UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

 

[ X ]            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

OR

 

[  ]            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from_____to______

 

Commission File No. 333-177305

 

 

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 and 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.                             [X] Yes  [  ] 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).                                 [X]  Yes  [   ] 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   [X]  No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.  Shares of Common Stock, par value $0.001, outstanding as of May 7, 2015: 26,722,268

 

 

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PART I. – FINANCIAL INFORMATION
	Item 1.  Financial Statements	3
	Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3.  Quantitative and Qualitative Disclosures about Market Risk	21
	Item 4.  Controls and Procedures	21
PART II. – OTHER INFORMATION
	Item 1.  Legal Proceedings	23
	Item 1A.  Risk Factors	25
	Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	25
	Item 3.  Defaults Upon Senior Securities	25
	Item 4.  Mine Safety Disclosures	25
	Item 5.  Other Information	25
	Item 6.  Exhibits	25
	Exhibit 31.1
	Exhibit 32.1

 

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FRESH HEALTHY VENDING INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

March 31, 2015 and June 30, 2014

		March 31, 2015 (unaudited)				June 30, 2014 (audited)
Assets
Current assets:
Cash		$	178,760			$	607,288
Cash in escrow			253,500				-
Accounts receivable, net			1,786,298				2,022,317
Deferred costs			954,838				738,522
Inventories			335,518				182,162
Prepaid expenses and other current assets			46,707				17,570
Total current assets			3,555,621				3,567,859
Property and equipment:
Cost			520,298				414,777
Less accumulated depreciation and amortization			(196,787	)			(135,326	)
			323,511				279,451
Deposits			30,067				40,067
Total assets		$	3,909,199			$	3,887,377
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued liabilities		$	1,152,314			$	1,034,112
Notes payable, net of debt discounts			819,666				507,666
Note payable to related party			100,000				-
Customer advances and deferred revenues			5,636,863				5,456,969
Provision for franchisee rescissions and refunds			620,436				530,923
Accrued personnel expenses			180,164				122,714
Deferred rent			5,935				19,422
Total current liabilities			8,515,378				7,671,806
Notes payable, long-term			250,000				-
Total liabilities			8,765,378				7,671,806
Contingencies (Note 5)
Stockholders' deficit:
Preferred stock; $0.001 par value; 25 million shares
authorized; no shares issued and outstanding			-				-
Common stock; $0.001 par value; 100 million shares
authorized; 26,722,268 outstanding (26,546,348 at June 30, 2014)			26,721				26,546
Additional paid-in capital			1,965,229				1,696,837
Accumulated deficit			(6,848,129	)			(5,507,812	)
Total stockholders' deficit			(4,856,179	)			(3,784,429	)
Total liabilities and stockholders' deficit		$	3,909,199			$	3,887,377

FRESH HEALTHY VENDING INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations - Unaudited

		For the three months ended March 31,								For the nine months ended March 31,
		2015				2014				2015				2014
Revenues:
Vending machine sales, net		$	1,570,771			$	928,821			$	4,193,711			$	3,647,486
Franchise fees			149,023				76,000				372,966				207,500
Company owned machines			58,839				77,332				128,943				183,635
Agency sales (net)			24,033				34,820				53,851				71,444
Other			114,445				55,908				190,601				92,800
			1,917,111				1,172,881				4,940,072				4,202,865
Cost of revenues			895,047				570,942				2,274,866				2,024,302
Gross margin			1,022,064				601,939				2,665,206				2,178,563
Operating expenses:
Selling, general and administrative			1,275,098				1,277,698				3,930,412				3,562,147
Loss from operations			(253,034	)			(675,759	)			(1,265,206	)			(1,383,584	)
Other income (expense):
Interest income (expense)			(28,074	)			(5,436	)			(59,361	)			(7,420	)
Accretion of discount on notes payable			(15,750	)			-				(15,750	)			(27,692	)
Loss before provision for income taxes			(296,858	)			(681,195	)			(1,340,317	)			(1,418,696	)
Provision for income taxes			-				-				-				8,366
Net loss		$	(296,858	)		$	(681,195	)		$	(1,340,317	)		$	(1,427,062	)
Net loss per share - basic and diluted		$	(0.01	)		$	(0.03	)		$	(0.05	)		$	(0.06	)
Weighted average shares used in computing net
loss per share - basic			26,691,019				23,609,749				26,636,588				22,288,739

 

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FRESH HEALTHY VENDING INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows  - Unaudited

For the nine months ended March 31, 2015 and 2014

		2015				2014
Cash flows from operating activities:
Net loss		$	(1,340,317	)		$	(1,427,062	)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization			61,849				42,186
Interest accretion on notes payable			15,750				27,692
Stock-based compensation			218,317				282,449
Loss on sales of property and equipment			6,714				10,044
Deferred rent			(13,487	)			(9,075	)
Bad debt expense			17,000				-
Changes in operating assets and liabilities:
Cash in escrow			(253,500	)			-
Accounts receivable			219,019				(796,333	)
Deferred costs			(216,316	)			343,268
Inventories			(153,356	)			(106,920	)
Prepaid expenses and other assets			(29,137	)			(1,214	)
Deposits			10,000				(16,137	)
Accounts payable and accrued liabilities			118,202				288,630
Customer advances and deferred revenues			179,894				483,634
Provision for franchisee rescissions and refunds			89,513				(333,951	)
Accrued personnel expenses			57,450				2,790
Cash flows used in operating activities			(1,012,405	)			(1,209,999	)
Cash flows from investing activities:
Purchases of property and equipment			(113,061	)			(146,380	)
Proceeds from sales of property and equipment			438				20,250
Cash flows used in investing activities			(112,623	)			(126,130	)
Cash flows from financing activities:
Proceeds from issuance of notes payable and warrants			596,500				692,000
Repayments of amounts due to related party			-				(42,000	)
Proceeds from issuance of note payable to related party			100,000				-
Repayment of notes payable			-				(34,212	)
Proceeds from issuance of common stock, net of costs			-				996,034
Cash flows provided by financing activities			696,500				1,611,822
Change in cash			(428,528	)			275,693
Cash, beginning of period			607,288				252,845
Cash, end of period		$	178,760			$	528,538
Supplemental disclosure of cash flow information:
Cash paid for:
Interest expense		$	30,666			$	902
Income taxes		$	-			$	11,790
Supplemental disclosure of non-cash investing
and financing activities:
Conversion of notes payable into common stock		$	-			$	402,083

 

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Fresh Healthy Vending International, Inc.

Notes to Condensed Consolidated Financial Statements

 

1.	Organization and description of business

Fresh Healthy Vending International, Inc. (referred to herein collectively with its subsidiaries as "we", the "Company", "our Company", or "FHV International") operates through its wholly-owned subsidiaries, Fresh Healthy Vending LLC ("FHV LLC"), The Fresh and Healthy Vending Corporation, and FHV Acquisition Corp. ("FHV Acquisition"), as a franchisor and owner and operator of healthy drink and snack vending machines and micro markets that feature cashless payment devices and remote monitoring software.  The Company uses in-house location specialists that are responsible for securing locations for its franchisees; additionally, the Company has negotiated discounts with a national product distribution chain.  The Company also operates its own machines and micro markets.

Basis of accounting

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the rules and regulations of the Securities and Exchange Commission ("SEC") for reporting on Form 10-Q.  Accordingly, these statements do not include all of the information and disclosures required by GAAP or SEC rules and regulations for complete financial statements.  In the opinion of management, these financial statements reflect all adjustments (consisting solely of normal recurring matters) considered necessary for a fair presentation of the results for the interim periods presented.   The results of operations for any interim period are not necessarily indicative of results for the full year.

These statements should be read in conjunction with the Company's filings with the SEC, including its most recent annual report on Form 10-K for the fiscal year ended June 30, 2014 filed on September 29, 2014.

Liquidity and capital resources

For the nine months ended March 31, 2015 we had a net loss totaling $1,340,317 and negative cash flows from operations totaling $1,012,405.  Our cash balance at March 31, 2015 was $178,760.  Since the date of the closing of the FHV Acquisition, our sales were less than anticipated and the resulting cash flows from franchise sales was not sufficient to cover expenditures associated with our daily operations resulting in a substantial decrease in our cash balances.  Also, we used cash on hand to retire liabilities associated with the franchise rescissions.  As of the filing date of the Form 10-Q, our Company has consumed the vast majority of its available cash, including the cash proceeds from the sale of our common stock received in July of 2013 and the issuance of several debt instruments.  In order to ensure sufficient liquidity for our continuing operations, we will require additional capital financing in the form of either debt or equity (or a combination thereof) financing. Management believes that it will be able to obtain such financing on terms acceptable to the Company, although there can be no assurance that we will be successful.

 

Our current plans include capital expenditures for the purchase of corporate owned and operated vending machines and micro markets, including the repurchase of machines from franchisees opting to rescind their franchise agreements.  Given our current cash position, we may be forced to curtail our plans by delaying or suspending the purchase of machines for our corporate operations.

 

Principles of consolidation

The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries, FHV LLC, The Fresh and Healthy Vending Corporation, and FHV Acquisition, Corp.  All significant intercompany accounts and transactions are eliminated.

Use of estimates

The preparation of our Company's financial statements requires our 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 our financial statements and the reported amounts of revenues, costs and expenses during the reporting period.  Actual results could differ significantly from those estimates.  Significant estimates include our provisions for bad debts, franchisee rescissions and refunds, legal estimates and the valuation allowance on deferred income tax assets. It is at least reasonably possible that a change in the estimates will occur in the near term.

Revenue recognition

Our primary revenue generating transactions come from the sale of franchises and vending machines to the franchisees.  There are no franchise fees charged beyond the initial first year franchise fee.  We receive ongoing fees and royalty payments in the form of annual advertising fees and a percentage of either franchisees' revenues or gross margins on vending machine sales.

We recognize revenues and associated costs in connection with franchises at the time that we have substantially performed or satisfied all material services or conditions relating to the franchise agreement.  We consider substantial performance to have occurred when: 1) no remaining obligations are unfulfilled under the franchise agreement; 2) there is no intent to refund any cash received or to forgive any unpaid amounts due from franchisees; 3) all of the initial services spelled out in the franchise agreement have been performed; and 4) we have met all other material conditions or obligations.  Revenues and expenses from product sales to franchisees are roughly equivalent and are accounted for on a net basis in the accompanying condensed consolidated statements of operations as agency sales, net.  We recognize royalty fees as revenue when earned.  Advertising fees are recorded as a liability until marketing expenditures are incurred.

6

Fresh Healthy Vending International, Inc.

Notes to Condensed Consolidated Financial Statements

 

It is not our policy to allow for returns, discounts or warranties to our franchisees.  Under certain circumstances, including as the result of regulatory actions, our Company may become obligated to offer our franchisees amounts in rescission to reacquire their existing franchises, including machines.  Additionally, if our Company is unable to fulfill its obligations under a franchise agreement we may, at our sole discretion, agree to refund or reduce part or all of a franchisee's payments or commitments to pay.  As of March 31, 2015 and June 30, 2014, the Company's provision for franchisee rescissions and refunds totaled $620,436 and $530,923, respectively.  There are warranties extended by the machine manufacturer and franchisees are responsible for making any required machine repairs.  To the extent the machines remain under warranty, our franchisees transact directly with the manufacturer.

Franchise contracts

We invoice franchisees in full at the time that we enter into contractual arrangements with them.  Payment terms vary but usually a significant portion of the contract's cash consideration (typically 40% of amounts due for vending machines plus initial franchise fees) is due at the time of signing, while remaining amounts outlined under the contract are due when locations are secured for the vending machines.

Amounts invoiced to franchisees for which we have not met the criteria for revenue recognition as discussed above, are deferred until such conditions are met.  Therefore, these amounts are accounted for as accounts receivable, deferred costs, and customer advances and deferred revenues, respectively in the accompanying condensed consolidated financial statements.  As of March 31, 2015, the Company had accounts receivable, deferred costs and customer advances and deferred revenues of $1,786,298, $954,838 and $5,636,863, respectively.  As of June 30, 2014, the Company had accounts receivable, deferred costs and customer advances, and deferred revenues totaling $2,022,317, $738,522 and $5,456,969, respectively.

Cash and cash equivalents

We consider all investments with an original maturity of three months or less to be cash equivalents.  When present, cash equivalents primarily represent funds invested in money market funds, bank certificates of deposit and U.S. government debt securities whose cost equals fair market value.  We had no cash equivalents at March 31, 2015 and June 30, 2014.  We may maintain our cash and cash equivalents in amounts that may, at times, exceed federally insured limits.  At March 31, 2015, bank balances exceeding federally insured limits totaled $65,146.  We have not experienced any losses with respect to cash, and we believe our Company is not exposed to any significant credit risk with respect to our cash.

Certain states require the Company to maintain customer deposits in escrow accounts until the Company has substantially performed its obligations. At March 31, 2015, the Company had $253,500 maintained in escrow accounts for this purpose.

Accounts receivable, net

Accounts receivable arise primarily from invoices for customer deposits, and product orders and are carried at their estimated collectible amounts, net of any estimated allowances for doubtful accounts.  We grant unsecured credit to our customers (located throughout North America, the Bahamas and Puerto Rico) deemed credit worthy.  Ongoing credit evaluations are performed and potential credit losses estimated by management are charged to operations on a regular basis.  At the time any particular account receivable is deemed uncollectible, the balance is charged to the allowance for doubtful accounts.  Our allowance for doubtful accounts aggregated $83,581 and $66,581 at March 31, 2015 and June 30, 2014, respectively. 

7

Fresh Healthy Vending International, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

 

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Fresh Healthy Vending International, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

On September 23, 2014, the Company entered into a Financing and Security Agreement (the "Financing Agreement") whereby the Company may be able to borrow up to $1.5 million through the issuance of convertible secured debt.  The principal terms of the Financing Agreement are as follows:

●

The Company may borrow up to $1.5 million in tranches of up to $150,000 each.

●

The first tranche of $150,000 was issued at the closing of the transaction and was used to acquire and put into service Company-owned micro markets. An additional amount of $100,000 was issued during the quarter ended December 31, 2014.  The balance at March 31, 2015 was $250,000.

●

All subsequent tranches shall be in the amount of up to $150,000, shall be due and funded by the lender within seven days of notice, and shall be contingent upon the Company placing an additional 20 micro markets into service.

●

The notes payable issued under the terms of the Financing Agreement are due in full 24 months from the funding of each tranche.  The Company may, at its discretion, extend the due date for each tranche for an additional 12 months.

●

Interest on the borrowings accrues at a rate of 10% per annum, and is payable quarterly.  In the event the Company elects to extend the maturity date of a tranche, the interest rate will increase to 12% per annum on that tranche.

●

The lender may at its discretion convert any outstanding principal under any of the tranches into shares of the Company's common stock.  The conversion price is 85% of the average closing prices for the 15 trading days prior to the notice of conversion, but in no event at a conversion price lower than $1.28 per share.

●

On the due date, or the extended due date, the Company may at its discretion convert up to one-half of the outstanding principal into shares of common stock.  The conversion price is 85% of the average closing prices for the 15 trading days prior to the due date or extended due date, whichever may be applicable.

●

Borrowings are secured by the Company-owned micro markets.

The Company calculates the beneficial conversion feature based on the difference between the stock price at the time of issuance of a tranche and 85% of the average stock price for the 15 trading days prior to the issuance of the tranche.  During the nine months ended March 31, 2015 no amounts were recorded as a beneficial conversion feature due to the price of the Company's common stock was below the $1.28 conversion price at March 31, 2015.

On January 13, 2015, the Company's Chairman, Nicholas Yates, agreed to loan the Company up to $200,000 (the "Loan"), each incremental borrowing under the Loan to be evidenced by a promissory note, the first of which was issued on the same date (the "January 2015 Note") in the amount of $100,000.  The January 2015 Note bears interest at the rate of 7% per annum, and is due and payable on April 30, 2015.  On April 30, 2015, Mr. Yates extended the maturity date on the Loan from April 30, 2015 to July 31, 2015.

On March 13, 2015, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with Gemini Master Fund, Ltd. (the "Purchaser"), under which the Company issued a Note (the "Note") aggregating $375,000, for a purchase price of $346,500.  The Note bears interest at the rate of 12% per annum.  The Note matures 90 days from the closing date payable in cash.  Under the terms of Purchase Agreement, the Company also issued a warrant (the "Warrant") granting the Purchaser the right to purchase up to 150,000 shares of the Company's common stock at an exercise price of $0.60 per share, subject to adjustments and anti-dilution provisions. The Warrant expires on the seventh anniversary from the issuance date.

In connection with the issuance of the Warrant, the Company has recorded the fair value of $50,250 as a discount on the Note and additional paid-in capital.  Furthermore, an additional $28,500 representing the discount on the proceeds of the note has been recorded as a discount on the Note payable.  The discount is amortized as interest expense over the term of the loan. During the period ended March 31, 2015, the Company charged $15,750 to interest expense relating to the discount on the Note.

The expense related to the warrant is recognized on a straight-line basis over the applicable term of the Note and is included as accretion of discount on notes payable in the accompanying condensed consolidated statements of operations.  The Warrants were valued using the Black Scholes model assuming the following:

 

The expected volatility was estimated based on the volatility of a set of companies that management believes are comparable to the Company.  The risk-free rate was based on the U.S. Treasury note rate over the expected life of the options. 

 

3.   Concentrations

Our vending machines are supplied by a single manufacturer who sells through a limited number of suppliers. Our micro markets are also supplied by a single manufacturer. Although there are a limited number of manufacturers of vending machines and micro markets, we believe that other suppliers could provide similar machines on comparable terms.  A change in suppliers, however, could cause a delay in deliveries and a possible loss of sales, which could adversely affect our operating results.

Our food products are primarily supplied by one distributor.  Although there are a limited number of product suppliers with the product selection and distribution capabilities required by our franchise network, we believe that other distributors could provide similar products on comparable terms.  A change in suppliers, however, could cause a delay in deliveries and a possible loss of revenue from both current and prospective franchisees, which could adversely affect our operating results.

 

11

Fresh Healthy Vending International, Inc.

Notes to Condensed Consolidated Financial Statements

4.   Stock-based compensation

During the nine months ended March 31, 2015, the Company granted stock options under its 2013 Equity Incentive Plan.  Stock-based compensation related to these awards is recognized on a straight-line basis over the applicable vesting period and is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations for the nine months ended March 31, 2015 and 2014.  During the nine months ended March 31, 2015, options issued were valued using the Black Scholes method assuming the following:

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Fresh Healthy Vending International, Inc.

Notes to Condensed Consolidated Financial Statements

 

On April 2, 2014 the DBO issued a "First Amended Statement of Issues in Support of Stop Order and Stop Order Denying Effectiveness of Franchise Registration Application".  The April stop order prohibited us from selling franchises in California until February 28, 2016, or until further order of the Commissioner. 

On November 7, 2014 the DBO issued a Stop Order and Citation (the "Stop Order") and the Company entered into a settlement agreement with the DBO.   The Stop Order prohibits us from selling franchises in the state of California until November 7, 2016.  The DBO found that we engaged in offers and sales of franchises in California without registration with respect to the three franchise sales we made in August and September 2012, that the sale of 15 franchises that occurred outside the state of California between March 2014 and May 2014 were made pursuant to a franchise disclosure document that contained omissions of material facts by failing to disclose the DBO's prior stop order and the statement of charges and notice of intent to enter an order to cease and desist issued by the state of Washington, and that our prior management failed to exercise due diligence with regard to our registration and disclosure obligations.  The DBO also denied our registration application filed in California on October 3, 2013.  In connection with the Stop Order, we paid administrative penalties of $37,500 and legal fees of $18,200 and offered rescission and restitution to the 15 franchisees that purchased franchises between March 2014 and May 2014.  Of the 15 franchisees offered rescission, nine franchisees accepted and six franchisees rejected our rescission offer. As of March 31, 2015, the Company has remitted full and partial payments of $494,282 to seven of the franchisees and the remaining liability to five of the franchisees aggregating $436,186, is included in provision for franchisee rescissions and refunds in the accompanying balance sheet. Furthermore, the Company has recorded an additional $184,250 in provision for franchisee rescissions and refunds related to other existing and potential refunds. Pursuant to the terms of the Stop Order, we also developed and implemented a compliance program and engaged an independent monitor for the duration of the Stop Order to review and report to the DBO our franchise compliance activities, including compliance with the Stop Order.

Our Company is subject to certain other state franchise registration and relationship laws, rules and regulations.  Any violation of these laws, rules or regulations could result in our Company being fined or prohibited from offering and selling franchises in the state.  Periodically we are contacted by other state franchise regulatory authorities and in some cases have been required to respond to inquiries or make changes to our franchise disclosure documents or franchise offer and sale practices.  Management believes these communications from state regulators and corresponding changes in our franchise disclosure documents and practices are administrative in nature and do not indicate the presence of a loss or probable potential loss.  See Part II, Item 1 ("Legal Proceedings") of the Company's Form 10-Q for the period ended March 31, 2015 of which these Financial Statements form a part thereof.

In June 2014, Seaga Manufacturing, Inc. ("Seaga") filed a complaint alleging that the Company had breached its agreement with Seaga by failing to purchase certain minimum quantities of automatic merchandising equipment and related parts.  The complaint seeks damages in the amount of $3.3 million.  In September 2014, the Company filed an answer, affirmative defenses and counterclaims and intends to vigorously defend this action. The parties are currently conducting discovery.   Although it is too early for management to make an assessment of this claim, we do not believe that the ultimate resolution will have a material adverse effect on the Company's financial position or results of operations.

The Company is also subject to normal and routine litigation and other legal actions by current or former franchisees, employees, and vendors.  We assess contingencies to determine the degree of probability and range of possible loss for potential accrual in its financial statements.  An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events.  The Company regularly reviews contingencies to determine the adequacy of the accruals and related disclosures.  The amount of ultimate loss may differ from these estimates.

Although we currently believe that the ultimate outcome of these matters will not have a material adverse effect on the results of operations, liquidity or financial position of the Company, it is possible they could be materially affected in any particular future reporting period by the unfavorable resolution of one or more of these matters or contingencies. 

6.   Stockholders' deficit

On October 1, 2014, Arthur S. Budman was appointed our Chief Executive Officer and Chief Financial Officer.  In connection with Mr. Budman's appointment, he was granted 250,000 shares of common stock which vest ratably over a period of one year. Stock-based compensation related to this award is recognized on a straight-line basis over the applicable vesting period and is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations for the three and nine months ended March 31, 2015. We recorded stock-based compensation expense totaling $28,125 and $79,062 for the three and nine months ended March 31, 2015, respectively, related to this stock grant.

7.   Subsequent events

On April 22, 2015, the Company entered into two agreements, each with a consultant who will perform certain corporate and financial strategic planning services for the Company (the "Agreements").  In consideration for the services to be provided by the consultants, each of them will be paid $2,500 per month and receive 200,000 shares of the Company's common stock and options to purchase an additional 200,000 shares of the Company's common stock in the form of a three year warrant with a strike price of $.60 per share. The Agreements are for a term of six months and may be terminated by either party upon 30 days prior written notice.

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Special Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends, our future expectations and other matters that do not relate strictly to historical facts and are based on certain assumptions of our management (such assumptions may be identified by "we," "our" or "us"). These statements are often identified by the use of words such as "may," "strive," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. Further, these statements are based on the beliefs and assumptions of our management based on information currently available. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation, the risks described in the section entitled "Risk Factors" under Item 1A in our Annual Report on Form 10-K for the year ended June 30, 2014.

We caution the reader to carefully consider such factors. Moreover, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview and Description of Business

Discussions with respect to our Company's operations included herein refer to our operating subsidiaries, Fresh Healthy Vending LLC ("FHV LLC") and The Fresh and Healthy Vending Corporation ("FHV Corp").  Effective as of July 19, 2013 our Company acquired all assets of FHV Holdings Corp ("FHV Cal") which included FHV LLC in a transaction (the "Acquisition") accounted for as an asset acquisition.  With the sale of the Green 4 Media, Inc. business under the Indemnity Agreement effective July 22, 2013, our continuing operations are exclusively those of FHV LLC and FHV Corp.  Information with respect to our Company's operations prior to the Acquisition is not included herein but may be obtained from viewing our Annual Report for the year ended June 30, 2014 filed on Form 10-K on September 29, 2014.

We are a public company listed under the symbol "GEEM" until September 19, 2013, at which time we began to trade under our current stock symbol "VEND".   On August 8, 2013, we changed our name to Fresh Healthy Vending International, Inc. 

Business

We are a Franchise Development Company and operator of Company-owned vending machines and micro markets that makes healthy eating more convenient through access to high quality healthy foods at high foot traffic destinations.  We and our franchisees have over 2,500 vending machines and micro markets primarily offering natural, organic and healthy food and beverage products throughout North America, the Bahamas and Puerto Rico.  Our obligations to each franchisee include securing locations for the healthy vending machines they purchase.  We offer thousands of healthy food and beverage products through a national distributor and we train each franchisee at our San Diego headquarters.  We provide dedicated account management and ongoing customer service to our franchisees.

The Industry and the Overall Market

We are both a franchisor of vending machine and micro market operations and an operator of vending machines and micro markets.  In the franchise market, 2012 saw the first positive growth in the number of franchise establishments since 2008 according to the IFA's annual Franchise Business Economic Outlook report (compiled by HIS Global Insight).  According to the International Franchise Association, the number of franchise establishments in the United States is expected to increase by 1.7% in 2014, ahead of the 2013 pace of 1.4%.  The vending machine industry saw the total dollar volume in machine sales rise to $43.3 billion in 2012 from $43.0 billion in 2011.

 

According to the report "A Roadmap for Simultaneously Developing the Supply and Demand for Energy Efficient Beverage Vending Machines," there are approximately 2.5 million food and beverage vending machines in the United States. 

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Vending Technology

We have developed a cash and cashless vending platform to readily monitor the sales of our franchisees' and our machines.  We help our franchisees to grow their business with onsite and virtual management tools, including as an example, wireless remote monitoring telemetry software. Our vending standards are UL ("Underwriters Laboratories") recognized, which we believe are among the highest standards in the industry.  This ensures food temperature compliance, which includes auto-contingency processes should electrical or hardware malfunction; it also ensures that ambient air stays within specified parameters at all times.  We believe our third-party cashless technology provides one of the highest levels of data and network compliance while ensuring complete transparency.  As a result, we generally handle little if any cash in the process.  All transactions are managed by third parties to facilitate financial compliance with local and national laws and regulations.

Products

We primarily provide a portfolio of fresh, organic and all-natural snacks and drinks.  Most products are available via an agreement with a national distributor.  We also create custom menus for each franchisee specific to each location type based on their guidelines, requests and demographics.  The Company supports the efforts of the United States Department of Agriculture's ("USDA") Smart Snacks in School regulation that indicates that all foods sold a la carte, in the school store and vending machines will need to meet certain nutritional standards.  The Company's website platform, www.freshandhealthy.org, caters to the new USDA guidelines and supports locations looking to implement a healthy vending program.  We have developed customized menus that meet and exceed school and State nutrition guidelines nationwide, facilitating the placement of machines in schools.  Our suppliers generally deliver products to our franchisees on a weekly basis and charge a fee of approximately $35.

During the year ended June 30, 2014, the Company introduced its newest product offering in a micro market kiosk. The micro market is a self-checkout kiosk that contains a similar portfolio of fresh, organic and all-natural snacks and drinks.  The micro market also provides fresh full meal options such as salads, sandwiches, and wraps, as well as frozen entrees.  The micro market is designed for implementation in corporate environments and certain retail locations.

Competition

The vending industry is large, highly fragmented and consolidating as the market leaders acquire regional vending companies to fulfill their real-estate expansion plans or acquire privately-held service verticals.  We believe we have laid the foundation for a national health vending operation with built-in, long-term service agreements and residual product and inventory sales.  We believe our business model offers competitive advantages including the following.

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We focus on healthier food included in school and other health-conscious vending locations.  Federal guidelines have been established that aim to counter youth obesity while improving student nutrition, such rules work to discourage our competitors' fare to be marketed to schools.

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We outsource non-core functions to third-party vendors. Outsourced services include: machine manufacturing, transport, location set-up, maintenance, inventory, food management and ordering, payment processing, and cash management.  This has historically allowed us to focus more of our financial resources to investing in new services.

 

International operations

During the year ended June 30, 2014, the Company decided to pursue international expansion of its operations.  In connection with our intended expansion, we engaged a consulting firm to assist us in locating and securing a master franchisee.  Although the Company initially signed a Letter of Intent ("LOI") with a master franchisee in Australia, we determined that it was in the Company's best interest to terminate the LOI.  Furthermore, we decided to manage the international expansion ourselves and therefore, terminated the agreement with the consulting firm as well.  The Company is currently evaluating its on-going strategy for international operations.

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Our Principal Suppliers

The Company currently purchases substantially all of its vending machines as needed from a sole supplier, Automated Merchandising Systems Inc. ("AMS"), or its designated distributor.  We believe that our relationship with AMS is excellent, and likely to continue.  In our view, the loss of our relationship with AMS, should it occur, may result in short term disruptions not likely to be material.  The Company has identified at least four other suppliers with comparable vending equipment. The Company also purchases its micro markets from a single manufacturer and believes the loss of its supplier may result in short term disruptions not likely to be material.

Additionally, primarily on behalf of our franchisees, the Company has negotiated discounts with a product distribution chain, United Natural Foods, Inc. ("UNFI").  We believe that our relationship with UNFI is excellent, and likely to continue.  In our view, the loss of our relationship with UNFI, should it occur, may result in short-term disruptions not likely to be material.  The Company has identified several other suppliers that stock the same or comparable products.  Furthermore, our franchisees are able to purchase directly from UNFI, however, without our negotiated discount.

Governmental Regulation

We are required to comply with regulations governing the sale of franchises – the primary component of our business.  Thirteen states directly regulate franchising and require pre-sale registration of a Franchise Disclosure Document ("FDD"), or offering prospectus, by the franchisor, normally with the state agency that oversees the sale of securities in that state, and pre-sale delivery of an FDD to a franchise candidate by a franchisor before the signing of a binding agreement or the payment of any money to the franchisor.  Franchise sales in the remaining 37 states are generally subject to the Franchise Rule promulgated by the Federal Trade Commission ("FTC"), which requires the pre-sale delivery of an FDD to a franchise candidate before the signing of a binding agreement or the payment of any money to the franchisor.  A franchisor that fails to properly register and maintain the registration of its FDD and disclose its franchisee candidates in the 13 registration states, unless exempt from registration under a few narrowly drawn exceptions to the registration requirements, is subject to legal action by its franchisees for damages and, under certain circumstances, for rescission of the franchise agreements, and to administrative, civil and criminal penalties that may be imposed as well.  The FTC's Franchise Rule does not require registration of an FDD with the FTC; however, a franchisor that fails to properly disclose its franchisee candidates is subject to claims for breach of contract, fraud, damages, sanctions and the like.

Our Employees

We had approximately 32 full-time employees as of March 31, 2015 and 11 part-time positions.

 

Seasonality

We do not expect that our business will experience significant seasonality other than that resulting from vending machine sales within schools.

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Item 1A.  Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1, "Risk Factors" in our Current Report on Form 10-K filed on September 29, 2014, which could materially affect our business, financial condition or operating results.  The risks described in our Annual Report on Form 10-K are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

In instances where we issued securities in reliance upon Regulation D, we relied upon Rule 506 of Regulation D.  The parties who received the securities in such instances made representations that such party (a) is acquiring the securities for his, her or its own account for investment and not for the account of any other person and not with a view to or for distribution, assignment or resale in connection with any distribution within the meaning of the Securities Act, (b) agrees not to sell or otherwise transfer the purchased shares unless they are registered under the Securities Act and any applicable state securities laws, or an exemption or exemptions from such registration are available, (c) has knowledge and experience in financial and business matters such that the purchaser is capable of evaluating the merits and risks of an investment in us, (d) had access to all of our documents, records, and books pertaining to the investment and was provided the opportunity to ask questions and receive answers regarding the terms and conditions of the offering and to obtain any additional information which we possessed or were able to acquire without unreasonable effort and expense, and (e) has no need for the liquidity in its investment in us and could afford the complete loss of such investment.  Management made the determination that the investors in instances where we relied on Regulation D are accredited investors (as defined in Regulation D) based upon management's inquiry into their sophistication and net worth.  In addition, there was no general solicitation or advertising for securities issued in reliance upon Regulation D. 

 

In instances where we indicate that we relied upon Section 4(a)(2) of the Securities Act in issuing securities, our reliance was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there were only a limited number of offerees, each of whom was deemed in our view to be an "accredited investor" within the meaning of federal securities laws; (c) there were no subsequent or contemporaneous public offerings of the securities by us; and (d) the securities were not broken down into smaller denominations.

Item 3.  Defaults Upon Senior Securities

None.

Item 4  Mine Safety Disclosures

Not Applicable.

Item 5.  Other Information

None.

Item 6.  Exhibits

A.  Exhibits

 

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