase agreement (the Purchase Agreement) with Typenex Co-Investment, LLC, a Utah limited liability company (the Investor), pursuant to which the Company concurrently issued to Investor a Secured Convertible Promissory Note in a principal amount of $1,687,500 (the Company Note). The principal amount included 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 issued a series of promissory notes aggregating to the sum of $1,600,000 (the Purchase Price), consisting of an initial cash disbursement of $200,000 and the issuance to the Company of ten promissory notes, the first two promissory notes in a principal amount of $100,000 each 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 bore interest at the rate of 10% per annum and were scheduled to mature on April 4, 2019 and the Companys obligations under the Company Note were secured by liens on the Investor Notes pursuant to the terms of a Security Agreement entered into by the Company in favor of the Investor. Subject to certain conditions, the Company could 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 could be prepaid (and the Company could receive additional funds under the facility in excess of the initial $200,000 cash proceeds) only upon the mutual agreement of the parties.
On January 16, 2015, upon the mutual agreement of the parties, 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 in the original principal amount of $100,000 dated November 4, 2014, issued by the Investor in favor of the Company.
The first two tranches (the November Notes) were issued with an original issue discount of $20,472, of which $2,137 was amortized to interest expense during the nine months ended March 31, 2016. As of March 31, 2016 the unamortized balance was $0.
The Company recognized an additional debt discount of $48,975 on the first two tranches for the original fair value recognition of the derivative liability (discussed further below), of which $5,201 was amortized to interest expense during the nine months ended March 31, 2016. As of March 31, 2016 the unamortized balance was $0.
Beginning on May 4, 2015, the Company was required to repay the outstanding balance on the Company 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 could be made in cash or, subject to certain conditions, in shares of the Companys common stock or any combination of cash and shares. If payments were made in shares (each, an Installment Conversion), such installments or portions thereof were, subject to certain conditions, convertible into shares of the Companys 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 the Companys 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 the Company delivered installment shares to Investor, there was a true-up where the Company was required to deliver additional shares if the installment conversion price as of the true-up date was 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 was convertible, at the option of the Investor (each, a Lender Conversion), into shares of the Companys 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 was convertible into shares of the Companys common stock by Investor in eleven tranches consisting of an initial tranche of $217,500 plus interest and other amounts due which could be converted into shares of the Companys 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 were in the amount of $105,000 plus interest and other amounts due and eight of which were in the amount of $157,500 plus interest and other amounts due. Each Subsequent Tranche could not be converted into shares of the Companys common stock unless the Investor paid in full the Investor Note corresponding to such tranche, which payment required the Companys 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 could be converted into shares of the Companys 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 the Companys common stock, the Company could also elect to convert the entire outstanding balance under the Company Note into shares of the Companys common stock at the Conversion Price.
If the Company failed to repay the Company Note when due, or if the Company was otherwise in default under the Company Note, at the option of Investor a default interest rate of 22% per annum would apply on all conversion eligible portions of the Company Note while the default continues. In the event the Company was in default under the Company Note, the Investor also had 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 the Company failed to issue stock to the Investor within three trading days of receipt of a notice of conversion, the Company was required to 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 provided that the Investor maintained a right of offset that, under certain circumstances, permitted the Investor to deduct amounts owed by the Company under the Company Note from amounts otherwise owed by Investor under the Investor Notes. In addition, the Company was permitted at any time to deduct and offset any amount owing by the Investor under the Investor Notes from any amount owed by the Company under the Company Note. Since the Company Note and the Investor Notes could be offset against each other, they are recorded on a net basis in the Consolidated Balance Sheet.
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 $252,188 under the Company Note as of June 30, 2015 and total unamortized debt discount of $60,096.
The Company Note provided that Investor could not convert the Company Note in an amount which would cause Investor to own more than 4.99%, or if the Companys market capitalization (as defined in the Company Note) is less than $10,000,000, more than 9.99%, of the Companys outstanding common stock.
The Company paid MSC-BD, LLC $20,000 as a finders fee (equal to 10% of the gross proceeds) in connection with the first closing and $10,020 in connection with the second closing and paid additional finders fees of $16,000 to MSC-BD, LLC in connection with the June Note discussed below. The total finders fee of $46,020 was capitalized as deferred finance costs and amortized over the term of the respective notes. As of March 31, 2016 unamortized deferred finance costs related to these instruments were $0.
On December 15, 2015 the Company entered into a Note Settlement Agreement modifying the terms of the November Notes and the June Note (discussed below). This modification was treated as a debt extinguishment under ASC 470-50-40. See Note 10 for further discussion.
The Company also determined that the Lender Conversion feature of the modified November Notes meets the definition of an embedded derivative that should be separated and accounted for as a derivative liability. See Note 11. Typenex Co-Investment June 2015 Note On June 4, 2015, the Company entered into a Note Purchase Agreement (the Purchase Agreement) with Typenex Co-Investment, LLC, a Utah limited liability company, pursuant to which the Company 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 investors legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the transaction. The original issue discount was recorded as debt discount and amortized to interest expense over the life of the note. 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 matured on December 4, 2015 and, as further described below, on December 15, 2015 the company entered into a Note Settlement Agreement relating to the June Note (see Note 10). As of March 31, 2016 the outstanding balance of the Modified June Note was $184,674 and unamortized debt discount was $89,603.
The June Note provided that 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.
The Company paid MSC-BD, LLC $16,000 as a finders fee (equal to 8% of the net proceeds) in connection with financing from the investor.
On December 15, 2015 the Company entered into a Note Settlement Agreement modifying the terms of the November Notes (discussed above) and the June Note. This Note Settlement Agreement modified the terms of the June Note to mirror the terms of the November Notes, thus making it a convertible instrument. This modification was treated as a debt extinguishment under ASC 470-50-40. See Note 10 for further discussion.
The Company also determined that the Lender Conversion feature of the modified June Note meets the definition of an embedded derivative that should be separated and accounted for as a derivative liability. See Note 11.
TCA Global Credit Master Fund, LP Note December 2015
On December 24, 2015, the Company entered into a Senior Secured Credit Facility Agreement with TCA Global Credit Master Fund, LP (TCA). At the initial closing on December 24, 2015, the Company received gross proceeds of $750,000 and issued to TCA a Convertible Promissory Note in the principal amount of $750,000 (the TCA Note). The TCA Note is scheduled to mature on June 24, 2017 (the Maturity Date). At any time prior to the Maturity Date or the earlier termination of the Loan Agreement, the Company can request up to $9,250,000 of additional loans, which additional loans may be made in the sole discretion of TCA. The Company may prepay borrowings at any time, in whole or in part, without penalty.
The loan will accrue interest on the unpaid principal balance at an annual rate of 18%. The Company will make interest only payments of $11,250 on each of January 24, February 24 and March 24, 2016, and thereafter, will make payments of approximately $56,208 of principal and interest per month until the Maturity Date. In the event the Company is in default under the loan agreement with TCA or any related transaction document, including as a result of a default in the Companys payment obligations, any amount due to TCA under the facility will, at TCAs option, bear interest from the date due until such past due amount is paid in full at an annual rate of 22%. In addition, upon the occurrence and during the continuance of an event of default under the transaction documents, TCA may terminate its commitments to the Company and declare all of the Companys obligations to TCA to be immediately due and payable.
While the Note is outstanding, but only upon the occurrence of (i) an event of default under the loan agreement with TCA or any related transaction document or (ii) the Companys mutual agreement with TCA, TCA may convert, subject to certain beneficial ownership limitations, all or any portion of the outstanding principal, accrued and unpaid interest and any other sums due and payable under the Note or any other transaction document (such total amount, the Conversion Amount) into a number of shares of the Companys common stock equal to: (i) the Conversion Amount divided by (ii) eighty-five percent (85%) of the lowest of the daily volume weighted average price of the Companys common stock during the five business days immediately prior to the conversion date (the Conversion Shares). Upon liquidation by TCA of Conversion Shares, if TCA realizes a net amount from such liquidation equal to less than the Conversion Amount, the Company is obligated to issue to TCA additional shares of the Companys common stock equal to: (a) the Conversion Amount minus the net realized amount, divided by (b) the average volume weighted average price of the Companys common stock during the five business days immediately prior to the date upon which TCA requests additional shares.
The payment and performance of all the Companys indebtedness and other obligations to TCA, including all borrowings under the loan agreement and related agreements, are secured by liens on substantially all of the Companys assets pursuant to a Security Agreement.
Of the proceeds received at the initial closing, approximately $106,000 was used to pay in full all indebtedness outstanding under the Companys Business Loan and Security Agreement with B of I Federal Bank (the Bank), entered into on November 3, 2015. Upon repayment of the Companys indebtedness under the Business Loan and Security Agreement, the Bank released its liens on the Companys assets. After the payment of approximately $51,000 of fees and cash expenses to TCA in connection with the loan transaction, the Company received net proceeds of approximately $593,000. As of March 31, 2016 the outstanding balance of TCA Note was $750,000 and unamortized debt discount of $500,282.
In connection with the Loan Agreement, the Company agreed to pay to TCA a fee for advisory services provided to the Company prior to the entry into the loan agreement in the amount of $126,000 (the Advisory Fee). As partial payment of the Advisory Fee, the Company issued to TCA 3,810,000 shares of the Companys common stock on December 24, 2015 (the Advisory Fee Shares), representing 4.99% of the Companys issued and outstanding shares of common stock on such date. In the event that TCA receives net proceeds from the sale of such shares that are less than the Advisory Fee, TCA may require the Company to issue additional shares of common stock in an amount sufficient such that, when sold and the net proceeds from such sale are added to the net proceeds from the sale of any of the previously issued and sold Advisory Fee Shares, TCA shall have received total net funds equal to the Advisory Fee. Notwithstanding the foregoing, subject to certain conditions, the Company has the right to redeem the Advisory Fee Shares then in TCAs possession for an amount payable in cash equal to the Advisory Fee, less any net cash proceeds received by TCA from previous sales of Advisory Fee Shares. In the event TCA has not realized net proceeds from the sale of Advisory Fee Shares equal to at least the Advisory Fee by the earlier to occur of: (i) December 24, 2016; (ii) the occurrence of an event of default under the transaction documents; or (iii) the Maturity Date, then at any time thereafter, TCA has the right to require the Company to redeem all of the Advisory Fee Shares then in TCAs possession for cash equal to the Advisory Fee, less any cash proceeds received by TCA from any previous sales of Advisory Fee Shares.
The Company also determined that the Conversion feature of the TCA Note and the Advisory Fee meets the definition of an embedded derivative that should be separated and accounted for as a derivative liability. See Note 11.
|
Note 8 -notes Payable |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Notes | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Note 8 -notes Payable | NOTE 8 NOTES PAYABLE
Bank of the West
On December 29, 2014, Kyle Winther, the Companys CEO, entered into a vehicle financing agreement with the Bank of the West. Pursuant to the agreement, the amount financed was $39,275, payable in 48 monthly payments plus accrued interest at a rate of 3.9%. In January 2015, the Company agreed to assume the payments on this loan and capitalized the vehicle. As of March 31, 2016 the outstanding balance was $31,883, with $7,210 classified as short term and $24,673 classified as long term.
Terminated Facilities with B of I Federal Bank
On January 2, 2015, the Company entered into a Business Loan and Security Agreement with B of I Federal Bank (the Bank). Pursuant to the agreement, the Company borrowed $200,000 from the Bank and received net proceeds of $195,000 USD after deducting an origination fee of $5,000. The loan was payable in 147 payments of $1,728 due each business day beginning on and after January 5, 2015, with the initial total repayment amount (subject to certain exceptions) being equal to $254,000.
On June 2, 2015, the Company entered into a new Business Loan and Security Agreement with the Bank. Pursuant to the agreement, the Company borrowed $175,000 from the Bank and received net proceeds of $104,071 after deducting an origination fee of $1,875 and the repayment of $69,054 in full satisfaction of the Companys remaining obligations under that certain Business Loan and Security Agreement entered into with the Bank on January 2, 2015. The new loan was payable in 126 payments of $1,708 due each business day beginning on June 3, 2015, with the total repayment amount (subject to certain exceptions) being equal to $215,249 (the Total Repayment Amount). As of March 31, 2016, the outstanding balance was $0.
On November 3, 2015, the Company entered into a new Business Loan and Security Agreement with the Bank. Pursuant to the agreement, the Company borrowed $125,000 from the Bank and received net proceeds of $93,615 after deducting an origination fee of $3,023 and the repayment of $28,361 in full satisfaction of the Companys remaining obligations under that certain Business Loan and Security Agreement entered into with the Bank on June 2, 2015. The new loan was payable in 126 payments of $1,220 due each business day beginning on November 4, 2015, with the total repayment amount (subject to certain exceptions) being equal to $153,750. On December 24, 2015, the loan balance of $106,000 was paid off upon the closing of the financing transaction with TCA Global Credit Master Fund, LP.
Iliad Co-Investment Note
On August 12, 2015, the Company entered into a Note Purchase Agreement (the Purchase Agreement) with Iliad Research & Trading, L.P, a Utah limited liability partnership, pursuant to which the Company concurrently issued to the investor an unsecured non-convertible Promissory Note in a principal amount of $245,000 (the August Note). The principal amount includes an original issue discount of $40,000 plus an additional $5,000 to cover the investors legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the transaction. In consideration for the August 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 August Note was originally scheduled to mature on February 12, 2016 and was extended to April 12, 2016 (see discussion below) and subsequently further extended to July 15, 2016 (see Note 13). The Company may prepay all or a portion of the amount owed earlier than it is due without penalty. The original issue discount and issuance costs for both the June Note (see Note 7) and the August Note were recorded as debt discount and amortized to interest expense over the life of the notes. As of March 31, 2016, the outstanding balance of the August Note was $245,000 and the unamortized debt discount was $0.
Interest does not accrue on the unpaid principal balance of the August Note unless an event of default occurs. Upon the occurrence of an event of default, the outstanding balance of the August 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 August Note, the investor may declare all unpaid principal, plus all accrued interest and other amounts due under the August Note to be immediately due and payable at an amount equal to 115% of the outstanding balance of the August 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.
On February 19, 2016, the Company entered into an Amendment to Promissory Note with Iliad Research & Trading, L.P which extended the maturity date of the August Note to April 12, 2016 and increased the principal amount of the note by $2,500 as consideration for the extension. The Company evaluated the Amendment to Promissory Note under ASC 470-50-40 Extinguishments of Debt (ASC 470), noting it did not meet the criteria for substantial modification under ASC 470, and accordingly treated the amendment as a modification Note Settlement Agreement, adding $2,500 to the balance and extending the due date under the modified terms.
Other short term facilities
Effective May 29, 2015, the Company entered into an Agreement to finance its annual Workers Compensation insurance coverage. The insurance coverage is provided through The Hartford. The amount of the policy is $18,871 with $18,871 being financed at 2.2% over 12 months with an initial payment of $4,425 and 10 monthly payments of $1,444. The Company cancelled the policy with the Hartford Group and started the new policy as of October 1, 2015. At March 31, 2016, the premium obligation due under the Agreement was $0.
Effective July 10, 2014, the Company entered into an Agreement to finance its annual General Liability insurance coverage. The insurance coverage is provided through Lloyds of London. The amount of the policy is $52,359 with $43,953 being financed at 11% over 10 months with a monthly payment of $4,620. At June 30, 2015, the remaining premium obligation due under the Agreement was $0. Effective July 10, 2015 the Company entered into a new agreement to finance its General Liability insurance coverage. The amount of the policy is $70,848 with $53,159 financed over 10 months at 9% interest with a monthly payment of $5,538. At March 31, 2016, the remaining premium obligation was $10,953.
As of August 22, 2015, the Company entered into an insurance contract with AFCO for Directors and Officers insurance coverage. The amount of the policy is $129,000 with $93,750 being financed at 5.3% over 10 months with a monthly payment of $9,604. At March 31, 2016, the remaining balance was $28,560.
|
Note 9 -loss Per Common Share |
9 Months Ended | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2016 | ||||||||||||||||||||||||||
Notes | ||||||||||||||||||||||||||
Note 9 -loss Per Common Share | NOTE 9 LOSS PER COMMON SHARE
A summary of the net loss and shares used to compute net loss per share for the nine months ended March 31, 2016 and 2015 is as follows:
|
Note 10 - Debt Extinguishment |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Notes | |
Note 10 - Debt Extinguishment | NOTE 10 DEBT EXTINGUISHMENT
On December 18, 2015, the Company and Typenex Co-Investment, LLC (the Investor) entered into a Note Settlement Agreement. The Note Settlement Agreement relates to the November Notes and the June Note (collectively, the Modified Notes) (see Note 7).
The Note Settlement Agreement restructures the payment provision of the Notes, including the June Note which was due and payable in full on December 4, 2015. The agreement provides that the Company is to make the following payments to Investor notwithstanding the terms of the Modified Notes (the Restructure): (a) a payment in the amount of $50,000 on or before December 15, 2015; (b) a payment in the amount of $50,000 on or before January 15, 2016; (c) a payment in the amount of $50,000 on or before February 15, 2016; and (d) a payment equal to the remaining aggregate outstanding balance of the Modified Notes on or before March 15, 2016 (collectively, the Note Payments). Unless specified otherwise by Investor in a written notice delivered to Company, all Note Payments shall be applied first against the outstanding balance of the November Note until the November Note has been paid in full and thereafter against the June Note until the June Note is paid in full. Note Payments may be made in cash or, subject to certain conditions, shares of the Companys Common Stock.
As consideration for Investors agreement to enter into the Note Settlement Agreement, the Company agreed to increase the outstanding balance of each Note by 15% (the Restructure Effect). Following the application of the Restructure Effect and including a $5,000 transaction expense fee, the outstanding balance of the November Note was $107,528 and the outstanding balance of the June Note was $281,750.
Upon satisfaction of the Companys obligations under the Note Settlement Agreement, the Company shall be deemed to have paid the entire outstanding balance of each of the Modified Notes in full and shall have no further obligations under either Note. In addition, subject to the Companys compliance with the terms and conditions of the Note Settlement Agreement, the Investor waives the default caused by the non-payment of the June Note on December 4, 2015.
In the event that the Company fails to comply with the conditions of the Note Settlement Agreement, the Restructure, the waiver of the June Note default, and all other accommodations given in the Note Settlement Agreement will be deemed withdrawn and the Investor will be entitled to all remedies available to it as provided in the Modified Notes, the other Transaction Documents, and the Note Settlement Agreement.
The Company evaluated the Note Settlement Agreement under ASC 470-50-40 Extinguishments of Debt (ASC 470). ASC 470 requires modifications to debt instruments to be evaluated to assess whether the modifications are considered substantial modifications. A substantial modification of terms shall be accounted for like an extinguishment. For extinguished debt, a difference between the re-acquisition price and the net carrying amount of the extinguished debt shall be recognized currently in income of the period of extinguishment as losses or gains. The Company noted the change in terms per the Note Settlement Agreement, met the criteria for substantial modification under ASC 470, and accordingly treated the modification as extinguishment of the original November Notes and June Note, replaced by the new convertible notes under the modified terms. The Company recorded a loss on extinguishment of debt of $93,336 during the nine months ended March 31, 2016.
Amendment to Note Settlement Agreement
On February 19, 2016, the Company entered into an Amendment to Note Settlement Agreement (the Settlement Agreement Amendment) with Investor. The Settlement Agreement Amendment relates to the Note Settlement Agreement (the Original Agreement) entered into between the parties on December 18, 2015. The Original Agreement, as amended by the Settlement Agreement Amendment, restructures the payment provision of the Modified Notes. The Settlement Agreement Amendment restructures the payment provisions contained in the Original Agreement and provides that the Company is to make the following payments to Investor, in lieu of the previously agreed to $50,000 cash payments, notwithstanding the terms of the Modified Notes (the Restructure): (a) a cash payment in the amount of $35,000 payable upon execution of the Settlement Agreement Amendment together with 918,386 shares of the Companys common stock (subject to adjustment as described in the Settlement Agreement Amendment) based on a note conversion amount of $15,000 and a conversion price of $0.016333, which shares are to be issued and delivered pursuant to the terms of the Settlement Agreement Amendment and (b) a cash payment on or before March 15, 2016 in the amount of $35,000 together with shares of the Companys common stock based on a note conversion amount of $15,000 and a conversion price of $0.016333, which 918,386 shares were issued and delivered pursuant to the terms of the Settlement Agreement Amendment; and (c) a payment equal to the remaining aggregate outstanding balance of the Modified Notes on or before April 15, 2016, which payment must be made in cash (collectively, the Note Payments). Unless specified otherwise by Investor in a written notice delivered to Company, all Note Payments shall be applied first against the outstanding balance of the November Note until the November Note has been paid in full and thereafter against the June Note until the June Note is paid in full.
As consideration for Investors agreement to enter into the Settlement Agreement Amendment, the Company agreed to pay Investor a restructuring fee of $2,500.00.
The Company evaluated the Settlement Agreement Amendment under ASC 470-50-40 Extinguishments of Debt (ASC 470). The Company noted the change in terms per the Settlement Agreement Amendment did not meet the criteria for substantial modification under ASC 470, and accordingly treated the amendment as a modification to the Note Settlement Agreement, adding $2,500 to the balance and extending the due date under the modified terms.
|
Note 11 - Derivative Liabilities |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Notes | |
Note 11 - Derivative Liabilities | NOTE 11 DERIVATIVE LIABILITIES
The Company evaluated the Modified Notes, the TCA Note and the TCA Advisory Fee under the requirements of ASC 480 Distinguishing Liabilities from Equity and concluded that the notes and advisory fee do not fall within the scope of ASC 480.
The Company then evaluated the Modified Notes, the TCA Note and the TCA Advisory Fee under the requirements of ASC 815 Derivatives and Hedging.
Due to the existence of the anti-dilution provisions in the Modified Notes, which reduces the Lender Conversion Price in the event of subsequent dilutive issuances by the Company, the Company determined that the Lender Conversion feature does not meet the definition of indexed to the Companys stock, and the scope exception to ASC 815s derivative accounting provisions does not apply. The Company also determined that the Lender Conversion feature in the Modified Notes meets the definition of an embedded derivative that should be separated from the Modified Notes and accounted for as a derivative liability.
Due to the conversion provisions of the TCA Note and the TCA Advisory Fee, the Company determined that the Conversion feature does not meet the definition of indexed to the Companys stock, and the scope exception to ASC 815s derivative accounting provisions does not apply. The Company also determined that the Conversion feature of the TCA Note and the TCA Advisory Fee meets the definition of an embedded derivative that should be separated from the TCA Note and TCA Advisory Fee, respectively and accounted for as a derivative liability.
The Company recorded an original valuation for the Modified Notes of $194,596 for the derivative liability. As of March 31, 2016, the Company had a derivative liability of $120,038.
The Company recorded an original valuation for the TCA Note of $610,514 for the derivative liability. As of March 31, 2016, the Company had a derivative liability for the TCA Note of $397,456.
The Company recorded an original valuation for the TCA Advisory Fee of $80,280 for the derivative liability. As of March 31, 2016, the Company had a derivative liability for the TCA Advisory Fee of $91,710.
The Company has recorded the fair value of each derivative as described above as a current liability as of March 31, 2016. The change in fair value was recorded as other income (expense) in operations for the nine months ended March 31, 2016.
In arriving at fair-value estimates, the Company utilizes the most observable inputs available for the valuation technique employed. If a fair-value measurement reflects inputs at multiple levels within the fair value hierarchy, the fair-value measurement is characterized based upon the lowest level input. For the Company, recurring fair-value measurements are performed for the derivative liability.
The Company does not have any liabilities that reduce risk associated with hedging exposure and has not designated the derivative liability as a hedge instrument.
The Company did not have any derivatives valued using Level 1 and Level 2 inputs as of March 31, 2016. The Company categorized the derivative liability as Level 3 using the Black-Scholes pricing model with a fair value of $609,201 as of March 31, 2016.
The Company used the following input ranges: stock price $0.0260-$0.0283; expected term 0.33-1.21 years; risk-free rate 0.21%-0.59%; and volatility 134.8%-155.6%. Unobservable inputs were the prevailing interest rates, the Companys stock volatility and the expected term.
There have been no transfers between Level 1, Level 2, or Level 3 categories. Level 3 balance at March 31, 2015 was $68,584. Level 3 activity for the nine months ended March 31, 2016 were additions of $885,390 for the original valuation of three derivatives, deletions of $94,799 for the elimination of an original derivative related to debt extinguishment, and decrease of $249,974 for the valuation adjustments during the period.
|
Note 12 - Equity |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Notes | |
Note 12 - Equity | NOTE 12 EQUITY
Unregistered Sales of Equity Securities
Pursuant to the TCA Note, the Company issued to TCA 3,810,000 Advisory Fee Shares on December 24, 2015 as partial consideration for advisory services provided by TCA and the Company may be required to issue an unknown number of additional Advisory Fee Shares and/or Conversion Shares in accordance with the terms of the transaction documents. These shares were valued at $0.027 per share, which was the closing market price the Companys shares at December 24, 2015. The initial valuation of these shares was recorded to deferred finance fees and is being amortized to expense over the life of the related instrument.
Pursuant to the Settlement Agreement Amendment (see Note 10), the Company issued to Investor 918,386 shares of the Companys common stock on or about February 19, 2016 and 918,386 shares of the Companys common stock on or about March 15, 2016. These shares were valued at $0.01633 as per the Settlement Agreement Amendment. |
Note 13 - Subsequent Events |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Notes | |
Note 13 - Subsequent Events | NOTE 13 SUBSEQUENT EVENTS
Amendment to Note Settlement Agreement On May 12, 2016 but effective as of April 15, 2016, the Company entered into Amendment #2 to Note Settlement Agreement (the Second Amendment) with Typenex Co-Investment, LLC (the Investor). The Second Amendment relates to the Note Settlement Agreement entered into between the parties on December 18, 2015, as previously amended on February 19, 2016 (as previously amended, the Original Agreement). The Original Agreement, as amended by the Second Amendment, restructures the payment provision of the Modified Notes. The Second Amendment restructures the payment provisions contained in the Original Agreement and provides that the Company is to make the following payments to Investor notwithstanding the terms of the Modified Notes (the Restructure): (a) a cash payment in the amount of $35,000 payable on or before April 15, 2016 together with 3,160,556 shares of the Companys common stock (subject to adjustment as described in the Settlement Agreement Amendment) based on a note conversion amount of $50,000 and a conversion price of $0.015820, which shares are to be issued and delivered pursuant to the terms of the Settlement Agreement Amendment and (b) a cash payment on or before May 15, 2016 in the amount of $35,000 together with shares of the Companys common stock based on a note conversion amount of $50,000 and a conversion price to be determined in accordance with the Notes, which shares are to be issued and delivered pursuant to the terms of the Settlement Agreement Amendment; and (c) a payment equal to the remaining aggregate outstanding balance of the Notes on or before June 15, 2016, which payment must be made in cash (collectively, the Note Payments). Unless specified otherwise by Investor in a written notice delivered to Company, all Note Payments shall be applied first against the outstanding balance of the November Note until the November Note has been paid in full and thereafter against the June Note until the June Note is paid in full. The Second Amendment also provides that outstanding balance on each of the November Note and the June Note will bear interest at the rate of 10% per annum from the effective date of the amendment until such notes are repaid in full; previously, the June Note did not accrue interest on the unpaid principal balance of the note unless an event of default occurred.
As consideration for Investors agreement to enter into the Second Amendment, the Company agreed to pay Investor a restructuring fee of $15,316.
As of the date of this report, the outstanding balance on the November Note is $0 and the outstanding balance on the June Note is $84,363 (which takes into account a cash payment of $35,000 made on May 11, 2016).
Entry into Exchange Agreement and Issuance of Convertible Promissory Note
On May 12, 2016 but effective as of April 15, 2016, the Company entered into an Exchange Agreement with Iliad Research and Trading L.P. (Iliad), an affiliate of the Investor (the Exchange Agreement). The Exchange Agreement relates to the Promissory Note issued on August 12, 2015 to Iliad in the original principal amount of $245,000, as previously amended on February 19, 2016 (as amended, the Original Note).
Pursuant to the Exchange Agreement, the Company and Iliad exchanged the Original Note for a new promissory note in the original principal amount of $272,250 (the Exchange Note), which balance includes an exchange fee of $24,750. The Exchange Note was issued in substitution of and not in satisfaction of the Original Note.
The Exchange Note provides that the Company is to make the following payments to Iliad: (a) a payment in shares of the Companys common stock within three trading days of June 15, 2016 based on a note conversion amount of $50,000 and a conversion price that is equal to 70% of the average of the three lowest closing bid prices of the Companys common stock in the twenty trading days immediately preceding such conversion, which shares are to be issued and delivered pursuant to the terms of the Exchange Note; and (b) a payment equal to the remaining aggregate outstanding balance of the Exchange Note on or before July 15, 2016, which payment must be made in cash. On the date that is twenty trading days from the date the Company delivers the conversion shares to Iliad, there is a true-up where the Company is required to deliver additional shares if the conversion price as of the true-up date is less than the conversion price used to deliver the initial shares. Interest accrues on the outstanding balance of the Exchange Note at a rate of 10% per annum; provided, however that if the Company fails to repay the Exchange Note when due, or if the Company is otherwise in default under the Exchange Note, at the option of Iliad a default interest rate of 18% per annum will apply. In the event the Company is in default under the Exchange Note, Iliad also has the option to accelerate the note with the outstanding balance becoming immediately due and payable at an amount equal to 115% of the outstanding balance of the Exchange Note as of the date the event of default occurred. The Exchange Note may be prepaid without penalty. The Exchange Note provides that the Company may not issue shares to Iliad under the Exchange Note if the issuance of such shares would cause Iliad to beneficially own more than 9.99% of the Companys outstanding common stock.
Issuance of Shares of Common Stock
Pursuant to the Settlement Agreement Amendment, the Company issued to Investor 3,160,556 shares of the Companys common stock on April 15, 2016 at a value of $0.01582 and will be required to issue an unknown number of additional shares of common stock in accordance with the terms of the Settlement Agreement Amendment, as amended, and the Exchange Note.
Regulatory Risks
On May 5, 2016, the U.S. Food and Drug Administration (FDA) issued a final rule deeming certain products to be subject to the Federal Food, Drug, and Cosmetic Act and regulations thereunder (the FD&C Act), which products include electronic cigarettes and their component parts, including e-liquids, atomizers, batteries, cartomizers, tank systems, flavors, vials that contain e-liquids and programmable software. The Company is evaluating the potential impact of this new regulation. |
Note 2 -summary of Significant Accounting Policies: Going Concern (Policies) |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Policies | |
Going Concern | Going Concern
The Companys unaudited condensed consolidated financial statements have been presented on the basis that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Companys cash balance as of March 31, 2016 along with its net loss and negative cash flow from operations, raise substantial doubt about its ability to continue as a going concern. The accompanying unaudited condensed consolidated 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.
The Company continues to face liquidity and capital resources constraints and does not believe that the proceeds from its debt facilities (see Note 7) along with its operating cash flows will be sufficient to meet its financing needs for the next twelve months. The extent of the Companys future capital requirements will depend on many factors, including the Companys results from operations and the growth rate of the Companys business. The Companys near term objective is to raise debt or equity capital to fund its immediate cash needs and to finance its longer term growth. The Company is also pursuing various means to increase revenues, reduce operating costs and to improve overall cash flow.
The Company presently does not have any arrangements for additional financing. However, the Company continues to evaluate various financing strategies to support its current operations and fund its future growth. |
Note 2 -summary of Significant Accounting Policies: Use of Estimates (Policies) |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Policies | |
Use of Estimates | Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates significant estimates and assumptions related to its accounts receivable allowance, accounts payable, deferred income tax asset valuation allowances, fair value of derivative liability, fair value of stock options, useful life of fixed assets, inventory reserves, estimates of sales return and accrual for potential liabilities. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Companys estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. |
Note 2 -summary of Significant Accounting Policies: Concentration of Risk (Policies) |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Policies | |
Concentration of Risk | Concentration of Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash. The Company places its cash with high quality banking institutions.
The Company relied on one manufacturer to make all of the Companys Mods during the three month period ended March 31, 2016. |
Note 2 -summary of Significant Accounting Policies: Financial Instruments and Fair Value Measurement (Policies) |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Policies | |
Financial Instruments and Fair Value Measurement | Financial Instruments and Fair Value Measurement
Pursuant to ASC 820, Fair Value Measurements and Disclosures, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:
Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The Companys financial instruments consist principally of cash, accounts payable, accrued liabilities, amounts due to related parties, derivative liabilities and convertible notes payable. Pursuant to ASC 820, the fair value of the Companys cash is determined based on Level 1 inputs, which consist of quoted prices in active markets for identical assets. Pursuant to ASC 820, the fair value of the Companys derivative liability is determined based on Level 3 inputs, which consist of unobservable inputs. The Company believes that the recorded values of all of its other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations. |
Note 2 -summary of Significant Accounting Policies: Revenue Recognition (Policies) |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Policies | |
Revenue Recognition | Revenue Recognition
The Company recognizes revenues when delivery of goods or completion of services has occurred provided there is persuasive evidence of an agreement, acceptance has been approved by its customers, the fee is fixed or determinable based on the completion of stated terms and conditions, and collection of any related receivable is probable.
For retail transactions, revenue is recognized at the point of sale. For wholesale and online transactions, revenue is recognized at the time goods are shipped. |
Note 2 -summary of Significant Accounting Policies: Deferred Revenue (Policies) |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Policies | |
Deferred Revenue | Deferred Revenue
The Company accrues deferred revenue when customer payments are received, but product has not yet shipped. As of March 31, 2016 and June 30, 2015, the Company had recorded $218,553 and $82,499, respectively for deferred income as a result of prepayments for product made by customers. Those prepayments are recognized into revenue at the point those prepaid products have subsequently shipped. The Company has recognized the $82,499 during the nine months ended March 31, 2016 and expects to recognize the $218,553 into revenue during the fiscal year ending June 30, 2016. |
Note 2 -summary of Significant Accounting Policies: Advertising Expense (Policies) |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Policies | |
Advertising Expense | Advertising Expense
Advertising costs are expensed as incurred. Advertising expense for the nine months ended March 31, 2015 and 2016 were $56,258 and $72,601, respectively and are included in general and administrative expenses. |
Note 2 -summary of Significant Accounting Policies: Deferred Finance Costs, Net (Policies) |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Policies | |
Deferred Finance Costs, Net | Deferred Finance Costs, Net
Costs with respect to the issuance of common stock, warrants, stock options or debt instruments by the Company are initially deferred and ultimately offset against the proceeds from such equity transactions or amortized to interest expense over the term of any debt funding, if successful, or expensed if the proposed equity or debt transaction is unsuccessful.
For the nine months ended March 31, 2016, the Company incurred $250,400 in costs in connection with the negotiation of a financing transaction with TCA Global Credit Master Fund, LP which amount is included in deferred finance costs as of March 31, 2016 (see Note 7). The unamortized finance costs for the nine months ended March 31, 2016 were $205,189. |
Note 2 -summary of Significant Accounting Policies: Basic and Diluted Net Loss Per Share (Policies) |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Policies | |
Basic and Diluted Net Loss Per Share | Basic and Diluted Net Loss per Share
The Company computes net income per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options, warrants or debentures. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As of March 31, 2016 and 2015, there were no dilutive securities. |
Note 2 -summary of Significant Accounting Policies: Recent Accounting Pronouncements (Policies) |
9 Months Ended |
---|---|
Mar. 31, 2016 | |
Policies | |
Recent Accounting Pronouncements | Recent Accounting Pronouncements
In January 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This update impacts the accounting for financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01 is to be applied prospectively and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company has not yet determined the impact of ASU 2016-01 on its consolidated results of operations, financial condition, or cash flows.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This update is intended to simplify the presentation of debt issuance costs and requires 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 this update. AUS 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company does not believe this will have a material impact on it consolidated results of operations, financial condition, or cash flows.
The Company has reviewed all other recent accounting pronouncements issued to date of the issuance of these unaudited condensed consolidated financial statements, and does not believe any of those pronouncements will have a material impact on the Companys unaudited condensed consolidated financial statements. |
Note 7 - Convertible Notes Payable: Schedule of Convertible Notes Payable Text Block (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Tables/Schedules | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Convertible Notes Payable Text Block |
|
Note 8 -notes Payable: Schedule of Notes Payable Text Block (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tables/Schedules | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Notes Payable Text Block |
|
Note 9 -loss Per Common Share: Schedule of Earnings Per Share, Basic and Diluted (Tables) |
9 Months Ended | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2016 | ||||||||||||||||||||||||||
Tables/Schedules | ||||||||||||||||||||||||||
Schedule of Earnings Per Share, Basic and Diluted |
|
Note 2 -summary of Significant Accounting Policies: Deferred Revenue (Details) - USD ($) |
Mar. 31, 2016 |
Jun. 30, 2015 |
---|---|---|
Details | ||
Deferred Revenue | $ 218,553 | $ 82,499 |
Note 2 -summary of Significant Accounting Policies: Advertising Expense (Details) - USD ($) |
9 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
|
Details | ||
Advertising Expense | $ 72,601 | $ 56,258 |
Note 3 - Officers' Loans Payable (Details) - USD ($) |
Mar. 31, 2016 |
Jun. 30, 2015 |
---|---|---|
Details | ||
Related Party Loan Outstanding | $ 84,804 | $ 96,312 |
Note 4 - Inventories (Details) - USD ($) |
Mar. 31, 2016 |
Jun. 30, 2015 |
---|---|---|
Details | ||
Inventory | $ 442,648 | $ 323,784 |
Note 5 - Lease Commitments (Details) - USD ($) |
1 Months Ended | 6 Months Ended | 11 Months Ended | 25 Months Ended | |||
---|---|---|---|---|---|---|---|
Sep. 30, 2015 |
Dec. 31, 2015 |
Jun. 30, 2014 |
Sep. 30, 2015 |
Aug. 30, 2015 |
Sep. 15, 2015 |
Feb. 28, 2015 |
|
S.J. Real Estate Group, LLC | |||||||
Operating Leases, Rent Expense | $ 2,214 | ||||||
Other Commitment | $ 38,280 | ||||||
S.B.P.W., LLC | |||||||
Operating Leases, Rent Expense | $ 4,070 | $ 2,035 | |||||
Other Commitment | $ 299,450 | ||||||
Security Deposit | 5,650 | ||||||
Winther Family Trust | |||||||
Monthly Lease and Rental Expense | $ 5,650 | ||||||
Security Deposit | 1,716 | ||||||
Susana Business Center, LLC | |||||||
Other Commitment | $ 10,296 | ||||||
Monthly Lease and Rental Expense | $ 1,716 |
Note 6 - Related Parties (Details) - USD ($) |
9 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Jun. 30, 2015 |
|
Details | ||
Due to Related Parties, Current | $ 84,804 | $ 96,312 |
Professional Fees | 43,000 | |
Accrued Professional Fees, Current | $ 0 | $ 12,369 |
Note 7 - Convertible Notes Payable (Details) - USD ($) |
9 Months Ended | ||
---|---|---|---|
Mar. 31, 2016 |
Jan. 16, 2015 |
Nov. 04, 2014 |
|
Amortization of Other Deferred Charges | $ 20,472 | ||
Interest Expense, Other | 2,137 | ||
Unamortized Debt | $ 0 | ||
Typenex Co- Investment, LLC | |||
Convertible Notes Payable | $ 1,687,500 | ||
Prepayment of Note Obligation | $ 102,028 | ||
Principal Amount of Note | $ 100,000 |
Note 9 -loss Per Common Share: Schedule of Earnings Per Share, Basic and Diluted (Details) - USD ($) |
9 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
|
Details | ||
Net loss for computation of basic and dilutive net (loss) per share | $ (481,826) | $ (400,636) |
Earnings Per Share, Basic and Diluted | $ (0.01) | $ (0.01) |
Weighted Average Number of Shares Outstanding, Basic and Diluted | 72,639,656 | 65,158,902 |
Note 10 - Debt Extinguishment (Details) |
9 Months Ended |
---|---|
Mar. 31, 2016
USD ($)
| |
Details | |
Gains (Losses) on Extinguishment of Debt | $ 93,336 |
Note 11 - Derivative Liabilities (Details) |
Mar. 31, 2016
USD ($)
|
---|---|
Derivative liabilities | $ 226,272 |
Modified Notes | |
Derivative Liability, Original Valuation | 194,596 |
Derivative liabilities | 120,038 |
TCA Note | |
Derivative Liability, Original Valuation | 610,514 |
Derivative liabilities | 397,456 |
TCA Advisory Fee | |
Derivative Liability, Original Valuation | 80,280 |
Derivative liabilities | $ 91,710 |
)L$+JVE?XIC=1"WUL-BU;"P"'0"0*=
M$" !\_,Y+W@?7K$K)VU@-_))+@T"G2+0*0&J6.K;%N8._%8!19^AZ#,B>@S1
M5TH&Q 0,H@Y O_7C3?2P;BY?JL_C5VZ]T?N84GE+]$
MZP9O-J.DA8Y/TKW@_ V6%K9!L$%IXTB:R3I49PHEBK^E6>@XSVEGFR^TZX1B
M(10KX7,6C:="T>87[GA=&9R)24<[\G"#^:[P!]$0[\W2L!6[#XBZ.M5Y^5"Q
M4Q#Z@#DD3)$P*X)Y];5$\?\2A^*"7CQ *!"+NV2]1CFE,[440MA(
MP*RI,,JAFH(P04$=^8N@+PE(A 1FX4^J4B*B)1T=J@V/H%#JN4]VS+JWQ>!=
M-#/T]:K?&X7#X8!>>C7JAX?CL9ND3[REKMM&;O2:;)M'8YRI-5.$ C!,8Q?2
M?5;$S@NR905M"B ]BNL-K.4^#O4(Y5B;)#[5%89O/+ N>%#Y?O90?+G"L'$3;&^P
MWYJ#I*+R]9B\73:H_5CHS4TH"X1:EO@RDMK K3+2:M?/TE6M.)\OR_S8)'/'!Y(LI@2-/\BW2JM&C
MXF>NP$]58X9:6B4I0"(!)/* 1$/R#Z]M@B>B4RZ3*C5,<10)1Y&O'#'F:"B9
ME8 2HLL!,LE1BK=HXR
>SC>*&C2+RZ61C?5V WA"@46 U"6R_FE2ICH391,QVM
'X^.*_@/1@01-#<
MN_662P-AC9WK#6GAZ(>3R.'O-S5