You are cordially invited to attend a Special Meeting of Stockholders of Vapor Hub International Inc., a Nevada corporation (the “Company”), to be held on March 29, 2017, at 9:00 a.m. Pacific Standard Time, at the Company’s office, 1871 Tapo Street, Simi Valley, CA 93063 (the “Special Meeting”).
At the Special Meeting, stockholders will be asked to consider and act upon the following matters:
To approve the sale (the “Asset Sale”) by the Company of the Company’s proprietary rights to its intangible assets pursuant to the Asset Purchase Agreement by and between the Company and PLY Technology (the “Buyer”) dated February 10, 2017 (the “Asset Purchase Agreement”), which assets collectively constitute substantially all of the Company’s assets;
To approve the winding up and liquidation of the Company pursuant to the terms of the Plan of Liquidation (the “Plan of Liquidation”);
To approve the adjournment or postponement of the Special Meeting to a later date, if necessary or appropriate, to allow for the solicitation of additional proxies in favor of the proposal to approve the Asset Sale and the Plan of Liquidation, if there are insufficient votes to approve the Asset Sale and the Plan of Liquidation; and
To transact other business properly presented at the Special Meeting or any postponement or adjournment thereof.
Our Board of Directors has fixed February 16, 2017 as the record date for the determination of stockholders entitled to notice and to vote at the Special Meeting and any postponement or adjournment thereof, and only stockholders of record at the close of business on that date are entitled to notice and to vote at the Special Meeting. A list of stockholders entitled to vote at the Special Meeting will be available at the Special Meeting and at the offices of the Company for 10 days prior to the Special Meeting.
Details of the proposals are set forth in the enclosed proxy statement, which you are urged to read carefully. The Board of Directors believes that the proposals are in the best interests of the Company and its stockholders. In arriving at its decision to recommend the proposals, the Board of Directors carefully reviewed and considered the terms and conditions of the proposals and the factors described in the enclosed proxy statement. The Board of Directors has approved each of the proposals and recommends that the holders of common stock vote “
FOR
” the approval of each of the proposals.
We hope that you will use this opportunity to take an active part in the affairs of the Company by voting on the business to come before the Special Meeting, either by executing and returning the enclosed Proxy Card or by casting your vote in person at the Special Meeting.
The Proposal to Adjourn or Postpone the Special Meeting
Q: Why am I being asked to vote on the Proposal to Adjourn or Postpone the Special Meeting?
A:
The U.S. Securities and Exchange Commission (the “SEC”) requires the Company to give its stockholders the ability to specifically vote on any adjournment proposal.
Q:
What is the vote required to approve the Proposal to Adjourn or Postpone the Special Meeting?
A:
If a quorum is present at the Special Meeting, the Proposal to Adjourn or Postpone the Special Meeting will be approved if it is approved by the affirmative vote of a majority of the shares entitled to vote that cast votes, in person or by proxy, “For” or “Against” the Proposal to Adjourn or Postpone the Special Meeting. Abstentions are not counted as votes cast for purposes the Proposal to Adjourn or Postpone the Special Meeting and will have no effect on approval of this proposal.
Other Commonly Asked Questions
Q: What are the U.S. federal income tax consequences of the Asset Sale to the Company?
A:
For U.S. federal income tax purposes, the Asset Sale will be treated as a taxable sale of assets by the Company and will give rise to net taxable gain recognition. The Company anticipates the gain recognized for U.S. federal income tax purposes will be offset entirely with net operating losses.
Q:
Where can I find more information about the Company and the Buyer?
A:
Up to and including February 14, 2017, the Company filed periodic reports with the SEC. This information is available at the SEC’s public reference facilities, and at the internet website maintained by the SEC at www.sec.gov
The Buyer does not file reports with the SEC but additional information about the Buyer is set forth under "
Proposal #1: The Asset Sale Proposal
.”
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Q: Who can help answer my questions?
A:
If you have questions about the Special Meeting, the Asset Sale or the Plan of Liquidation after reading this proxy statement, you should contact Lori Winther, Chief Financial Officer of the Company, at 1871 Tapo Street, Simi Valley, CA 93063, phone (805) 309-0530
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VAPOR HUB INTERNATIONAL INC.
1871 Tapo Street
Simi Valley, CA 93063
(805) 309-0530
Proxy Statement
for the Special Meeting of the Stockholders
to be held on March 29, 2017
This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors (the “Board of Directors” or the “Board”) of Vapor Hub International Inc. (the “Company”) for use at the Special Meeting of the Stockholders to be held at 9:00 a.m. local time on March 29, 2017 at the Company’s offices at 1871 Tapo Street, Simi Valley, CA 93063, and at any adjournment thereof (the “Special Meeting”), for the purpose of considering and voting on (1) a proposal (the “Asset Sale Proposal”) to approve the sale of the Company’s proprietary rights to its intangible assets, as contemplated in the Asset Purchase Agreement (the “APA” or the “Asset Purchase Agreement”) executed February 10, 2017 by and between the Company and PLY Technology (the “Asset Sale”), which assets collectively constitute substantially all of the Company’s assets; (2) a proposal (the “Plan of Liquidation Proposal”) to approve the winding up and liquidation of the Company pursuant to the terms of the Plan of Liquidation (the “Plan of Liquidation”); and (3) a proposal (the “Proposal to Adjourn or Postpone the Special Meeting”) to adjourn or postpone the Special Meeting to a later date, if necessary or appropriate, to allow for the solicitation of additional proxies in favor of Asset Sale Proposal and the Plan of Liquidation Proposal, if there are insufficient votes to approve the Asset Sale Proposal and the Plan of Liquidation Proposal.
This proxy statement, the Notice of Meeting, and the enclosed form of proxy are expected to be mailed to stockholders on or about March 3, 2017.
SUMMARY TERM SHEET
The following summary highlights information in this proxy statement and may not contain all the information that is important to you. Accordingly, we encourage you to read carefully this entire proxy statement, its annexes and the documents referred to in this proxy statement. We sometimes make reference to Vapor Hub International Inc. in this proxy statement by using the terms “Vapor Hub,” the “Company,” “we,” “our” or “us.” Each item in this summary includes a page reference directing you to a more complete description of the item in this proxy statement.
The Parties to the Asset Sale
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Parties to the Transaction
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Referred to as:
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PLY Technology
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the “Buyer”
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Vapor Hub International Inc.
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the “Company”
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The Company’s principal executive office is located at 1871 Tapo Street, Simi Valley, CA 93063. The telephone number of the Company’s principal executive offices is (805) 309-0530.
The Buyer’s principal executive office is located at 122A East Foothill Blvd., #145, Arcadia, CA 91006. The telephone number of the Buyer’s principal executive offices is (626) 693-1554.
The Asset Purchase Agreement – Annex A
On February 10, 2017, we entered into an Asset Purchase Agreement with the Buyer pursuant to which we have agreed, subject to specified terms and conditions, to sell the Company’s proprietary rights to its intangible assets in the Asset Sale, which assets collectively constitute substantially all of the Company’s assets.
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A copy of the APA is attached as
ANNEX A
to this proxy statement. You should read the APA in its entirety because it, and not this proxy statement, is the legal document that governs the proposed transaction. The following is a summary of the principal terms of the APA:
Assets Being Sold to the Buyer
At the closing of the transactions contemplated by the Asset Purchase Agreement, the Company will sell to Buyer all of the Company’s right, title and interest in and to the Company’s proprietary rights, and all goodwill associated with such proprietary rights, owned by the Company or used, or held for use by the Company, in connection with its business as conducted by the Company as of the date of the Asset Purchase Agreement, together with all rights to collect income, royalties, damages, products, proceeds and payments due or payable at the closing or after the closing with respect to the foregoing, including all claims against third parties for past, present or future infringements or misappropriations of such proprietary rights (collectively, the “Purchased Assets”). The Purchased Assets are to be acquired by the Buyer free and clear of any liens.
Assets Being Retained by the Company
The Company will retain all assets that are not Purchased Assets. One asset to be retained by the Company is inventory, which the Company plans to liquidate in connection with the winding up and liquidation of the Company.
In addition, the Company will retain all rights to recovery in connection with that certain lawsuit filed by the Company on November 4, 2015 in the Superior Court of California, County of Orange, Case Number 30-2015-00818492-CU-BC-CJC against Kevin Crump, an individual, Magnavape, Inc. and Magnavon, Inc. The lawsuit alleges breach of contract, fraud, negligent misrepresentation, intentional interference with economic advantage and negligent interference with economic advantage relating to the production by the defendants of the Company’s AR Mods. The lawsuit prayer is for $3,000,000. This amount includes general damages, lost profits and punitive damages against the defendants. A mandatory settlement conference is scheduled for February 24, 2017 and a jury trial is scheduled for March 27, 2017. Although the Company believes it will be meritorious in the lawsuit, the outcome of the litigation is not guaranteed and even if the Company receives a judgment in its favor, there is no guarantee the Company will be able to collect any cash proceeds awarded as a result of the litigation.
Liabilities Being Assumed by the Buyer
The Buyer is not assuming any liabilities of the Company of any kind in connection with the sale of the Purchased Assets by the Company.
Liabilities Being Retained by the Company
At the closing of the Asset Sale, all Company liabilities will be retained by the Company.
Purchase Price
The aggregate purchase price for the Purchased Assets shall be $1,000,000 United States Dollars (the “Purchase Price”). The Buyer shall pay the Purchase Price to the Company at the closing of the Asset Sale by (i) cancelling all outstanding principal, accrued interest and all other obligations payable to Buyer by the Company on the closing date of the Asset Sale under that certain Senior Secured Credit Facility Agreement entered into by the Buyer and the Company on December 23, 2016 (the “Loan Agreement”), and the related transaction documents (collectively, the “Outstanding PLY Debt Obligations”) and (ii) to the extent the Purchase Price exceeds the Outstanding PLY Debt Obligations, paying an amount in cash equal to the difference between the Purchase Price and the Outstanding PLY Debt Obligations by wire transfer of immediately available funds.
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Closing
We expect to close the Asset Sale on or before March 30, 2017. We cannot complete the Asset Sale until we satisfy a number of conditions, which include approval of the Asset Sale and the Plan of Liquidation by our stockholders at the Special Meeting. The effective date of the Asset Sale will be the date on which the closing occurs.
Representations and Warranties Made by the Company
In the Asset Purchase Agreement, the Company makes various representations and warranties for the benefit of the Buyer. Categories covered by the Company’s representations and warranties include: corporate organization and authorization; enforceability; no conflicts; consents; title to assets being acquired; intellectual property; assigned contracts; permits; non-foreign status; compliance with laws; legal proceedings; broker’s fees and matters pertaining to the Company’s filings with the Securities and Exchange Commission. Subject to certain exceptions, it is a condition to the Buyer’s obligation to complete the Asset Sale that these representations and warranties be true and correct in all material respects at the time of closing. In addition, in certain circumstances discussed elsewhere in this proxy statement, if the Buyer discovers a breach of these representations and warranties after the closing, such breach may give rise to an indemnification claim against the Company.
No Solicitation of Acquisition Proposals
The Company has agreed that, from the date of the APA until the closing of the Asset Sale or the proper termination of the APA, except as described in the next paragraph, (i) Buyer and its affiliates shall have the sole and exclusive right to negotiate with the Company with respect to any Acquisition Proposal (as defined on page 33 of this proxy statement), and (i) neither the Company nor any of its officers, directors, employees, agents, or representatives shall solicit, pursue indications of interest from, initiate negotiations with, or enter into any agreement with, any third party in relation to an Acquisition Proposal.
Notwithstanding the restrictions in the previous paragraph, if at any time after the date of the APA and prior to the occurrence of approval of the Asset Sale and Plan of Liquidation by the stockholders of the Company, the Company receives an unsolicited bona fide Acquisition Proposal from a third party, the Company may, subject to certain conditions (i) furnish information regarding the Company to the person making the Acquisition Proposal, (ii) participate in discussions or negotiations with the person making such Acquisition Proposal regarding such Acquisition Proposal and (iii) withhold, withdraw, amend or modify its approval of the APA, but only if and to the extent that in connection with the foregoing clauses (i)-(iii), the Board determines in good faith (after consultation with outside legal counsel) that such Acquisition Proposal if accepted, is reasonably likely to be consummated (taking into account all legal, financial and regulatory aspects of the proposal, the likelihood of the proposal being financed and the person making the Acquisition Proposal), and would, if consummated, result in a transaction more favorable to the Company’s stockholders from a financial point of view than the APA but only if the Board reasonably concludes in good faith (following the receipt of advice from outside counsel) that withholding, withdrawing, amending or modifying its approval of the APA is required in order to comply with its fiduciary obligations to the Company’s stockholders under applicable law (a “Change of Recommendation”). In the event the Company makes a Change in Recommendation, it will constitute a default under the Loan Agreement and permit the Buyer to exercise its remedies as a secured lender, as further described under the heading “Transactions and Agreements Related to the APA.”
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Conditions to Closing
The consummation of the Asset Sale is subject to the satisfaction or waiver of a number of conditions on or prior to the closing. Such conditions include, in addition to customary closing conditions, approval of the Asset Sale and Plan of Liquidation by our stockholders at the Special Meeting (the “Seller Stockholders’ Approval”).
License
Effective as of the closing of the Asset Sale, Buyer will grant to the Company a license to use the proprietary rights included in the Purchased Assets for the purpose of marketing, distributing and selling its remaining inventory in connection with the Company’s winding up and dissolution.
Post-Closing Indemnification
The APA requires that, after the closing, the Company indemnify and hold the Buyer harmless from damages arising out of the following categories of claims: (i) any inaccuracy in or breach of any of the representations or warranties of the Company contained in the APA or any document to be delivered in connection with the APA, (ii) any breach or non-fulfillment of any covenant, agreement or obligation to be performed by the Company pursuant to the APA or any document to be delivered in connection with the APA and (iii) any liability or obligation of the Company.
The APA also requires that, after the closing, the Buyer indemnify and hold the Company harmless from damages arising out of the following categories of claims: (i) any inaccuracy in or breach of any of the representations or warranties of the Buyer contained in the APA or any document to be delivered in connection with the APA and (ii) any breach or non-fulfillment of any covenant, agreement or obligation to be performed by the Buyer pursuant to the APA or any document to be delivered in connection with the APA.
Indemnification claims relating to any inaccuracy in or breach of any of the representations or warranties must be made by the party seeking indemnification prior to the 12-month anniversary of the closing date other than claims for indemnification relating to any inaccuracy in or breach of any of the (i) representations and warranties in Section 3.01 of the APA (relating to the organization and authority of the Company; Enforceability), Section 4.01 of the APA (relating to the organization and authority of Buyer; Enforceability), Section 3.10 of the APA (relating to Company brokerage fees), Section 4.03 of the APA (relating to Buyer brokerage fees), Section 3.03(a) of the APA (relating to the Company’s title to assets), which may be made at any time after the closing in perpetuity and (ii) representations and warranties in Section 3.04 of the APA (relating to the Company’s Intellectual Property), Section 3.08 of the APA (relating to the Company’s compliance with laws) and Section 3.09 of the APA (relating to legal proceedings pertaining to the Company), which may be made at any time prior to the 24-month anniversary of the closing date (the representations and warranties identified in clause (i) and (ii) are referred to collectively as the “Material Representations”). Indemnification claims relating to a breach of covenant may be made during the time period specified in the particular covenant, and if no period is specified, at any time following the closing in perpetuity.
In addition, indemnification for losses relating to any inaccuracy in or breach of any of the representations or warranties by the Buyer or the Company are subject to a $20,000 deductible and an aggregate limit on indemnification payments of $100,000, except for claims relating to any inaccuracy in or breach by either Buyer or the Company of a Material Representation, which losses are not subject to the deductible or the $100,000 limitation on indemnification payments. In addition, in no event are either the Buyer or the Company required to make indemnification payments under the APA relating to any inaccuracy in or breach of any of the representations or warranties for losses in excess of the Purchase Price (including for any inaccuracy in or breach of any Material Representation). The limitations described in this paragraph will not apply for any losses suffered as a result of the fraud of the Buyer or the Company.
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Employees
Although the Buyer has no obligation to hire any employees of the Company, the Buyer currently plans to offer employment to certain specified employees of the Company following the closing of the Asset Sale. The Company will remain responsible for all severance, separation, deferred compensation and similar employee benefits for all Company employees, regardless of whether they are hired by the Buyer following the closing of the Asset Sale.
Termination of the APA
Either the Company or the Buyer may terminate the APA by their mutual written consent or in the event that (i) there shall be any law that makes consummation of the transactions contemplated by the APA illegal or otherwise prohibited, (ii) any governmental entity issues an order restraining or enjoining the transactions contemplated by the APA, and such order shall have become final and non-appealable, (iii) the Seller Stockholders’ Approval shall not have been obtained on or before March 30, 2017 or (iv) the closing of the Asset Sale does not occur on or before March 30, 2017.
Further, the Buyer may terminate the APA (i) if the Company exercises its right to withhold, withdraw, amend or modify its approval of the APA in connection with a third party acquisition proposal, (ii) if any condition to the Buyer’s obligations to close have not been or if it becomes apparent that any of such conditions will not be fulfilled by March 30, 2017, unless such failure is due to the failure of Buyer to perform or comply with any of its covenants, agreements or conditions to be performed or complied with prior to the closing or (iii) if Buyer is not then in material breach of any provision of the APA and there has been a breach, inaccuracy in or failure to perform any representation, warranty, covenant or agreement made by the Company pursuant to the APA that would give rise to the failure of any of the closing conditions specified in Section 2.02 of the APA and such breach, inaccuracy or failure has not been cured by the Company within fifteen (15) days of the Company’s receipt of written notice of such breach from Buyer.
Likewise, the Company may terminate the APA (i) if the Company exercises its right to withhold, withdraw, amend or modify its approval of the APA in connection with a third party acquisition proposal, (ii) if any condition to the Company’s obligations to close have not been or if it becomes apparent that any of such conditions will not be fulfilled by March 30, 2017, unless such failure is due to the failure of the Company to perform or comply with any of its covenants, agreements or conditions to be performed or complied with prior to the closing or (iii) if the Company is not then in material breach of any provision of the APA and there has been a breach, inaccuracy in or failure to perform any representation, warranty, covenant or agreement made by the Buyer pursuant to the APA that would give rise to the failure of any of the closing conditions specified in Section 2.03 of the APA and such breach, inaccuracy or failure has not been cured by Buyer within fifteen (15) days of Buyer’s receipt of written notice of such breach from the Company.
If the APA is properly terminated in accordance with its terms, the APA shall then become null and void and, subject to certain exceptions, neither the Company nor the Buyer shall have any liability or obligation under the APA.
Governing Law; Venue Selection
The APA is governed by, and construed under, the internal laws of the State of California without reference to principles of conflicts or choice of laws. All disputes, claims and controversies under the APA must be brought in the exclusive forum of the county courts of Los Angeles, California.
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Expected Consummation of Asset Sale
We expect to consummate the Asset Sale as soon as practicable after all of the closing conditions in the APA, including approval of the Asset Sale Proposal and Plan of Liquidation Proposal by our stockholders, have been satisfied or waived. Subject to the satisfaction or waiver of these conditions, we expect the Asset Sale to close on or before March 30, 2017. However, there can be no assurance that the Asset Sale will be consummated at all or, if consummated, when it will be consummated.
Use of Proceeds from the Asset Sale
If we complete the Asset Sale, we will cease our current operations and use the sale proceeds (i) to pay off our transaction costs and related expenses, (ii) to pay off all of our existing debt, (iii) to make other adequate provision for the discharge of the Company’s liabilities and obligations and (iv) for working capital purposes and operating expenses while we complete a winding up and liquidation of the Company pursuant to the Plan of Liquidation. Any remaining balance of the sale proceeds plus our cash on hand (including cash on hand from any sale of retained assets, including inventory), after making adequate provision for the discharge of the Company’s liabilities and obligations, will be used to make cash distributions to our stockholders in accordance with applicable law.
Fairness Opinion
Our Board of Directors engaged Diamond Capital Partners (“Diamond”) to provide its opinion as to the fairness, from a financial point of view, of the consideration to be received by the Company pursuant to the APA. On February 10, 2017, Diamond delivered an opinion to the Board that, subject to the limitations set forth in its opinion, the consideration to be received by the Company in connection with the APA is fair to the Company from a financial point of view. That opinion can be found on page 27 of this proxy statement.
Diamond’s opinion does not constitute a recommendation as to whether or not any stockholder should vote or act with respect to the Asset Sale Proposal, the Plan of Liquidation Proposal or otherwise.
Dissenters’ Right of Appraisal
Stockholders will not have dissenters’ rights or rights of appraisal in connection with the approval of the Asset Sale or the Plan of Liquidation.
Anticipated Accounting Treatment
Following the consummation of the Asset Sale, we will remove the sold assets from our consolidated balance sheet and will record a gain on the sale equal to the difference between the aggregate consideration received and the Company’s book value of net assets sold.
Material U.S. Federal Income Tax Consequences of the Transaction
The Asset Sale will be treated as a taxable sale of assets by the Company and will give rise to net taxable gain recognition. The Company anticipates the gain recognized for United States federal income tax purposes will be offset entirely with net operating losses.
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Transactions and Agreements Related to the APA
On December 23, 2016, the Company entered into the Loan Agreement with the Buyer. At the initial closing on December 23, 2016, the Company received gross proceeds of $543,110.30, which includes $60,000 previously advanced to the Company by the Buyer and issued to the Buyer a Senior Secured Convertible Promissory Note in the principal amount of $543,110.30 (the “Note”). The Note was originally scheduled to mature on February 15, 2017 and the Company entered into an amendment to the Note on February 10, 2017 to extend the maturity date until March 30, 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 $331,899.70 of additional loans, which additional loans may be made in the sole discretion of the Buyer. The Company may prepay borrowings at any time, in whole or in part, without penalty, with the consent of the Buyer.
The loan accrues interest on the unpaid principal balance at an annual rate of 18% and the principal amount and all accrued but unpaid interest thereon is due and payable on the Maturity Date. If the Company is in default under the Loan Agreement or any related transaction document, including as a result of a default in the Company’s payment obligations, any amount due to the Buyer under the Loan Agreement will, at the Buyer’s option, bear interest from the date due until such past due amount is paid in full at an annual default rate of 22%. In addition, upon the occurrence and during the continuance of an event of default under the transaction documents, the Buyer may terminate its commitments to the Company and declare all of the Company’s obligations to the Buyer 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 or any related transaction document or (ii) the Company’s mutual agreement with the Buyer, the Buyer 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 Company’s 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 Company’s common stock during the five business days immediately prior to the conversion date (the “Conversion Shares”). Upon sale by the Buyer of Conversion Shares, if the Buyer realizes a net amount from such sale equal to less than the Conversion Amount, the Company is obligated to issue to the Buyer additional shares of its common stock equal to: (a) the Conversion Amount
minus
the net realized amount,
divided by
(b) the average volume weighted average price of the Company’s common stock during the five business days immediately prior to the date upon which the Buyer requests additional shares.
The payment and performance of all the Company’s indebtedness and other obligations to the Buyer, including all borrowings under the Loan Agreement and related agreements, are secured by first priority liens on substantially all of the Company’s assets pursuant to a Security Agreement. Upon the occurrence and during the continuance of an event of default under the transaction documents (which defaults include the Company’s failure to repay the Note by the Maturity Date and the Company making a Change in Recommendation), the Buyer may, at its option, exercise a number of remedies as a secured lender including selling, leasing or disposing all or a portion of the Company’s assets (including the Purchased Assets) or retaining all or a portion of the Company’s assets (including the Purchased Assets) in satisfaction of the Company’s obligations to the Buyer. Therefore, in the event the Asset Sale is not consummated, the Company’s stockholders may receive less consideration than they otherwise may if the Asset Sale closes.
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In connection with the Loan Agreement, on December 23, 2016, the Company entered into a consulting agreement with the Buyer (the “Consulting Agreement”), pursuant to which the Company will assist the Buyer in connection with the operation of its business, which includes the sale of e-cigarette products and services, and granted to the Buyer a non-exclusive license to use the Company’s intellectual property rights in connection with the marketing, sale and distribution of products developed as a result of the Company’s services to the Buyer. Unless earlier terminated, the Consulting Agreement is scheduled to expire on June 30, 2017. For the Company’s services under the Consulting Agreement, the Company received a fee of $25,000 on December 23, 2016.
Plan of Liquidation– ANNEX B
If the Plan of Liquidation is approved by our stockholders, after the completion of the Asset Sale or, in the event the Asset Sale is not consummated, at such other time as the Board shall determine, the Company will file with the Secretary of State of the State of Nevada a certificate of dissolution signed by an officer of the Company (the “Certificate of Dissolution”). The Certificate of Dissolution will become effective upon its filing with the Nevada Secretary of State. The dissolution of the Company will not impair any remedy or cause of action available to or against the Company or its directors, officers or stockholders commenced within 2 years after the date of the dissolution with respect to any remedy or cause of action in which the plaintiff learns, or in the exercise of reasonable diligence should have learned of, the underlying facts on or before the date of dissolution, or within 3 years after the date of dissolution with respect to any other remedy or cause of action. Any remedy or cause of action not commenced within the applicable period is barred. Following the filing of the Certificate of Dissolution, the Company will continue for the purpose of prosecuting and defending suits, actions, proceedings and claims of any kind or character by or against the Company and to enable it to gradually settle and close its business, collect its assets, collect and discharge its obligations, dispose of and convey its property, distribute its money and other property among the stockholders, after paying or adequately providing for the payment of its liabilities and obligations, and to do every other act to wind up and liquidate its business and affairs, but not for the purpose of continuing its historical operations.
Recommendation of our Board of Directors
After careful consideration, our Board of Directors recommends that you vote:
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“
FOR
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the Asset Sale Proposal;
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“
FOR
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the Plan of Liquidation Proposal; and
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“
FOR
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the Proposal to Adjourn or Postpone the Special Meeting.
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Reasons for the Transaction
In making its determination to approve and to recommend the Asset Sale for approval by the Company’s stockholders, the Board of Directors consulted with the Company’s management and its accounting and legal advisors and also considered the factors described in the section of this proxy statement titled “
Proposal #1: The Asset Sale Proposal
, as well as the following factors:
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the Board’s understanding of and familiarity with the business, operations, management, projections and future business prospects for the Company (as well as the risks and costs involved in pursuing those prospects);
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the Company’s historical and current financial performance and results of operations, the Company’s prospects and long-term strategy, its competitive position in the industry in which it operates and general economic and stock market conditions;
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the Company’s difficulty in securing product supply from its manufacturers, which resulted in a significant decline in sales in the quarter ended December 31, 2016 and the time required to locate and on-board alternative suppliers acceptable to the Company;
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the Purchase Price will be paid in cash providing certainty, immediate value and liquidity to the Company in order to satisfy its outstanding debt obligations and potentially distribute excess cash to its stockholders pursuant to the Plan of Liquidation;
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the Board’s belief, after a review of potential strategic alternatives, that the Purchase Price is more favorable to Company and its stakeholders than the potential value that might have resulted from other strategic opportunities potentially available to the Company, including remaining as a standalone company or pursuing a business combination transaction with another party;
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the Board’s belief that as a result of arm’s-length negotiations with the Buyer, the Company and its representatives had negotiated the highest purchase price that the Buyer was willing to pay for the Purchased Assets and that the terms of the Asset Purchase Agreement include the most favorable terms to the Company in the aggregate to which the Buyer was willing to agree;
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the Board’s belief that absent the completion of the Asset Sale or a significant cash infusion, the Company would have little recourse but to enter into a restructuring through bankruptcy which would likely reduce significantly or eliminate stockholder value and assets available to satisfy obligations to creditors;
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the Board’s knowledge of the regulatory environment surrounding the electronic cigarette industry, which is significantly increasing the regulatory burden on the Company, particularly in relation to its United States operations;
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the Board’s assessment of what prospective buyers are willing to pay for the Company’s assets and capital stock and the likelihood of closing a transaction with them in an expedited time frame;
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the Board’s belief that the Company had engaged in a reasonable process to obtain the best available value for stockholders taking into account the Company’s need for cash, including by creating an opportunity both before execution of the Asset Purchase Agreement and following execution of the Asset Purchase Agreement, for other potentially interested parties to negotiate a transaction with the Company;
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the review by the Board with representatives of Stubbs Alderton & Markiles, LLP, counsel to the Company (“Stubbs Alderton”) of the structure and terms of the Asset Sale and the Plan of Liquidation;
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the ability of the Board, pursuant to the provisions of the Asset Purchase Agreement, to evaluate an unsolicited bona fide Acquisition Proposal that the Company may receive at any time prior to the occurrence of approval of the Asset Sale and Plan of Liquidation by the stockholders of the Company, and the Board’s ability to withdraw its approval of the Asset Purchase Agreement (which will constitute a default under the Loan Agreement) if the Board reasonably concludes in good faith (following the receipt of advice from outside counsel) that withdrawing its approval of the Asset Purchase Agreement is required in order to comply with its fiduciary obligations to the Company’s stockholders;
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the opinion of Diamond, dated February 10, 2017, to the Board of Directors as to the fairness, from a financial point of view and as of such date, of the Purchase Price to be received by the Company pursuant to the Asset Purchase Agreement, which opinion was based on and subject to the assumptions, limitations, qualifications and conditions described in such opinion as more fully described under the caption “
Fairness of the Asset Sale.
”
Diamond’s opinion does not constitute a recommendation as to whether or not any stockholder should vote or act with respect to the Asset Sale Proposal, the Plan of Liquidation Proposal or otherwise
;
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the terms and conditions of the Asset Purchase Agreement, including the reasonableness of the conditions to closing under the Asset Purchase Agreement, the likelihood that the stockholder approval necessary to approve the Asset Sale and Plan of Liquidation will be obtained and the ultimate likelihood that the Asset Sale will be completed;
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that the Asset Sale is subject to approval of holders of at least a majority of all of the outstanding shares of the Company’s common stock, and that if such stockholders did not approve the Asset Sale terms, the Asset Sale would not close;
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that the Buyer intends to make offers of employment to a majority of the employees of the Company following the closing of the Transaction; and
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that the Purchase Price should enable the Company to satisfy its known obligations to its creditors.
In addition, the Board considered a variety of risks and other potentially negative factors concerning the Asset Purchase Agreement and the transactions contemplated thereby, including, among others, the following:
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the possibility that the Asset Sale may not be completed, or that completion may be delayed for reasons that are beyond the control of the Company, including the failure of the Company’s stockholders to approve the Asset Sale and Plan of Liquidation or the failure of the Company to obtain the third-party consents that are a condition to the closing of the Asset Sale;
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the risks and contingencies relating to the announcement and pendency of the Asset Sale and the risk and costs to the Company if the Asset Sale is not completed, including the effect of an announcement of termination of the Asset Purchase Agreement on the trading price of the Company’s common stock, business, and relationships with its customers, suppliers and employees;
·
if the Asset Purchase Agreement is terminated in connection with a Change of Recommendation, it will constitute a default under the Loan Agreement and permit Buyer to exercise its remedies as a secured lender, which may eliminate a potential cash distribution pursuant to the Plan of Liquidation to the Company’s stockholders;
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the incurrence of significant costs and expenses in connection with completing the Asset Sale, including the substantial amount of management time and effort that will be devoted to consummating the Asset Sale;
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the absence of dissenters’ rights for the Company’s stockholders with respect to the Asset Sale and Plan of Liquidation under Nevada law;
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as compared with a cash-out merger transaction, the uncertainty regarding the timing and amount of any cash distributions made by the Company to its stockholders, and the resulting tax treatment of any such distribution, following the Asset Sale, if the Board were to pursue making a cash distribution to its stockholders;
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that, following the Asset Sale, the Company will no longer continue its historical operations and that the Company’s stockholders will not participate in any future growth of the Company, including any potential future benefit from the continued development and commercialization of new products by the Buyer;
·
the Board’s decision, in connection with its entry into the Loan Agreement with Buyer on December 23, 2016, to enter into exclusive negotiations with the Buyer in relation to an acquisition of the Company or its assets, which may have deterred a third party from making an Acquisition Proposal;
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the restrictions in the Asset Purchase Agreement that prohibit the Company from soliciting or initiating discussions with third parties regarding a competing offer for the Company and that place certain constraints on the Company’s ability to respond to such proposals, subject to the fulfillment of certain fiduciary duties of the Board; and
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the other factors described under “Risk Factors.”
The Board of Directors concluded that the risks, uncertainties, restrictions and potentially negative factors associated with the Asset Purchase Agreement and Plan of Liquidation were outweighed by the potential benefits of the Asset Purchase Agreement and Plan of Liquidation.
The above discussion of the factors considered by the Board is not intended to be exhaustive, but does set forth certain material factors considered by the Board. In view of the wide variety of factors considered in connection with its evaluation of the Asset Sale and the Plan of Liquidation and the complexity of these matters, the Board did not consider it practicable to, and did not attempt to, quantify or otherwise assign relative or specific weight or values to any of these factors, and individual directors may have held varied views of the relative importance of the factors considered. The Board viewed its position and recommendation as being based on an overall review of the totality of the information available to it, including discussions with the Company’s management and legal and financial advisors, and overall considered these factors to be favorable to, and to support, its determination regarding the Asset Sale and the Plan of Liquidation.
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THE SPECIAL MEETING
Meeting, Place and Time
The Board of Directors is soliciting proxies in the accompanying form to be used at the Special Meeting to be held at the offices of Vapor Hub International Inc., at 1871 Tapo Street, Simi Valley, CA 93063, on March 29, 2017 at 9:00 a.m. local time, or at any adjournment or postponement thereof.
Purposes of the Meeting
The purpose of the Special Meeting is for our stockholders to consider and vote upon the following: (1) a proposal to approve the sale (the “Asset Sale”) by the Company of the Company’s proprietary rights to all its intangible assets pursuant to the Asset Purchase Agreement, which assets collectively constitute substantially all of the Company’s assets; (2) a proposal to approve the winding up and liquidation of the Company pursuant to the Plan of Liquidation; and (3) a proposal to adjourn or postpone the Special Meeting to a later date, if necessary or appropriate, to allow for the solicitation of additional proxies in favor of Asset Sale Proposal and the Plan of Liquidation Proposal, if there are insufficient votes to approve the Asset Sale Proposal and the Plan of Liquidation Proposal. As of the date of this Proxy Statement, our Board of Directors knows of no other business that may be presented for consideration at the Special Meeting.
Record Date and Shares Entitled to Vote
The Company fixed the close of business on February 16, 2017, as the record date (the “Record Date”) for the determination of holders of outstanding shares of the Company common stock entitled to notice of and to vote on all matters presented at the Special Meeting. On the Record Date, there were 94,349,313 shares of the Company’s common stock outstanding with each share being entitled to one vote on each matter to be voted upon. Stockholders may vote in person or by proxy.
Proxy Solicitation
In addition to the solicitation of proxies by the Board of Directors through use of the mails, proxies may also be solicited by the Company and its directors, officers, and employees (who will receive no additional compensation therefor) by telephone, telegram, facsimile transmission or other electronic communication, and/or by personal interview. We may also engage a proxy solicitation firm on terms and at costs reasonably acceptable to our Board of Directors. The Company will reimburse banks, brokerage houses, custodians, nominees and other fiduciaries that hold shares of common stock in their name or custody, or in the name of nominees for others, for their out-of-pocket expenses incurred in forwarding copies of the proxy materials to those persons for whom they hold such shares. The Company will bear the costs of the Special Meeting and of soliciting proxies therefor, including the cost of printing and mailing this proxy statement and related materials.
Any questions or requests for assistance regarding the Company proxies and related materials may be directed in writing to Lori Winther, Chief Financial Officer, Vapor Hub International Inc. at 1871 Tapo Street, Simi Valley, CA 93063, or by calling (805) 309-0530.
Quorum and Votes Required
The presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of the Company’s common stock on the Record Date shall constitute a quorum for the transaction of business at the Special Meeting. Holders of shares of the Company’s common stock present in person or represented by proxy (including shares which abstain or do not vote with respect to one or more of the matters presented for stockholder approval) will be counted for purposes of determining whether a quorum exists at the Special Meeting.
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The Asset Sale Proposal
: The Asset Sale Proposal must be approved by the affirmative vote of stockholders holding at least a majority of the Company’s issued and outstanding shares of common stock.
If you abstain from voting, either in person or by proxy, or you do not instruct your broker or other nominee how to vote your shares, the resulting abstention or broker non-vote will have the same effect as a vote against the Asset Sale Proposal
.
The Plan of Liquidation Proposal
: The Plan of Liquidation must be approved by the affirmative vote of stockholders holding at least a majority of the Company’s issued and outstanding shares of common stock.
If you abstain from voting, either in person or by proxy, or you do not instruct your broker or other nominee how to vote your shares, the resulting abstention or broker non-vote will have the same effect as a vote against the Plan of Liquidation Proposal
.
The Proposal to Adjourn or Postpone the Special Meeting
: If a quorum is present at the Special Meeting, the Proposal to Adjourn or Postpone the Special Meeting will be approved if it is approved by the affirmative vote of a majority of the shares entitled to vote that cast votes, in person or by proxy, “For” or “Against” the Proposal to Adjourn or Postpone the Special Meeting. Abstentions are not counted as votes cast for purposes of the Proposal to Adjourn or Postpone the Special Meeting.
If you abstain from voting on the Proposal to Adjourn or Postpone the Special Meeting, either in person or by proxy, the resulting abstention will have no effect on the approval of this proposal
.
Voting of Proxies
Your proxy card will appoint Lori Winther and Kyle Winther as proxy holders, or your representatives, to vote your shares as you indicate. They will have full power of substitution and may act alone as proxy holders to vote all of the shares of stockholders who return signed proxy cards. All proxies will be voted by the proxy holders in accordance with the instructions of the stockholder unless revoked as described below. If no choice is specified, the proxies will be voted
FOR
the approval of the Asset Sale Proposal,
FOR
the approval of the Plan of Liquidation Proposal and
FOR
the approval of the Proposal to Adjourn or Postpone the Special Meeting set forth in the accompanying Notice of Meeting and on the proxy card. Management is not aware of any other matters to be presented for action at the Special Meeting. If any other business properly comes before the Special Meeting, votes will be cast pursuant to those proxies in respect of any other business in accordance with the judgment of the persons acting under those proxies.
Pursuant to applicable Nevada law, abstentions are counted as present for purposes of determining the presence of a quorum. Because the affirmative vote of shares of outstanding common stock is required to approve the Asset Sale Proposal and the Plan of Liquidation Proposal, abstentions will have the same effect as a vote “against” those proposals. However, because the affirmative vote of a majority of the shares entitled to vote that cast votes, in person or by proxy, “For” or “Against” the Proposal to Adjourn or Postpone the Special Meeting, an express abstention regarding the Proposal to Adjourn or Postpone the Special Meeting will have no effect on the approval of those proposals.
Under the rules that govern brokers who have record ownership of shares that are held in “street name” for their clients, who are the beneficial owners of the shares, brokers have discretion to vote these shares on routine matters, but not on non-routine matters. In the case of non-routine matters, brokers may not vote shares held in “street name” for which they have not received voting instructions from the beneficial owner (“Broker Non-Votes”), whereas they may vote those shares in their discretion in the case of any routine matter. Broker Non-Votes will not be counted for purposes of calculating whether a quorum is present at the Special Meeting or for purposes of determining the numbers of votes present in person or represented by proxy and entitled to vote with respect to a particular proposal. The Asset Sale Proposal, the Plan of Liquidation Proposal and the Proposal to Adjourn or Postpone the Special Meeting are all non-routine matters. Thus, Broker Non-Votes will not be counted for the purpose of determining a quorum at the Special Meeting. Broker Non-Votes will have the effect of a vote “against” the Asset Sale Proposal and the Plan of Liquidation Proposal. Broker Non-Votes will not have any effect on the outcome of the vote on the Proposal to Adjourn or Postpone the Special Meeting. Therefore, it is important that you complete and return your proxy early so that your vote may be recorded.
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Revocability of Proxies
Execution of a proxy by a stockholder will not affect such stockholder’s right to attend the Special Meeting and to vote in person. A stockholder who completes and returns the proxy that accompanies this proxy statement may revoke that proxy at any time before the closing of the polls at the Special Meeting. A stockholder may revoke a proxy by filing a written notice of revocation with, or by delivering a duly executed proxy bearing a later date to, the Secretary of the Company at the Company’s main office address at any time before the Special Meeting. Stockholders may also revoke proxies by delivering a duly executed proxy bearing a later date to the inspector of election at the Special Meeting before the close of voting, or by attending the Special Meeting and voting in person. Notwithstanding the foregoing, if a stockholder holds its shares in street name, such stockholder may vote its shares in person at the Special Meeting only if it obtains a proxy executed in its favor, from the record holder. Representatives of Stubbs Alderton & Markiles, LLP, will act as the inspectors of election at the meeting. You may attend the Special Meeting even though you have executed a proxy, but your presence at the Special Meeting will not automatically revoke your proxy.
Anticipated Mailing Date
Our principal executive offices are located at 1871 Tapo Street, Simi Valley, CA 93063. It is anticipated that the mailing to stockholders of this Proxy Statement and the enclosed proxy will commence on or about March 3, 2017.
Business of the Company
We design, source, market and sell the next generation of smokeless electronic cigarettes which are popularly known as “vaping” devices. We provide a selection of premium vaping devices and related accessories which we design and source, including our popular “Limitless Mods” and “Limitless Atomizers”, and we also purchase vaping devices and related accessories from third parties for resale. We distribute our products nationally and internationally to wholesale customers and retail customers, including through our website www.vapor-hub.com. We also market and sell our products through a retail location located in southern California.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, that are subject to the safe harbor created thereby. These forward-looking statements are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. The use of words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes,” “may”, “will”, and “should”, among others, generally identify forward-looking statements.
Actual results could differ materially from those contained in the forward-looking statements. Factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include the following: economic crises; terrorism; disruptions resulting from severe weather or other Acts of God; uncertainties surrounding the Asset Sale, including the uncertainty as to the timing of the closing and whether our stockholders will approve the Asset Sale, the possibility that competing offers for the assets to be sold will be made, the possibility that various closing conditions for the Asset Sale may not be satisfied or waived, and the possibility that the Company or the Buyer could terminate the Asset Purchase Agreement; and uncertainties surrounding the Plan of Liquidation, including potential negative tax treatment if the Liquidation is not approved, the timing of distributions to stockholders, and the necessary contingency reserves.
These and additional factors to be considered are set forth under “
Risk Factors
” beginning on page 19 of this proxy statement.
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Other unknown or unpredictable factors that could also adversely affect our business, financial condition and results of operations may arise from time to time. In light of these risks and uncertainties, the forward-looking statements discussed in this proxy statement may not prove to be accurate. Accordingly, you should not place undue reliance on these forward-looking statements, which only reflect the views of our management as of the date of this proxy statement. Except as required by applicable law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results or expectations.
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RISK FACTORS
In addition to the other information contained in this proxy statement, you should carefully consider the following risk factors relating to the Asset Sale and the Plan of Liquidation.
While the Asset Sale is pending, it creates uncertainty about our future, which could materially and adversely affect our business, financial condition and results of operations.
While the Asset Sale is pending, it creates uncertainty about our future. Therefore, our current or potential business partners may decide to delay, defer or cancel entering into new business arrangements with us pending consummation of the Asset Sale or termination of the APA. In addition, while the Asset Sale is pending, we are subject to a number of risks, including:
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the diversion of management and employee attention from our day-to-day business, which impacts our ability to operate our business in the ordinary course and generate revenues;
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the loss of employees who may depart due to their concern about losing their jobs following the Asset Sale or a shift in loyalty of employees of the Company who see the Buyer as their
de facto
employer even before the consummation of the Asset Sale; and
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our inability to respond effectively to competitive pressures, industry developments and future opportunities.
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The occurrence of any of these events individually or in combination could materially and adversely affect our business, financial condition and results of operations. We have also incurred substantial transaction costs in connection with the Asset Sale, and we will continue to do so until the consummation of the Asset Sale.
The Asset Purchase Agreement limits our ability to pursue alternatives to the Asset Sale
.
The APA contains provisions that make it substantially more difficult for us to sell the Company’s assets to a party other than the Buyer. Specifically, the Company agreed not to solicit any acquisition proposals until the date of closing or the proper termination of the APA
except that
the Board of Directors does have the right to withhold, withdraw, amend or modify its approval of the APA if (i) the Company receives an unsolicited written acquisition proposal that its Board of Directors believes in good faith is reasonably likely to be consummated and would result in a transaction more favorable to Company’s stockholders from a financial point of view and (ii) it reasonably concludes in good faith that taking such action is required in order to comply with its fiduciary obligations to the Company’s stockholders under applicable law. However, in the event that the Company makes a Change of Recommendation, such action will constitute an event of default under the Loan Agreement with the Buyer. Upon the occurrence and during the continuance of an event of default under the Loan Agreement, the Buyer may, at its option, exercise a number of remedies as a secured lender including selling, leasing or disposing all or a portion of our assets (including the Purchased Assets) or retaining all or a portion of our assets (including the Purchased Assets) in satisfaction of our obligations to the Buyer.
These provisions could discourage a third party that might have an interest in acquiring the Company or its assets from considering or proposing such an acquisition, even if that party was prepared to pay consideration with a higher value than the purchase price to be paid by the Buyer.
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The failure to consummate the Asset Sale may materially and adversely affect our business, financial condition and results of operations
.
The Buyer’s obligation to close the Asset Sale is subject to a number of conditions, including our stockholders’ approval of the Asset Sale Proposal and the Plan of Liquidation Proposal. We cannot control some of these conditions and we cannot assure you that they will be satisfied or that the Buyer will waive any that are not satisfied. If the Asset Sale is not consummated, we may be subject to a number of risks, including the following:
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we may not be able to identify an alternate transaction, or if an alternate transaction is identified, such alternate transaction may not result in an equivalent price to what is proposed in the Asset Sale;
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the trading price of our common stock may decline to the extent that the then current market price reflects a market assumption that the Asset Sale will be consummated;
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our relationships with our customers, suppliers and employees may be damaged beyond repair and the value of our assets will likely significantly decline; and
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we likely will not be able to satisfy our debt obligations under our Loan Agreement with the Buyer, which is scheduled to mature on March 30, 2017. Upon the occurrence and during the continuance of an event of default under the Loan Agreement, the Buyer may, at its option, exercise a number of remedies as a secured lender including selling, leasing or disposing all or a portion of our assets (including the assets to be purchased in the Asset Sale) or retaining all or a portion of our assets (including the assets to be purchased in the Asset Sale) in satisfaction of our obligations to the Buyer.
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The occurrence of any of these events individually or in combination will likely materially and adversely affect our business, financial condition and results of operations, cause the market value of our common stock to significantly decline or become worthless and force us to liquidate and windup our operations.
The failure to consummate the Asset Sale by the prescribed deadline will likely result in the Asset Sale being abandoned
.
Either the Buyer or the Company may terminate the APA without penalty if (i) our stockholders do not approve the Asset Sale Proposal and Plan of Liquidation Proposal by March 30, 2017 or (ii) if the Asset Sale is otherwise not completed by March 30, 2017 (unless such deadline is missed due to a breach by the party seeking termination of a representation, warranty, covenant or agreement in the APA). In the event the APA is terminated, the potential adverse effects from failing to consummate the Asset Sale discussed above would be implicated, including the Buyer having the right to exercise its remedies as a secured lender under the Loan Agreement as a result of our inability to satisfy our debt obligations under the Loan Agreement by the Maturity Date.
Our executive officers and directors may have interests in the Asset Sale other than, or in addition to, the interests of our stockholders generally
.
Members of our Board of Directors and our executive officers may have interests in the Asset Sale that are different from, or are in addition to, the interests of our stockholders generally, including as discussed under “
Interests of Certain Parties in the Matters to be Acted Upon
” below. Our Board of Directors was aware of these interests and considered them, among other matters, in approving the Asset Purchase Agreement.
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We will no longer be an operating company following the closing of the Asset Sale
.
If we complete the Asset Sale and the stockholders approve the Plan of Liquidation (or if the Asset Sale is not consummated and the stockholders approve the Plan of Liquidation), we will cease to do business and will not engage in any business activities except for dealing with post-closing matters (in the event the Asset Sale is consummated) and for the purpose of liquidating our remaining assets, paying any debts and obligations, distributing the remaining assets to stockholders, and doing other acts required to liquidate and wind up our business and affairs. We will pay or make provision for payment of our known or reasonably ascertainable liabilities that have been incurred or are expected to be incurred prior to liquidation. After that, we will distribute the remaining assets to our stockholders in proportion to their respective stockholder interest in the Company. In considering how to vote on the Asset Sale Proposal and the Plan of Liquidation Proposal, stockholders should not assume that they will receive any distributions from the Company.
We cannot determine at this time the exact timing of any distribution to our stockholders because there are many factors, some of which are outside of our control, that could affect our ability to make any distribution.
As stated previously, the Company can give no assurance regarding the amount of any distribution or if a distribution to our stockholders will occur. In addition, at this time, we cannot determine when (if ever) we will be able to make any distributions to our stockholders. These distributions are dependent on a number of factors, including but not limited to when we are able to sell our remaining assets, the amount and nature of any unknown or contingent liabilities in the future, inaccuracies in the cost estimates to resolve currently known contingent liabilities, general business and economic conditions, and other matters.
If our stockholders vote against the Plan of Liquidation Proposal, they could receive less consideration in the event the Company is able to make a distribution to its stockholders
.
If our stockholders vote against the Plan of Liquidation Proposal, the Buyer is not obligated to consummate the Asset Sale and the Buyer would have the right to terminate the APA. In the event the APA is terminated and Company’s obligations under the Loan Agreement are not otherwise satisfied by the Maturity Date, the Buyer would have the right, at the Company’s expense, to exercise its remedies as a secured lender under the Loan Agreement. Therefore, in the event the Asset Sale is not consummated, the Company’s stockholders may receive less consideration than they otherwise may if the Asset Sale closes and the Plan of Liquidation is approved. In addition, our stockholders could incur an increased stockholder-level tax liability in the event that property (including cash) distributed to stockholders (if any) is characterized as a dividend for tax purposes rather than a return of capital (see the section entitled “Certain U.S. Federal Income Tax Consequences of the Winding Up - Certain U.S. Federal Income Tax Consequences to Stockholders”).
If we fail to create an adequate contingency reserve for payment of our expenses and liabilities, our stockholders may be required to return any received distributions.
If the Plan of Liquidation is approved by our stockholders, following the closing of the Asset Sale (or if the Asset Sale is not consummated, at such time as determined by our Board of Directors), we plan to promptly file the Certificate of Dissolution with the Nevada Secretary of State. The Certificate of Dissolution will become effective upon its filing with the Nevada Secretary of State. The dissolution of the Company will not impair any remedy or cause of action available to or against the Company or its directors, officers or stockholders commenced within 2 years after the date of the dissolution with respect to any remedy or cause of action in which the plaintiff learns, or in the exercise of reasonable diligence should have learned of, the underlying facts on or before the date of dissolution, or within 3 years after the date of dissolution with respect to any other remedy or cause of action. Any remedy or cause of action not commenced within the applicable period is barred. Following the filing of the Certificate of Dissolution, the Company will continue for the purpose of prosecuting and defending suits, actions,
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proceedings and claims of any kind or character by or against the Company and to enable it to gradually settle and close its business, collect its assets, collect and discharge its obligations, dispose of and convey its property, distribute its money and other property among the stockholders, after paying or adequately providing for the payment of its liabilities and obligations, and to do every other act to wind up and liquidate its business and affairs, but not for the purpose of continuing its historical operations.
If the amount ultimately required to be paid in respect of our liabilities exceeds the amount available from money we have set aside to satisfy our creditors, our creditors could seek an injunction against our making distributions to our stockholders on the grounds that the amounts to be distributed are needed to provide for the payment of our expenses and liabilities. Any such action could delay or substantially diminish the amount of any cash distributions to our stockholders. In addition, if we fail to create an adequate contingency reserve for payment of our expenses and liabilities and we make distributions to our stockholders, creditors could assert claims against the Company for the payment of any shortfall. In such event, a stockholder could be required to return all distributions previously made to such stockholder, provided that no stockholder will be liable for any claim against the Company in an amount in excess of such stockholder’s pro rata share of the claim or the amount so distributed to such stockholder, whichever is less. Moreover, in the event a stockholder has paid taxes on amounts previously received by the stockholder, a repayment of all or a portion of such amount could result in a stockholder incurring a net tax cost if the stockholder’s repayment of an amount previously distributed does not cause a commensurate reduction in taxes payable. The Board of Directors is not required to obtain a solvency opinion as a condition to authorizing a liquidating distribution and we cannot assure you that any contingency reserve established by us will be adequate to cover all expenses and liabilities.
The tax treatment of any liquidating distributions may vary from stockholder to stockholder, and the discussions in this proxy statement regarding such tax treatment are general in nature
.
You should consult your own tax advisor instead of relying on the discussions of tax treatment in this proxy statement for tax advice.
We have not requested a ruling from the Internal Revenue Service (“IRS”) with respect to the anticipated tax consequences of the liquidation of the Company, and we will not seek an opinion of counsel with respect to the anticipated tax consequences of any liquidating distributions. If any of the anticipated tax consequences described in this proxy statement proves to be incorrect, the result could be increased taxation at the corporate and/or stockholder level, thus reducing the benefit to our stockholders and us from the liquidation and distributions. Tax considerations applicable to particular stockholders may vary with and be contingent upon the stockholder’s individual circumstances.
Stockholders may not be able to recognize a loss for federal income tax purposes until they receive a final distribution from us
.
As a result of the liquidation of the Company, for federal income tax purposes, stockholders will recognize gain or loss equal to the difference between (i) the sum of the amount of cash distributed to them and the aggregate fair market value of any property distributed to them, and (ii) their tax basis for their holdings in the Company. A stockholder’s tax basis in their holdings in the Company will depend upon various factors, including the stockholder’s cost and the amount and nature of any distributions received with respect thereto. Any loss generally will be recognized only when the final distribution from us has been received, and if the stockholder is still the owner of his, her, or its holdings in the Company.
In certain circumstances, a third party may be appointed to oversee the Company’s liquidation
.
In connection with the Company’s dissolution, a Nevada district court, on application of any creditor or stockholder of the Company, at any time, may either continue the directors as trustees to windup the Company’s operations, or appoint one or more persons to perform such tasks. If a third party is appointed by the court to windup the Company, such third party would have control over the liquidation process, including the sale or distribution of any remaining assets under the approved Plan of Liquidation.
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PROPOSAL # 1: THE ASSET SALE PROPOSAL
The following information describes material aspects of the Asset Sale. It is not intended to be a complete description of all information relating to the Asset Sale and is qualified in its entirety by reference to more detailed information contained in the Annexes to this document, including the APA. A copy of the APA is included as
ANNEX A
and is incorporated herein by reference. You are urged to read the Annexes, including the APA, in their entirety.
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Parties to the Transaction
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Referred to as:
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PLY Technology
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the “Buyer”
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Vapor Hub International Inc.
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the “Company”
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The Company’s principal executive office is located at 1871 Tapo Street, Simi Valley, CA 93063. The telephone number of the Company’s principal executive offices is (805) 309-0530.
The Buyer’s principal executive office is located at 122A East Foothill Blvd. #145, Arcadia, CA 91006. The telephone number of the Buyer’s principal executive offices is (626) 693-1554.
The Asset Sale- Brief Overview
On February 10, 2017, the Company and the Buyer entered into the APA. Under the APA, the Company agreed to sell the Company’s proprietary rights to its intangible assets to the Buyer, and the Buyer agreed to pay the Company a purchase price of $1,000,000, subject to the satisfaction of certain closing conditions, which include obtaining the approval of the Company’s stockholders of the Asset Sale Proposal and the Plan of Liquidation Proposal. The Company intends to use the net proceeds from the Asset Sale as further described under the heading “
Proposal #2: Plan of Liquidation Proposal”.
For a detailed summary of the terms of the APA, please see the summary of the APA under the heading “The Asset Purchase Agreement” below.
Background of the Transaction
In November of 2015, Kyle Winther, the Chief Executive Officer and a director of the Company, Lori Winther, the Chief Financial Officer and a director of the Company, Jake Perlingos, the President and a director of the Company, Niels Winther, a director of the Company and Justin Moreno, formerly a director of the Company and formerly the Company’s Chief Operating Officer met with Tom Li, the Chief Executive Officer of Jasper Technology, Inc. (“Jasper”), a supplier to the Company, to discuss a potential strategic transaction between the two companies. Following the meeting, Jasper informed the Company that it did not wish to pursue further discussions relating to a strategic transaction.
In May of 2016, the Company began to have IJOYGROUP Co. Ltd., a manufacturer based in China (“IJoy”), co-design and manufacture its “Limitless” branded vaping products and the Company received its first shipment of products from IJoy in June of 2016. The Company continued to receive product shipments of its “Limitless” branded products from IJoy until August, 2016. After this time, IJoy failed to supply the Company with products despite the Company’s continued efforts to secure supply, and purportedly manufactured and sold products under the Company’s “Limitless” brand without consent. As a result of not having an adequate supply of its Limitless branded products, the Company’s revenues significantly declined, particularly in the final three months of the calendar year ended December 31, 2016 and its working capital was significantly depleted.
On October 5, 2016, a broker acting on behalf of a medical marijuana company (“Company B”) presented an unsolicited letter of intent to acquire the Company. On October 6, 2016, Kyle Winther had a telephone conference with the broker to discuss the letter of intent.
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On October 13, 2016, Kyle Winther and Jake Perlingos approached Tom Li to determine if Mr. Li was aware of other parties who may be interested in acquiring or investing in the Company.
On October 14, 2016, Kyle Winther, Jake Perlingos and Lori Winther participated in a conference call with representatives of Company B to further discuss the letter of intent and explore ways in which the companies could potentially work together.
On October 18, 2016, Tom Li on behalf of a potential acquirer requested financial information from the Company that was in the public domain.
On October 19, 2016, Kyle Winther and Jake Perlingos participated in a phone conversation with a representative of one of the largest manufacturers and distributers in the world of vaping devices and accessories (“Company C”), about a potential strategic transaction.
On October 24, 2016, Kyle Winther, Jake Perlingos and Lori Winther had a phone conference with an executive of Company C to further discuss the potential of Company C acquiring the Company. On approximately October 26, 2016, Company C informed the Company that it was not interested in further pursuing an acquisition of the Company.
On October 25, 2016, Kyle Winther, Lori Winther, Jake Perlingos and Niels Winther, constituting the entire Board of Directors, along with a representative of Stubbs Alderton, counsel to the Company, and representatives of Hall and Company, Inc., the Company’s auditors, met in person at the Company’s offices to consider strategic alternatives for the Company, including going dark and also discussed structures pursuant to which an acquirer could acquire control of the Company.
On October 27, 2016, Kyle Winther and Jake Perlingos participated in a conference call with a representative of PLY Group about a potential strategic transaction with PLY USA.
On October 28, 2016, all members of the Board of Directors met in person at the Company’s offices to consider strategic alternatives for the Company and discussed the Company’s conversations with various potential acquirers. After discussion, the Board decided to further explore a possible strategic transaction with PLY USA or its affiliate. After reviewing diligence information relating to Company B, the Board decided to end its discussions with Company B after determining that a strategic transaction with Company B would not be in the best interests of the Company and its stockholders. The Board also discussed the potential of finding an alternate manufacturer to IJoy, and determined that an alternate supply of Limitless branded products could not be secured (and deliver products to the Company) for at least three to six months.
On November 1, 2016, Kyle Winther and Jake Perlingos discussed various potential deal structures with a representative of PLY USA pursuant to which PLY USA or its affiliates would acquire control of the Company.
On November 3, 2016, Kyle Winther and Jake Perlingos received an email from representatives of PLY USA with an offer to acquire the business of the Company through an asset purchase.
On November 8, 2016, Kyle Winther and Jake Perlingos participated in a conference call with representatives of PLY USA and provided a counter offer during the call, which included a higher purchase price for the assets to be acquired.
On November 11, 2016, Kyle Winther, Lori Winther, Jake Perlingos and Niels Winther along with a representative of Stubbs Alderton, counsel to the Company participated in a phone conference with representatives of PLY USA and representatives of Squire Patton Boggs (US) LLP, counsel to PLY USA, to generally discuss the structure and terms of a potential strategic transaction between the Company and PLY USA.
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On November 15, 2016, Kyle Winther and Lori Winther met with a representative of PLY USA to discuss PLY USA’s asset purchase offer.
On November 17, 2016, Kyle Winther, Lori Winther, Jake Perlingos and Niels Winther met with representatives of PLY USA at the Company’s offices to discuss the potential strategic transaction. During the meeting, the Company proposed alternative structures to an asset purchase for PLY USA’s consideration, including a tender offer for all of the Company’s shares or a merger transaction pursuant to which the Company would become a wholly-owned subsidiary of PLY USA or its affiliates.
On November 18, 2016, Kyle Winther, Lori Winther, Jake Perlingos and Niels Winther along with a representative of Stubbs Alderton, counsel to the Company (who participated by phone) met with representatives of PLY USA and representatives of Squire Patton Boggs (US) LLP, counsel to PLY USA, to further discuss the structure and terms of a potential strategic transaction between the Company and PLY USA. To address the Company’s immediate need for financing, PLY USA agreed to provide bridge financing to the Company through its affiliate, the Buyer, on terms to be determined while the structure of an acquisition of the Company by PLY USA was further explored.
On November 20
th
, 2016, the Company received drafts of the Loan Agreement, the Note and a Security Agreement (the “Security Agreement”) from a representative of Squire Patton Boggs.
On November 21, 2016, Lori Winther and Kyle Winther of the Company and a representative of Stubbs Alderton, counsel to the Company, participated in a phone conference with representatives of the Buyer and representatives of its counsel, Squire Patton Boggs, to discuss the terms and structure of the bridge financing.
On November 24, 2016, the Buyer provided $60,000 of funding to the Company to meet a payment obligation of the Company.
On December 8, 2016, Lori Winther, Kyle Winther and Jake Perlingos of the Company and a representative of Stubbs Alderton participated in a conference call with representatives of the Buyer and representatives from its counsel, Squire Patton Boggs, to discuss the terms of the bridge financing and the structure of a potential acquisition of the Company by the Buyer.
On December 11, 2016, a representative of Squire Patton Boggs distributed an email outlining proposed terms for the bridge financing and the structure of a potential acquisition of the Company by the Buyer.
From December 12, 2016 to December 14, 2016, counsel to the Company distributed revised drafts of the Security Agreement, Note and Loan Agreement and also distributed drafts of ancillary agreements to the Loan Agreement to counsel to the Buyer for review.
On December 15, 2016, counsel to the Buyer provided revised drafts of the Loan Agreement and also distributed a draft Consulting Agreement and draft Asset Purchase Agreement for the Company’s review.
From December 15, 2016 to December 23, 2016, the parties continued to finalize the Loan Agreement, the Note, the Security Agreement and the related transaction documents.
On December 23, 2016, the Company and the Buyer entered into the Loan Agreement, the Note, the Security Agreement and the related transaction documents pursuant to which the Buyer agreed to loan the Company up to $875,000, including the $60,000 previously advanced to the Company on November 24, 2016.
On December 30, 2016, the Company filed a Current Report on Form 8-K with the Securities and Exchange Commission to report the entry into the Loan Agreement with the Buyer.
On January 4, 2017, counsel to the Company provided a revised draft of the Asset Purchase Agreement to the Buyer and its counsel for review.
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On January 6, 2017, counsel to the Buyer provided a revised draft of the Asset Purchase Agreement to the Company and its counsel for review.
On January 10, 2017, counsel to the Company provided a revised draft of the Asset Purchase Agreement to the Buyer and its counsel for review.
On January 20, 2017, counsel to the Buyer provided a revised draft of the Asset Purchase Agreement to the Company and its counsel for review.
On January 20, 2017, the Company engaged Diamond to provide its opinion as to the fairness, from a financial point of view, of the consideration to be received by the Company pursuant to the APA.
On January 24, 2017 after considerable discussion between the Buyer and the Company, the Buyer agreed to increase the Purchase Price from $875,000 to $1,000,000.
On February 10, 2017, the Board of Directors held a telephonic meeting, together with representatives from Stubbs Alderton and Diamond. At this meeting, a representative of Stubbs Alderton provided an overview of the transaction and reviewed the Board’s fiduciary duties, including in connection with a sale of substantially all of the assets of the Company. The Stubbs Alderton representative then reviewed the material terms and conditions of the proposed Asset Purchase Agreement, which had been circulated to the Board in advance of the meeting. Also at this meeting, Diamond reviewed with the Board of Directors its financial analysis of the Purchase Price consideration to be received by the Company pursuant to the Asset Purchase Agreement and delivered a favorable opinion regarding the fairness, from a financial point of view, of the Purchase Price to be received by the Company pursuant to the Asset Purchase Agreement. After considering, among other things, the factors described below under “The Reasons for the Recommendation”, the Board of Directors unanimously authorized, approved and declared advisable the execution, delivery and performance of the Asset Purchase Agreement and approved the Plan of Liquidation and resolved to recommend that the stockholders of the Company adopt and approve the Asset Sale and the Plan of Liquidation.
On February 10, 2017, the Company and Buyer executed the Asset Purchase Agreement.
On February 14, 2017, the Company announced the transaction to the public, via a Current Report on Form 8-K.
Transactions and Agreements Related to the Asset Purchase Agreement
On December 23, 2016, the Company entered into the Loan Agreement with the Buyer. At the initial closing on December 23, 2016, the Company received gross proceeds of $543,110.30, which includes $60,000 previously advanced to the Company by the Buyer and issued to the Buyer the Note in the principal amount of $543,110.30. The Note was originally scheduled to mature on February 15, 2017 and the Company entered into an amendment to the Note on February 10, 2017 to extend the Maturity Date until March 30, 2017. At any time prior to the Maturity Date or the earlier termination of the Loan Agreement, the Company can request up to $331,899.70 of additional loans, which additional loans may be made in the sole discretion of the Buyer. The Company may prepay borrowings at any time, in whole or in part, without penalty, with the prior consent of the Buyer.
The loan accrues interest on the unpaid principal balance at an annual rate of 18% and the principal amount and all accrued but unpaid interest thereon is due and payable on the Maturity Date. If the Company is in default under the Loan Agreement or any related transaction document, including as a result of a default in the Company’s payment obligations, any amount due to the Buyer under the Loan Agreement will, at the Buyer’s option, bear interest from the date due until such past due amount is paid in full at an annual default rate of 22%. In addition, upon the occurrence and during the continuance of an event of default under the transaction documents, the Buyer may terminate its commitments to the Company and declare all of the Company’s obligations to the Buyer to be immediately due and payable.
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While the Note is outstanding, but only upon the occurrence of (i) an event of default under the Loan Agreement or any related transaction document or (ii) the Company’s mutual agreement with the Buyer, the Buyer 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 Company’s 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 Company’s common stock during the five business days immediately prior to the conversion date (the “Conversion Shares”). Upon sale by the Buyer of Conversion Shares, if the Buyer realizes a net amount from such sale equal to less than the Conversion Amount, the Company is obligated to issue to the Buyer additional shares of its common stock equal to: (a) the Conversion Amount
minus
the net realized amount,
divided by
(b) the average volume weighted average price of the Company’s common stock during the five business days immediately prior to the date upon which the Buyer requests additional shares.
The payment and performance of all the Company’s indebtedness and other obligations to the Buyer, including all borrowings under the Loan Agreement and related agreements, are secured by first priority liens on substantially all of the Company’s assets pursuant to the Security Agreement. Upon the occurrence and during the continuance of an event of default under the transaction documents (which defaults include the Company’s failure to repay the Note by the Maturity Date and the Company making a Change in Recommendation), the Buyer may, at its option, exercise a number of remedies as a secured lender including selling, leasing or disposing all or a portion of the Company’s assets (including the assets to be purchased in the Asset Sale) or retaining all or a portion of the Company’s assets (including the assets to be purchased in the Asset Sale) in satisfaction of the Company’s obligations to the Buyer. Therefore, in the event the Asset Sale is not consummated, the Company’s stockholders may receive less consideration than they otherwise may if the Asset Sale closes.
In connection with the Loan Agreement, on December 23, 2016, the Company entered into the Consulting Agreement, pursuant to which the Company will assist the Buyer in connection with the operation of its business, which includes the sale of e-cigarette products and services, and granted to the Buyer a non-exclusive license to use the Company’s intellectual property rights in connection with the marketing, sale and distribution of products developed as a result of the Company’s services to the Buyer. Unless earlier terminated, the Consulting Agreement is scheduled to expire on June 30, 2017. For the Company’s services under the Consulting Agreement, the Company received a fee of $25,000 on December 23, 2016.
2015 Omnibus Incentive Plan
If the Asset Sale is consummated, such event will be deemed to be a “Change In Control” under the Company’s 2015 Omnibus Incentive Plan and will cause all unvested options to immediately vest and become exercisable upon the consummation of the Asset Sale. However, since all of the Company’s outstanding options are fully vested and exercisable, the Asset Sale will not have any impact on outstanding option awards.
Governmental and Regulatory Approvals
The Asset Sale is not contingent on obtaining any governmental or regulatory approvals.
Fairness of the Asset Sale
On February 10, 2017, Diamond Strategic Advisors, LLC (“Diamond”) rendered its oral opinion to the Company’s Board of Directors (which was subsequently confirmed in writing by delivery of Diamond’s written opinion addressed to the Company’s Board of Directors dated the same date), as to whether, as of such date, the Asset Sale transaction is fair, from a financial point of view, to the Company (the “Fairness Opinion”). Diamond did not negotiate the Asset Sale or advise the Company with respect to alternatives to it.
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The Company selected Diamond to deliver the Fairness Opinion based on Diamond’s qualifications, experience and reputation in mergers and acquisitions, and the experience of its personnel in rendering fairness opinions generally, including to small and middle-market companies. Neither Diamond nor any of its principals has any ownership or other beneficial interests in the Company and has not provided any previous investment banking or consulting services to the Company or otherwise had a material relationship with the Company. Diamond will receive a non-contingent fee from the Company relating to its services in providing the Fairness Opinion.
The following is the full text of Diamond’s opinion:
February 10, 2017
The Board of Directors
Vapor Hub International Inc.
Ladies and Gentlemen:
We understand that Vapor Hub International Inc (“VHI” or “Company” hereinafter) is selling all of its rights, title and interest in and to its Proprietary Rights, including its Limitless branded products, and all goodwill associated therewith owned by the Company or used, or held for use by the Company, in connection with its business as conducted by the Company as of the date of the Asset Purchase Agreement (“APA”), together with all rights to collect income, royalties, damages, products, proceeds and payments due and payable at the closing or after the closing with respect to the foregoing, including claims against third parties for past, present or future infringements of such Proprietary Rights (collectively the “Purchased Assets”), to PLY Technology (“PLY”) (the “Transaction”) for $1,000,000 (the “Consideration”). The Purchased Assets do not include any other assets of the Company. The Consideration to be received by VHI will consist of the cancellation of all indebtedness owed by VHI to PLY as per that certain Credit Agreement dated December 23, 2016 in the original principal amount of $543,110.30, with the remainder payable in cash.
Diamond Strategic Advisors, LLC (“Diamond” or “we”) has been engaged by VHI to render this written Opinion to the Board of Directors (the “Board”) of VHI as to whether, as of the date of this opinion, the Transaction is fair, from a financial point of view, to the Company.
We have not been requested to, and did not, (a) solicit third party indications of interest in acquiring all or any part of the Company, or (b) perform an independent appraisal or valuation of the Company. Furthermore, we have not negotiated the Transaction or advised you with respect to alternatives to it.
In connection herewith, Diamond has relied upon, without independent verification, public and non-public reports of the Company and other information supplied to it by or on behalf of the Company. Diamond shall not in any respect be responsible for the accuracy or completeness of any such report or information, public or non-public, supplied to it by or on behalf of the Company or for any obligation to verify the same nor for any conclusions based upon inaccurate or incomplete information.
We have not been requested to opine as to, and this Opinion does not express an opinion as to, make any recommendations with respect to, or otherwise address, among other things, (i) the underlying business decision of the Company or any other party to proceed with or effect the Transaction, (ii) the terms of any arrangements, understandings, agreements or documents related to, or the form or any other portion or aspect of, the Transaction or otherwise, (iii) the solvency or creditworthiness of the Company or any other participant in the Transaction under any applicable laws relating to bankruptcy, insolvency, fraudulent conveyance or similar matters, or (iv) the effect of the Company entering into or consummating the Transaction on any contract, agreement or arrangement to which the Company may be a party. We express no opinion with respect to the fairness of the amount or nature of the compensation to any of the Company’s officers, directors or employees, or any class of such persons, if any, relative to the consideration to be received by the holders of shares of the Company’s common stock in the transaction, if any.
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In arriving at its Opinion, Diamond has made the following reviews and inquires:
•
Visited the business offices of the Company;
•
Held discussions with Company management regarding the Transaction, and the business, operations and assets of the Company, and the historical and projected future performance of the Company;
•
Reviewed internally prepared historical financial statements of the Company including (a) Balance Sheets as of January 30, 2017, December 31, 2016, December 31, 2015, June 30, 2016, June 30, 2015, and June 30 2014; (b) Statement of Cash Flows July through December 2016 and July through December 2015; and (c) Income Statements July 2015 through June 2016, July 2014 through June 2015, July through December 2016 and July through December 2015.;
•
Reviewed the Credit Agreement dated December 23, 2016;
•
Reviewed the Draft Asset Purchase Agreement to be entered into;
•
Reviewed 10-Ks for the fiscal years ended June 30 2016 and June 30 2015, 8-Ks filed during the calendar years of 2015 and 2016, and Draft Preliminary Proxy Statement dated February [ ], 2017
•
Reviewed publicly available financial data for certain companies that we deem comparable to the Company;
•
Reviewed publicly available information for certain transactions that we deem comparable to the Transaction; and
•
Undertook such other studies, analyses and investigations as Diamond deemed relevant and appropriate.
We have relied upon and assumed, without undertaking any responsibility for independent verification or investigation, the accuracy, sufficiency, completeness and reasonableness of the financial, legal, tax, and other information provided to, discussed with or reviewed by us, including, without limitation, information about the future performance and prospects of the Company, and have assumed such accuracy, sufficiency, completeness and reasonableness for purposes of rendering our Opinion. We have relied upon the Board’s assertion that absent the completion of the Transaction, the Company would have little recourse but to enter into a restructuring through bankruptcy which would likely significantly reduce Company value. We have further relied upon assurances and representations from the Company that they are unaware of any facts that would make the information provided to us to be incomplete or misleading for the purposes of our Opinion. Furthermore, no opinion, counsel or interpretation is intended with respect to matters for which legal, regulatory, accounting, insurance, tax or other similar professional advice is required or advisable. It is assumed that such opinions, counsel or interpretations have been or will be obtained from the appropriate professional sources. Furthermore, we have relied, with your consent, upon the Company and their respective advisers, as to all legal, regulatory, accounting, insurance and tax matters with respect to the Company and the Transaction.
This Opinion has been furnished for the use and benefit of the Board in connection with their evaluation of the Transaction and may not be used for any other purpose without our prior written consent. In addition, this Opinion does not in any manner address the prices at which the Company’s common stock will trade following consummation of the Transaction and Diamond expresses no opinion or recommendation as to how the shareholders of the Company should vote at any shareholder meetings to be held in connection with the Transaction.
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Our Opinion is necessarily based upon our evaluation of information made available to us as well as the economic, monetary, market, financial, regulatory and other conditions as they exist and can be evaluated on the date hereof. We have not undertaken, and we assume no responsibility, to update, revise, reaffirm or withdraw this Opinion, or otherwise comment on or consider events or circumstances occurring after the date hereof. We disclaim any obligation to advise the Board or any person of any change in any fact or matter affecting our Opinion, which may come or be brought to our attention after the date of this Opinion. We did not provide, and will not provide, any advice with respect to any legal conclusions as to whether the Transaction may be prohibited by law.
While all public information (including industry and statistical information, if any) considered by us in connection with this Opinion was obtained from sources we believe are reliable, we make no representation as to the accuracy or completeness thereof, and we have relied upon such public information without further verification.
In rendering our Opinion, we have assumed, with your consent, that the Transaction will be consummated on the terms substantially described in this letter without any material changes to any of the economic assumptions stated herein.
Each of the analyses conducted by Diamond was carried out to provide a particular perspective of the Transaction. Diamond did not form a conclusion as to whether any individual analysis, when considered in isolation, supported or failed to support our Opinion as to the fairness of the Transaction, from a financial point of view, to the Company. Diamond does not place any specific reliance or weight on any individual analysis, but instead, concludes that its analyses taken as a whole, supports its Opinion. Accordingly, Diamond believes that its analyses must be considered in their entirety and that selecting portions of its analyses or the factors it considered, without considering all analyses and factors collectively, could create an incomplete view of the processes underlying the analyses performed by Diamond in connection with the preparation of the Opinion.
This Opinion has been approved by Diamond’s fairness committee. This Opinion is not intended to be, and does not constitute, a recommendation to the Board or to any other party to approve or proceed with the Transaction. This Opinion relates solely to the question of the fairness of the Transaction, from a financial point of view, to the Company. This Opinion should not be construed as creating any fiduciary duty on our part to any person.
Except as set forth in our engagement letter with the Company dated January 27, 2017, this Opinion may not be disclosed, reproduced, disseminated, quoted, summarized or referred to at any time, in any manner or for any purpose, nor shall any references to Diamond or any of its affiliates be made.
Diamond, as part of its investment banking services, is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, underwritings, private placements, bankruptcy, capital restructuring, solvency analyses, stock buybacks, and valuations for corporate and other purposes. Neither Diamond nor any of its principals has any ownership or other beneficial interests in the Company and has not provided any previous investment banking or consulting services to the Company or otherwise had a material relationship with the Company. Diamond will receive a non-contingent fee from the Company relating to its services in providing the Opinion.
Based on and subject to the foregoing, we are of the Opinion that, as of the date hereof, the Transaction is fair, from a financial point of view, to the Company.
Very truly yours,
/s/ Diamond Strategic Advisors, LLC
DIAMOND STRATEGIC ADVISORS, LLC
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Effects of the Asset Sale
If the Company completes the Asset Sale and the Plan of Liquidation Proposal is approved by the Company’s stockholders at the Special Meeting, the Company will wind up the affairs of the Company and liquidate its assets in accordance with the Plan of Liquidation. If the Plan of Liquidation Proposal is not approved by the Company’s stockholders at the Special Meeting, we will still complete the Asset Sale if it is authorized by our stockholders and the other conditions to closing of the Asset Sale are satisfied or waived and our Board of Directors, in discharging its fiduciary obligations to our stockholders, would evaluate other strategic alternatives that may be available, which alternatives may not be as favorable to our stockholders as the Asset Sale and the Liquidation together. This may include remaining an operating company, which may reduce amounts available to stockholders in the event of a later liquidation. In addition, we would likely continue to ask the stockholders to approve the Plan of Liquidation, in a separate special meeting of stockholders called for that purpose. In any event, with limited operating assets with which to generate revenues and no Plan of Liquidation approved, we would use the cash received from the Asset Sale, as well as our other cash (including cash proceeds generated through the sale of our remaining inventory), to pay off our indebtedness, and pay ongoing operating expenses instead of having the potential to make distributions to our stockholders. We would have no material business or operations after the Asset Sale and will have retained only those employees required to maintain our corporate existence and wind down the Company.
Dissenters’ Right of Appraisal
The stockholders of the Company are not entitled to dissenter’s rights of appraisal in connection with the Asset Sale.
Interests of Certain Parties in the Matters to be Acted Upon
In considering the recommendation of the Board of Directors to vote to approve the Asset Sale Proposal, our stockholders should be aware that our directors and executive officers have financial interests in the consummation of the Asset Sale that may be in addition to, or different from, the interests of our stockholders generally. The Board of Directors was aware of and considered these potential interests, among other matters, in evaluating and negotiating the Asset Sale and APA and in recommending to our stockholders that they approve the Asset Sale Proposal. Our stockholders should take these interests into account in deciding whether to vote “FOR” the Asset Sale Proposal. The following discussion describes the different contractual arrangements and other rights of our executive officers and directors in connection with the Asset Sale.
Employment with Buyer
Following the closing of the Asset Sale, the Buyer intends to offer employment to various employees of the Company, including its Chief Executive Officer, Kyle Winther, and its President, Jake Perlingos. However, no member of the Company’s management has entered into an employment agreement or other agreement, arrangement or understanding with respect to continuing employment, nor has any member of the Company’s management entered into an equity rollover agreement or other agreement, arrangement or understanding with the Buyer.
No Golden Parachute Payments to Officers and Directors
In connection with the consummation of the Asset Sale, the Company will not be making any severance payments (in cash or otherwise) or retention payments to its named executive officers or directors and no named executive officer or director will receive any other perquisites or benefits in connection with the Asset Sale.
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2015 Omnibus Incentive Plan
Niels Winther, a director of the Company, holds fully-vested options to purchase 200,000 shares of the Company’s common stock at an exercise price of $0.0419 per share, which were granted on June 30, 2015. No other officer or director of the Company holds any rights to acquire common stock of the Company. If the Asset Sale is consummated, no member of the Company’s Board of Directors nor any executive officer of the Company will benefit from any accelerating vesting of equity awards.
Anticipated Accounting Treatment
Following the consummation of the Asset Sale, we will remove the sold assets from our balance sheet and will record a gain on the sale equal to the difference between the aggregate consideration received and the Company’s book value of net assets sold.
U.S. Federal Income Tax Consequences of the Asset Sale
See “Certain U.S. Federal Income Tax Considerations” below.
Expected Consummation of the Asset Sale
We expect to consummate the Asset Sale as soon as practicable after all of the closing conditions in the APA, including approval of the Asset Sale Proposal and the Plan of Liquidation Proposal by our stockholders, have been satisfied or waived. Subject to the satisfaction or waiver of these conditions, we expect the Asset Sale to close on or before March 30, 2017. However, there can be no assurance that the Asset Sale will be consummated at all or, if consummated, when it will be consummated.
Reasons for the Recommendation
In making its determination to approve and to recommend the Asset Sale for approval by the Company’s stockholders, the Board of Directors consulted with the Company’s management and its accounting and legal advisors and considered the following factors, among others:
·
the Board’s understanding of and familiarity with the business, operations, management, projections and future business prospects for the Company (as well as the risks and costs involved in pursuing those prospects);
·
the Company’s historical and current financial performance and results of operations, the Company’s prospects and long-term strategy, its competitive position in the industry in which it operates and general economic and stock market conditions;
·
the Company’s difficulty in securing product supply from its manufacturers, which resulted in a significant decline in sales in the quarter ended December 31, 2016 and the time required to locate and on-board alternative suppliers acceptable to the Company;
·
the Purchase Price will be paid in cash providing certainty, immediate value and liquidity to the Company in order to satisfy its outstanding debt obligations and potentially distribute excess cash to its stockholders pursuant to the Plan of Liquidation;
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|
|
·
the Board’s belief, after a review of potential strategic alternatives, that the Purchase Price is more favorable to Company and its stakeholders than the potential value that might have resulted from other strategic opportunities potentially available to the Company, including remaining as a standalone company or pursuing a business combination transaction with another party;
|
·
the Board’s belief that as a result of arm’s-length negotiations with the Buyer, the Company and its representatives had negotiated the highest purchase price that the Buyer was willing to pay for the Purchased Assets and that the terms of the Asset Purchase Agreement include the most favorable terms to the Company in the aggregate to which the Buyer was willing to agree;
·
the Board’s belief that absent the completion of the Asset Sale or a significant cash infusion, the Company would have little recourse but to enter into a restructuring through bankruptcy which would likely reduce significantly or eliminate stockholder value and assets available to satisfy obligations to creditors;
·
the Board’s knowledge of the regulatory environment surrounding the electronic cigarette industry, which is significantly increasing the regulatory burden on the Company, particularly in relation to its United States operations;
·
the Board’s assessment of what prospective buyers are willing to pay for the Company’s assets and capital stock and the likelihood of closing a transaction with them in an expedited time frame;
·
the Board’s belief that the Company had engaged in a reasonable process to obtain the best available value for stockholders taking into account the Company’s need for cash, including by creating an opportunity both before execution of the Asset Purchase Agreement and following execution of the Asset Purchase Agreement, for other potentially interested parties to negotiate a transaction with the Company;
·
the review by the Board with representatives of Stubbs Alderton & Markiles, LLP, counsel to the Company (“Stubbs Alderton”) of the structure and terms of the Asset Sale and the Plan of Liquidation;
·
the ability of the Board, pursuant to the provisions of the Asset Purchase Agreement, to evaluate an unsolicited bona fide Acquisition Proposal that the Company may receive at any time prior to the occurrence of approval of the Asset Sale and Plan of Liquidation by the stockholders of the Company, and the Board’s ability to withdraw its approval of the Asset Purchase Agreement (which will constitute a default under the Loan Agreement) if the Board reasonably concludes in good faith (following the receipt of advice from outside counsel) that withdrawing its approval of the Asset Purchase Agreement is required in order to comply with its fiduciary obligations to the Company’s stockholders;
·
the opinion of Diamond, dated February 10, 2017, to the Board of Directors as to the fairness, from a financial point of view and as of such date, of the Purchase Price to be received by the Company pursuant to the Asset Purchase Agreement, which opinion was based on and subject to the assumptions, limitations, qualifications and conditions described in such opinion as more fully described under the caption “
Opinion of Company’s Financial Advisor.
”
Diamond’s opinion does not constitute a recommendation as to whether or not any stockholder should vote or act with respect to the Asset Sale Proposal, the Plan of Liquidation Proposal or otherwise
;
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·
The terms and conditions of the Asset Purchase Agreement, including the reasonableness of the conditions to closing under the Asset Purchase Agreement, the likelihood that the stockholder approval necessary to approve the Asset Sale and Plan of Liquidation will be obtained and the ultimate likelihood that the Asset Sale will be completed;
·
that the Asset Sale is subject to approval of holders of at least a majority of all of the outstanding shares of the Company’s common stock, and that if such stockholders did not approve the Asset Sale terms, the Asset Sale would not close;
·
that the Buyer intends to make offers of employment to a majority of the employees of the Company following the closing of the Transaction; and
·
that the Purchase Price should enable the Company to satisfy its known obligations to its creditors.
In addition, the Board considered a variety of risks and other potentially negative factors concerning the Asset Purchase Agreement and the transactions contemplated thereby, including, among others, the following:
·
the possibility that the Asset Sale may not be completed, or that completion may be delayed for reasons that are beyond the control of the Company, including the failure of the Company’s stockholders to approve the Asset Sale and Plan of Liquidation or the failure of the Company to obtain the third-party consents that are a condition to the closing of the Asset Sale;
·
the risks and contingencies relating to the announcement and pendency of the Asset Sale and the risk and costs to the Company if the Asset Sale is not completed, including the effect of an announcement of termination of the Asset Purchase Agreement on the trading price of the Company’s common stock, business, and relationships with its customers, suppliers and employees;
·
if the Asset Purchase Agreement is terminated in connection with a Change of Recommendation, it will constitute a default under the Loan Agreement and permit Buyer to exercise its remedies as a secured lender, which may eliminate a potential cash distribution pursuant to the Plan of Liquidation to the Company’s stockholders;
·
the incurrence of significant costs and expenses in connection with completing the Asset Sale, including the substantial amount of management time and effort that will be devoted to consummating the Asset Sale;
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the absence of dissenters’ rights for the Company’s stockholders with respect to the Asset Sale and Plan of Liquidation under Nevada law;
·
as compared with a cash-out merger transaction, the uncertainty regarding the timing and amount of any cash distributions made by the Company to its stockholders, and the resulting tax treatment of any such distribution, following the Asset Sale, if the Board were to pursue making a cash distribution to its stockholders;
·
that, following the Asset Sale, the Company will no longer continue its historical operations and that the Company’s stockholders will not participate in any future growth of the Company, including any potential future benefit from the continued development and commercialization of new products by the Buyer;
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·
the Board’s decision, in connection with its entry into the Loan Agreement with Buyer on December 23, 2016, to enter into exclusive negotiations with the Buyer in relation to an acquisition of the Company or its assets, which may have deterred a third party from making an Acquisition Proposal;
·
the restrictions in the Asset Purchase Agreement that prohibit the Company from soliciting or initiating discussions with third parties regarding a competing offer for the Company and that place certain constraints on the Company’s ability to respond to such proposals, subject to the fulfillment of certain fiduciary duties of the Board; and
·
the other factors described under “Risk Factors.”
The Board of Directors concluded that the risks, uncertainties, restrictions and potentially negative factors associated with the Asset Purchase Agreement and Plan of Liquidation were outweighed by the potential benefits of the Asset Purchase Agreement and Plan of Liquidation.
The above discussion of the factors considered by the Board is not intended to be exhaustive, but does set forth certain material factors considered by the Board. In view of the wide variety of factors considered in connection with its evaluation of the Asset Sale and the Plan of Liquidation and the complexity of these matters, the Board did not consider it practicable to, and did not attempt to, quantify or otherwise assign relative or specific weight or values to any of these factors, and individual directors may have held varied views of the relative importance of the factors considered. The Board viewed its position and recommendation as being based on an overall review of the totality of the information available to it, including discussions with the Company’s senior management and legal and financial advisors, and overall considered these factors to be favorable to, and to support, its determination regarding the Asset Sale and the Plan of Liquidation.
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THE ASSET PURCHASE AGREEMENT
Assets Being Sold to the Buyer
At the closing of the transactions contemplated by the Asset Purchase Agreement, the Company will sell to Buyer all of the Company’s right, title and interest in and to the Company’s Proprietary Rights (as defined below), and all goodwill associated with such Proprietary Rights, owned by the Company or used, or held for use by the Company, in connection with its business as conducted by the Company as of the date of the Asset Purchase Agreement, together with all rights to collect income, royalties, damages, products, proceeds and payments due or payable at the closing or after the closing with respect to the foregoing, including all claims against third parties for past, present or future infringements or misappropriations of such Proprietary Rights. The Purchased Assets are to be acquired by the Buyer free and clear of any liens.
In the Asset Purchase Agreement, “Proprietary Rights” means all of the following items and all corresponding rights, throughout the world:
(i) patents, patent applications, patent disclosures and inventions and all industrial designs registrations and applications (including utility model rights, design rights and industrial property rights) and any reissue, continuation, continuation-in-part, divisional, revision, extension or reexamination of the foregoing; (ii) trademarks, service marks, certification marks, trade dress, logos, trade names, slogans, Internet domain names and corporate names, all registrations, applications and renewals for any of the foregoing, and all goodwill associated with the foregoing, including, without limitation, the name “Limitless” and any and all rights related thereto; (iii) copyrights and other works of authorship (whether or not copyrightable, including “look and feel”) and moral rights, and all registrations, applications and renewals for any of the foregoing; (iv) trade secrets and other confidential information (including know-how, processes, techniques, methods, financial, business and marketing plans, and customer and supplier lists and related information);
(v) software, data collections and databases; (vi) rights of publicity and privacy, including the right to use names, likenesses, voices and biographical information of real Persons; (vii) other intellectual property and proprietary rights (including all rights to sue and recover and retain damages, costs and attorneys' fees for past, present and future infringement and any other rights relating to any of the foregoing); and (viii) all copies and tangible embodiments of the foregoing (in whatever form or medium).
Assets Being Retained by the Company
The Company will retain all assets that are not Purchased Assets. One asset to be retained by the Company is inventory, which the Company plans to liquidate in connection with the winding up and liquidation of the Company.
In addition, the Company will retain all rights to recovery in connection with that certain lawsuit filed by the Company on November 4, 2015 in the Superior Court of California, County of Orange, Case Number 30-2015-00818492-CU-BC-CJC against Kevin Crump, an individual, Magnavape, Inc. and Magnavon, Inc. The lawsuit alleges breach of contract, fraud, negligent misrepresentation, intentional interference with economic advantage and negligent interference with economic advantage relating to the production by the defendants of the Company’s AR Mods. The lawsuit prayer is for $3,000,000. This amount includes general damages, lost profits and punitive damages against the defendants. A mandatory settlement conference is scheduled for February 24, 2017 and a jury trial is scheduled for March 27, 2017. Although the Company believes it will be meritorious in the lawsuit, the outcome of the litigation is not guaranteed and even if the Company receives a judgment in its favor, there is no guarantee the Company will be able to collect any cash proceeds awarded as a result of the litigation.
Liabilities Being Assumed by the Buyer
The Buyer is not assuming any liabilities of the Company of any kind in connection with the sale of the Purchased Assets by the Company.
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Liabilities Being Retained by the Company
At the closing of the Asset Sale, all Company liabilities will be retained by the Company.
Purchase Price
The aggregate purchase price for the Purchased Assets shall be $1,000,000 United States Dollars. The Buyer shall pay the Purchase Price to the Company at the closing of the Asset Sale by (i) cancelling all outstanding principal, accrued interest and all other obligations payable to Buyer by the Company on the closing date of the Asset Sale under the Loan Agreement, and the related transaction documents (collectively, the “Outstanding PLY Debt Obligations”) and (ii) to the extent the Purchase Price exceeds the Outstanding PLY Debt Obligations, paying an amount in cash equal to the difference between the Purchase Price and the Outstanding PLY Debt Obligations by wire transfer of immediately available funds.
Closing
We expect to close the Asset Sale on or before March 30, 2017. We cannot complete the Asset Sale until we satisfy a number of conditions, which include approval of the Asset Sale and the Plan of Liquidation by our stockholders at the Special Meeting. The effective date of the Asset Sale will be the date on which the closing occurs.
Representations and Warranties Made by the Company
In the Asset Purchase Agreement, the Company makes various representations and warranties for the benefit of the Buyer. Categories covered by the Company’s representations and warranties include: corporate organization and authorization; enforceability; no conflicts; consents; title to assets being acquired; intellectual property; assigned contracts; permits; non-foreign status; compliance with laws; legal proceedings; broker’s fees and matters pertaining to the Company’s filings with the Securities and Exchange Commission. Subject to certain exceptions, it is a condition to the Buyer’s obligation to complete the Asset Sale that these representations and warranties be true and correct in all material respects at the time of closing. In addition, in certain circumstances discussed elsewhere in this proxy statement, if the Buyer discovers a breach of these representations and warranties after the closing, such breach may give rise to an indemnification claim against the Company.
Representations and Warranties Made by the Buyer
In the Asset Purchase Agreement, the Buyer makes various representations and warranties for the benefit of the Company. Categories covered by the Buyer’s representations and warranties include: corporate organization and authorization; enforceability; no conflicts; consents; legal proceedings; broker’s fees and matters pertaining to information supplied by the Buyer which is included in the Company’s filings with the Securities and Exchange Commission. Subject to certain exceptions, it is a condition to the Company’s obligation to complete the Asset Sale that these representations and warranties be true and correct in all material respects at the time of closing. In addition, in certain circumstances discussed elsewhere in this proxy statement, if the Company discovers a breach of these representations and warranties after the closing, such breach may give rise to an indemnification claim against the Buyer.
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Notice of Certain Events
In connection with the APA, we have agreed to continue to through the closing date promptly notify the Buyer in writing of (i) any fact, circumstance, event or action the existence, occurrence or taking of which (a) has had, or could reasonably be expected to have a material adverse effect on the Company, (b) has resulted in, or could reasonably be expected to result in, any representation or warranty made by the Company not being true and correct in any material respect, or (c) has resulted in, or could reasonably be expected to result in, the failure of any of the conditions to closing to be satisfied, (ii) the receipt of any notice from a governmental authority or court concerning the Asset Sale, (iii) any legal actions commenced or threatened against the Company; and (iv) the Company’s exercise of its right to withhold, withdraw, amend or modify its approval of the APA in connection with a third party acquisition proposal.
No Solicitation of Acquisition Proposals
The Company has agreed that, from the date of the APA until the closing of the Asset Sale or the proper termination of the APA, except as described in the next paragraph, (i) Buyer and its affiliates will have the sole and exclusive right to negotiate with the Company with respect to any Acquisition Proposal (as defined below), and (ii) neither the Company nor any of its officers, directors, employees, agents, or representatives shall solicit, pursue indications of interest from, initiate negotiations with, or enter into any agreement with, any third party in relation to an Acquisition Proposal.
Notwithstanding the restrictions in the previous paragraph, if at any time after the date of the APA and prior to the occurrence of the approval of the Asset Sale and Plan of Liquidation by the stockholders of the Company, the Company receives an unsolicited bona fide Acquisition Proposal from a third party, the Company may, subject to certain conditions (i) furnish information regarding the Company to the person making the Acquisition Proposal, (ii) participate in discussions or negotiations with the person making such Acquisition Proposal regarding such Acquisition Proposal and (iii) withhold, withdraw, amend or modify its approval of the APA, but only if and to the extent that in connection with the foregoing clauses (i)-(iii), the Board determines in good faith (after consultation with outside legal counsel) that such Acquisition Proposal if accepted, is reasonably likely to be consummated (taking into account all legal, financial and regulatory aspects of the proposal, the likelihood of the proposal being financed and the person making the Acquisition Proposal), and would, if consummated, result in a transaction more favorable to the Company’s stockholders from a financial point of view than the APA but only if the Board reasonably concludes in good faith (following the receipt of advice from outside counsel) that withholding, withdrawing, amending or modifying its approval of the APA is required in order to comply with its fiduciary obligations to the Company’s stockholders under applicable law (a “Change of Recommendation”).
In the APA, “Acquisition Proposal” means any proposal, offer or indication of interest (whether or not in writing) relating to, or that would reasonably be expected to lead to, in one transaction or a series of transactions, (i) any direct or indirect acquisition or purchase (including by any exclusive license or lease) by any Person or group (as defined under Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (the “Exchange Act”)) of (a) assets or businesses that constitute all or substantially all of the assets of the Company, or (b) beneficial ownership of twenty percent (20%) or more of any class of equity securities of the Company; (ii) any purchase or sale of, or tender offer or exchange offer for, equity securities of the Company that, if consummated, would result in any Person or group (as defined under Section 13(d) of the Exchange Act) beneficially owning twenty percent (20%) or more of any class of equity securities of the Company; or (iii) any merger, consolidation, business combination, recapitalization, reorganization, dual listed structure, joint venture, share exchange or similar transaction involving the Company, as a result of which the owners of the equity securities of the Company immediately prior to such event own less than 80% of the equity securities of the Company immediately following such event; or (iv) any liquidation or dissolution of the Company.
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Further Assurances
In connection with the APA, the Buyer and the Company have agreed, on or prior to the closing of the Asset Purchase, to use their reasonable best efforts to fulfill or obtain the fulfillment of the conditions precedent to the consummation of the transactions contemplated by the APA, including the execution and delivery of any documents, certificates, instruments, consents or other papers that are reasonably required for the consummation of the transactions contemplated by the APA.
Conditions to Closing - Buyer
The obligation of the Buyer to consummate the Asset Sale is subject to the satisfaction or waiver of a number of conditions on or prior to the closing. Such conditions include the approval of the Asset Sale and Plan of Liquidation by our stockholders at the Special Meeting. Additional closing conditions include: the Company having delivered certain closing deliverables to the Buyer, including a Bill of Sale and Intellectual Property Assignment; the Company’s representations and warranties being true and correct in all material respects as of the closing date, subject to certain exceptions; the Company having performed its obligations under the APA, including obtaining all requisite third party consents; there being no proceeding pending or threatened that could adversely impact the Asset Sale; the Company having obtained the release of all liens on its assets and no law or order shall have been enacted that would prevent the consummation of the transactions contemplated by the APA.
Conditions to Closing - Company
The obligation of the Company to consummate the Asset Sale is subject to the satisfaction or waiver of a number of conditions on or prior to the closing. Such conditions include the approval of the Asset Sale and Plan of Liquidation by our stockholders at the Special Meeting. Additional closing conditions include: the Buyer’s delivery of the Purchase Price; the Buyer having delivered certain closing deliverables to the Company, including evidence of the termination of the Outstanding PLY Debt Obligations and of the termination and release of all liens associated with such debt; the Buyer’s representations and warranties being true and correct in all material respects as of the closing date, subject to certain exceptions; the Buyer having performed its obligations under the APA; there being no proceeding pending or threatened that could adversely impact the Asset Sale and no law or order shall have been enacted that would prevent the consummation of the transactions contemplated by the APA.
License
Effective as of the closing of the Asset Sale, Buyer will grant to the Company a license to use the Proprietary Rights for the purpose of marketing, distributing and selling its remaining inventory in connection with the Company’s winding up and dissolution.
Post-Closing Indemnification
The APA requires that, after the closing, the Company indemnify and hold the Buyer harmless from damages arising out of the following categories of claims: (i) any inaccuracy in or breach of any of the representations or warranties of the Company contained in the APA or any document to be delivered in connection with the APA, (ii) any breach or non-fulfillment of any covenant, agreement or obligation to be performed by the Company pursuant to the APA or any document to be delivered in connection with the APA and (iii) any liability or obligation of the Company.
The APA also requires that, after the closing, the Buyer indemnify and hold the Company harmless from damages arising out of the following categories of claims: (i) any inaccuracy in or breach of any of the representations or warranties of the Buyer contained in the APA or any document to be delivered in connection with the APA and (ii) any breach or non-fulfillment of any covenant, agreement or obligation to be performed by the Buyer pursuant to the APA or any document to be delivered in connection with the APA.
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Indemnification claims relating to any inaccuracy in or breach of any of the representations or warranties must be made by the party seeking indemnification prior to the 12-month anniversary of the closing date other than claims for indemnification relating to any inaccuracy in or breach of any of the (i) representations and warranties in Section 3.01 of the APA (relating to the organization and authority of the Company; Enforceability), Section 4.01 of the APA (relating to the organization and authority of Buyer; Enforceability), Section 3.10 of the APA (relating to Company brokerage fees), Section 4.03 of the APA (relating to Buyer brokerage fees), Section 3.03(a) of the APA (relating to the Company’s title to assets), which may be made at any time after the closing in perpetuity and (ii) representations and warranties in Section 3.04 of the APA (relating to the Company’s Intellectual Property), Section 3.08 of the APA (relating to the Company’s compliance with laws) and Section 3.09 of the APA (relating to legal proceedings pertaining to the Company), which may be made at any time prior to the 24-month anniversary of the closing date (the representations and warranties identified in clause (i) and (ii) are referred to collectively as the “Material Representations”). Indemnification claims relating to a breach of covenant may be made during the time period specified in the particular covenant, and if no period is specified, at any time following the closing in perpetuity.
In addition, indemnification for losses relating to any inaccuracy in or breach of any of the representations or warranties by the Buyer or the Company are subject to a $20,000 deductible and an aggregate limit on indemnification payments of $100,000, except for claims relating to any inaccuracy in or breach by either Buyer or the Company of a Material Representation, which losses are not subject to the deductible or the $100,000 limitation on indemnification payments. In addition, in no event are either the Buyer or the Company required to make indemnification payments under the APA relating to any inaccuracy in or breach of any of the representations or warranties for losses in excess of the Purchase Price (including for any inaccuracy in or breach of any Material Representation). The limitations described in this paragraph will not apply for any losses suffered as a result of the fraud of the Buyer or the Company.
Employees
Although the Buyer has no obligation to hire any employees of the Company, the Buyer currently plans to offer employment to certain specified employees of the Company following the closing of the Asset Purchase. The Company will remain responsible for all severance, separation, deferred compensation and similar employee benefits for all Company employees, regardless of whether they are hired by the Buyer following the closing of the Asset Purchase.
Termination of the APA
Either the Company or the Buyer may terminate the APA by their mutual written consent or in the event that (i) there shall be any law that makes consummation of the transactions contemplated by the APA illegal or otherwise prohibited, (ii) any governmental entity issues an order restraining or enjoining the transactions contemplated by the APA, and such order shall have become final and non-appealable, (iii) the Seller Stockholders’ Approval shall not have been obtained on or before March 30, 2017 or (iv) the closing of the Asset Sale does not occur on or before March 30, 2017.
Further, the Buyer may terminate the agreement (i) if the Company exercises its right to withhold, withdraw, amend or modify its approval of the APA in connection with a third party acquisition proposal, (ii) if any condition to the Buyer’s obligations to close have not been or if it becomes apparent that any of such conditions will not be fulfilled by March 30, 2017, unless such failure is due to the failure of Buyer to perform or comply with any of its covenants, agreements or conditions to be performed or complied with prior to the closing or (iii) if Buyer is not then in material breach of any provision of the APA and there has been a breach, inaccuracy in or failure to perform any representation, warranty, covenant or agreement made by the Company pursuant to the APA that would give rise to the failure of any of the closing conditions specified in Section 2.02 of the APA and such breach, inaccuracy or failure has not been cured by the Company within fifteen (15) days of the Company’s receipt of written notice of such breach from Buyer.
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Likewise, the Company may terminate the agreement (i) if the Company exercises its right to withhold, withdraw, amend or modify its approval of the APA in connection with a third party acquisition proposal, (ii) if any condition to the Company’s obligations to close have not been or if it becomes apparent that any of such conditions will not be fulfilled by March 30, 2017, unless such failure is due to the failure of the Company to perform or comply with any of its covenants, agreements or conditions to be performed or complied with prior to the closing or (iii) if the Company is not then in material breach of any provision of the APA and there has been a breach, inaccuracy in or failure to perform any representation, warranty, covenant or agreement made by the Buyer pursuant to the APA that would give rise to the failure of any of the closing conditions specified in Section 2.03 of the APA and such breach, inaccuracy or failure has not been cured by Buyer within fifteen (15) days of Buyer’s receipt of written notice of such breach from the Company.
If the APA is properly terminated in accordance with its terms, the APA shall then become null and void and, subject to certain exceptions, neither the Company nor the Buyer shall have any liability or obligation under the APA.
Governing Law; Venue Selection
The APA is governed by, and construed under, the internal the laws of the State of California without reference to principles of conflicts or choice of laws. All disputes, claims and controversies under the APA must be brought in the exclusive forum of the county courts of Los Angeles, California.
The Board recommends a vote “FOR” the Asset Sale Proposal.
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