VHUB Vapor Hub International Inc (PK)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2015.

or

[  ]

Transition Report Pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from __________________ to ______________________.

Commission file number   000-55363

VAPOR HUB INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)

Nevada	27-3191889
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

1871 Tapo Street

Simi Valley, CA 93063

 (Address of principal executive offices) (zip code)

(805) 309-0530

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  [X]  No  [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  [X]  No  [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller” reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  [  ]  No  [X]

As of February 10, 2016, the issuer had 76,265,606 shares of common stock issued and outstanding.

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VAPOR HUB INTERNATIONAL INC.
TABLE OF CONTENTS

Part I.  Financial Information

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PART I:  FINANCIAL INFORMATION

Item 1.

Financial Statements

VAPOR HUB INTERNATIONAL INC.

Condensed Consolidated Balance Sheets

The accompanying notes are integral part of these condensed consolidated financial statements

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VAPOR HUB INTERNATIONAL INC.

Unaudited Condensed Consolidated Statements of Cash Flows

The accompanying notes are integral part of these unaudited condensed consolidated financial statements

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VAPOR HUB INTERNATIONAL INC.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1- INCORPORATION, NATURE OF OPERATIONS AND ACQUISITION

Vapor Hub International Inc. (formerly DogInn, Inc.) (hereinafter known as “the Company”) was  incorporated in the State of Nevada on July 15, 2010. On February 14, 2014, the Company entered into a Share Exchange Agreement with Vapor Hub Inc., a California corporation (“Vapor”), Delite Products, Inc., a California corporation (“Delite”) and the shareholders of both companies (the “Exchange Agreement”).  Pursuant to the terms of Exchange Agreement, the Company agreed to acquire all 30,000 of the issued and outstanding shares of Vapor’s common stock, as well as all 30,000 of the issued and outstanding shares of Delite’s common stock in exchange for the issuance by the Company of 38,000,001 shares of common stock to the shareholders of both companies.  On March 14, 2014, the Company completed the acquisition of Vapor and issued all of the 38,000,001 shares of its stock to the shareholders of Vapor, who are also the shareholders of Delite.  On March 26, 2014, the Company completed the acquisition of Delite.  As a result of the closing of the transactions contemplated by the Exchange Agreement, Vapor and Delite became the Company’s wholly owned subsidiaries and the Company now carries on the business of developing, producing, marketing and selling the next generation of electronic cigarettes, known as vaping devices, and related accessories, including e-liquids, batteries and atomizers.  The transaction with Vapor was accounted for as a reverse acquisition (recapitalization) whereby Vapor was deemed to be the accounting acquirer, and the Company the legal acquirer.  Prior to the Company’s acquisition of Vapor, the Company existed as a “shell company” with nominal assets whose sole business was to identify, evaluate and investigate various companies to acquire or with which to merge. The transaction with Delite was accounted for as a business acquisition and the Company assumed the assets and liabilities of Delite as of March 26, 2014 and the activity of Delite was included from that date forward.

Upon the Company’s acquisition of Vapor, Robin Looban resigned as the Company’s sole director, president, secretary, treasurer, Chief Financial Officer and Chairman of the Board of Directors and management members from Vapor were appointed to serve as directors and officers of the Company.   As a condition of the closing of the acquisition of Vapor, the Company cancelled 50,928,984 outstanding common shares and retired them in treasury.

NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying (a) condensed consolidated balance sheet at June 30, 2015 has been derived from audited statements and (b) the condensed consolidated unaudited financial statements as of and for the periods ended December 31, 2015 and 2014, have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2015 (the “2015 Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on October 13, 2015. It is management’s opinion, however, that all material adjustments (consisting of normal recurring adjustments), have been made which are necessary for a fair financial statements presentation. The financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the financial statements not misleading as required by Regulation S-X, Rule 10-01. Operating results for the three months and six months ended December 31, 2015 are not necessarily indicative of the results of operations expected for the year ending June 30, 2016.

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s unaudited condensed consolidated financial statements. The unaudited condensed consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to US GAAP and have been consistently applied in the preparation of the unaudited condensed consolidated financial statements.

The Company operates in one segment in accordance with accounting guidance Financial Accounting Standards Board (“FASB”) ASC Topic 280, Segment Reporting. The Company’s Chief Executive Officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.

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Going Concern

The Company’s unaudited condensed consolidated financial statements have been presented on the basis that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company’s cash balance as of December 31, 2015 along with its net loss and negative cash flow from operations, raise substantial doubt about its ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

The Company continues to face liquidity and capital resources constraints and does not believe that the proceeds from its debt facilities (see Note 7) along with its operating cash flows will be sufficient to meet its financing needs for the next twelve months. The extent of the Company’s future capital requirements will depend on many factors, including the Company’s results from operations and the growth rate of the Company’s business. The Company’s near term objective is to raise debt or equity capital to fund its immediate cash needs and to finance its longer term growth. The Company is also pursuing various means to increase revenues, reduce operating costs and to improve overall cash flow.

The Company presently does not have any arrangements for additional financing. However, the Company continues to evaluate various financing strategies to support its current operations and fund its future growth.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates significant estimates and assumptions related to its accounts receivable allowance, accounts payable, deferred income tax asset valuation allowances, fair value of derivative liability, fair value of stock options, useful life of fixed assets, inventory reserves, estimates of sales return and accrual for potential liabilities. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Concentration of Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash. The Company places its cash with high quality banking institutions.

The Company relied on one manufacturer to make all of the Company’s Mods during the three month period ended December 31, 2015.

Financial Instruments and Fair Value Measurement

Pursuant to ASC 820, Fair Value Measurements and Disclosures, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:

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Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The Company’s financial instruments consist principally of cash, accounts payable, accrued liabilities, amounts due to related parties, derivative liabilities and convertible notes payable.  Pursuant to ASC 820, the fair value of the Company’s cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. Pursuant to ASC 820, the fair value of the Company’s derivative liability is determined based on “Level 3” inputs, which consist of unobservable inputs. The Company believes that the recorded values of all of its other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.

Revenue Recognition

The Company recognizes revenues when delivery of goods or completion of services has occurred provided there is persuasive evidence of an agreement, acceptance has been approved by its customers, the fee is fixed or determinable based on the completion of stated terms and conditions, and collection of any related receivable is probable.

For retail transactions, revenue is recognized at the point of sale. For wholesale and online transactions, revenue is recognized at the time goods are shipped.  

Deferred Revenue

The Company accrues deferred revenue when customer payments are received, but product has not yet shipped. As of December 31, 2015 and June 30, 2015, the Company had recorded $9,830 and $82,499, respectively for deferred income as a result of prepayments for product made by customers. Those prepayments are recognized into revenue at the point those prepaid products have subsequently shipped. The Company has recognized the $82,499 during the six months ended December 31, 2015 and expects to recognize the $9,830 into revenue during the fiscal year ending June 30, 2016.

Advertising Expense

Advertising costs are expensed as incurred. Advertising expense for the six months ended December 31, 2014 and 2015 were $48,358 and $54,232, respectively and are included in general and administrative expenses.

Deferred Finance Costs, Net

Costs with respect to the issuance of common stock, warrants, stock options or debt instruments by the Company are initially deferred and ultimately offset against the proceeds from such equity transactions or amortized to interest expense over the term of any debt funding, if successful, or expensed if the proposed equity or debt transaction is unsuccessful.

For the six months ended December 31, 2015, the Company incurred $250,400 in costs in connection with the negotiation of a financing transaction with TCA Global Credit Master Fund, LP which amount is included in deferred finance costs as of December 31, 2015 (see Note 7). The unamortized finance costs for the six months ended December 31, 2015 were $246,922.

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Basic and Diluted Net Loss per Share

The Company computes net income per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options, warrants or debentures. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As of December 31, 2015 and 2014, there were no dilutive securities.

Recent Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This update impacts the accounting for financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01 is to be applied prospectively and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company has not yet determined the impact of ASU 2016-01 on its consolidated results of operations, financial condition, or cash flows.

The Company has reviewed all other recent accounting pronouncements issued to date of the issuance of these unaudited condensed consolidated financial statements, and does not believe any of those pronouncements will have a material impact on the Company’s unaudited condensed consolidated financial statements.

NOTE 3 – OFFICERS’ LOANS PAYABLE

As of December 31, 2015 and June 30, 2015, the Company had a balance of $86,178 and $96,312 respectively, outstanding as related party loans from Kyle Winther, the Company’s CEO, Lori Winther, the Company’s CFO and Winther & Company, CPAs (an entity owned by Lori Winther, and her husband, Niels Winther, CPA, who is a director of the Company), as well as a Chase Bank Line of Credit (which was extended to the Company, though owed personally by Niels & Lori Winther).  The outstanding balances are unsecured, non-interest bearing and repayable upon demand.

NOTE 4 – INVENTORIES

As of December 31, 2015 and June 30, 2015, the Company had a balance of $397,505 and $323,784, respectively, as inventories which consist of vaping devices, electronic cigarettes, e-liquid, related supplies, and accessories. There is no reserve for inventory obsolescence as of December 31, 2015 and June 30, 2015.

NOTE 5 – LEASE COMMITMENTS

The Company entered into a lease agreement with S. J. Real Estate Group, LLC to lease a retail space in Chatsworth, California, effective September 13, 2013. The lease term was for two years with a monthly lease payment of $2,214. Effective October 15, 2015, the Company and the landlord agreed to terminate the lease and the Company closed its retail store located at the location. The Company has no further obligation due under the lease agreement.

On February 28, 2015, the Company entered into a lease agreement with landlord Samantha Carrington to provide retail space for its Simi Valley retail location and on April 1, 2015, the Simi Valley retail location opened at the new premises. The lease term extends through March 31, 2017 with a monthly lease payment of $3,190. The Company has a commitment under this lease of $57,420 and a security deposit of $6,380 was paid to the landlord in relation to this lease.

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The Company entered into a lease agreement with S.B.P.W., LLC to lease warehouse and office space in Simi Valley, California effective August 5, 2013 which agreement was subsequently amended on February 20, 2014. The lease term extended through April 30, 2015 with a monthly lease payment of $2,035 which increased to $4,070 effective July 1, 2014. On September 1, 2015, the Company terminated this lease and surrendered its facility at 67 W Easy St., Unit 115, Simi Valley, CA 93065 in favor of entering into a lease with Winther Family Trust for executive, sales, and warehouse space at 1871 Tapo Street, Simi Valley, CA 93063. The trustees of the trust are Niels Winther, CPA, a director of the Company, as well as Lori Winther, the Chief Financial Officer, a shareholder and director of the Company. The lease term extends through August 31, 2020 with a monthly lease payment of $5,650. The Company has a commitment under this lease of $333,350 and a security deposit of $5,650 was paid to the landlord in relation to this lease.

On September 15, 2015, the Company entered into a lease agreement with Santa Susana Business Center, LLC to lease warehouse and office space at 4685 Runway Street, Unit D, Simi Valley, CA 93063. The lease term extends through September 30, 2016 with a monthly lease payment of $1,716. The Company has a commitment under this lease of $20,592 and a security deposit of $1,716 was paid to the landlord in relation to this lease.

NOTE 6 – RELATED PARTIES

As of December 31, 2015 and June 30, 2015, the Company had a balance of $86,178 and $96,312, respectively, outstanding as related party loans from Kyle Winther, the Company’s CEO, Lori Winther, the Company’s CFO and Winther & Company, CPAs (an entity owned by Lori Winther, and her husband, Niels Winther, CPA, who is a director of the Company), as well as Chase Bank Line of Credit (which was extended to the Company, though owed personally by Niels & Lori Winther). The outstanding balances are unsecured, non-interest bearing and repayable upon demand.

From time to time the Company will engage the services of Winther & Co. an accounting firm owned by the husband of the Company’s CFO. Winther & Co. provides bookkeeping, accounting and tax services to the Company. For the six months ended December 31, 2015 the Company incurred approximately $46,503 in fees with Winther & Co. As of December 31, 2015 and June 30, 2015 the Company had Accounts Payable outstanding to related parties for accounting fees of $14,552 and $12,369, respectively. 

The Company leases its headquarters from the Winther Family Trust. See Note 5 for further discussion.

NOTE 7 – CONVERTIBLE NOTES PAYABLE

Note Holder	Balance December 31, 2015		Unamortized Original Derivative Discount		Convertible Notes Net of Derivative Discount
Modified November Notes	52,443		(25,461)		26,981
Modified June Note	281,750		(136,792)		144,958
TCA Global Loan Payable	320,229		(260,672)		59,557
Total Convertible Notes Payable, current portion	654,422		(422,926)		231,496
TCA Global Loan Payable	429,771		(341,362)		88,409
Total Convertible Notes Payable, net of current portion	1,084,193		(764,288)		319,905

Typenex Co-Investment November 2014 Note

On November 4, 2014, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Typenex Co-Investment, LLC, a Utah limited liability company (the “Investor”), pursuant to which the Company concurrently issued to Investor a Secured Convertible Promissory Note in a principal amount of $1,687,500 (the “Company Note”). The principal amount includes an original issue discount of $80,000 plus an additional $7,500 to

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cover Investor's due diligence and legal fees in connection with the transaction. In consideration for the Company Note, Investor issued a series of promissory notes aggregating to the sum of $1,600,000 (the “Purchase Price”), consisting of an initial cash disbursement of $200,000 and the issuance to the Company of ten promissory notes, the first two promissory notes in a principal amount of $100,000 each and the remaining eight promissory notes in a principal amount of $150,000 (each an “Investor Note” and collectively, the “Investor Notes”). The Company Note and the Investor Notes each bear interest at the rate of 10% per annum and mature on April 4, 2019 and the Company’s obligations under the Company Note are secured by liens on the Investor Notes pursuant to the terms of a Security Agreement entered into by the Company in favor of the Investor. Subject to certain conditions, the Company may prepay the Company Note by making a payment equal to 125% of the then outstanding balance (including interest and other fees and amounts due). Each of the Investor Notes may be prepaid (and the Company may receive additional funds under the facility in excess of the initial $200,000 cash proceeds) only upon the mutual agreement of the parties.

On January 16, 2015, upon the mutual agreement of the parties, the Investor paid to the Company the sum of $102,028 as a prepayment of all of its obligations owed to the Company under the first Investor Note in the original principal amount of $100,000 dated November 4, 2014, issued by the Investor in favor of the Company.

The first two tranches (the “November Notes”) were issued with an original issue discount of $20,472, of which $2,137 was amortized to interest expense for the six months ended December 31, 2015.  As of December 31, 2015 the unamortized balance was $0.

The Company recognized an additional debt discount of $48,975 on the first two tranches for the original fair value recognition of the derivative liability (discussed further below), of which $5,201 was amortized to interest expense for the six months ended December 31, 2015.  As of December 31, 2015 the unamortized balance was $0.

Beginning on May 4, 2015, the Company was required to repay the outstanding balance on the Company Note in monthly installments of approximately $35,000 per month plus all unpaid interest and other costs, fees or charges under the Company Note. Payment may be made in cash or, subject to certain conditions, in shares of the Company’s common stock or any combination of cash and shares. If payments are made in shares (each, an “Installment Conversion”), such installments or portions thereof are, subject to certain conditions, convertible into shares of the Company’s common stock at the lesser of (i) a conversion price of $0.10, subject to adjustment or (ii) a price that is equal to 70% of the average of the three lowest closing bid prices of the Company’s common stock in the twenty trading days immediately preceding such conversion, subject to a floor of $0.01. In addition, on the date that is twenty trading days from the date the Company delivers installment shares to Investor, there is a true-up where the Company is required to deliver additional shares if the installment conversion price as of the true-up date is less than the installment conversion price used to deliver the initial shares.

Beginning on May 4, 2015, all or any amount of a conversion eligible tranche (as described below) under the Company Note is convertible, at the option of the Investor (each, a “Lender Conversion”), into shares of the Company’s common stock at a conversion price of $0.10 per share, subject to customary anti-dilution adjustments and other adjustments described in the Company Note (the “Conversion Price”). The Company Note is convertible into shares of the Company’s common stock by Investor in eleven tranches consisting of an initial tranche of $217,500 plus interest and other amounts due which may be converted into shares of the Company’s common stock at the Conversion Price at any time on or after May 4, 2015 and ten additional tranches (each a “Subsequent Tranche”), two of which are in the amount of $105,000 plus interest and other amounts due and eight of which are in the amount of $157,500 plus interest and other amounts due. Each Subsequent Tranche may not be converted into shares of the Company’s common stock unless the Investor has paid in full the Investor Note corresponding to such tranche, which payment requires the Company’s consent. On January 16, 2015, the Investor paid to the Company the sum of $102,028 as a prepayment of all of its obligations owed to the Company under the first Investor Note and consequently the first Subsequent Tranche of $105,000 plus interest and other amounts due may be converted into shares of the Company’s common stock at the Conversion Price at the option of the Investor at any time on or after May 4, 2015. Subject to certain conditions based on the trading volume and trading price of the Company’s common

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stock, the Company may also elect to convert the entire outstanding balance under the Company Note into shares of the Company’s common stock at the Conversion Price.

If the Company fails to repay the Company Note when due, or if the Company is otherwise in default under the Company Note, at the option of Investor a default interest rate of 22% per annum will apply on all conversion eligible portions of the Company Note while the default continues. In the event the Company is in default under the Company Note, the Investor also has the option to accelerate the note with the outstanding balance becoming immediately due and payable or increase the outstanding balance of the note by an amount of 5% or 15% depending on the particular default. In addition, if the Company fails to issue stock to the Investor within three trading days of receipt of a notice of conversion, the Company must pay a penalty equal to the greater of (i) $500 per day; or (ii) 2% of the product of (A) the number of shares to which Investor was entitled that were not issued on a timely basis; and (B) the closing sale price of the common stock on the trading day immediately preceding the last day for us to timely issue the shares.

The Company Note provides that the Investor maintains a right of offset that, under certain circumstances, permits the Investor to deduct amounts owed by the Company under the Company Note from amounts otherwise owed by Investor under the Investor Notes. In addition, the Company is permitted at any time to deduct and offset any amount owing by the Investor under the Investor Notes from any amount owed by the Company under the Company Note. Since the Company Note and the Investor Notes may be offset against each other, they are recorded on a net basis in the Consolidated Balance Sheet.

On June 30, 2015 pursuant to the terms of the Company Note, the Company elected to deduct and offset the principal amount of $1,300,000 and all accrued interest thereon owing by the Investor under the remaining nine Investor Notes from the amount owed by the Company under the Company Note, leaving an outstanding balance of $252,188 under the Company Note as of June 30, 2015 and total unamortized debt discount of $60,096.

The Company Note provides that Investor may not convert the Company Note in an amount which would cause Investor to own more than 4.99%, or if the Company’s market capitalization (as defined in the Company Note) is less than $10,000,000, more than 9.99%, of the Company’s outstanding common stock.

The Company paid MSC-BD, LLC $20,000 as a finder’s fee (equal to 10% of the gross proceeds) in connection with the first closing and $10,020 in connection with the second closing and paid additional finder’s fees of $16,000 to MSC-BD, LLC in connection with the June Note discussed below. The total finder’s fee of $46,020 was capitalized as deferred finance costs and amortized over the term of the respective notes. As of December 31, 2015 unamortized deferred finance costs related to these instruments were $0.

On December 15, 2015 the Company entered into a Note Settlement Agreement modifying the terms of the November Notes and the June Note (discussed below). This modification was treated as a debt extinguishment under ASC 470-50-40. See Note 10 for further discussion.

The Company also determined that the Lender Conversion feature of the modified November Notes meets the definition of an embedded derivative that should be separated and accounted for as a derivative liability. See Note 11.

Typenex Co-Investment June 2015 Note

On June 4, 2015, the Company entered into a Note Purchase Agreement (the “Purchase Agreement”) with Typenex Co-Investment, LLC, a Utah limited liability company, pursuant to which the Company concurrently issued to the investor an unsecured non-convertible Promissory Note in a principal amount of $245,000 (the “June Note”).  The principal amount includes an original issue discount of $40,000 plus an additional $5,000 to cover the investor’s legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the transaction. The original issue discount was recorded as debt discount and amortized to interest expense over the life of the note.  In consideration for the June Note, the investor paid an aggregate cash purchase price of $200,000, computed as follows: $245,000 original principal balance, less the original issue discount of $40,000, and less the transaction costs.  The June Note matured on December 4, 2015 and, as further described below, on December 15, 2015 the company entered into a Note Settlement Agreement relating to the June Note.   

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Interest does not accrue on the unpaid principal balance of the June Note unless an event of default occurs.  Upon the occurrence of an event of default, the outstanding balance of the June Note will bear interest at the lesser of the rate of 18% per annum or the maximum rate permitted by applicable law.  In addition, if an event of default occurs under the June Note, the investor may declare all unpaid principal, plus all accrued interest and other amounts due under the June Note to be immediately due and payable at an amount equal to 115% of the outstanding balance of the June Note as of the date of the applicable event of default, plus all interest, fees and charges that may accrue on such outstanding balance thereafter.  

The Company paid MSC-BD, LLC $16,000 as a finder’s fee (equal to 8% of the net proceeds) in connection with financing from the investor.

On December 15, 2015 the Company entered into a Note Settlement Agreement modifying the terms of the November Notes (discussed above) and the June Note. This Note Settlement Agreement modified the terms of the June Note to mirror the terms of the November Notes, thus making it a convertible instrument. This modification was treated as a debt extinguishment under ASC 470-50-40. See Note 10 for further discussion.

The Company also determined that the Lender Conversion feature of the modified June Note meets the definition of an embedded derivative that should be separated and accounted for as a derivative liability. See Note 11.

TCA Global Credit Master Fund, LP Note December 2015

On December 24, 2015, the Company entered into a Senior Secured Credit Facility Agreement with TCA Global Credit Master Fund, LP (“TCA”).  At the initial closing on December 24, 2015, the Company received gross proceeds of $750,000 and issued to TCA a Convertible Promissory Note in the principal amount of $750,000 (the “TCA Note”).  The TCA Note is scheduled to mature on June 24, 2017 (the “Maturity Date”).  At any time prior to the Maturity Date or the earlier termination of the Loan Agreement, the Company can request up to $9,250,000 of additional loans, which additional loans may be made in the sole discretion of TCA.  The Company may prepay borrowings at any time, in whole or in part, without penalty.

The loan will accrue interest on the unpaid principal balance at an annual rate of 18%.  The Company will make interest only payments of $11,250 on each of January 24, February 24 and March 24, 2016, and thereafter, will make payments of approximately $56,208 of principal and interest per month until the Maturity Date.  In the event the Company is in default under the loan agreement with TCA or any related transaction document, including as a result of a default in the Company’s payment obligations, any amount due to TCA under the facility will, at TCA’s option, bear interest from the date due until such past due amount is paid in full at an annual rate of 22%.  In addition, upon the occurrence and during the continuance of an event of default under the transaction documents, TCA may terminate its commitments to the Company and declare all of the Company’s obligations to TCA to be immediately due and payable.

While the Note is outstanding, but only upon the occurrence of (i) an event of default under the loan agreement with TCA or any related transaction document or (ii) the Company’s mutual agreement with TCA, TCA may convert, subject to certain beneficial ownership limitations, all or any portion of the outstanding principal, accrued and unpaid interest and any other sums due and payable under the Note or any other transaction document (such total amount, the “Conversion Amount”) into a number of shares of the 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 liquidation by TCA of Conversion Shares, if TCA realizes a net amount from such liquidation equal to less than the Conversion Amount, the Company is obligated to issue to TCA additional shares of the Company’s 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 TCA requests additional shares.

The payment and performance of all the Company’s indebtedness and other obligations to TCA, including all borrowings under the loan agreement and related agreements, are secured by liens on substantially all of the Company’s assets pursuant to a Security Agreement.

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Of the proceeds received at the initial closing, approximately $106,000 was used to pay in full all indebtedness outstanding under the Company’s Business Loan and Security Agreement with B of I Federal Bank (the “Bank”), entered into on November 3, 2015.  Upon repayment of the Company’s indebtedness under the Business Loan and Security Agreement, the Bank released its liens on the Company’s assets.  After the payment of approximately $51,000 of fees and cash expenses to TCA in connection with the loan transaction, the Company received net proceeds of approximately $593,000.

In connection with the Loan Agreement, the Company agreed to pay to TCA a fee for advisory services provided to us prior to the entry into the loan agreement in the amount of $126,000 (the “Advisory Fee”).  As partial payment of the Advisory Fee, the Company issued to TCA 3,810,000 shares of the Company’s common stock on December 24, 2015 (the “Advisory Fee Shares”), representing 4.99% of the Company’s issued and outstanding shares of common stock on such date.  In the event that TCA receives net proceeds from the sale of such shares that are less than the Advisory Fee, TCA may require the Company to issue additional shares of common stock in an amount sufficient such that, when sold and the net proceeds from such sale are added to the net proceeds from the sale of any of the previously issued and sold Advisory Fee Shares, TCA shall have received total net funds equal to the Advisory Fee. Notwithstanding the foregoing, subject to certain conditions, the Company has the right to redeem the Advisory Fee Shares then in TCA’s possession for an amount payable in cash equal to the Advisory Fee, less any net cash proceeds received by TCA from previous sales of Advisory Fee Shares.  In the event TCA has not realized net proceeds from the sale of Advisory Fee Shares equal to at least the Advisory Fee by the earlier to occur of: (i) December 24, 2016; (ii) the occurrence of an event of default under the transaction documents; or (iii) the Maturity Date, then at any time thereafter, TCA has the right to require the Company to redeem all of the Advisory Fee Shares then in TCA’s possession for cash equal to the Advisory Fee, less any cash proceeds received by TCA from any previous sales of Advisory Fee Shares. See Note 11 and Note 12 for further discussion.

The Company also determined that the Conversion feature of the TCA Note and the Advisory Fee meets the definition of an embedded derivative that should be separated and accounted for as a derivative liability. See Note 11.

NOTE 8 –NOTES PAYABLE

Note Holder	Balance December 31, 2015		Unamortized Original Issue Discount		Balance, net of Discount December 31, 2015
Iliad Unsecured Short Term	245,000		(9,131)		235,869
Capital Premium	27,077		-		27,077
AFCO Insurance	56,745		-		56,745
Bank of the West - short term portion	7,211		-		7,211
Total Short Term Notes Payable	$ 336,033		$ (9,131)		$ 326,902
Bank of the West - long term	$ 26,193		$ -		$ 27,698
Total Long Term Notes Payable	$ 26,193		$ -		$ 27,698

Bank of the West

On December 29, 2014, Kyle Winther, the Company’s CEO, entered into a vehicle financing agreement with the Bank of the West. Pursuant to the agreement, the amount financed was $39,275, payable in 48 monthly payments plus accrued interest at a rate of 3.9%. In January 2015, the Company agreed to assume the payments on this loan and capitalized the vehicle. As of December 31, 2015 and June 30, 2015 the outstanding balance was $33,404 and $36,400, respectively, with $7,211 classified as short term and $26,193 and $29,189, respectively, classified as long term.

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Facilities with B of I Federal Bank

On January 2, 2015, the Company entered into a Business Loan and Security Agreement with B of I Federal Bank (the “Bank”).  Pursuant to the agreement, the Company borrowed $200,000 from the Bank and received net proceeds of $195,000 USD after deducting an origination fee of $5,000.  The loan was payable in 147 payments of $1,728 due each business day beginning on and after January 5, 2015, with the initial total repayment amount (subject to certain exceptions) being equal to $254,000.

On June 2, 2015, the Company entered into a new Business Loan and Security Agreement with the Bank.  Pursuant to the agreement, the Company borrowed $175,000 from the Bank and received net proceeds of $104,071 after deducting an origination fee of $1,875 and the repayment of $69,054 in full satisfaction of the Company’s remaining obligations under that certain Business Loan and Security Agreement entered into with the Bank on January 2, 2015. The new loan was payable in 126 payments of $1,708 due each business day beginning on June 3, 2015, with the total repayment amount (subject to certain exceptions) being equal to $215,249 (the “Total Repayment Amount”). As of December 31, 2015 and June 30, 2015 the outstanding balance was $0 and $153,655, respectively.

On November 3, 2015, the Company entered into a new Business Loan and Security Agreement with the Bank.  Pursuant to the agreement, the Company borrowed $125,000 from the Bank and received net proceeds of $93,615 after deducting an origination fee of $3,023 and the repayment of $28,361 in full satisfaction of the Company’s remaining obligations under that certain Business Loan and Security Agreement entered into with the Bank on June 2, 2015.  The new loan was payable in 126 payments of $1,220 due each business day beginning on November 4, 2015, with the total repayment amount (subject to certain exceptions) being equal to $153,750. On December 24, 2015, the loan balance of $106,000 was paid off upon the closing of the financing transaction with TCA Global Credit Master Fund, LP.  

Iliad Co-Investment Note

On August 12, 2015, the Company entered into a Note Purchase Agreement (the “Purchase Agreement”) with Iliad Research & Trading, L.P, a Utah limited liability partnership, pursuant to which the Company concurrently issued to the investor an unsecured non-convertible Promissory Note in a principal amount of $245,000 (the “August Note”).  The principal amount includes an original issue discount of $40,000 plus an additional $5,000 to cover the investor’s legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the transaction. In consideration for the August Note, the investor paid an aggregate cash purchase price of $200,000, computed as follows: $245,000 original principal balance, less the original issue discount of $40,000, and less the transaction costs.  The August Note matures on February 12, 2016.  The Company may prepay all or a portion of the amount owed earlier than it is due without penalty. The original issue discount and issuance costs for both the June Note (see Note 7) and the August Note were recorded as debt discount and amortized to interest expense over the life of the notes. As of December 31, 2015 and June 30, 2015 the outstanding balance of the August Note was $245,000 and zero, respectively.

Interest does not accrue on the unpaid principal balance of the August Note unless an event of default occurs.  Upon the occurrence of an event of default, the outstanding balance of the August Note will bear interest at the lesser of the rate of 18% per annum or the maximum rate permitted by applicable law.  In addition, if an event of default occurs under the August Note, the investor may declare all unpaid principal, plus all accrued interest and other amounts due under the August Note to be immediately due and payable at an amount equal to 115% of the outstanding balance of the August Note as of the date of the applicable event of default, plus all interest, fees and charges that may accrue on such outstanding balance thereafter.  

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Other short term facilities

Effective May 29, 2015, the Company entered into an Agreement to finance its annual Workers Compensation insurance coverage. The insurance coverage is provided through The Hartford. The amount of the policy is $18,871 with $18,871 being financed at 2.2% over 12 months with an initial payment of $4,425 and 10 monthly payments of $1,444. The Company cancelled the policy with the Hartford Group and started the new policy as of October 1, 2015.  At December 31, 2015 and June 30, 2015, the premium obligation due under the Agreement was zero and $13,001, respectively.

Effective July 10, 2014, the Company entered into an Agreement to finance its annual General Liability insurance coverage. The insurance coverage is provided through Lloyds of London. The amount of the policy is $52,359 with $43,953 being financed at 11% over 10 months with a monthly payment of $4,620. At June 30, 2015, the remaining premium obligation due under the Agreement was $0. Effective July 10, 2015 the Company entered into a new agreement to finance its General Liability insurance coverage. The amount of the policy is $70,848 with $53,159 financed over 10 months at 9% interest with a monthly payment of $5,538. At December 31, 2015, the remaining premium obligation is $27,706

As of August 22, 2015, the Company entered into an insurance contract with AFCO for Director’s and Officer’s insurance coverage. The amount of the policy is $129,000 with $93,750 being financed at 5.3% over 10 months with a monthly payment of $9,604. At December 31, 2015, the remaining balance is $56,745.

NOTE 9 –LOSS PER COMMON SHARE

A summary of the net loss and shares used to compute net loss per share for the six months ended December 31, 2015 and 2014 is as follows:

		December 31, 2015		December 31, 2014
Net income (loss) for computation of basic and dilutive net income (loss) per share	$	(408,597)	$	(145,622)
Basic and dilutive net income (loss) per share	$	(0.01)	$	0.00
Basic and dilutive weighted average shares outstanding		72,621,258		68,060,001

NOTE 10 – DEBT EXTINGUISHMENT

On December 15, 2015, the Company and Typenex Co-Investment, LLC (the “Investor”) entered into a Note Settlement Agreement. The Note Settlement Agreement relates to the November Notes and the June Note (collectively, the “Modified Notes”)(see Note 7).  

 

The Note Settlement Agreement restructures the payment provision of the Notes, including the June Note which was due and payable in full on December 4, 2015. The agreement provides that the Company is to make the following payments to Investor notwithstanding the terms of the Modified Notes (the “Restructure”): (a) a payment in the amount of $50,000 on or before December 15, 2015; (b) a payment in the amount of $50,000 on or before January 15, 2016; (c) a payment in the amount of $50,000 on or before February 15, 2016; and (d) a payment equal to the remaining aggregate outstanding balance of the Modified Notes on or before March 15, 2016 (collectively, the “Note Payments”). Unless specified otherwise by Investor in a written notice delivered to Company, all Note Payments shall be applied first against the outstanding balance of the November Note until the November Note has been paid in full and thereafter against the June Note until the June Note is paid in full. Note Payments may be made in cash or, subject to certain conditions, shares of the Company’s Common Stock.

 

As consideration for Investor’s agreement to enter into the Note Settlement Agreement, the Company agreed to increase the outstanding balance of each Note by 15% (the “Restructure Effect”). Following the application of the Restructure Effect and including a $5,000 transaction expense fee, the outstanding balance of the November Note was $107,528 and the outstanding balance of the June Note was $281,750. After giving effect to the December 15, 2015 payment of $50,000, the outstanding balance of the November Note was $57,608.

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Upon satisfaction of the Company’s obligations under the Note Settlement Agreement, the Company shall be deemed to have paid the entire outstanding balance of each of the Modified Notes in full and shall have no further obligations under either Note. In addition, subject to the Company’s compliance with the terms and conditions of the Note Settlement Agreement, the Investor waives the default caused by the non-payment of the June Note on December 4, 2015.  

 

In the event that the Company fails to comply with the conditions of the Note Settlement Agreement, the Restructure, the waiver of the June Note default, and all other accommodations given in the Note Settlement Agreement will be deemed withdrawn and the Investor will be entitled to all remedies available to it as provided in the Modified Notes, the other Transaction Documents, and the Note Settlement Agreement.

The Company evaluated the Note Settlement Agreement under ASC 470-50-40 “Extinguishments of Debt” (“ASC 470”). ASC 470 requires modifications to debt instruments to be evaluated to assess whether the modifications are considered “substantial modifications”. A substantial modification of terms shall be accounted for like an extinguishment. For extinguished debt, a difference between the re-acquisition price and the net carrying amount of the extinguished debt shall be recognized currently in income of the period of extinguishment as losses or gains. The Company noted the change in terms per the Note Settlement Agreement, met the criteria for substantial modification under ASC 470, and accordingly treated the modification as extinguishment of the original November Notes and June Note, replaced by the new convertible notes under the modified terms. The Company recorded a loss on extinguishment of debt of $93,336 during the six months ended December 31, 2015.

 

NOTE 11 – DERIVATIVE LIABILITIES

The Company evaluated the Modified Notes, the TCA Note and the TCA Advisory Fee under the requirements of ASC 480 “Distinguishing Liabilities from Equity” and concluded that the notes and advisory fee do not fall within the scope of ASC 480.

The Company then evaluated the Modified Notes, the TCA Note and the TCA Advisory Fee under the requirements of ASC 815 “Derivatives and Hedging”.

Due to the existence of the anti-dilution provisions in the Modified Notes, which reduces the Lender Conversion Price in the event of subsequent dilutive issuances by the Company, the Company determined that the Lender Conversion feature does not meet the definition of “indexed to” the Company’s stock, and the scope exception to ASC 815’s derivative accounting provisions does not apply. The Company also determined that the Lender Conversion feature in the Modified Notes meets the definition of an embedded derivative that should be separated from the Modified Notes and accounted for as a derivative liability.

Due to the conversion provisions of the TCA Note and the TCA Advisory Fee, the Company determined that the Conversion feature does not meet the definition of “indexed to” the Company’s stock, and the scope exception to ASC 815’s derivative accounting provisions does not apply. The Company also determined that the Conversion feature of the TCA Note and the TCA Advisory Fee meets the definition of an embedded derivative that should be separated from the TCA Note and TCA Advisory Fee, respectively and accounted for as a derivative liability.

The Company recorded an original valuation for the Modified Notes of $194,596 for the derivative liability. As of December 31, 2015, the Company had a derivative liability of $183,964.

The Company recorded an original valuation for the TCA Note of $610,514 for the derivative liability. As of December 31, 2015, the Company had a derivative liability for the TCA Note of $694,766.

The Company recorded an original valuation for the TCA Advisory Fee of $80,280 for the derivative liability. As of December 31, 2015, the Company had a derivative liability for the TCA Advisory Fee of $80,280.  

The Company has recorded the fair value of each derivative as described above as a current liability as of December 31, 2015. The change in fair value was recorded as other income (expense) in operations for the six months ended December 31, 2015.

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In arriving at fair-value estimates, the Company utilizes the most observable inputs available for the valuation technique employed. If a fair-value measurement reflects inputs at multiple levels within the fair value hierarchy, the fair-value measurement is characterized based upon the lowest level input. For the Company, recurring fair-value measurements are performed for the derivative liability.

The Company does not have any liabilities that reduce risk associated with hedging exposure and has not designated the derivative liability as a hedge instrument.

The Company did not have any derivatives valued using Level 1 and Level 2 inputs as of December 31, 2015. The Company categorized the derivative liability as Level 3 using the Black-Scholes pricing model with a fair value of $959,010 as of December 31, 2015.

The Company used the following input ranges: stock price $0.0260-$0.0281; expected term 0.21-1.50 years; risk-free rate 0.16%-1.06%; and volatility 155.1%-155.6%. Unobservable inputs were the prevailing interest rates, the Company’s stock volatility and the expected term.

There have been no transfers between Level 1, Level 2, or Level 3 categories. Level 3 additions for the six months ended December 31, 2015 were $99,835 for valuation adjustments during the period.

NOTE 12 – EQUITY

Unregistered Sales of Equity Securities

Pursuant to the TCA Note, the Company issued to TCA 3,810,000 Advisory Fee Shares on December 24, 2015 as partial consideration for advisory services provided by TCA and the Company may be required to issue an unknown number of additional Advisory Fee Shares and/or Conversion Shares in accordance with the terms of the transaction documents.  The Note and Advisory Shares were issued to TCA in reliance upon the exemption from registration set forth in Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D thereunder for transactions not involving a public offering.  TCA represented that it is an “accredited investor” as defined in Regulation D.  These shares were valued at $0.027 per share, which was the closing market price the Company’s shares at December 24, 2015. The initial valuation of these shares was recorded to deferred finance fees and is being amortized to expense over the life of the related instrument.

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Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our Unaudited Condensed Consolidated Financial Statements and the related Notes thereto contained in Part I, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report, as well as in our Annual Report on Form 10-K for the year ended June 30, 2015 (“Annual Report”) and in our other filings with the SEC, which discuss our business in greater detail.

 

This Quarterly Report contains forward-looking statements that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statements that do not directly relate to historical or current fact. We use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “may,” “should,” “estimates,” “predicts,” “potential,” “continue,” “becoming,” “transitioning,” and similar expressions to identify such forward-looking statements. Our forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, capital resources sufficiency, capital expenditures and cash commitments. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those referenced in the subsection entitled “Risk Factors” in Part I, Item 1A of our Annual Report, and similar discussions in our other SEC filings. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

General Overview

On February 14, 2014, we entered into a Share Exchange Agreement with Vapor Hub Inc., a California corporation (“Vapor”), Delite Products, Inc., a California corporation (“Delite”) and the shareholders of both companies (the “Exchange Agreement”).  Pursuant to the terms of Exchange Agreement, we agreed to acquire all 30,000 of the issued and outstanding shares of Vapor’s common stock, as well as all 30,000 of the issued and outstanding shares of Delite’s common stock in exchange for the issuance by our company of 38,000,001 shares of our common stock to the shareholders of both companies.  On March 14, 2014, we completed the acquisition of Vapor and issued all of the 38,000,001 shares of our stock to the shareholders of Vapor, who are also the shareholders of Delite.  On March 26, 2014, we completed the acquisition of Delite.  As a result of the closing of the transactions contemplated by the Exchange Agreement, Vapor and Delite became our wholly owned subsidiaries and we now carry on the business of developing, producing, marketing and selling vaping devices and related accessories.  The transaction with Vapor was accounted for as a reverse acquisition (recapitalization) where Vapor was deemed to be the accounting acquirer, and us the legal acquirer. The transaction with Delite was accounted for as a business acquisition and we assumed the assets and liabilities of Delite at historical basis as of March 26, 2014 and the activity of Delite was included from that date forward. Prior to our acquisition of Vapor, we existed as a “shell company” with nominal assets whose sole business was to identify, evaluate and investigate various companies to acquire or with which to merge.  On May 18, 2015, Vapor and Delite were merged with and into the Company, ending the separate existences of Vapor and Delite. This had no impact on the historical consolidated financial statements.  

Upon our acquisition of Vapor, Robin Looban resigned as our sole director, president, secretary, treasurer, Chief Financial Officer and Chairman of the Board of Directors and management members from Vapor and Delite were appointed to serve as directors and officers of our company.  To reflect our acquisition of Vapor, on March 14, 2014 we changed our corporate name from Doginn, Inc. to Vapor Hub International Inc., and our stock symbol from “DOGI” to “VHUB”.  We also changed our fiscal year end from December 31 to June 30.

Our principal executive office is located at 1871 Tapo Street Simi Valley, CA 93063. The telephone number at our principal executive office is (805) 309-0533.  

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Business Overview

Product Description

Vaping devices (as well as electronic cigarettes, also known as e-cigarettes) are battery-powered products that allow users to inhale water vapor instead of the smoke, ash, tar and carbon monoxide associated with traditional cigarettes.  In contrast to e-cigarettes, vaping devices are often precision manufactured from metallic materials and do not look like traditional cigarettes.  Vaping devices, as compared to e-cigarettes, also offer a unique user experience as a result of greater vapor production, enriched taste, and an ability to highly customize a device with different mechanical components and fashionable accessories, including different colors and finishes.  

Sourcing

We use third party contract manufacturers to produce and finish our vaping devices from facilities primarily located in Southern California.  Our vaping devices (or Mods), which are made from a metallic material such as steel, brass or copper, are custom machined to meet our design specifications.  Once machined, unfinished products are delivered to our location in Simi Valley, or to a third party service provider to be buffed, polished and to add various treatments and embellishments, such as paint and dog tags.  Finished products are then held in inventory for distribution and sale. For the six months ended December 31, 2015, we relied on one manufacturer to machine all of our Mods.  Although we relied on one manufacturer to machine our Mods during the quarter, we believe manufacturing capacity is readily available to meet our current and planned needs. We do not currently have any long term agreements in place for the manufacture of our Mods.  

With respect to our vaping accessories, we purchase batteries from suppliers in China and atomizers from suppliers in the United States, Austria, the Philippines and China.  We believe that suppliers for accessories are readily available to meet our current and planned needs.  

We source our proprietary E-liquids from an ISO Class 7 certified manufacturer in the United States, which helps ensure their purity and quality.  In addition to sourcing our own e-liquids, we also purchase e-liquid from reputable American suppliers for resale through our distribution channels.  

Distribution to Retail Stores

We market and sell our vaping devices and related products to end customers through our websites www.vapor-hub.com and www.smokelessdelite.com, to retail stores through direct sales primarily in the United States but also internationally, and through third party wholesalers who then resell our products to retailers in their territory. Retailers of our products include vaping shops throughout the United States as well as convenience stores and several gas stations. Products we distribute include vaping devices and related accessories purchased from third parties for resale as well as our vaping devices and related accessories, which we design and source, including our popular “AR Mechanical Mods”, newly released and popular “Limitless Mechanical Mods”, as well as “Binary Premium e-Liquid”. Prior to its acquisition on March 26, 2014, our distribution business was operated by Delite.

Operation of Retail Stores

We also sell our products and those of third parties to end consumers directly through our own 1,500 square foot retail location located in Simi Valley, California.  We also operated a second retail location in Chatsworth, CA which store was closed on October 16, 2015.

Through our retail location, we sell and market vaping devices as well as e-liquid, accessories, and supplies relating to vaping devices to both novice users as well as consumers who demand high end technical devices.  

We opened our retail locations in order to create brand recognition for our products and also to enable us to gather information about user preferences in the rapidly evolving vaping industry.  By learning about user preferences, we believe we are better able to design and source products to meet market demand.  For these reasons, we plan to continue to operate our retail store in Simi Valley, CA.

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Going Concern

Our unaudited condensed consolidated financial statements have been presented on the basis that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Our cash balance as of December 31, 2015 along with continued losses and negative cash flows from operations raises substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our possible inability to continue as a going concern.

As discussed in Note 7, on December 24, 2015, we entered into a Senior Secured Credit Facility Agreement with TCA Global Credit Master Fund, LP.  Notwithstanding the foregoing financing event, we continue to face liquidity and capital resources constraints.  We do not believe that the proceeds from our existing financing facilities along with our operating cash flows will be sufficient to meet our financing needs for the next twelve months, and the extent of our future capital requirements will depend on many factors, including results of operations and the growth rate of our business.   Our near term objective is to raise debt or equity capital to fund our immediate cash needs and to finance our longer term growth.   We are also pursuing various means to increase revenues, reduce operating costs and to improve cash flow.  

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in accordance with U.S. GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statements presentation, financial condition, results of operations, and cash flows will be affected. Please refer to Note 2 “BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for further discussion.

Recently Issued Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This update impacts the accounting for financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01 is to be applied prospectively and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We have not yet determined the impact of ASU 2016-01 on our consolidated results of operations, financial condition, or cash flows.

We have reviewed all other recent accounting pronouncements issued to date of the issuance of these unaudited consolidated financial statements, and do not believe any of these pronouncements will have a material impact on our unaudited condensed consolidated financial statements.

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Results of Operations

Comparison of the Three Months Ended December 31, 2015 to the Three Months Ended December 31, 2014

The following is a summary of our results from operation for the three month periods ended December 31, 2015 and December 31, 2014:

	Three Months Ended, December 31, 2015		Three Months Ended December 31, 2014
Revenues	$  1,295,128		$  1,127,473
Cost of revenues	599,951		670,164
Gross profit	695,187		457,309
General and administrative expenses	744,687		627,561
Net loss from operations	(49,500)		(170,252)
Other expense	(284,944)		(19,657)
Loss before taxes	(334,444)		(189,909)
Net loss	$    (344,444)		$  (189,909)

Revenues: Revenues are comprised of gross sales less returns and discounts.  During the three months ended December 31, 2015 and 2014, we generated revenue of $1,295,128 (net of returns and discounts of $5,050) and $1,127,473 (net of returns and discounts of $31,205), respectively.  The modest increase in revenues compared to the prior year period primarily results from growth of our wholesale distribution and direct distribution to retail store sales.  We expect revenues derived from our wholesale distribution, direct distribution to retail stores and sales through our websites, which collectively account for approximately 90% of our revenue, to increase as we increase our marketing initiatives.  We also expect our sales growth to be driven by sales of our Limitless Mods, our Binary Premium e-Liquid line and our new Limitless Atomizer, which have been well received in the marketplace and collectively account for a majority of our sales.  We anticipate that retail sales will decline in subsequent periods as a result of the closing of our Chatsworth, CA retail location.   

Cost of Revenues: Our cost of revenue primarily represents the cost of our outsourced manufacturing of our products and also the cost of purchasing products from third parties for resale.  Generally, our cost of revenue is lower on products that we directly source and is higher when we purchase products for resale from third parties. During the three months ended December 31, 2015 and 2014, our cost of revenue was $599,951 and $670,164, respectively.  The decrease in cost of revenues during the three months ended December 31, 2015 compared to the prior year period is primarily attributable to sourcing and distributing more of our proprietary products as opposed to purchasing products from third parties for resale.  For the three months ended December 31, 2015, our directly sourced products comprised approximately 74% of our sales, which is approximately a 6% increase from the prior year period, which resulted in a slight decrease in our cost of revenues.

Gross Profit:  Gross profit represents revenue less the cost of revenue.  During the three months ended December 31, 2015, our gross profit was $695,187 and during the comparable prior year period ended December 31, 2014 was $457,309. Our gross margin (which is gross profit as a percentage of revenue) for the three months ended December 31, 2015 was 53.6% compared to 40.6% for the prior year period. The increase in our gross profit during the three months ended December 31, 2015 compared to the prior year period is primarily attributable to sourcing and distributing more of our proprietary products as opposed to purchasing products from third parties for resale, as described in the previous paragraph.  We expect our gross profit and profit margins to increase in subsequent periods as we sell more of our proprietary products, including without limitation, our Limitless Mods and Binary Premium e-Liquids and our newly launched Limitless Atomizer, which have higher margins than products we purchase for resale.

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General and Administrative Expense:   General and administrative expenses consist primarily of payroll and related costs, sales and marketing costs, infrastructure costs and costs associated with being a public reporting company.  During the three months ended December 31, 2015, we incurred general and administrative expenses of $744,687 and in the comparable prior year period ended December 31, 2014 we incurred general and administrative expenses of $627,561.  The increase in general and administrative expense during the three months ended December 31, 2015 compared to the prior year period results primarily from additional legal fees incurred in connection with financing transactions.  Our general and administrative expenses as a percentage of sales was 57.5% and 55.7% for each of the three months ended December 31, 2015 and December 31, 2014, respectively. We are continuing to evaluate our general and administrative expenses in an effort to reduce costs and improve our future profitability and cash flow.  In October of 2015, we took steps to lower our general and administrative expenses by dismissing 4 full time and 2 part time employees.

Other expense: Other expense of $284,944 for the three months ended December 31, 2015 consists of interest expense of $55,802 incurred in connection with our credit facilities, finance fees of $10,508, interest expense-amortization of debt discount $70,946, loss on extinguishment of debt $93,336 and expenses incurred in connection with a change in derivative liability of $54,352 associated with our credit facilities with Typenex Co-Investment, LLC and TCA Global Credit Master Fund, LP.  During the comparable period in 2014, we had $19,657 interest expense.

Net Loss: Net loss was $334,444 for the three months ended December 31, 2015 and $189,909 for the three months ended December 31, 2014 for the reasons discussed above.

Comparison of the Six Months Ended December 31, 2015 to the Six Months Ended December 31, 2014

The following is a summary of our results from operation for the six month periods ended December 31, 2015 and December 31, 2014:

	Six Months Ended, December 31, 2015		Six Months Ended December 31, 2014
Revenues	$  3,257,483		$  2,499,023
Cost of revenues	1,803,793		1,413,486
Gross profit	1,453,690		1,085,537
General and administrative expenses	1,446,428		1,192,615
Net Income (loss) from operations	7,262		(107,078)
Other expense	(415,059)		(37,544)
Net loss before taxes	(407,797)		(144,622)
Income tax provision	800		800
Net loss	$    (408,597)		$  (145,422)

Revenues: Revenues are comprised of gross sales less returns and discounts.  During the six months ended December 31, 2015 and 2014, we generated revenue of $3,257,483 (net of returns and discounts of $13,433) and $2,499,023 (net of returns and discounts of $60,217), respectively.  The increase in revenues compared to the prior year period primarily results from growth of our wholesale distribution and direct distribution to retail store sales. We expect revenues derived from our wholesale distribution, direct distribution to retail stores and sales through our websites, which collectively account for approximately 90% of our revenue, to increase as we increase our marketing initiatives.  We also expect our sales growth to be driven by sales of our Limitless Mods, our Binary Premium e-Liquid line and our new Limitless Atomizer, which have been well received in the marketplace and collectively account for a majority of our sales.  We anticipate that retail sales will decline in subsequent periods as a result of the closing of our Chatsworth, CA retail location.   

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Cost of Revenues: Our cost of revenue primarily represents the cost of our outsourced manufacturing of our products and also the cost of purchasing products from third parties for resale.  Generally, our cost of revenue is lower on products that we directly source and is higher when we purchase products for resale from third parties. During the six months ended December 31, 2015 and 2014, our cost of revenue was $1,803,793 and $1,413,486, respectively.  The increase in cost of revenues during the six months ended December 31, 2015 compared to the prior year period is primarily attributable to the period-over-period increase in our revenues as well as an increase in sales of products we purchased from third parties for resale in the three-month period ended September 30, 2015 compared to the prior year period.

Gross Profit:  Gross profit represents revenue less the cost of revenue.  During the six months ended December 31, 2015, our gross profit was $1,453,690 and during the comparable prior year period ended December 31, 2014 was $1,085,537. The increase in gross profit during the six months ended December 31, 2015 compared to the prior year period is primarily attributable to the period-over-period increase in our revenues.  Our gross margin (which is gross profit as a percentage of revenue) for the six months ended December 31, 2015 was 44.6% compared to 43.4% for the prior year period.  The modest increase in our gross margin during the six months ended December 31, 2015 results primarily from the sale of a reduced percentage of third party products purchased for resale in the six-month period ended December 31, 2015 compared to the prior year period.  We expect our gross profit and profit margins to increase in subsequent periods as we sell more of our proprietary products, including without limitation, our Limitless Mods and Binary Premium e-Liquids and our newly launched Limitless Atomizer, which have higher margins than products we purchase for resale.

General and Administrative Expense:   General and administrative expenses consist primarily of payroll and related costs, sales and marketing costs, infrastructure costs and costs associated with being a public reporting company.  During the six months ended December 31, 2015, we incurred general and administrative expenses of $1,446,428 and in the comparable prior year period ended December 31, 2014 we incurred general and administrative expenses of $1,192,615.  The increase in general and administrative expense during the six months ended December 31, 2015 compared to the prior year period is attributable to increased sales and marketing costs, the hiring of additional employees and costs associated with being a public reporting company.  Although our general and administrative expenses as a percentage of sales decreased to 44.4% for the six-month period ended December 31, 2015 compared to 47.7% for the prior year period, we are continuing to evaluate our general and administrative expenses in an effort to reduce costs and improve our future profitability and cash flow.  In October of 2015, we took steps to lower our general and administrative expenses by dismissing 4 full time and 2 part time employees.

Other expense: Other expense of $415,059 for the six months ended December 31, 2015 consists of interest expense of $88,487 incurred in connection with our credit facilities, finance fees of $20,273, interest expense-amortization of debt discount $113,128, loss on extinguishment of debt $93,336 and expenses incurred in connection with a change in derivative liability of $99,835 associated with our credit facilities with Typenex Co-Investment, LLC and TCA Global Credit Master Fund, LP.  We had $37,544 interest expense in the prior year period ended December 31, 2014.

Net loss: Net loss was $408,597 for the six months ended December 31, 2015 and $145,422 for the six months ended December 31, 2014 for the reasons discussed above.

Seasonality

Our operating results and operating cash flows tend to be lower in the three month period ending December 31, compared to other periods. This year, our sales for the three month period ending September 30, 2015 were $1,962,345 compared to $1,295,128 for the three month period ending December 31, 2015.

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Liquidity and Capital Resources

As of December 31 2015, we had cash of $442,942 and working capital deficit of $364,781 and as of June 30, 2015, we had cash of $351,081 and a working capital deficit of $539,496.  We depend on cash from financing activities to fund our operating activities, and we expect this trend to continue as we continue to grow our operations.  A summary of our net working capital as of December 31, 2015 and as of June 30, 2015, and our cash flows for the six months ended December 31, 2015 and 2014 are summarized in the following tables:

Net Working Capital
		As of December 31, 2015		As of June 30, 2015
Current Assets	$	1,245,046		794,377
Current Liabilities		1,609,827		1,333,873
Net Working Capital	$	(364,781)		(539,496)

Cash Flows
		Six Months Ended December 31, 2015		Six Months Ended December 31, 2014
Net cash used in Operating Activities		$ (342,925)	$ (450,370)
Net cash provided by (used in) Investing Activities		(5,734)	3,037
Net cash provided by Financing Activities		440,520	195,428
Increase/(Decrease) in Cash during period		91,861	(251,905)
Cash, Beginning of Period		351,081	307,567
Cash, End of Period		$ 442,942	$ 55,662

Operating Activities

Net cash used in operating activities was $342,925 for the six months ended December 31, 2015.  Net cash used by operating activities was $450,370 for the six months ended December 31, 2014.  Net cash used in operations for the period ended December 31, 2015 primarily results from our net loss, inventory purchases, a decrease in deferred income and a decrease in accounts payable and accrued expenses offset by an increase in amortization of debt discount, loss on extinguishment of debt and changes in derivative liability.  Net cash used in operations for the six months ended December 31, 2014 primarily results from our net loss, a decrease in deferred income, an increase in inventory and an increase in prepaid expenses and other current and long term assets offset by an increase in accounts payable and accrued expenses.  

Investing Activities

Net cash used in investing activities was $5,734 for the six months ended December, 2015.  For the sixth months ended December 31, 2014, net cash provided by investing activities was $3,037.  Net cash used by investing activities for the six months ended December 31, 2015 consists of the purchase of property and equipment for $5,734.

Financing Activities

Net cash received in financing activities $440,520 for the six months ended December 31, 2015 and $195,428 for the six months ended December 31, 2014.  For the six months ended December 31, 2015, net cash received in financing activities primarily consisted of proceeds from convertible notes payable of $699,350 from our financing with TCA and proceeds from short term notes payable of $330,000 offset by payments on convertible notes payable of $218,759, payments made on short term notes payable of $278,655 and payments on financed insurance premiums of $76,089.  For the six months ended December 31, 2014, net cash received in financing activities consisted of a convertible loan of $200,000 offset by payments on affiliate loans of $2,386 and payments on leased property loans $2,186.

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Description of Financing Facilities

Facility with Typenex Co-Investment, LLC

On November 4, 2014, we entered into a securities purchase agreement (the “Purchase Agreement”) with Typenex Co-Investment, LLC, a Utah limited liability company (the “Investor”), pursuant to which we concurrently issued to Investor a Secured Convertible Promissory Note in a principal amount of $1,687,500 (the “November Note”).  For a further description of the terms of the November Note, please see Note 7.  On December 15, 2015 the company renegotiated the terms of the November Note pursuant to the Note Settlement Agreement, which is further described below. The original loan is accounted for as an extinguished loan and the modified loan was recorded as a new instrument.  As of December 31, 2015, the remaining balance on the November Note is $0.

Second Facility with Typenex Co-Investment, LLC

On June 4, 2015, we entered into a Note Purchase Agreement (the “Purchase Agreement”) with Typenex Co-Investment, LLC, a Utah limited liability company, pursuant to which we concurrently issued to the investor an unsecured non-convertible Promissory Note in a principal amount of $245,000 (the “June Note”).  The principal amount includes an original issue discount of $40,000 plus an additional $5,000 to cover the investor’s legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the transaction.  In consideration for the June Note, the investor paid an aggregate cash purchase price of $200,000, computed as follows: $245,000 original principal balance, less the original issue discount of $40,000, and less the transaction costs.  The June Note matured on December 4, 2015.  For a further description of the terms of the June Note, please see Note 7.  On December 15, 2015 the company renegotiated the terms of the June Note pursuant to the Note Settlement Agreement, which is further described below.  The original loan is accounted for as an extinguished loan and the modified loan was recorded as a new instrument.

Note Settlement Agreement

On December 15, 2015, Typenex Co-Investment, LLC (the “Investor”) entered into a Note Settlement Agreement with us. The Note Settlement Agreement relates to the November Note and the June Note (collectively, the “Modified Notes”).  

 

The Note Settlement Agreement restructures the payment provision of the Modified Notes, including the June Note which was due and payable in full on December 4, 2015. The agreement provides that we are to make the following payments to Investor notwithstanding the terms of the Modified Notes (the “Restructure”): (a) a payment in the amount of $50,000 on or before December 15, 2015; (b) a payment in the amount of $50,000 on or before January 15, 2016; (c) a payment in the amount of $50,000 on or before February 15, 2016; and (d) a payment equal to the remaining aggregate outstanding balance of the Modified Notes on or before March 15, 2016 (collectively, the “Note Payments”). Unless specified otherwise by Investor in a written notice delivered to us, all Note Payments shall be applied first against the outstanding balance of the November Note until the November Note has been paid in full and thereafter against the June Note until the June Note is paid in full. Note Payments may be made in cash or, subject to certain conditions, shares of our Common Stock.

As consideration for Investor’s agreement to enter into the Note Settlement Agreement, we agreed to increase the outstanding balance of each Note by 15% (the “Restructure Effect”). Following the application of the Restructure Effect and including a $5,000 transaction expense fee, the outstanding balance of the November Note was $107,528 and the outstanding balance of the June Note was $281,750. After giving effect to the December 15, 2015 payment of $50,000, the outstanding balance of the November Note was $57,608.

Upon satisfaction of our obligations under the Note Settlement Agreement, we shall be deemed to have paid the entire outstanding balance of each of the Modified Notes in full and shall have no further obligations under either Note. In addition, subject to our compliance with the terms and conditions of the Note Settlement Agreement, the Investor waives the default caused by the non-payment of the June Note on December 4, 2015.  

 

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In the event that we fail to comply with the conditions of the Note Settlement Agreement, the Restructure, the waiver of the June Note default, and all other accommodations given in the Note Settlement Agreement will be deemed withdrawn and the Investor will be entitled to all remedies available to it as provided in the Modified Notes, the other Transaction Documents, and the Note Settlement Agreement.

Iliad Research and Trading, L.P. Note Purchase Agreement and Promissory Note

On August 12, 2015, we entered into a Note Purchase Agreement with Iliad Research and Trading, L.P., a Utah limited partnership (“Iliad”) and an affiliate of Typenex Co-Investment, LLC., pursuant to which we concurrently issued to Iliad a Promissory Note in a principal amount of $245,000 (the “August Note”).  The principal amount includes an original issue discount of $40,000 plus an additional $5,000 to cover Iliad’s legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the transaction.  In consideration for the August Note, Iliad paid an aggregate cash purchase price of $200,000, computed as follows: $245,000 original principal balance, less the original issue discount of $40,000, and less the transaction costs.  The August Note matured on February 12, 2016 and we are currently in the process of restructuring the payment terms of this note with Iliad.  For a further description of the terms of the August Note, please see Note 8.

Facility with B of I Federal Bank

On November 3, 2015, we entered into a Business Loan and Security Agreement with BofI Federal Bank (the “Bank”).  Pursuant to the agreement, we borrowed $125,000 from the Bank and received net proceeds of $93,615.51 after deducting the repayment of $31,384.49 in full satisfaction of our remaining obligations under that certain Business Loan and Security Agreement entered into with the Bank on June 2, 2015 (see Note 7 for further details on the June 2 note).  The new loan was payable in 126 payments of $1,220.24 due each business day beginning on November 4, 2015, with the total repayment amount (subject to certain exceptions) being equal to $153,750.24. On December 24, 2015, the loan balance of $106,000 was paid off in connection with the closing of our financing with TCA Global Credit Master Fund, LP.

Prior to its repayment, the loan was secured by all personal property of the Company and was also personally guaranteed by Lori Winther, our Chief Financial Officer and a director of the Company, Kyle Winther, our Chief Executive Officer and a director of the Company, and Gary Perlingos, our President and a director of the Company.

Facility with TCA Global Credit Master Fund, LP Note December 2015

On December 24, 2015, we entered into a Senior Secured Credit Facility Agreement with TCA Global Credit Master Fund, LP (“TCA”).  At the initial closing on December 24, 2015, we received gross proceeds of $750,000 and issued to TCA a Convertible Promissory Note in the principal amount of $750,000 (the “TCA Note”). The TCA Note is scheduled to mature on June 24, 2017 (the “Maturity Date”).  At any time prior to the Maturity Date or the earlier termination of the Loan Agreement, we can request up to $9,250,000 of additional loans, which additional loans may be made in the sole discretion of TCA.  We may prepay borrowings at any time, in whole or in part, without penalty.

The loan will accrue interest on the unpaid principal balance at an annual rate of 18%.  We will make interest only payments of $11,250 on each of January 24, February 24 and March 24, 2016, and thereafter, will make payments of approximately $56,208 of principal and interest per month until the Maturity Date.  In the event we are in default under the loan agreement with TCA or any related transaction document, including as a result of a default in our payment obligations, any amount due to TCA under the facility will, at TCA’s option, bear interest from the date due until such past due amount is paid in full at an annual rate of 22%.  In addition, upon the occurrence and during the continuance of an event of default under the transaction documents, TCA may terminate its commitments to us and declare all of our obligations to TCA to be immediately due and payable.

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While the Note is outstanding, but only upon the occurrence of (i) an event of default under the loan agreement with TCA or any related transaction document or (ii) our mutual agreement with TCA, TCA may convert, subject to certain beneficial ownership limitations, all or any portion of the outstanding principal, accrued and unpaid interest and any other sums due and payable under the Note or any other transaction document (such total amount, the “Conversion Amount”) into a number of shares of our common stock equal to: (i) the Conversion Amount divided by (ii) eighty-five percent (85%) of the lowest of the daily volume weighted average price of our common stock during the five business days immediately prior to the conversion date (the “Conversion Shares”).  Upon liquidation by TCA of Conversion Shares, if TCA realizes a net amount from such liquidation equal to less than the Conversion Amount, we are obligated to issue to TCA additional shares of our common stock equal to: (a) the Conversion Amount minus the net realized amount, divided by (b) the average volume weighted average price of our common stock during the five business days immediately prior to the date upon which TCA requests additional shares.

The payment and performance of all our indebtedness and other obligations to TCA, including all borrowings under the loan agreement and related agreements, are secured by liens on substantially all of our assets pursuant to a Security Agreement. For a further description of the terms of the TCA Note, please see Note 7.

Conversion of Gotama Capital S.A. Debt into Common Stock

On June 30, 2015, we converted $614,340, representing the entire principal amount of each of the following promissory notes (collectively, the “Notes”) and all accrued interest thereon into an aggregate of 4,095,605 shares of our common stock, par value $0.001 per share (the “Conversion Shares”):

(i)

that certain convertible promissory note issued to Gotama Capital S.A. (“Gotama”) on March 14, 2014 in the principal amount of $185,000;

(ii)

that certain convertible promissory note issued to Gotama on April 10, 2014 in the principal amount of $200,000; and

(iii)

that certain convertible promissory note issued to Gotama on May 19, 2014 in the original principal amount of $175,000.  

Pursuant to the terms of the Notes, at our election, the principal amount of each of the Notes and all accrued interest thereon was converted into Conversion Shares at a price of $0.15 per share.  

Future Capital Requirements

We continue to face liquidity and capital resources constraints and do not believe that the proceeds from our debt facilities along with our operating cash flows will be sufficient to meet our financing needs for the next twelve months. The extent of our future capital requirements will depend on many factors, including our results from operations and the growth rate of our business. Our near term objective is to raise debt or equity capital to fund our immediate cash needs and to finance our longer term growth. We are also pursuing various means to increase revenues, reduce operating costs and to improve overall cash flow.

Although our near term objective is to raise capital to fund our immediate cash needs and to finance our longer term growth, there can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain additional financing on a timely basis, we may not be able to grow our operations as planned, may not be able to meet our other obligations as they become due and may ultimately be forced to restructure or cease our operations.

 

If we are successfully able to raise capital, the issuance of additional equity securities by us could result in significant dilution in the equity interests of our current stockholders and if capital is raised through debt facilities, such facilities will increase our liabilities and future cash commitments, and may also impose restrictive covenants relating to the operation of our business.

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We presently do not have any arrangements for additional financing and will continue to evaluate various financing strategies to support our current operations and fund our future growth.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

As a “smaller reporting company”, we are not required to provide the information required by this Item.

Item 4.

Controls and Procedures   

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, our management, with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal accounting officer and principal financial officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2015, the end of the period covered by this report.  Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were not effective to ensure that information that is required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  

The Company's management identified material weaknesses in its internal control over financial reporting related to the following matters:  

·

A lack of sufficient segregation of duties. Specifically, this material weakness is such that the design over these areas relies primarily on defective controls and could be strengthened by adding preventative controls to properly safeguard company assets.

·

A lack of sufficient personnel in the accounting function due to the Company's limited resources with appropriate skills, training and experience to perform certain tasks as it relates to financial reporting.

The Company's plan to remediate those material weaknesses is as follows:

To improve the effectiveness of the accounting group, the company uses the firm of Winther and Company CPA’s to augment existing resources, to improve segregation procedures and to assist in the analysis and recording of complex accounting transactions.  The Company also hired a full-time accounting manager to maintain the Company’s books and records under the supervision of the CFO.  The Company plans to further mitigate its accounting deficiencies by hiring additional personnel in the accounting department once it generates significantly more revenue, or raises significant additional working capital.  

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The company is also in the process of adopting specific internal control mechanisms with its Board of Directors’ and executive officers’ collaboration to ensure effectiveness as the company grows. Future controls, among other things, will include more checks and balances and communication strategies between the management and the Board of Directors to ensure efficient and effective oversight over company activities as well as more stringent accounting policies to track and update the company’s financial reporting.  

Changes in Internal Controls over Financial Reporting

Other than as described above, there was no change in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the three months ended December 15, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1A.  Risk Factors

Other than described below, there have been no material changes to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2015.

Our Convertible Note financing may result in significant dilution to existing stockholders and could cause us to incur significant financial penalties

On December 24, 2015, we entered into a Senior Secured Credit Facility Agreement with TCA Global Credit Master Fund, LP (“TCA”) and issued to TCA a Convertible Promissory Note in the principal amount of $750,000 (the “TCA Note”).   The payment and performance of all our indebtedness and other obligations to TCA, including all borrowings under the loan agreement and related agreements, are secured by liens on substantially all of our assets pursuant to a Security Agreement.

Upon the occurrence and during the continuance of an event of default under the transaction documents, including as a result of our failure to meet our payment obligations or to satisfy our covenants under the transaction documents, TCA may terminate its commitments to us and declare all of our obligations to TCA to be immediately due and payable.  In addition, upon the occurrence and during the continuance of an event of default under the transaction documents, TCA may also exercise all of its rights as a secured creditor and obtain our assets.   If we lose all or a substantial portion of our assets, our shares will likely significantly decline in value or become worthless.  

While the TCA Note is outstanding, but only upon the occurrence of (i) an event of default under the loan agreement with TCA or any related transaction document or (ii) our mutual agreement with TCA, TCA may convert, subject to certain beneficial ownership limitations, all or any portion of the outstanding principal, accrued and unpaid interest and any other sums due and payable under the Note or any other transaction document (such total amount, the “Conversion Amount”) into a number of shares of our common stock equal to: (i) the Conversion Amount divided by (ii) eighty-five percent (85%) of the lowest of the daily volume weighted average price of our common stock during the five business days immediately prior to the conversion date (the “Conversion Shares”).  Upon liquidation by TCA of Conversion Shares, if TCA realizes a net amount from such liquidation equal to less than the Conversion Amount, we are obligated to issue to TCA additional shares of our common stock equal to: (a) the Conversion Amount minus the net realized amount, divided by (b) the average volume weighted average price of our common stock during the five business days immediately prior to the date upon which TCA requests additional shares.  In the event we issue Conversion Shares to pay obligations under the TCA Note, our existing stockholders will likely be significantly diluted pursuant to the terms of the TCA Note and our shares may significantly decline in value or become worthless.

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Similarly, in connection with the loan agreement with TCA, we agreed to pay to TCA a fee for advisory services provided to us prior to the entry into the loan agreement in the amount of $126,000 (the “Advisory Fee”).  As partial payment of the Advisory Fee, we issued to TCA 3,810,000 shares of our common stock on December 24, 2015 (the “Advisory Fee Shares”).  In the event that TCA receives net proceeds from the sale of such shares that are less than the Advisory Fee, TCA may require us to issue additional shares of common stock in an amount sufficient such that, when sold and the net proceeds from such sale are added to the net proceeds from the sale of any of the previously issued and sold Advisory Fee Shares, TCA shall have received total net funds equal to the Advisory Fee.  Notwithstanding the foregoing, subject to certain conditions, we have the right to redeem the Advisory Fee Shares then in TCA’s possession for an amount payable in cash equal to the Advisory Fee, less any net cash proceeds received by TCA from previous sales of Advisory Fee Shares.  In the event TCA has not realized net proceeds from the sale of Advisory Fee Shares equal to at least the Advisory Fee by the earlier to occur of: (i) December 24, 2016; (ii) the occurrence of an event of default under the transaction documents; or (iii) the Maturity Date, then at any time thereafter, TCA has the right to require us to redeem all of the Advisory Fee Shares then in TCA’s possession for cash equal to the Advisory Fee, less any cash proceeds received by TCA from any previous sales of Advisory Fee Shares.  In the event TCA sells its Advisory Fee Shares in the market, our share price may significantly decline.  In addition, in the event we issue additional Advisory Fee Shares to pay the Advisory Fee, our existing stockholders will likely be significantly diluted and our shares may significantly decline in value or become worthless.

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Item 6.

Exhibits

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

File Number

Exhibit

Filing Date

Filed Herewith

10.1

B of I Business Loan and Security Agreement dated November 3, 2015

X

10.2

Note Settlement Agreement by and between Vapor Hub International Inc. and Typenex Co-Investment, LLC dated December 18, 2015.

8-K

000-55363

10.1

12/31/2015

10.3

Senior Secured Credit Facility Agreement dated December 24, 2015 by and between Vapor Hub International Inc. and TCA Global Credit Master Fund, LP.

8-K

000-55363

10.1

12/31/2015

10.4

Security Agreement dated December 24, 2015 by and between Vapor Hub International Inc. and TCA Global Credit Master Fund, LP.

8-K

000-55363

10.2

12/31/2015

10..5

Convertible Promissory Note dated December 24, 2015 issued by Vapor Hub International Inc. to TCA Global Credit Master Fund, LP.

8-K

000-55363

10.3

12/31/2015

31.1

Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

31.2

Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

32.1

Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

#

101.INS

XBRL Instance Document

X

101.SCH

XBRL Taxonomy Extension Schema Document

X

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

X

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

X

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

X

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

X

_________________________________________

# Furnished herewith

32

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: February 16, 2016

Vapor Hub International Inc.

(Registrant)

By: /s/ Kyle Winther

Kyle Winther

Chief Executive Officer

(Principal Executive Officer)

By: /s/ Lori Winther

Lori Winther

Chief Financial Officer

(Principal Financial and Accounting Officer)

33

OnDeck>

Business Loan and

Security Agreement

This Business Loan and Security Agreement Supplement is part of (and incorporated by reference into) the Business Loan and Security Agreement. Borrower should keep this important legal document for Borrower's records.

YOUR LOAN DETAILS
Borrower:	VAPOR HUB INTERNATIONAL INC
Lender:	Bofl Federal Bank
Loan Amount:	$125,000.00
Origination Fee: (Deducted at time of disbursement)	$0.00
Disbursement Amount: (Loan Amount less Origination Fee less any principal amount owed to Lender from an existing loan or any amount used to pay off an existing obligation owed to a third party lender)	$125,000.00
Daily Payment Amount: (Business days only) Number of Daily Payments: (Business days only) Payment Schedule:	$1,220.24 126 126 payments of $1,220.24 due each Business day beginning on the first Business day after the Disbursement Amount is disbursed by Lender. "Business day" means any Monday through Friday except for Federal Reserve holidays.
Interest Expense Multiplier: (Total Repayment Amount divided by the Loan Amount. This reflects per dollar interest cost of the loan)	$1.23
Total Interest Expense: (Does not include any Fees)	$28,750.24
Total Repayment Amount: (Loan Amount plus Total Interest Expense)	$153,750.24
PREPAYMENT, RENEWAL, AND OTHER FEES AND OTHER FEES
Prepayment: (See Section 10 of the Business Loan and Security Agreement for specific details)	A "Prepayment Interest Reduction Percentage" of 25% (with respect to unpaid interest remaining on this Loan) will be applied to the extent that the Borrower prepays this Loan in whole in accordance with, and subject to, Section 10 of the Business Loan and Security Agreement. Note that 75% of remaining unpaid interest will still be due upon Prepayment.
Renewals:	Remaining unpaid interest on this Loan will be eligible to be forgiven by Lender if: (i) Borrower is current on its scheduled payments with respect to this Loan and, (ii) while this Loan is outstanding, Borrower enters into a business loan and security agreement for a new qualifying term loan with Lender, a portion of the proceeds of which is used to repay this Loan in whole.
Other Fees:	Returned Payment Fee: $25.00 Late Fee: $10.00 (maximum $50 within any 20 day period)

ODC App 855640 Customer: VAPOR HUB INTERNATIONAL INC

(rev. 9/25/2015)

CERTAIN DISCLOSURES

ODC App #: 855640 Customer: VAPOR HUB INTERNATIONAL INC DLT doc. #37121.11 (rev. 10/20/09)

OnDeck>

Authorization Agreement for

Direct Deposits (ACH Credit) and

Direct Payments (ACH Debit)

This Authorization Agreement for Direct Deposit (ACH Credit) and Direct Payments (ACH Debits) is part of (and Incorporated by reference into) the Business Loan and Security Agreement. Borrower should keep this important legal document for Borrower's records.

DISBURSMENT OF LOAN PROCEEDS. By signing below, Borrower authorizes Lender to disburse the Loan proceeds less the amount of any applicable fees upon Loan approval by initiating an ACH credit to the checking account indicated below (or a substitute checking account Borrower later identifies and is acceptable to Lender) (hereinafter referred to as the "Designated Checking Account") in the disbursal amount set forth in the accompanying Business Loan and Security Agreement Supplement. This authorization is to remain in full force and effect until Lender has received written notification from Borrower of its termination in such time and in such manner as to afford Lender and Borrowers depository bank a reasonable opportunity to act on it.

AUTOMATIC PAYMENT PLAN. Enrollment in Lender's Automatic Payment Plan is required for Loan approval. By signing below, Borrower agrees to enroll in the Automatic Payment Plan and authorizes Lender to collect payments required under the terms of Borrowers Business Loan and Security Agreement by initiating ACH debit entries to the Designated Checking Account in the amounts and on the dates provided in the payment schedule set forth in the accompanying Business Loan and Security Agreement Supplement. Borrower authorizes Lender to increase the amount of any scheduled ACH debit entry or assess multiple ACH debits for the amount of any previously scheduled payment(s) that was not paid as provided in the payment schedule and any unpaid Fees. This authorization is to remain in full force and effect until Lender has received written notification from Borrower of its termination in such time and in such manner as to afford Lender and Borrower's depository bank a reasonable opportunity to act on it. Lender may suspend or terminate Borrower's enrollment in the Automatic Payment Plan immediately if Borrower fails to keep Borrower's designated checking account in good standing or if there are insufficient funds in Borrower's checking account to process any payment. If Borrower revokes the authorization or Lender suspends or terminates Borrower's enrollment in the Automatic Payment Plan, Borrower still will be responsible for making timely payments pursuant to the alternative payment methods described in the Business Loan and Security Agreement.

Provisional Payment. Credit given by us to you with respect to an automated clearing house ("ACH") credit entry is provisional until we receive final settlement for such entry through a Federal Reserve Bank. If we do not receive such final settlement, you are hereby notified and agree that we are entitled to a refund of the amount credited to you in connection with such entry, and the party making to you via such entry (i.e. the originator of the entry) shall not be deemed to have paid you in the amount of such entry.

Notice of Receipt of Entry. Under the operating rules of the National Automated Clearing House Association, which are applicable to ACH transactions involving your account, we are not required to give next day notice to you of receipt of an ACH item and we will not do so. However, we will continue to notify you of the receipt of payments in the periodic statement we provide to you.

Choice of Law. We may accept on your behalf payments to your account which have been transmitted through one or more Automated Clearing Houses {"ACH") and which are not subject to the Electronic Fund Transfer Act and your rights and obligations with respect to such payments shall be construed in accordance with and governed by the laws of the state of California, unless it has otherwise specified in a separate agreement that the law of some other state shall govern.

BUSINESS PURPOSE ACCOUNT. By signing below, Borrower attests that the Designated Checking Account was established for business purposes and not primarily for personal, family or household purposes.

ACCOUNT CHANGES. Borrower agrees to promptly notify Lender in writing if there are any changes to the account and routing numbers of the Designated Checking Account.

MISCELLANEOUS. Lender is not responsible for any fees charged by Borrower's bank as the result of credits or debits initiated under this agreement. The origination of ACH transactions to Borrowers account must comply with the provisions of U.S. law.

Depository Name:

Branch:

City:

 State:

 Zip:

Routing Number:

Account Number:

Print Business Name:

Tax ID Number:

Signature:

Title:

Date:

Guarantor #1:

Borrower #1:

(Signature)

(Signature)

LORI WINTHER

LORI WINTHER

Date:

Title:

Date:

Guarantor #2:

Borrower #2:

(Signature)

(Signature)

KYLE WINTHER

KYLE WINTHER

Date:

Title:

Date:

Guarantor #3:

Borrower #3:

(Signature)

(Signature)

GARY PERLINGOS

GARY PERLINGOS

Date:

Title:

Date:

Note: Both sections 49 (Personal Guaranty) and 50 (Certification and Signatures) must be signed and dated before a loan can be funded.

50. CERTIFICATION AND SIGNATURES. By executing this Agreement or authorizing the person signing or affirming below to execute on its behalf, Borrower certifies that Borrower has received a copy of this Agreement and that Borrower has read, understood and agreed to be bound by its terms. Each person signing below codifies that each person is signing on behalf of the Borrower and/or in the capacity indicated below the signer's name (and if Borrower is a sole proprietorship, in the capacity of the owner of such sole proprietorship) and that such signer is authorized to execute this Agreement on behalf of or the in stated relation to Borrower.

Use of Proceeds Certification

As referred to in Section 4, by signing below, the Borrower certifies, acknowledges and understands that the proceeds from the requested Loan will be used solely for purchasing or acquiring specific products or services, for the following purposes only:

- specified merchandise

- insurance (but not self insurance programs)

- services or equipment

- inventory or other specified goods

- improvements / construction of facilities (but not purchase of real estate)

- loans to finance specified sales transactions

- public works projects or educational services (e.g., training)

For Lender's Use Only: This Agreement has been received and accepted by Lender in California after being signed by Borrower and any Guarantor(s). By:

(Signature)

(Print Name) Title:

Date:

Loan Pricing Disclosure	Lender uses a system of risk-based pricing to determine interest charges and fees. Risk-based pricing is a system that evaluates the risk factors of your application and adjusts the interest rate up or down based on this risk evaluation. Although Lender believes that its loan process provides expedited turnaround time and efficient access to capital, this loan may be a higher cost loan than loans that may be available through other lenders.
Loan For	The proceeds of the requested Loan may solely be used for the specific purposes as set forth in the Use of
Specific Purposes Only	Proceeds Certification of the Business Loan and Security Agreement. IN ADDITION, THE LOAN WILL NOT BE
	USED FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES. Borrower understands that Borrowers agreement not to use the Loan proceeds for personal, family or household purposes means that certain important duties imposed upon entities making loans for consumer/personal purposes, and certain important rights conferred upon consumers, pursuant to federal or state law will not apply to this transaction.

If you have any questions, please call us at 1.888.828.5717 (we have support available Monday - Friday 8am - 8pm EST and Saturdays 8:30am - 5:30pm EST) or email support@ondeck.com.

Please initial this Business Loan and Security Agreement Supplement here

1.

INTRODUCTION. This Business Loan and Security Agreement (together with the accompanying Business Loan and Security Agreement Supplement and the accompanying Authorization Agreement for Direct Deposit (ACH Credit) and Direct Payments (ACH Debits), this "Agreement") governs your business loan ("Loan") made by Boll Federal Bank and serviced by On Deck Capital, Inc. ("Servicer"). Please read it and keep it for your reference. In this Agreement, the words "you," "your and "Borrower" mean the Borrower identified on the signature page of this Business Loan and Security Agreement. Each Guarantor identified on the signature page of this Business Loan and Security Agreement shall be referred to individually as "Guarantor" and collectively as "Guarantors" in this Agreement. The words "Lender", "we", "us", and "our" mean Bofl

Federal Bank or its successor(s) and assign(s).

2.

EFFECTIVE DATE. This Agreement begins on the date we accept this Agreement in California. Borrower understands and agrees that Lender may postpone, without penalty, the disbursement of amounts to Borrower until all required security interests have been perfected and Lender has received all required personal guarantees or other documentation.

3.

AUTHORIZATION. Borrower agrees that the Loan made by Lender to Borrower shall be conclusively deemed to have been authorized by Borrower and to have been made pursuant to a duly authorized request on its behalf.

4.

LOAN FOR SPECIFIC PURPOSES ONLY. The proceeds of the  requested Loan may solely be used for the specific purposes as set forth  in the Use of Proceeds Certification contained in Section 50 below, and  not for any other purposes. In addition, the Loan will not be used for personal, family or household purposes. Borrower understands that Borrower's agreement not to use the Loan proceeds for personal, family or household purposes means that certain important duties imposed upon entities making loans for consumer/personal purposes, and certain important rights conferred upon consumers, pursuant to federal or state law will not apply to the Loan or the Agreement. Borrower also understands that Lender will be unable to confirm whether the use of the Loan conforms to this section. Borrower agrees that a breach by Borrower of the provisions of this section will not affect Lender's right to

(i) enforce Borrower's promise to pay for all amounts owed under this Agreement, regardless of the purpose for which the Loan is in fact obtained or (ii) use any remedy legally available to Lender, even if that remedy would not have been available had the Loan been made for consumer purposes.

5.

DISBURSEMENT OF LOAN PROCEEDS AND MAINTENANCE OF BORROWER'S BANK ACCOUNT. If Borrower applied and was approved for a Loan, Borrower's Loan will be disbursed upon approval as provided in the accompanying Authorization Agreement for Direct Deposit (ACH Credit) and Direct Payments (ACH Debits). Borrower agrees to maintain Direct Payments (ACH Debits) in its operating account which is the account that was reviewed in conjunction with underwriting and approval of this Loan (including keeping such account open until the Total Repayment Amount had been completely repaid).

6.

PROMISE TO PAY. Borrower agrees to pay Lender the Total Repayment Amount shown in the accompanying Business Loan and Security Agreement

Supplement in accordance with the Payment Schedule shown in the accompanying Business Loan and Security Agreement Supplement. Borrower agrees to enroll in Lender's Automatic Payment Plan and authorizes Lender to collect required payments as provided in the accompanying Authorization Agreement for Direct Deposit (ACH Credit) and Direct Payments (ACH Debits). If required by Lender, Borrower further agrees and authorizes Lender or its Servicer to collect required payments from a transfer account established pursuant to certain Transfer Account Loan Documentation that will be provided by Lender in connection with this Business Loan and Security Agreement if applicable.

7.

ALTERNATIVE PAYMENT METHODS. If Borrower knows that for any reason Lender will be unable to process a payment under Lender's Automatic Payment Plan, then Borrower must either restore sufficient funds such that the missed payment can be collected as provided in the accompanying Authorization Agreement for Direct Deposit (ACH Credit) and Direct Payments (ACH Debits), or promptly mail or deliver a check to Lender in the amount of the missed payment or, if offered, make the missed payment by any pay-by-phone or on-line service that Lender may make available from time to time. If Borrower elects to send payments on Borrower's Account by postal mail, then Borrower agrees to send such payments to our Servicer, On Deck Capital, 901 N Stuart Street, Suite 700, Arlington, VA 22203, Attn: Director of Operations. All alternative payments must be made in good funds by check, money order, wire transfer, automatic transfer from an account at an institution offering such service, or other instrument in U.S. Dollars. Borrower understands and agrees that payments made at any other address than as specified by Lender may result in a delay in processing and/or crediting. If Borrower makes an alternative payment on Borrower's Loan by mail or by any pay-by-phone or on-line service that Lender makes available while Borrower is enrolled in the Automatic Payment Plan, Lender may treat such payment as an additional payment and continue to process Borrower's scheduled Automatic Payment Plan payments or may reduce any scheduled Automatic Payment Plan payment by the amount of any such additional payment received.

8.

APPLICATION OF PAYMENTS. Subject to applicable law, Lender reserves the right to allocate and apply payments received on Borrower's Loan between principal, interest and fees in any manner Lender chooses in Lender's sole discretion it being understood and agreed that any fees and interest will generally be paid during the earlier portion of the term.

9.

POSTDATED CHECKS, RESTRICTED ENDORSEMENT CHECKS AND OTHER DISPUTED OR QUALIFIED PAYMENTS. Lender can accept late, postdated or partial payments without losing any of Lender's rights under this Agreement (a postdated check is a check dated later than the day it was actually presented for payment). Lender is under no obligation to hold a postdated check and Lender reserves the right to process every item presented as if dated the same date received by Lender or Lender's check processor unless Borrower gives Lender adequate notice and a reasonable opportunity to act on it. Except where such notice and opportunity is given, Borrower may not hold Lender liable for depositing any postdated check. Borrower agrees not to send Lender partial payments marked "paid in full," "without recourse," or similar language. If Borrower sends such a payment,

Lender may accept it without losing any of Lender's rights under this Agreement. All notices and written communications concerning postdated checks, restricted endorsement checks (including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount) or any other disputed, nonconforming or qualified payments, must be mailed or delivered to our Servicer, On Deck Capital, Customer Service, 901 N Stuart Street, Suite 700, Arlington, VA 22203, Attn: Director of Operations.

10.

PREPAYMENT. Borrower may prepay Borrower's Loan in whole on any Business day by paying Lender the sum total of the Total Repayment Amount, any Returned Payment Fees, and any Late Fees, in each case as described in the accompanying Business Loan and Security Agreement Supplement less (i) the amount of any Loan payments made prior to such prepayment and (ii) the product of (x) the percentage identified as the applicable Prepayment Interest Reduction Percentage in the accompanying Business Loan and Security Agreement Supplement; and (y) the aggregate amount of unpaid interest remaining on the Borrower's Loan as of such date as determined by Lender's records in accordance with Section 8. Borrower may prepay Borrower's Loan in part on any Business day and such payment shall be applied against the Total Repayment Amount, any Returned Payment Fees, and any Late Fees, in each case as described in the accompanying Borrower's Business Loan and Security Agreement Supplement.

11.

SECURITY INTEREST. Borrower hereby grants to Lender, the secured party hereunder, a continuing security interest in and to any and all "Collateral" as described below to secure payment and performance of all debts, liabilities and obligations of Borrower to Lender hereunder and also any and all other debts, liabilities and obligations of Borrower to Lender of every kind and description, direct or indirect, absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising, related to the Loan described in this Agreement, whether or not contemplated by the parties at the time of the granting of this security interest, regardless of how they arise or by what agreement or instrument they may be evidenced or whether evidenced by any agreement or instrument, and includes obligations to perform acts and refrain from taking action as well as obligations to pay money including, without limitation, all interest, other fees and expenses (all hereinafter called "Obligations"). The Collateral includes the following property that Borrower (or Guarantor, if applicable, pursuant to Section 12) now owns or shall acquire or create immediately upon the acquisition or creation thereof: (i) any and all amounts owing to Borrower now or in the future from any merchant processor(s) processing charges made by customers of Borrower via credit card or debit card transactions; and (ii) all other tangible and intangible personal property, including, but not limited to (a) cash and cash equivalents, (b) inventory, (c) equipment, (d) investment property, including certificated and uncertificated securities, securities accounts, security entitlements, commodity contracts and commodity accounts, (e) instruments, including promissory notes

(f)

chattel paper, including tangible chattel paper and electronic chattel paper,

(g)

documents, (h) letter of credit rights, (i) accounts, including health-care insurance receivables, (j) deposit accounts, (k) commercial tort claims,

(I) general intangibles, including payment intangibles and software and

(m) as-extracted collateral as such terms may from time to time be defined in the Uniform Commercial Code. The security interest Borrower (or Guarantor, if applicable, pursuant to Section 12) grants includes all accessions, attachments, accessories, parts, supplies and replacements for the Collateral, all products, proceeds and collections thereof and all records and data relating thereto. Lender disclaims any security interest in household goods in which Lender is forbidden by law from taking a security interest.

12.

13.

PROTECTING THE SECURITY INTEREST. Borrower agrees that Lender and/or Lender's Representative may file any financing statement, lien entry form or other document Lender and/or Lender's Representative requires in order to perfect, amend or continue Lender's security interest in the Collateral and Borrower agrees to cooperate with Lender and Lender's Representative as may be necessary to accomplish said filing and to do whatever Lender or Lender's Representative deems necessary to protect Lender's security interest in the Collateral, Borrower and Guarantor each agree that, if any Guarantor is a corporate entity, then Lender or Lender's Representative may file any financing statement, lien entry form or other document against such Guarantor or its property that Lender and/or Lender's Representative requires in order to perfect, amend or continue Lender's security interest in the Collateral. Any such Guarantor agrees to cooperate with Lender and Lender's Representative as may be necessary to accomplish said filing and to do whatever Lender and Lender's Representative deems necessary to protect Lender's security interest in the Collateral. In this Agreement, "Lender's Representative" means any entity or individual that is designated by Lender to serve in such capacity.

13.

LOCATION OF COLLATERAL; TRANSACTIONS INVOLVING COLLATERAL. Unless Lender has agreed otherwise in writing, Borrower agrees and warrants that (i) all Collateral (or records of the Collateral in the case of accounts, chattel paper and general intangibles) shall be located at Borrower's address as shown in the application, (ii) except for inventory sold or accounts collected in the ordinary course of Borrower's business, Borrower shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral, (iii) no one else has any interest in or claim against the Collateral that Borrower has not already told Lender about, (iv) Borrower shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance or charge, other than the security interest provided for in this Agreement and (v) Borrower shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral for less than the fair market value thereof. Borrower shall defend Lender's rights in the Collateral against the claims and demands of all other persons. All proceeds from any unauthorized disposition of the Collateral shall be held in trust for Lender, shall not be co-mingled with any other funds and shall immediately be delivered to Lender. This requirement, however, does not constitute consent by Lender to any such disposition.

14.

TAXES, ASSESSMENTS AND LIENS. Borrower will complete and file all necessary federal, state and local tax returns and will pay when due all taxes, assessments, levies and liens upon the Collateral and provide evidence of such payments to Lender upon request.

15.

INSURANCE. Borrower shall procure and maintain such insurance as Lender may require with respect to the Collateral, in form, amounts and coverage reasonably acceptable to Lender and issued by a company reasonably acceptable to Lender naming Lender as loss payee. If Borrower at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may obtain such insurance as Lender deems appropriate at Borrower's sole cost and expense. Borrower shall promptly notify Lender of any loss of or damage to the Collateral.

16.

REPAIRS AND MAINTENANCE. Borrower agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order, repair and condition at all times while this Agreement remains in effect. Borrower further agrees to pay when due all claims for work done on, or services rendered or material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the Collateral.

17.

INSPECTION OF COLLATERAL AND PLACE OF BUSINESS; USE OF PHOTOGRAPHS AND TESTIMONIALS. Lender and Lender's designated representatives and agents shall have the right during Borrower's normal

business hours and at any other reasonable time to examine the Collateral wherever located and the interior and exterior of any Borrower place of business. During an examination of any Borrower place of business, Lender may examine, among other things, whether Borrower (i) has a place of business that is separate from any personal residence, (ii) is open for business, (iii) has sufficient inventory to conduct Borrowers business and (iv) has one or more credit card terminals if Borrower processes credit card transactions. When performing an examination, Lender may photograph the interior and exterior of any Borrower place of business, including any signage, and may photograph any individual who has signed the Agreement ("Signatory") unless the Signatory previously has notified Lender that he or she does not authorize Lender to photograph the Signatory. Lender may obtain testimonials from any Signatory, including testimonials on why Borrower needed the Loan and how the Loan has helped Borrower. Any photograph and testimonial will become and remain the sole property of Lender. Borrower and each Signatory grant Lender the irrevocable and permanent right to display and share any photograph and testimonial in all forms and media, including composite and modified representations, for all purposes, including but not limited to any trade or commercial purpose, with any Lender employees and agents and with the general public. Lender may, but is not required to, use the name of any Borrower and Signatory as a credit in connection with any photograph and testimonial. Borrower and each Signatory waive the right to inspect or approve versions of any photograph or testimonial or the written copy or other media that may be used in connection with same. Borrower and each Signatory release Lender from any claims that may arise regarding the use of any photograph or testimonial, including any claims of defamation, invasion of privacy or infringement of moral rights, rights of publicity or copyright.

18.

LENDER'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any related documents, including but not limited to Borrower's failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any related documents, Lender on Borrower's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral. To the extent permitted by applicable law, all such expenses will become a part of the Obligations and, at Lender's option, will: (i) be payable on demand; (ii) be added to the balance of the Loan and be apportioned among and be payable with any installment payments to become due during the remaining term of the Loan; or (iii) be treated as a balloon payment that will be due and payable at the Loan's maturity. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon an Event of Default.

19.

BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants that: (i) Borrower will comply with all laws, statutes, regulations and ordinances pertaining to the conduct of Borrowers business and promises to hold Lender harmless from any damages, liabilities, costs, expenses (including attorneys' fees) or other harm arising out of any violation thereof, (ii) Borrower's principal executive office and the office where Borrower keeps its records concerning its accounts, contract rights and other property, is that shown in the application; (iii) Borrower is duly organized, licensed, validly existing and in good standing under the laws of its state of formation and shall hereafter remain in good standing in that state, and is duly qualified, licensed and in good standing in every other state in which it is doing business, and shall hereafter remain duly qualified, licensed and in good standing in every other state in which it is doing business, and shall hereafter remain duly qualified, licensed and in good standing in every other state in which the failure to qualify or become licensed could have a material adverse

ODC App #: 855640 Customer: VAPOR HUB INTERNATIONAL INC

effect on the financial condition, business or operations of Borrower; (iv) the true and correct legal name of the Borrower is set forth in the application; (v) the aggregate ownership percentage of the Signatories is greater than or equal to fifty percent (50%) of the Borrower's business; (vi) the execution, delivery and performance of this Agreement, and any other document executed in connection herewith, are within Borrower's powers, have been duly authorized, are not in contravention of law or the terms of Borrower's charter, by-laws or other constating documents, or of any indenture, agreement or undertaking to which Borrower is a party; (vii) all organization papers and all amendments thereto of Borrower have been duly filed and are in proper order and any capital stock issued by Borrower and outstanding was and is properly issued and all books and records of Borrower are accurate and up to date and will be so maintained; (viii) Borrower (a) is subject to no charter, corporate or other legal restriction, or any judgment, award, decree, order, governmental rule or regulation or contractual restriction that could have a material adverse effect on its financial condition, business or prospects, and (b) is in compliance with its charter, by-laws and other constating documents, all contractual requirements by which it may be bound and all applicable laws, rules and regulations other than laws, rules or regulations the validity or applicability of which it is contesting in good faith or provisions of any of the foregoing the failure to comply with which cannot reasonably be expected to materially adversely affect its financial condition, business or prospects or the value of the Collateral; and (ix) there is no action, suit, proceeding or investigation pending or, to Borrowers knowledge, threatened against or affecting it or any of its assets before or by any court or other governmental authority which, if determined adversely to it, would have a material adverse effect on its financial condition, business or prospects or the value of the Collateral.

20. INTEREST AND FEES. Borrower agrees to pay in full the interest as set forth in the accompanying Business Loan and Security Agreement Supplement. In addition to any other fees described in the Agreement, Borrower agrees to pay the following fees:

A.

Origination Fee: A one-time Origination Fee in the amount set forth in the accompanying Business Loan and Security Agreement Supplement. Borrower agrees that this fee will be immediately deducted from the proceeds of Borrower's Loan.

B.

Returned Payment Fee: A Returned Payment Fee in the amount set forth in the accompanying Business Loan and Security Agreement Supplement if any electronic payment processed on Borrower's Loan is returned unpaid or dishonored for any reason,

C.

Late Fee: A Late Fee in the amount set forth in the accompanying Business Loan and Security Agreement Supplement if a scheduled payment is not received by Lender as provided in the payment schedule set forth in the accompanying Business Loan and Security Agreement Supplement.

Payments made by Borrower hereunder will be applied and allocated between Loan principal, interest and fees in the manner set forth in Section 8.

21. INTEREST AND FEES EXCEEDING PERMITTED LIMIT. If the Loan is subject to a law that sets maximum charges, and that law is finally interpreted so that the interest or other fees collected or to be collected in connection with this Agreement exceed the permitted limits, then (i) any such charge will be reduced by the amount necessary to reduce the charge to the permitted limit and (ii) if required by applicable law, any sums already collected from Borrower that exceed the permitted limits will be refunded or credited to Borrower.

22. ONLINE CUSTOMER PORTAL. When Borrower signs in with Borrower's valid username and password at loans.ondeck.com, Borrower can obtain information about the Borrowers Loan, such as the outstanding balance, daily

DLT doc, #37121.11 (rev. 11//2014) 6

transactions and fees. No additional paper statement will be mailed to Borrower, Borrower agrees not to share Borrower's username and password to loans.ondeck.com with any third party.

23.

FINANCIAL INFORMATION AND REEVALUATION OF CREDIT. Borrower and each guarantor (if any) authorize Lender to obtain business and personal credit bureau reports in Borrower's and any guarantor's name, respectively, at any time and from time to time for purposes of deciding whether to approve the requested Loan or for any update, renewal, extension of credit or other lawful purpose. Upon Borrower's or any guarantor's request, Lender will advise Borrower or guarantor if Lender obtained a credit report and Lender will give Borrower or guarantor the credit bureau's name and address. Borrower and each guarantor (if any) agree to submit current financial information, a new credit application, or both, in Borrower's name and in the name of each guarantor, respectively, at any time promptly upon Lender's request. Borrower authorizes Lender to act as Borrower's agent for purposes of accessing and retrieving transaction history information regarding Borrower from Borrower's designated merchant processor(s). Lender may report Lenders credit experiences with Borrower and any guarantor of Borrower's Loan to third parties as permitted by law. Borrower also agrees that Lender may release information to comply with governmental reporting or legal process that Lender believes may be required, whether or not such is in fact required, or when necessary or helpful in completing a transaction, or when investigating a loss or potential loss. Borrower is hereby notified that a negative credit report reflecting on Borrower's credit record may be submitted to a credit reporting agency if Borrower fails to fulfill the terms of its credit obligations hereunder,

24.

ATTORNEYS' FEES AND COLLECTION COSTS. To the extent not prohibited by applicable law, Borrower shall pay to Lender on demand any and all expenses, including, but not limited to, collection costs, all attorneys' fees and expenses, and all other expenses of like or unlike nature which may be expended by Lender to obtain or enforce payment of Obligations either as against Borrower or any guarantor or surety of Borrower or in the prosecution or defense of any action or concerning any matter arising out of or connected with the subject matter of this Agreement, the Obligations or the Collateral or any of Lender's rights or interests therein or thereto, including, without limiting the generality of the foregoing, any counsel fees or expenses incurred in any bankruptcy or insolvency proceedings and all costs and expenses (including search fees) incurred or paid by Lender in connection with the administration, supervision, protection or realization on any security held by Lender for the debt secured hereby, whether such security was granted by Borrower or by any other person primarily or secondarily liable (with or without recourse) with respect to such debt, and all costs and expenses incurred by Lender in connection with the defense, settlement or satisfaction of any action, claim or demand asserted against Lender in connection therewith, which amounts shall be considered advances to protect Lenders security, and shall be secured hereby. To the extent permitted by applicable law, all such expenses will become a part of the Obligations and, at Lender's option, will: (i) be payable on demand; (ii) be added to the balance of the Loan and be apportioned among and be payable with any installment payments to become due during the remaining term of the Loan; or (iii) be treated as a balloon payment that will be due and payable at the Loan's maturity. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon an Event of Default.

25.

BORROWER'S REPORTS. Promptly upon Lender's written request, Borrower and each guarantor agrees to provide Lender with such information about the financial condition and operations of Borrower or any guarantor, as Lender may, from time to time, reasonably request. Borrower also agrees promptly upon becoming aware of any Event of Default, or the occurrence or

ODC App 855640 Customer: VAPOR HUB INTERNATIONAL INC

existence of an event which, with the passage of time or the giving of notice or both, would constitute an Event of Default hereunder, to promptly provide notice thereof to Lender in writing.

26.

TELEPHONE COMMUNICATIONS. Borrower hereby expressly consents to receiving calls and messages, including auto-dialed and pre-recorded message calls and SMS messages (including text messages) from Lender, its affiliates, marketing partners, agents and others calling at Lender's request or on its behalf, at any telephone numbers that Borrower has provided or may provide in the future or otherwise in Lender's possession (including any cellular or mobile telephone numbers),

27.

INDEMNIFICATION. Except for Lender's gross negligence or willful misconduct, Borrower will indemnify and save Lender harmless from all losses, costs, damages, liabilities or expenses (including, without limitation, court costs and reasonable attorneys' fees) that Lender may sustain or incur by reason of defending or protecting Lender's security interest or the priority thereof or enforcing the Obligations, or in the prosecution or defense of any action or proceeding concerning any matter arising out of or in connection with this Agreement and/or any other documents now or hereafter executed in connection with this Agreement and/or the Obligations and/or the Collateral. This indemnity shall survive the repayment of the Obligations and the termination of this Agreement.

28.

MERGERS, CONSOLIDATIONS OR SALES. Borrower represents and agrees that Borrower will not (i) merge or consolidate with or into any other business entity or (ii) enter into any joint venture or partnership with any person, firm or corporation.

29.

CHANGE IN LEGAL STATUS. Without Lender's consent, Borrower represents and agrees that Borrower will not (i) change its name, its place of business or, if more than one, chief executive office, its mailing address, or organizational identification number if it has one, or (ii) change its type of organization, jurisdiction of organization or other legal structure. If Borrower does not have an organizational identification number and later obtains one, Borrower shall promptly notify Lender of such taxpayer identification number.

30.

DEFAULT. The occurrence of any one or more of the following events (herein, "Events of Default') shall constitute, without notice or demand, a default under this Agreement and all other agreements between Lender and Borrower and instruments and papers given Lender by Borrower, whether such agreements, instruments, or papers now exist or hereafter arise: (i) Lender is unable to collect any Automatic Payment Plan payment on two consecutive dates due and/or, Borrower fails to pay any Obligations on two consecutive dates due; (ii) Borrower fails to comply with, promptly, punctually and faithfully perform or observe any term, condition or promise within this Agreement; (iii) the determination by Lender that any representation or warranty heretofore, now or hereafter made by Borrower to Lender, in any documents, instrument, agreement, or paper was not true or accurate when given; (iv) the occurrence of any event such that any indebtedness of Borrower from any lender other than Lender could be accelerated, notwithstanding that such acceleration has not taken place; (v) the occurrence of any event that would cause a lien creditor, as that term is defined in Section 9-102 of the Uniform Commercial Code, (other than Lender) to take priority over the Loan made by Lender, (vi) a filing against or relating to Borrower (unless consented to in writing by Lender) of (a) a federal tax lien in favor of the United States of America or any political subdivision of the United States of America, or (b) a state tax lien in favor of any state of the United States of America or any political subdivision of any such state; (vii) the occurrence of any event of default under any other agreement between Lender and Borrower or instrument or paper given Lender by Borrower, whether such agreement, instrument, or paper now exists or hereafter arises (notwithstanding that Lender may not have exercised its rights upon default under any such other agreement, instrument or

DLT doc. #37121.11 (rev. 11//2014) 7

paper); (viii) any act by, against, or relating to Borrower, or its property or assets, which act constitutes the application for, consent to, or sufferance of the appointment of a receiver, trustee or other person, pursuant to court action or otherwise, over all, or any part of Borrower's property; (ix) the granting of any trust mortgage or execution of an assignment for the benefit of the creditors of Borrower, or the occurrence of any other voluntary or involuntary liquidation or extension of debt agreement for Borrower; (x) the failure by Borrower to generally pay the debts of Borrower as they mature; (xi) adjudication of bankruptcy or insolvency relative to Borrower; (xii) the entry of an order for relief or similar order with respect to Borrower in any proceeding pursuant to The 11 of the United States Code entitled 'Bankruptcy" (the "Bankruptcy Code") or any other federal bankruptcy law; (xiii) the filing of any complaint, application or petition by or against Borrower initiating any matter in which Borrower is or may be granted any relief from the debts of Borrower pursuant to the Bankruptcy Code or any other insolvency statute or procedure; ()ay) the calling or sufferance of a meeting of creditors of Borrower, (w) the meeting by Borrower with a formal or informal creditor's committee; (xvi) the offering by or entering into by Borrower of any composition, extension or any other arrangement seeking relief or extension for the debts of Borrower, or the initiation of any other judicial or non-judicial proceeding or agreement by, against or including Borrower that seeks or intends to accomplish a reorganization or arrangement with creditors;

(xvii)

the entry of any judgment against Borrower, which judgment is not satisfied or appealed from (with execution or similar process stayed) within 15 days of its entry;

(xviii)

the occurrence of any event or circumstance with respect to Borrower such that Lender shall believe in good faith that the prospect of payment of all or any part of the Obligations or the performance by Borrower under this Agreement or any other agreement between Lender and Borrower is impaired or there shall occur any material adverse change in the business or financial condition of Borrower (such event specifically includes, but is not limited to, taking additional financing from a credit card advance, cash advance company or an additional working capital loan without the prior written consent of Lender); (xix) the entry of any court order that enjoins, restrains or in any way prevents Borrower from conducting all or any part of its business affairs in the ordinary course of business; (xx) the occurrence of any uninsured loss, theft, damage or destruction to any material asset(s) of Borrower; (xxi) any act by or against, or relating to Borrower or its assets pursuant to which any creditor of Borrower seeks to reclaim or repossess or reclaims or repossesses all or a portion of Borrower's assets; (xxii) the termination of existence, dissolution or liquidation of Borrower or the ceasing to carry on actively any substantial part of Borrower's current business; (xxiii) this Agreement shall, at any time after its execution and delivery and for any reason, cease to be in full force and effect or shall be declared null and void, or the validity or enforceability hereof shall be contested by Borrower or any guarantor of Borrower denies it has any further liability or obligation hereunder; (xxiv) any guarantor or person signing a support agreement in favor of Lender shall repudiate, purport to revoke or fail to perform his or her obligations under his guaranty or support agreement in favor of Lender or any corporate guarantor shall cease to exist; (xxv) any material change occurs in Borrower's ownership or organizational structure (acknowledging that any change in ownership will be deemed material when ownership is closely held); (xxvi) if Borrower is a sole proprietorship, the owner dies; if Borrower is a trust, a trustor dies; if Borrower is a partnership, any general or managing partner dies; if Borrower is a corporation, any principal officer or 10% or greater shareholder dies; if Borrower is a limited liability company, any managing member dies; if Borrower is any other form of business entity, any person(s) directly or indirectly controlling 10% or more of the ownership interests of such entity dies.

31. RIGHTS AND REMEDIES UPON DEFAULT. Subject to applicable law, if an Event of Default occurs under this Agreement, at any time thereafter, Lender may exercise any one or more of the following rights and remedies:

A, Refrain from Disbursing Loan Proceeds: Lender may refrain from disbursing Borrower's Loan proceeds to Borrower's Designated Checking ODC App #: 855640 Customer: VAPOR HUB INTERNATIONAL INC

Account.

B.

Debit Amounts Due From Borrower's Accounts: Lender may debit from Borrowers Designated Checking Account all Automatic Payment Plan payments that Lender was unable to collect and/or the amount of any other Obligations that Borrower failed to pay,

C.

Accelerate Indebtedness: Lender may declare the entire Obligations immediately due and payable, without notice of any kind to Borrower.

D.

Assemble Collateral: Lender may require Borrower and/or Guarantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Borrower and/or Guarantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter, provided Lender does so without a breach of the peace or a trespass, upon the property of Borrower and/or Guarantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Borrower and Guarantor agree that Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Borrower and Guarantor after repossession.

E.

Sell the Collateral: Lender shall have full power to sell, lease, transfer, or
otherwise deal with the Collateral or proceeds thereof in Lender's own name or that of Borrower and/or Guarantor. Lender may sell the Collateral at public auction or private sale, Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Borrower, Guarantor and other persons as required by law, reasonable notice of the time and place of any public sale, or the time after which any private sale or any other disposition of the Collateral is to be made. However, no notice need be provided to any person who, after an Event of Default occurs, enters into and authenticates an agreement waiving that person's right to notification of sale. The requirements of reasonable notice shall be met if such notice is given at least 10 days before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Obligations secured by this Agreement. To the extent permitted by applicable law, all such expenses will become a part of the Obligations and, at Lender's option, will: (i) be payable on demand; (ii) be added to the balance of the Loan and be apportioned among and be payable with any installment payments to become due during either (a) the term of any applicable insurance policy or (b) the remaining term of the Loan; or (hi) be treated as a balloon payment that will be due and payable at the Loan's maturity.

F.

Appoint Receiver: Lender shall have the right to have a receiver appointed
to take possession of all or any part of the Collateral, with the power to protect and preserve the Collateral, to operate the Collateral preceding foreclosure or sate, and to collect the rents from the Collateral and apply the proceeds, over and above the cost of the receivership, against the Obligations. The receiver may serve without bond if permitted by law. Lender's right to the appointment of a receiver shall exist whether or not the apparent value of the Collateral exceeds the Obligations by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver,

G.

Collect Revenues, Apply Accounts: Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in Lender's discretion transfer any Collateral into Lender's own name or that of Lender's nominee and

DLT doc. #37121.11 (rev, 11//2014) 8

receive the payments, rents, income and revenues therefrom and hold the same as security for the Obligations or apply it to payment of the Obligations in such order of preference as Lender may determine, Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, chases in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose or realize on the Collateral as Lender may determine, whether or not any amount included within the Obligations is then due. For these purposes, Lender may, on behalf of and in the name of Borrower and/or Guarantor, receive, open and dispose of mail addressed to Borrower; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment or storage of any Collateral. To facilitate collections, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender.

H.

Obtain Deficiency: If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Borrower and/or Guarantor for any deficiency remaining on the Obligations due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Borrower and/or Guarantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper.

I.

Other Rights and Remedies: Lender shall have all the rights and remedies
of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time, In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity or otherwise.

J.

Election of Remedies: Except as may be prohibited by applicable law, all
of Lender's rights and remedies, whether evidenced by this Agreement, any related documents, or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower under the Agreement, after Borrower's failure to perform, shall not affect Lenders right to declare a default and exercise its remedies.

32.

GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE. Borrower and Lender agree that this Agreement and Borrower's Loan will be governed by federal law, and, to the extent state law applies, the substantive law of California. These laws will apply no matter where Borrower lives or obtained this Loan. Subject to Section 33 below, Borrower and Lender agree that any action or proceeding to enforce or arising out of this Agreement shall be brought in any court of the State of California or in the United States District Court for the Southern District of California, and Borrower waives personal service of process. Borrower and Lender agree that venue is proper in such courts.

33.

ARBITRATION. To the extent that a claim or dispute arises out of, or in relation to this Agreement, including without limitation, the terms, construction, interpretation, performance, termination, breach, or enforceability of this Agreement, the parties hereby agree that the claim or dispute shall be, at the election of either party, resolved by mandatory binding arbitration in Virginia within a reasonable time period not to exceed ninety (90) days. The parties (including, without limitation, the Guarantors) agree that the arbitration shall be administered by JAMS and the arbitration shall be conducted in accordance with the Expedited Procedures of the JAMS Comprehensive Arbitration Rules and Procedures except as otherwise agreed in this Agreement. The arbitrator shall be chosen in accordance with the procedures of JAMS, and shall base the

award on applicable Virginia law. The parties agree that the arbitration shall be conducted by a single arbitrator. Judgment on the award may be entered in any court having jurisdiction, subject to Section 32 above. The parties further agree that the costs of the arbitration shall be divided equally between them, except that Lender will consider in good faith a request by Borrower to pay the costs of arbitration. Each party may pursue arbitration solely in an individual capacity, and not as a representative or class member in any purported class or representative proceeding. The arbitrator may not consolidate more than one person's or entity's claims, and may not otherwise preside over any form of a representative or class proceeding. This arbitration section is governed by the Federal Arbitration Act, 9 U.S.C. §§ 1-16.

34.

NO WAIVER BY LENDER. No delay or omission on the part of Lender in exercising any rights under this Agreement, any related guaranty or applicable law shall operate as a waiver of such right or any other right. Waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. All Lender's rights and remedies, whether evidenced hereby or by any other agreement, instrument or paper, shall be cumulative and may be exercised singularly or concurrently.

35.

ASSIGNMENT. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties hereto; provided, however, that Borrower may not assign this Agreement or any rights or duties hereunder without Lender's prior written consent and any prohibited assignment shall be absolutely null and void. No consent to an assignment by Lender shall release Borrower from its Obligations. Lender may assign this Agreement and its rights and duties hereunder and no consent or approval by Borrower is required in connection with any such assignment. Lender reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in Lender's rights and benefits hereunder. In connection with any assignment or participation, Lender may disclose all documents and information that Lender now or hereafter may have relating to Borrower or Borrowers

business.

To the extent that Lender assigns its rights and obligations

hereunder to another party, Lender thereafter shall be released from such assigned obligations to Borrower and such assignment shall affect a novation between Borrower and such other party.

36.

INTERPRETATION. Paragraph and section headings used in this Agreement are for convenience only, and shall not affect the construction of this Agreement. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Lender or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto.

37.

SEVERABILITY. If one or more provisions of this Agreement (or the application thereof) is determined invalid, illegal or unenforceable in any respect in any jurisdiction, the same shall not invalidate or render illegal or unenforceable such provision (or its application) in any other jurisdiction or any other provision of this Agreement (or its application).

38.

NOTICES. Except as otherwise provided in this Agreement, notice under this Agreement must be in writing. Notices will be deemed given when deposited in the U.S. mail, postage prepaid, first class mail; when delivered in person; or when sent by registered mail; by certified mail; by nationally recognized overnight courier; or when sent by electronic mail. Notice to Borrower will be sent to Borrower's last known address or electronic mail address in Lender's records for this Loan. Notice to Lender may be sent to our Servicer: On Deck Capital, 901 N Stuart Street, Suite 700, Arlington, VA 22203, Attn: Director of Operations.

39.

RECORDKEEPING AND AUDIT REQUIREMENTS. Lender shall have no obligation to maintain any electronic records or any documents, schedules, invoices or any other paper delivered to Lender by Borrower in connection with this Agreement or any other agreement other than as required by law. Borrower will at all times keep accurate and complete records of Borrower's accounts and Collateral. At Lender's request, Borrower shall deliver to Lender:

(i) schedules of accounts and general intangibles; and (ii) such other information regarding the Collateral as Lender shall request. Lender, or any of its agents, shall have the right to call any telephone numbers that Borrower has provided or may provide in the future or otherwise in the Lender's possession (including any cellular or mobile telephone numbers) at intervals to be determined by Lender, and without hindrance or delay, to inspect, audit, check, and make extracts from any copies of the books, records, journals, orders, receipts, correspondence that relate to Borrower's accounts and Collateral or other transactions between the parties thereto and the general financial condition of Borrower and Lender may remove any of such records temporarily for the purpose of having copies made thereof. If Borrower was referred to Lender for this Loan by a third party (the "Referring Party"), then Borrower consents to Lender sharing certain reasonable information about Borrower with the Referring Party for purposes of the Referring Party verifying and/or auditing loans made through such Referring Party's referrals.

40.

GOVERNING LAW. Subject to Section 33 above, our relationship including this Agreement and any claim, dispute or controversy (whether in contract, tort, or otherwise) at any time arising from or relating to this Agreement is governed by, and this Agreement will be construed in accordance with, applicable federal law and (to the extent not preempted by federal law) California law without regard to internal principles of conflict of laws. The legality, enforceability and interpretation of this Agreement and the amounts contracted for, charged and reserved under this Agreement will be governed by such laws. Borrower understands and agrees that (i) Lender is located in California, (ii) Lender makes all credit decisions from Lender's office in California, (iii) the Loan is made in California (that is, no binding contract will be formed until Lender receives and accepts Borrower's signed Agreement in California) and (iv) Borrower's payments are not accepted until received by Lender in California.

41.

WAIVER OF NOTICES AND OTHER TERMS. Except for any notices provided for in this Agreement, Borrower and any person who has obligations pursuant to this Agreement (e.g., a guarantor), to the extent not prohibited by applicable law hereby, waives demand, notice of nonpayment, notice of intention to accelerate, notice of acceleration, presentment, protest, notice of dishonor and notice of protest. To the extent permitted by applicable law, Borrower and any person who has obligations pursuant to this Agreement also agrees: Lender is not required to file suit, show diligence in collection against Borrower or any person who has obligations pursuant to this Agreement, or proceed against any Collateral; Lender may, but will not be obligated to, substitute, exchange or release any Collateral; Lender may release any Collateral, or fail to realize upon or perfect Lender's security interest in any Collateral; Lender may, but will not be obligated to, sue one or more persons without joining or suing others; and Lender may modify, renew, or extend this Agreement (repeatedly and for any length of time) without notice to or approval by any person who has obligations pursuant to this Agreement (other than the party with whom the modification, renewal or extension is made).

42.

MONITORING, RECORDING AND ELECTRONIC COMMUNICATIONS. In order to ensure a high quality of service for Lender's customers, Lender may monitor and/or record telephone calls between Borrower and Lender's employees or agents. Borrower acknowledges that Lender may do so and agrees in advance to any such monitoring or recording of telephone calls.

Borrower also agrees that Lender may communicate with Borrower electronically by e-mail.

43.

JURY TRIAL WAIVER AND CLASS ACTION WAIVER. To the extent not prohibited by applicable law, Borrower and Lender waive their right to a trial by jury of any claim or cause of action based upon, arising out of or related to the Agreement and all other documentation evidencing the Obligations, in any legal action or proceeding. Subject to Section 33 above, any such claim or cause of action shall be tried by court sitting without a jury.

THE PARTIES HERETO WAIVE ANY RIGHT TO ASSERT ANY CLAIMS AGAINST THE OTHER PARTY AS A REPRESENTATIVE OR MEMBER IN ANY CLASS OR REPRESENTATIVE ACTION, EXCEPT WHERE SUCH WAIVER IS PROHIBITED BY LAW OR AGAINST PUBLIC POLICY. TO THE EXTENT EITHER PARTY IS PERMITTED BY LAW OR COURT OF LAW TO PROCEED WITH A CLASS OR REPRESENTATIVE ACTION AGAINST THE OTHER, THE PARTIES HEREBY AGREE THAT: (1) THE PREVAILING PARTY SHALL NOT BE ENTITLED TO RECOVER ATTORNEYS' FEES OR COSTS ASSOCIATED WITH PURSUING THE CLASS OR REPRESENTATIVE ACTION (NOT WITHSTANDING ANY OTHER PROVISION IN THIS AGREEMENT); AND (2) THE PARTY WHO INITIATES OR PARTICIPATES AS A MEMBER OF THE CLASS WILL NOT SUBMIT A CLAIM OR OTHERWISE PARTICIPATE IN ANY RECOVERY SECURED THROUGH THE CLASS OR REPRESENTATIVE ACTION.

44.

CONFIDENTIALITY. Borrower shall not make, publish or otherwise disseminate in any manner a copy of this Agreement or any public statement or description of the terms of this Agreement, except to its employees, advisors and similar persons who have a legitimate need to know its contents,

45.

ENTIRE AGREEMENT. Any application Borrower signed or otherwise submitted in connection with the Loan, the accompanying Business Loan and Security Agreement Supplement and the Authorization Agreement for Direct Deposit (ACH Credit) and Direct Payments (ACH Debits) and any other documents required by Lender now or in the future in connection with this Agreement and Borrower's Loan are hereby incorporated into and made a part of this Agreement. This Agreement is the entire agreement of the parties with respect to the subject matter hereof and supersedes any prior written or verbal communications or instruments relating thereto.

46.

COUNTERPARTS; ELECTRONIC SIGNATURES. This Agreement may be executed in one or more counterparts, each of which counterparts shall be deemed to be an original, and all such counterparts shall constitute one and the same instrument. For purposes of the execution of this Agreement, signatures delivered by electronic or fax submission shall be treated in all respects as original signatures.

47.

CUSTOMER SERVICE CONTACT INFORMATION. If you have questions or comments about your Loan, you may contact our Servicer, on Deck Capital, Inc. by (i) e-mail at support@ondeck.com, (ii) telephone at (888) 269-4246 or (iii) mail at 901 N Stuart Street, Suite 700, Arlington, VA 22203, Attn: Director of Operations.

48.

GRANT OF LICENSE TO USE THE ON DECK PLATFORM. Subject to Borrower's compliance with this Agreement and the Terms of Use for the On Deck Platform, Servicer grants Borrower a nonexclusive, revocable, non­transferable, non-sublicenseable, limited right and royalty-free license to use the On Deck Platform, effective solely during the term of the Loan and so long as an Event of Default has not occurred. The license granted to Borrower is personal, and no rights hereunder may be transferred by Borrower without the express written approval of Servicer. Servicer may terminate the license granted hereunder without notice at any time after an Event of Default has occurred.

49.

PERSONAL GUARANTY. Each Guarantor, jointly and severally (if more than one), absolutely and unconditionally guarantee the prompt payment to Lender, including its successors and assignees, of any and all Obligations incurred by the Borrower pursuant to the Agreement (this "Personal Guaranty"). Each Guarantor further agrees to repay the Obligations on demand, without requiring Lender first to enforce payment against Borrower. This is a guarantee of payment and not of collection. This is an absolute, unconditional, primary, and continuing obligation and will remain in full force and effect until the first to occur of the following: (a) all of the Obligations have been indefeasibly paid in full, and Lender has terminated this Personal Guaranty, or (b) 30 days after the date on which written notice of revocation is actually received and accepted by Lender. No revocation will affect: (i) the then existing liabilities of the revoking Guarantor under this Personal Guaranty; (ii) Obligations created, contracted, assumed, acquired or incurred prior to the effective date of such revocation; (iii) Obligations created, contracted, assumed, acquired or incurred after the effective date of such revocation pursuant to any agreement entered into or commitment obtained prior to the effective date of such revocation; or (iv) any Obligations then or thereafter arising under the agreements or instruments then in effect and then evidencing the Obligations. Each Guarantor represents and warrants that it is a legal resident of the United States of America. Each Guarantor waives all notices to which the Guarantor might otherwise be entitled by law, and also waives all defenses, legal or equitable, otherwise available to the Guarantor. This Personal Guaranty shall be construed in accordance with the laws of the State of California, and shall inure to the benefit of Lender, its successors and assigns. To the extent not prohibited by applicable law, each of the undersigned Guarantors waives its right to a trial by jury of any claim or cause of action based upon, arising out of or related to this guaranty, the Agreement and all other documentation evidencing the Obligations, in any legal action or proceeding. Subject to Section 33 above, any such claim or cause of action shall be tried by court sitting without a jury.

[Signature page follows]

Exhibit 31.1

Certification of Principal Executive Officer Pursuant To

Exchange Act Rules 13a-14(a) and 15d-14(a),

As Adopted Pursuant To

Section 302 of Sarbanes-Oxley Act of 2002

I, Kyle Winther, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Vapor Hub International Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.	The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c)	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d)	Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.	The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize, and report financial information; and
	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

Date: February 16, 2016

/s/ Kyle Winther

Kyle Winther

Chief Executive Officer

(Principal Executive Officer)

Exhibit 31.2

Certification of Principal Financial Officer Pursuant To

Exchange Act Rules 13a-14(a) and 15d-14(a),

As Adopted Pursuant To

Section 302 of Sarbanes-Oxley Act of 2002

I, Lori Winther, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Vapor Hub International Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.	The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
	(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	(c)	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	(d)	Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.	The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
	(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize, and report financial information; and
	(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

Date: February 16, 2016

/s/ Lori Winther

Lori Winther

Chief Financial Officer

(Principal Financial and Accounting Officer)

Exhibit 32.1

Certifications of Principal Executive Officer and Principal Financial Officer

Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Vapor Hub International Inc. (the “Company”) on Form 10-Q for the quarter ended December 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the knowledge of the undersigned:

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 16, 2016

/s/ Kyle Winther

Kyle Winther

Chief Executive Officer

Date: February 16, 2016

/s/ Lori Winther

Lori Winther

Chief Financial Officer

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