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EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - Vape Holdings, Inc.f10k2017ex32-2_vape.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 - Vape Holdings, Inc.f10k2017ex32-1_vape.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER - Vape Holdings, Inc.f10k2017ex31-2_vape.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Vape Holdings, Inc.f10k2017ex31-1_vape.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

  

   Annual Report PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

For the fiscal year ended September 30, 2017 

 

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 Number 000-55328 

 

VAPE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   90-0436540
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

5304 Derry Avenue, Suite C, Agoura Hills, CA 91301

(Address of principal executive offices) (Zip Code)

 

(877) 827-3959

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, par value $0.00001

(Title of class)

 

Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

 

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 ☒ No ☐

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

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

 

Large accelerated filer

Accelerated filer
Non-accelerated filer     (Do not check if a smaller reporting company) Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 ☒ 

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $2,500,000, based upon the price ($0.0025) at which the common stock was last sold as of November 15, 2018 multiplied by the approximate number of shares of common stock held by persons other than executive officers, directors and five percent stockholders of the registrant without conceding that any such person is an “affiliate” of the registrant for purposes of the federal securities laws.  

 

At November 15, 2018, there were 1,000,000,000 shares of the Registrant’s common stock outstanding. 

 

 

 

 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain information included in this Annual Report on Form 10-K and other filings of the Registrant under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as information communicated orally or in writing between the dates of such filings, contains or may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.  Forward-looking statements in this Annual Report on Form 10-K, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from expected results.  Among these risks, trends and uncertainties are the availability of working capital to fund our operations, the competitive market in which we operate, the efficient and uninterrupted operation of our computer and communications systems, our ability to generate a profit and execute our business plan, the retention of key personnel, our ability to protect and defend our intellectual property, the effects of governmental regulation and other risks identified in the Registrant’s filings with the Securities and Exchange Commission from time to time.

 

In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms or other comparable terminology.  Although the Registrant believes that the expectations reflected in the forward-looking statements contained herein are reasonable, the Registrant cannot guarantee future results, levels of activity, performance or achievements.  Moreover, neither the Registrant, nor any other person, assumes responsibility for the accuracy and completeness of such statements.  The Registrant is under no duty to update any of the forward-looking statements contained herein after the date of this Annual Report on Form 10-K.

  

i

 

 

VAPE HOLDINGS INC.

 

INDEX TO FORM 10-K

 

PAGE
PART I  
     
Item 1. Business 1
Item 1A. Risk Factors 2
Item 1B. Unresolved Staff Comments 2
Item 2. Properties 2
Item 3. Legal Proceedings 3
Item 4. Mine Safety Disclosure 4
     
PART II  
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities 5
Item 6. Selected Financial Data 6
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation 7
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 11
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 11
Item 9A. Controls and Procedures 11
Item 9B. Other Information 12
     
PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance 13
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 17
Item 13. Certain Relationships and Related Transactions and Director Independence 18
Item 14. Principal Accountant Fees and Services 19
Item 15. Exhibits, Financial Statement Schedules 1
  Index to Consolidated Financial Statements F-1
  Index of Exhibits E-1
     
Signatures 20

  

ii

 

 

PART I

 

Item 1. Business

 

Background

 

On August 9, 2013, PeopleString Corporation, and its wholly-owned subsidiary, RewardString Corporation (“RewardString”), and Vape Holdings, Inc., a Nevada corporation (the “Private Company”), entered into a Merger and Reorganization Agreement (the “Agreement”) whereby the Private Company merged with RewardString, with the Private Company being the surviving entity (the “Merger”). In consideration for the merger, the shareholders of the Private Company received a total of approximately 4,684,538   shares of common stock of the merged company on a pro rata basis in exchange for 8,875 shares of the Private Company’s common stock, representing 100% of the outstanding common stock of the Private Company. The total shares of the merged company issued on a pro rata basis to the Private Company shareholders represented approximately 74.95% of the total issued and outstanding common stock of the merged company.

 

The merger among PeopleString, RewardString and the Private Company was accounted for as a reverse acquisition and change in reporting entity, whereby the Private Company was the accounting acquirer.  The Merger was accounted for using the purchase method of accounting in accordance with ASC 805 “Business Combinations”, whereby the estimated purchase was allocated to tangible net assets acquired based upon preliminary fair values at the date of acquisition.  Accordingly, the assets and liabilities of PeopleString and RewardString were recorded at fair value; the assets of PeopleString Corporation were not significant.  The historical results of operations and cash flows of the Private Company are being reported beginning in the quarter ended December 31, 2013 in this Quarterly Report.  The Merger closed on September 30, 2013.

 

On March 27, 2014, the Company formally closed its asset purchase of the HIVE Ceramics LLC (“HIVE”) vaporization product an related intellectual property and has begun distributing the HIVE products through various wholesale distribution channels.  HIVE had been in development of a ceramic product for use in the vaporization market.  The development for one product line was completed in 2014.  No sales of this product line were made prior to Vape’s acquisition of the HIVE ceramic product line on March 27, 2014.  We determined that HIVE’s assets acquired were not deemed a business prior to being acquired by the Company under Rule 11-01(d) of Regulation S-X since there were no significant revenue activities, physical assets, employees or customers. In May 2018 HIVE was handed over to Kyle Tracey.

 

Overview

 

General

 

Vape Holdings, Inc. (“VAPE,” the “Company,” “we,” “us,” “our,” “our company”) is a holding company with its primary focus was in the manufacturing and distribution of healthy and sustainable vaporization products. The Company designed, markets and distributes ceramic vaporization products under a unique brand. The Company had introduced a nonporous, non-corrosive, chemically inert medical-grade ceramic vaporization element as a healthy, sustainable alternative to traditional titanium and quartz vaporization materials, as well as lower-grade ceramic found in traditional electronic cigarettes and vaporizers. This material can be used for a wide range of applications, including stand-alone vaporization products and “E-cigs.” Electronic cigarettes come in a variety of designs ranging from those that look vastly like traditional cigarettes, to larger vaporizer units which are capable of vaporizing liquid with varying viscosity. The process of vaporization is believed to eliminate the smoke, tar, ash, and other byproducts of traditional smoking by utilizing lower temperatures in a controlled electronic environment.

 

HIVE Ceramics

 

HIVE Ceramics (“HIVE”) was the premier brand under the VAPE umbrella. HIVE outsource manufactures and distributes a proprietarily blended ceramic vaporization element for torched, electronic and portable vaporizers with countless design and product crossover capabilities in existing and emerging markets. HIVE is dedicated to bringing the healthiest and cleanest vaporization experience possible to the market.

 

HIVE Ceramics saw a significant decrease in sales due to competition in the market and restricted operations. While sales channels are still open, without an infusion, the revenues are not large enough to support HIVE Ceramics outside of its existing product line.

 

On April 28, 2018, the Company received a Notice of Default from Hive Ceramics and Kyle Tracey (the “Notice”) with respect to the Company’s breach of the Settlement Agreement and Release, dated as of April 28, 2017. The breaches consist of failure to pay $234,000 owed under the Tracey Note and failure to pay the $7,000 monthly payment obligations set forth in the Settlement Agreement, and $216,222 owed for failure to repay the Hive Note. The Company has not been able to resolve the defaults set forth in the Notice and Hive/Tracey have been informed the Company handed over possession of the Hive Assets in May 2018. Concurrently, the Company has proposed to enter into a Sales Representative Agreement whereby the Company may continue to sell Hive products for a period of 12 months on a non-exclusive basis in exchange for a commission on net sales currently to no avail. The HIVE/Tracey Settlement Agreement and Release documents are qualified in their entirety by reference to the full text of the agreements, copies of which were filed on Company’s Current Report on Form 8-K May 3, 2017 as Exhibit 10.1.

 

1 

 

 

REVIVAL PRODUCTS

 

On December 28, 2015, the Company created a new wholly-owned subsidiary, Revival Products, LLC (“Revival”), which is in the business of portable vaporization devices. Revival will sell disposable cartridges that complement HIVE Ceramic’s product lines utilizing its sales and distribution channels and via its own designated e-commerce site at www.revivalvapes.com. Revival launched three signature products, The Calloway, The Cleo, and The Charleston in January 2016. The Company ceased the Revival product line upon Justin Braun’s resignation in June 2016

 

BETTERCHEM 

 

On July 1, 2015, the Company entered into a Share Exchange Agreement with BetterChem Consulting, Inc. (“BetterChem”), a Pennsylvania corporation, and its sole shareholder and the Company’s current Chief Science Officer Dr. Mark Scialdone (“Dr. Scialdone”), whereby the Company acquired a controlling 80% interest in BetterChem from Dr. Scialdone in exchange for up to 400,000 shares of the Company’s restricted common stock. In consideration for the issuance of the shares to Dr. Scialdone, the Company acquired 80 shares of the common stock of BetterChem which represents 80% of the issued and outstanding shares of BetterChem. Dr. Scialdone retained a 20% interest in BetterChem. The Share Exchange Agreement transaction closed concurrently with its execution on July 1, 2015 and was approved by Unanimous Written Consent of the Board of Directors (the “Board”) of the Company on the same date. At closing, the Company issued 250,000 shares of its common stock valued at $67,500 to BetterChem. BetterChem had no identifiable assets and liabilities upon closing, and no significant revenues. 

  

On January 12, 2016, the Company unwound the transaction and curtailed the subsidiary’s operations in order to reduce overhead costs and focus on HIVE Ceramics. An impairment of the acquisition of BetterChem of $69,250 was recorded during the year ended September 30, 2015.

  

Employees

 

As of the filing date, we had 2 employees. Since inception, we have never had a work stoppage, and our employees are not represented by a labor union. We consider our relationship with our employees to be positive.

 

Item 1A. Risk Factors

 

Vape is a smaller reporting company and is therefore not required to provide this information.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

As of September 30, 2017, the Company has no property.

 

2 

 

  

Item 3. Legal Proceedings

  

Union Capital, LLC, v. Vape Holdings, Inc. On February 22, 2016, a convertible promissory note holder, Union Capital, LLC (“Union”), filed suit against the Company in the United States District Court for the Southern District of New York claiming breach of contract and conversion and seeking specific performance, permanent injunction, and damages arising from the Company’s rejection of certain conversion notices submitted by Union. On February 24, 2016, the Court denied Union’s request for a TRO holding that Union failed to meet its burden of establishing irreparable harm and ordered the Company to show cause why a preliminary injunction should not be granted. The Court denied Union’s motion for a preliminary injunction. On March 31, 2017, the court ruled on the Company’s motion to dismiss and on Union’s motion for summary judgment. The court granted the Company’s motion to dismiss as it related to Union’s conversion claim but denied the Company’s motion to dismiss Union’s breach of contract claim. The court granted Union’s Motion for Summary Judgment as to the Company’s liability for breach of contract but denied Union’s motion in all other respects, including Union’s request for an award of damages, and struck down portions of Union’s note as penalty provisions. The Company and Union settled this matter in July 2017 without further court proceedings for $170,000.

  

LG Capital Funding, LLC, v. Vape Holdings, Inc. On May 3, 2016, convertible promissory note holder LG Capital Funding, LLC, (“LG”), filed suit against the Company in the United State District Court for the Eastern District of New York claiming breach of contract and conversion and seeking a preliminary injunction and declaratory relief arising from the Company’s rejection of certain conversion notices submitted by LG. The court denied LG both a temporary restraining order and a preliminary injunction and referred the parties to mediation. At mediation, the parties agreed that the Company would pay LG the sum of $151,000 in settlement of its claims.

 

On or about December 1, 2016, upon LG’s request, the court entered judgment in the amount of $151,000. On or about December 10, 2016, the Company learned that LG had placed a judgment lien on the Company’s operating account. The effect of the lien was that the Company’s operating account was frozen for an amount twice the judgment, or approximately $300,000. In or around December of 2016 and continuing into early January 2017, GHS Investments, LLC, a Nevada limited liability company (“GHS”) and LG Capital negotiated a transaction whereby GHS purchased the rights to the LG Capital Convertible Promissory Note and/or the right to collect on the LG Capital judgment. On or about January 10, 2017, GHS and the Company entered into a Convertible Promissory Note in the amount of $161,000 (the “GHS Convertible Note”) which represented that amount paid by GHS to LG Capital. The GHS Convertible Note carried a 10% interest rate, was due on October 15, 2017 and is convertible into common stock of the Company at a 45% discount off the lowest trading price for the Company’s common stock during the 20 trading days immediately preceding the conversion date.

 

HIVE, LLC. On December 10, 2015, the Company entered into a Secured Series B Preferred Stock Convertible Promissory Note in the principal amount of $50,000 (“Series B Note”) with HIVE Ceramics, LLC (the “Holder”). The Series B Note carried an interest rate of 8.0%. The Series B Note was due and payable by the Company on December 10, 2016 (the “Maturity Date”). The Series B Note was convertible into shares of the Company’s Series B Preferred Stock at the option of Holder. The indebtedness represented by the Series B Note was secured by all the Company’s assets. The Series B Note is attached as Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on December 27, 2016 (the “12/27/16 Form 8-K”) and incorporated herein by this reference. 

 

Also, on December 10, 2015, the Company entered into an Amended and Restated Secured Series B Preferred Stock Convertible Promissory Note in the principal amount of $250,000 (“Amended Note”) with the Holder. The Amended Note amended, restated, modified and superseded that $250,000 Promissory Note, dated March 27, 2014, entered into by and between the Company and Holder, which note had a principal of $250,000 and a maturity date of February 27, 2016. The Amended Note carried an interest rate of 8.0%. The Amended Note was due and payable by the Company on December 10, 2016 (the “Maturity Date”). The Amended Note was convertible into shares of the Company’s Series B Preferred Stock at the option of Holder. The indebtedness represented by the Amended Note was secured by all the Company’s assets. The Amended Note is attached as Exhibit 10.8 to the 12/27/16 Form 8-K and incorporated herein by this reference. 

 

3 

 

 

The Company failed to pay the Series B Note and the Amended Note on the Maturity Date (December 10, 2016). On December 15, 2016, the Company received a Notice of Default from counsel for Holder. Holder’s counsel demanded that all amounts owed under the Series B Note and the Amended Note be paid no later than December 20, 2016. The Company was unable to pay the demanded amounts by December 20, 2016. The Company believes that the Holder intends to execute on the security for the Series B Note and the Amended Note, namely, all of the assets of the Company. The Company is attempting to negotiate a resolution that does not include seizure of the Company’s assets however there is no guarantee that the Company will be able to work out a satisfactory resolution that does not include seizure of the Company’s assets.  

 

Subsequent to the year ended September 30, 2017, on April 28, 2018, subsequent to the period covered by this filing, the Company received a Notice of Default from Hive Ceramics and Kyle Tracey (the “Notice”) with respect to the Company’s breach of the Settlement Agreement and Release, dated as of April 28, 2017. The breaches consist of failure to pay $234,000 owed under the Tracey Note and failure to pay the $7,000 monthly payment obligations set forth in the Settlement Agreement, and $216,222 owed for failure to repay the Hive Note. The Company has not been able to resolve the defaults set forth in the Notice and Hive/Tracey have been informed the Company will hand over possession of the Hive Assets when arrangements can be made. Concurrently, the Company has proposed to enter into a Sales Representative Agreement whereby the Company may continue to sell Hive products for a period of 12 months on a non-exclusive basis in exchange for a commission on net sales. The HIVE/Tracey Settlement Agreement and Release documents are qualified in their entirety by reference to the full text of the agreements, copies of which were filed on Company’s Current Report on Form 8-K May 3, 2017 as Exhibit 10.1. 

 

Justin Braune v. Vape Holdings, Inc., Ben Beaulieu and Allan Viernes. On May 16, 2017, Justin Braune, the Company’s former Chief Executive Officer filed a civil lawsuit in Los Angeles County Superior Court against the Company, Allan Viernes and Ben Beaulieu claiming breach of Mr. Braune’s employment contract, including, but not limited to failure to pay wages including deferred salary and commissions, and wages upon separation of employment and seeking damages arising from the Company’s breach. The Company and Justin Braune subsequently settled this matter without further court proceedings. On September 25, 2017, the parties participated in a full-day mediation and agreed to settle and resolve all matters including the lawsuit. On December 6, 2017, the parties entered into a Settlement Agreement whereby, the Allan Viernes and Ben Beaulieu 1) shall pay the sum of $15,000 by December 8, 2017 and the Company shall, 2) $40,000 on or before December 31, 2018, and 3) a convertible promissory note in the amount of $100,000. The convertible note and/or any shares issued in connection shall have a buyout cash value of no less than 125% of the cash value.

 

Subsequent to the year ended September 30, 2017, on April 4, 2018, Braune filed an Ex Parte Application for an Order to Enter Judgement Against the Company for breach of the Settlement Agreement for failure to pay under the terms of the Settlement Agreement, which the Court granted in favor of Braune. The Ex Parte Application was denied. On May 23, 2018, Braune brought a different Ex Parte Application for Appointment of a Receiver. The hearing was held on May 23, 2018, during which the Company submitted papers opposing the appointment, and which ultimately resulted in the Court denying Braune’s application. The Ex Parte Application was denied. There is a motion to appoint receiver scheduled for November 13, 2018. 

 

Item 4. Mine Safety Disclosure

 

Not applicable.

 

4 

 

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

 

Market Information

 

Our common stock was qualified for quotation on the OTCQB under the trading symbol “VAPE” on January 8, 2014. Our common stock is currently quoted on OTCQB. The closing price of our common stock on September 30, 2017 was $0.002 per share. The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported on the OTCQB. This information reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

From the Year Ended September 30, 2017  High   Low 
First Quarter  $0.032   $0.004 
Second Quarter  $0.020   $0.006 
Third Quarter  $0.008   $0.003 
Fourth Quarter  $0.006   $0.002 

 

From the Year Ended September 30, 2016  High   Low 
First Quarter  $0.069   $0.004 
Second Quarter  $0.017   $0.002 
Third Quarter  $0.011   $0.002 
Fourth Quarter  $0.004   $0.001 

 

The OTCQB is generally considered to be a less active and less efficient market than the NASDAQ Global Market, the NASDAQ Capital Market or any national exchange and will not provide investors with the liquidity that the NASDAQ Global Market, the NASDAQ Capital Market or a national exchange would offer.  

 

Holders

 

As of September 30, 2017, the approximate number of registered holders of our common stock was 71. As of September 30, 2017, the number of outstanding shares of our common stock was 866,861,512; and there were no shares of common stock subject to outstanding warrants or stock options. As of the date of the filing there are 1,000,000,000 shares outstanding and approximately 74 holders of our shares of common stock.

 

Dividends

 

No dividends were declared on Vape’s common stock in the years ended September 30, 2017 and 2016, and it is anticipated that cash dividends will not be declared on Vape’s common stock in the foreseeable future.  Our dividend policy is subject to the discretion of our board of directors and depends upon a number of factors, including operating results, financial condition and general business conditions.  Holders of common stock are entitled to receive dividends as, if and when declared by our board of directors out of funds legally available therefor.  We may pay cash dividends if net income available to stockholders fully funds the proposed dividends, and the expected rate of earnings retention is consistent with capital needs, asset quality and overall financial condition.

 

Details of Issuance of Shares of Our Common Stock in Connection with Investor Relation Services

 

None

 

Securities Authorized for Issuance under Equity Compensation Plans

 

As of September 30, 2017, there were no options issued and outstanding under the 2014 Plan and 2009 Plan as all options were forfeited and cancelled as of September 30, 2015. There have been no changes during the year ended September 30, 2017.

 

5 

 

 

Recent Sales of Unregistered Securities

  

Securities Purchase Agreement with Typenex Co-Investment, LLC

 

On November 1, 2016, the Company closed a Securities Purchase Agreement (the “Typenex Agreement”) with Typenex. Pursuant to the Typenex Agreement, Typenex purchased a Convertible Promissory Note from the Company in the original principal amount of up to $1,413,000 (the “Typenex Note”), at an interest rate of ten percent (10%) per annum. The Typenex Note is unsecured. The principal amount of the Typenex Note included an original issue discount of $128,000 and a transaction fee of $5,000.

 

The investment from Typenex was scheduled to occur in a series of sixteen (16) tranches, represented each by a separate Secured Investor Promissory Note (the “Tranche Notes”) in varying amounts. The first Tranche Note of $40,000 was memorialized in Secured Promissory Note #1, the funding of which occurred on or immediately after the execution of the Typenex Agreement. Net proceeds of $235,500 were received during the year ended September 30, 2017 under the Typenex Agreement.

  

Each Tranche Note, or any part of it, is convertible into common stock of the Company. The Conversion Price is as described in the Typenex Agreement and is based on at least a 45% discount, and up to 55% discount based on events of default, to the lowest trading price during the prior 20-days of notice of intent to convert by the holder into the Company’s common stock.

 

As a part of the Typenex Agreement, the Company agreed to use its best efforts to cause its authorized but unissued stock to be increased in order for the Company to create a reserve sufficient to meet its conversion obligations under the Typenex Note. The Company is in the process of taking steps in order to increase its authorized but unissued stock to meet its obligations.

 

Securities Purchase Agreement with GHS Investments, LLC

 

On October 28, 2016, the Company closed a Securities Purchase Agreement (the “GHS Purchase Agreement”) with GHS. Pursuant to the GHS Purchase Agreement, GHS agreed to purchase and the Company agreed to sell up to $1,105,000 of convertible securities, in the form of a Convertible Promissory Note (the “GHS Note”), at an interest rate of ten percent (10%) per annum. The GHS Note is also attached as Exhibit 10.6 to the 12/27/16 Form 8K and is incorporated herein by this reference. The GHS Note included a ten percent (10%) original issuance discount (i.e., $100,000) and a $5,000 initial transaction fee, as defined in the GHS Purchase Agreement. Upon the closing of the GHS Purchase Agreement, GHS funded $38,000, net, to the Company (the “Initial Tranche”). No other tranches were funded. There is no guarantee that GHS will fund the remainder of the Subsequent Tranches and in fact it is within GHS’s sole and absolute discretion whether it ultimately funds the Subsequent Tranches. Should GHS decide it won’t fund the Subsequent Tranches, the Company’s operating results will suffer and its ability to remain a going concern will be jeopardized.

  

The GHS Note is convertible into common stock of the Company. The Conversion Price is as described in the Typenex Agreement and is based on at least a 45% discount, and up to 55% discount based on events of default, to the lowest trading price during the prior 20-days of notice of intent to convert by the holder into the Company’s common stock.

 

As a part of the GHS Purchase Agreement, the Company agreed to use its best efforts to cause its authorized but unissued stock to be increased in order for the Company to create a reserve sufficient to meet its conversion obligations.

 

There is no guarantee that GHS will fund the remainder of the Subsequent Tranches and in fact it is within GHS’s sole and absolute discretion whether it ultimately funds the Subsequent Tranches. Should GHS decide it won’t fund the Subsequent Tranches, the Company’s operating results will suffer and its ability to remain a going concern will be jeopardized.

   

Item 6. Selected Financial Data

 

Vape is a smaller reporting company and is therefore not required to provide this information.

 

6 

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

The following discussion and analysis is intended to provide information about Vape’s financial condition and results of operations for the years ended September 30, 2017 and 2016. This information should be read in conjunction with Vape’s audited consolidated financial statements for the years ended September 30, 2017 and 2016, which begin on page F-2 of this report. Some of the information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report, includes forward-looking statements based on our current management’s expectations. There can be no assurance that actual results, outcomes, or business conditions will not differ materially from those projected or suggested in such forward-looking statements. Some of the factors that may cause results to differ are described in the forward-looking statements cautionary language on page two of this report. 

 

Background

 

On August 9, 2013, PeopleString Corporation, and its wholly-owned subsidiary, RewardString Corporation (“RewardString”), and Vape Holdings, Inc., a Nevada corporation (the “Private Company”), entered into a Merger and Reorganization Agreement (the “Agreement”) whereby the Private Company merged with RewardString, with the Private Company being the surviving entity (the “Merger”). In consideration for the merger, the shareholders of the Private Company received a total of approximately 4,684,538 shares of common stock of the merged company on a pro rata basis in exchange for 8,875 shares of the Private Company’s common stock, representing 100% of the outstanding common stock of the Private Company. The total shares of the merged company issued on a pro rata basis to the Private Company shareholders represented approximately 74.95% of the total issued and outstanding common stock of the merged company.

  

The merger among PeopleString, RewardString and the Private Company was accounted for as a reverse acquisition and change in reporting entity, whereby the Private Company was the accounting acquirer. The Merger was accounted for using the purchase method of accounting in accordance with ASC 805 “Business Combinations”, whereby the estimated purchase was allocated to tangible net assets acquired based upon preliminary fair values at the date of acquisition. Accordingly, the assets and liabilities of PeopleString and RewardString were recorded at fair value; the assets of PeopleString Corporation were not significant. The historical results of operations and cash flows of the Private Company are being reported beginning in the quarter ended December 31, 2013 in this Quarterly Report. The Merger closed on September 30, 2013. On September 30, 2013, the Company approved a change in fiscal year end of the Company from December 31st to September 30th.

 

On March 27, 2014, the Company formally closed its asset purchase of the HIVE Ceramics LLC (“HIVE”) vaporization product and related intellectual property and has begun distributing the HIVE products through various wholesale distribution channels.  HIVE had been in development of a ceramic product for use in the vaporization market.  The development for one product line was completed in 2014.  No sales of this product line were made prior to Vape’s acquisition of the HIVE ceramic product line on March 27, 2014.  We determined that HIVE’s assets acquired were not deemed a business prior to being acquired by the Company under Rule 11-01(d) of Regulation S-X since there were no significant revenue activities. 

 

Overview

 

General

 

Vape Holdings, Inc. (formerly PeopleString Corporation) (“Vape,” the “Company,” “we,” “us,” “our,” “our company”) is a holding company with its primary focus in the manufacturing and distribution of healthy and sustainable vaporization products. The Company has designed, and recently began marketing, and distributing ceramic vaporization products under a unique brand. The Company has also introduced a nonporous, non-corrosive, chemically inert medical-grade ceramic vaporization element as a healthy, sustainable alternative to traditional titanium and quartz vaporization materials, as well as lower-grade ceramic found in traditional electronic cigarettes and vaporizers. This material can be used for a wide range of applications, including stand-alone vaporization products and “E-cigs.” Electronic cigarettes come in a variety of designs ranging from those that look vastly like traditional cigarettes, to larger vaporizer units which are capable of vaporizing liquid with varying viscosity.    The process of vaporization is believed to eliminate the smoke, tar, ash, and other byproducts of traditional smoking by utilizing lower temperatures in a controlled electronic environment.

 

HIVE Ceramics (“HIVE”) was the premier brand under the VAPE umbrella. HIVE manufactured and distributed a proprietarily blended ceramic vaporization element for torched, electronic and portable vaporizers with countless design and product crossover capabilities in existing and emerging markets. HIVE was dedicated to bringing the healthiest and cleanest vaporization experience possible to the market. The HIVE product line currently consists of over 15 distinct ceramic elements, featuring the ONYX 14mm Domeless, The HIVE x QUAVE – Ceramic Club Banger and the HIVE x Brothership Ceramic Honey Bucket. The HIVE line also showcases the 2 piece domeless, domeless direct inject, domeless and regular 10mm, 14mm and 18mm elements, Flower Cup, Carb Cap, Stinger Dabber, and the HIVE x D-Nail 16mm V2 and 20mm attachments.

 

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The Company’s premiere brand, HIVE Ceramics has seen a significant decrease in sales due to competition in the market and restricted operations. While sales channels are still open, without a capital infusion, the revenues are not large enough to support HIVE Ceramics outside of its existing product line.

 

Subsequent to the year ended September 30, 2017, on April 28, 2018, the Company received a Notice of Default from Hive Ceramics and Kyle Tracey (the “Notice”) with respect to the Company’s breach of the Settlement Agreement and Release, dated as of April 28, 2017. The breaches consist of failure to pay $234,000 owed under the Tracey Note and failure to pay the $7,000 monthly payment obligations set forth in the Settlement Agreement, and $216,222 owed for failure to repay the Hive Note. The Company has not been able to resolve the defaults set forth in the Notice and Hive/Tracey have been informed the Company will hand over possession of the Hive Assets when arrangements can be made. Concurrently, the Company has proposed to enter into a Sales Representative Agreement whereby the Company may continue to sell Hive products for a period of 12 months on a non-exclusive basis in exchange for a commission on net sales. The HIVE/Tracey Settlement Agreement and Release documents are qualified in their entirety by reference to the full text of the agreements, copies of which were filed on Company’s Current Report on Form 8-K May 3, 2017 as Exhibit 10.1.

  

REVIVAL PRODUCTS

 

On December 28, 2015, the Company created a new wholly-owned subsidiary, Revival Products, LLC (“Revival”), which is in the business of portable vaporization devices. Revival will sell disposable cartridges that complement HIVE Ceramic’s product lines utilizing its sales and distribution channels and via its own designated e-commerce site at www.revivalvapes.com. The Company ceased the Revival product line upon Justin Braun’s resignation in June 2016

 

Critical Accounting Policies

 

VAPE’s discussion and analysis of financial condition and results of operations are based upon VAPE’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited consolidated financial statements requires Vape to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Vape evaluated its estimates, including but not limited to those related to such items as costs to complete performance contracts, accruals, depreciable/useful lives, revenue recognition and valuation allowances for deferred tax assets. Vape based its estimates on historical experience and on various other assumptions that were believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that were not readily apparent from other sources. Actual results could differ from those estimates.

 

CONVERTIBLE DEBT

 

Convertible debt is accounted for under the guidelines established by ASC 470-20 “Debt with Conversion and Other Options.” ASC 470-20 embedded conversion features be assessed under ASC 815 Derivative Instruments to the extent the embedded conversion features are not conventional. Many of the conversion features embedded in the Company’s notes are variable and are adjusted based on a discount to market prices which could cause an unlimited number of common stock to be issued.  In these cases, we record the embedded conversion feature as a derivate instrument, at fair value –see Derivative Instruments below. The embedded conversion features are recorded as discounts generally at the time of issuance. The discounts relating to the initial recording of the embedded conversion features are accreted over the term of the debt using the effective interest method.  

 

The Company accounts for modifications of conversion features in accordance with ASC 470-50 “Modifications and Extinguishments.” ASC 470-50 requires the modification of a convertible debt instrument that changes the fair value of an embedded conversion feature and the subsequent recognition of interest expense of the associated debt instrument when the modification does not result in a debt extinguishment. A gain or loss debt extinguishment is recorded when comparing the modified fair value of the associated debt instrument to its net carrying value as of the modification date.

 

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DERIVATIVE FINANCIAL INSTRUMENTS

 

Derivative financial instruments, as defined in ASC 815, “Accounting for Derivative Financial Instruments and Hedging Activities”, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.

  

The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued financial instruments including senior convertible notes payable and freestanding stock purchase warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815, in certain instances, these instruments are required to be carried as derivative liabilities, at fair value, in our consolidated financial statements.

 

The Company estimates the fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with objectively measuring fair values. In selecting the appropriate technique, consideration is given to, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, the Company generally uses the Black-Scholes option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, the Company’s operating results will reflect the volatility in these estimate and assumption changes.

 

REVENUE RECOGNITION

 

The Company recognizes revenues from product sales when (a) persuasive evidence that an agreement exists; (b) the products have been delivered; (c) the prices are fixed and determinable and not subject to refund or adjustment; and (d) collection of the amounts due is reasonably assured.  Sales tax is charged on retail sales in the applicable district. We have historically estimated returns and have reduced revenues for such amounts, which have not been significant

 

INVENTORY

 

Inventory is valued at the lower of cost or market, using the first-in, first-out (FIFO) method. The Company provides for an allowance for slow moving inventories based on current demand and competition. Management has recorded provisions for loss for obsolete or slow moving inventory to reduce carrying amounts to net realizable value.

 

Results of Operations

 

The results of operations information below provides details on net loss and general and administrative expenses. General and administrative expenses provide details on continuing operations and include items such as management compensation, SEC compliance, insurance, office and other general expenses.

 

For the Years Ended September 30, 2017 and 2016

  

Net Loss. For the years ended September 30, 2017 and 2016, net loss was $1,326,760 and $6,093,948, respectively. We expect to continue suffering losses for the foreseeable future.

 

Revenue.  For the years ended September 30, 2017 and 2016, revenue was $128,696 and $890,514, respectively. Revenue decreased in 2017 due to a decrease in new product releases of HIVE Ceramics and a decline in our ability to generate revenues due to lack of liquidity.

 

Cost of Revenue. For the years ended September 30, 2017 and 2016, cost of revenue was $100,033 and $1,112,168, respectively. In 2017, cost of revenue included approximately $18,000 of ceramic products costs, $12,000 of freight, $15,000 of quality assurance, $16,000 of royalties, and $26,000 of obsolescence reserve. In 2016, cost of revenue included approximately $345,000 of ceramic products costs, $161,000 of depreciation, $233,000 of obsolescence reserve, $47,000 of vape pen costs, $43,000 of freight, $33,000 of quality assurance, $46,000 of occupancy and warehouse costs, and $98,000 of royalties.

 

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Gross Profit (Loss). For the years ended September 30, 2017 and 2016, gross profit was $28,663 or 22% and ($221,654) or (25%), respectively. Gross profit increased due to no further write-offs of inventory and obsolescence of ceramics.

 

Sales and Marketing.  For the years ended September 30, 2017 and 2016, sales and marketing expenses were $88,202 and $375,807, respectively. In 2017, sales and marketing expenses included approximately $56,000 of outside sales expense and $26,000 of investor relations. In 2016, sales and marketing expenses included approximately $68,000 of general advertising, $81,000 of outside sales expense, $34,800 of stock compensation, and $104,000 of payroll expenses.

 

Research and Development. For the years ended September 30, 2017 and 2016, were $0 and $47,648, respectively. In 2016, research and development included approximately $20,000 of payroll expenses, $4,000 of product design prototypes, and $8,000 of travel.

 

General and Administrative. For the years ended September 30, 2017 and 2016, general and administrative expenses were $515,173 and $1,028,736, respectively. In 2017, general and administrative expenses included approximately $24,000 of insurance expense, $19,000 of office expense, $37,000 of accounting fees, and $504,000 of payroll expenses. In 2016, general and administrative expenses included approximately $45,000 of insurance expense, $46,000 of office expense, $463,000 of payroll expenses, $32,889 of stock compensation, $80,000 of accounting fees, and $210,000 of legal fees.

 

Interest Expense. For the years ended September 30, 2017 and 2016, interest expense was $549,860 and $1,945,231, respectively. There were significant increases in conversions into common stock in 2016 versus 2017, which resulted in full accretion of discounts to interest expense upon conversion.

 

Interest Expense - related party. For years ended September 30, 2017 and 2016, related party interest expense was $16,612 and $18,624, respectively.

  

Loss from Effects of Derivative Liabilities. For the years ended September 30, 2017 and 2016, the loss from effects of derivative liabilities was $185,576 and $2,507,067, respectively, due to the excess fair value of derivative discounts and fluctuations in the stock price versus the lowest traded prices during a period of time prior to notice of conversion.

 

Gain on Settlements. For years ended September 30, 2017 and 2016, the net gain on settlements was $0 and $175,769, respectively.

 

Liquidity and Capital Resources

 

As of September 30, 2017, we had cash of $5,360 and a working capital deficit of $3,812,094 as compared to cash of $0 and a working capital deficit of $5,031,000 as of September 30, 2016. We believe our current liquidity and securities purchase commitments are not sufficient and the Company requires immediate capital to assume any sort of normal operations, let alone new business initiatives. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management plans to raise additional capital to funds immediate operating needs, and ultimately, work the Company’s creditors to restructure the convertible notes, so we can raise growth capital to acquire new businesses. Our registered public accounting firm included an explanatory paragraph in their report regarding substantial doubt about the Company’s ability to continue as a going concern.

 

We had total liabilities of $3,820,751 as of September 30, 2017, including current liabilities of $397,999 of accounts payable, $1,060,023 of accrued expenses, $642,001 of convertible notes payable, net, $15,000 of related party notes payable, $200,000 of related party convertible notes payable, $1,405,728 of derivative liabilities, and $100,000 of settlement liability. We had total liabilities of $5,100,604 as of September 30, 2016, including current liabilities of $473,654 of accounts payable, $555,994 of accrued expenses, $537,291 of convertible notes payable, $15,000 of related party notes payable, $300,000 of related party convertible notes payable, $2,755,544 of derivative liabilities, $422,000 of settlement liability, and long-term liabilities of $41,121 of convertible notes payable. We must increase the authorized shares in order to convert out the remaining convertible notes and then reset the capital structure.

 

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We used $268,140 of cash in operating activities during the year ended September 30, 2017, which was attributable to our net loss of $1,326,760, which was offset by a $185,576 loss from effects of derivative liabilities, $515,404 of accretion of debt discounts, and $357,640 of net cash provided by the change in operating assets and liabilities. We used $507,554 of cash in operating activities during the year ended September 30, 2016, which was attributable to our net loss of $6,093,948, which was offset by $123,150 impairment of intangibles, $161,427 of depreciation, $2,507,067 loss from effects of derivative liabilities, $175,769 gain on settlements, $1,752,743 of accretion of debt discounts, $67,689 of stock-based compensation, $223,798 of other, and $1,373,885 of net cash provided by the change in operating assets and liabilities.

 

There were no investing activities during the year ended September 30, 2017. Investing activities used $43,100 during the year ended September 30, 2016 consisting of capital expenditures.

 

We had $273,500 of net cash provided by financing activities during the year ended September 30, 2017 consisting of $273,500 from additional proceeds towards its Typenex and GHS Investments convertible notes payable. We had $276,750 of net cash provided by financing activities during the year ended September 30, 2016 consisting of $312,150 of net proceeds from issuance of convertible notes payable, $50,000 of net proceeds from issuance of related party convertible notes payable, and $85,400 of repayments on convertible notes payable.

  

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

 

Vape is a smaller reporting company and is therefore not required to provide this information.

 

Item 8. Financial Statements and Supplementary Data

 

The consolidated financial statements and supplementary data of Vape called for by this item are submitted under a separate section of this report.  Reference is made to the Index of Financial Statements contained on page F-1 herein.

 

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A. Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures.

 

Management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Based on management’s evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2017, we have a material weakness with regards to our disclosure controls and procedures not designed at a reasonable assurance level and not are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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We plan to engage a financial expert to assist the Company with procedures related to the treatment of convertible debt. We expect to resolve the material weakness during the year ending September 30, 2019.

 

(b) Changes in internal control over financial reporting.

 

We review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

 

(c) Management’s report on internal control over financial reporting.

 

Management is responsible for establishing and maintaining adequate control over financial reporting for Vape. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.  Internal controls over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Vape; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of Vape are being made only in accordance with authorizations of management and directors of Vape; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Vape’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management, with the participation of our principal executive officer and principal financial and accounting officer, conducted an evaluation of the effectiveness of Vape’s internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of September 30, 2017.

 

Item 9B. Other Information

 

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The following table sets forth the names, ages and positions of our executive officers and directors as of September 30, 2017.   All directors serve for a term set to expire at the next annual meeting of stockholders of Vape or until their successors are elected and qualified. All officers are appointed by our board of directors and their terms of officer are, except to the extent governed by an employment contract, at the discretion of our board of directors.

 

Name and Address   Age   Principal Occupation or Employment
         
Benjamin Beaulieu   30   Chief Executive Office since June 20, 2016. Chief Operating Officer and Director since May 11, 2015 and Chairman of the Board since December 10, 2015
         
Allan Viernes   32   Chief Financial Officer since June 25, 2014, Director since May 11, 2015

   

There are no family relationships among Vape’s directors and executive officers. None of the directors of Vape is a director of any company registered pursuant to Section 12 of the Exchange Act, or subject to the requirements of Section 15(d) of the Exchange Act, or any company registered as an investment company under the Investment Company Act of 1940, as amended.

 

Directors

 

Number of Directors. Our board of directors currently consists of two individuals.

 

Director Qualifications. While the selection of directors is a complex and subjective process that requires considerations of many intangible factors, the Company believes that candidates should generally meet the following criteria:

 

Broad training, experience and a successful track record at senior policy-making levels in business, government, education, technology, accounting, law, consulting and/or administration;
   
The highest personal and professional ethics, integrity and values;
   
Commitment to representing the long-term interests of the Company and all of its shareholders;
   
An inquisitive and objective perspective, strength of character and the mature judgment essential to effective decision-making;
   
Expertise that is useful to the Company and complementary to the background and experience of other Board members; and
   
Sufficient time to devote to Board and committee activities and to enhance their knowledge of our business, operations and industry.

 

The Board believes that our current directors meet these criteria. In addition, as outlined below, the directors bring a strong and unique background and set of skills to the Board, giving the Board as a whole competence and experience in a wide variety of areas, including the legal cannabis industry, related horticulture and concentrate extraction industries, business and management, operations, corporate governance, board service and executive management. We believe that the Board as a whole and our directors possess the necessary qualifications and skills to effectively advise management on strategy, monitor our performance and serve our best interests and the best interests of our shareholders.

 

Biographical Information

 

See Executive Officer Section below for biographical information for Mr. Viernes and Mr. Beaulieu.

 

Executive Officers

 

Benjamin Beaulieu, 30, Chief Executive Officer and Chairman

 

Mr. Beaulieu delivers valued experience in the implementation and integration of operational and sales systems to the VAPE Holdings executive team. Mr. Beaulieu has owned operated several multi-million-dollar retail garden supply and technology businesses. With a focus on automation and functionality, Mr. Beaulieu has successfully expanded those companies from brick and mortar locations to E-commerce superstores with global sales and partnerships with the industry’s top distributors in the United States and Canada. Mr. Beaulieu’s experience operating various companies in the ancillary MMJ markets has already improved Hive Ceramics and VAPE Holdings employee management and development. With a focus on streamlining operations Mr. Beaulieu will allow Vape Holdings, Inc. and subsidiaries to rapidly grow while combating the associated costs responsibly.

 

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Allan Viernes, 32, Chief Financial Officer and Board of Directors

 

Mr. Viernes, 32, is an accounting and financial advisor specializing in public and private accounting and finance, SEC matters, bankruptcy reporting and analysis, mergers and acquisitions, and financial modelling/analysis. Mr. Viernes has served in such positions as Chief Financial Officer of an oil and gas company, Corporate Controller of a software company, and consulted with various retail and restaurant franchises and real estate companies through troubled debt restructurings and leveraged buy outs. Mr. Viernes also has past experience as an auditor with McKennon Wilson & Morgan, a PCAOB registered accounting firm, focusing on audits of private and publicly-held companies. Mr. Viernes graduated with a Bachelor of Administration with a concentration in accounting from Devry University, earned a Master of Business Administration from the Keller Graduate School of Management, and is a Certified Public Accountant.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires Vape’s executive officers and directors, and persons who own more than ten percent of a registered class of Vape’s equity securities, to file reports of ownership and changes of ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission. Executive officers, directors and greater than ten percent stockholders are required by Securities and Exchange Commission regulation to furnish Vape with copies of all Forms 3, 4 and 5 they file. 

 

Vape believes that all filings required to be made by its executive officers and directors pursuant to Section 16(a) of the Exchange Act have been filed within the time periods prescribed. 

 

Committees of the Board of Directors

 

On May 11, 2015, the Board authorized the establishment of separate audit and compensation committees consisting of a certain numbers of independent directors. The Company is still in the process of seeking out independent directors for its Board and committees and, as a result, the Company has not yet begun use of these committees. As such, we do not currently have a separately designated audit, compensation, or nominating committee of our Board and the function customarily delegated to these committees are performed by our full Board. We are not a “listed company” under SEC rules and are therefore not required to have separate committees comprised of independent directors.

 

The Board does not have a nominations committee because the Board does not believe that a defined policy with regard to the consideration of candidates recommended by stockholders is necessary at this time because the functions of such committee are adequately performed by our Board. There are no specific minimum qualifications that the Board believes must be met by a candidate recommended by the Board. Currently, the entire Board decides on nominees, on the recommendation of any member of the Board, followed by the Board’s review of the candidates’ resumes and interviews of candidates. Based on the information gathered, the Board then makes a decision on whether to recommend the candidates as nominees for director. We do not pay any fee to any third party, or parties, to identify or evaluate or assist in identifying or evaluating potential nominees.

 

The Board has not yet begun use of an audit committee. However, for certain purposes of the rules and regulations of the SEC and in accordance with the Sarbanes-Oxley Act of 2002, our Board is deemed to be its audit committee and as such functions as an audit committee and performs some of the same functions as an audit committee including: (i) selection and oversight of our independent accountant; (ii) establishing procedures for the receipt, retention, and treatment of complaints regarding accounting, internal controls, and auditing matters; and (iii) engaging outside advisors. Our Board has determined that its members do not include a person who is an “audit committee financial expert” within the meaning of the rules and regulations of the SEC. Our Board has determined that each of its members is able to read and understand fundamental financial statements and has substantial business experience that results in that member’s financial sophistication. Accordingly, our Board believes that each of its members has sufficient knowledge and experience to fulfill the duties and obligations of an audit committee.

 

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The Board has not yet begun use of a compensation committee because the Board believes that it is not necessary to have a compensation committee at this time because the functions of such committee are adequately performed by our Board.

 

Stockholder Communications

 

Our Board has determined not to adopt a formal methodology for communications from stockholders directly to the Board on the belief that any communication sent to the Company’s current investor relations firm, Growth Circle, would be brought to the Board’s attention by our Chief Executive Officer, Benjamin Beaulieu.

 

Meetings of the Board of Directors

 

The Board of Directors of Vape conducts business through meetings of the Board or by unanimous written consents of the Board. Such actions by written consent of all directors are, according to Delaware corporate law and our bylaws, valid and effective as if they had been passed at a meeting of the directors duly called and held. The Board of Directors for the fiscal year ended September 30, 2017 consisted of: Benjamin Beaulieu and Allan Viernes. None of Mr. Viernes or Mr. Beaulieu qualifies as an “independent director” pursuant to the rules and regulations of the Securities and Exchange Commission. During the fiscal year ended September 30, 2017, the Board held no formal meetings, and the Board acted by unanimous written consent on multiple occasions.

 

On May 17, 2013, the Company selected the accounting firm of dbbmckennon to act as the then PeopleString’s independent public accounting firm for the year ended December 31, 2012. dbbmckennon audited the financial statements of Vape for the years ended September 30, 2017 and 2016.

 

Board Leadership Structure and Role in Risk Oversight

 

During the year ended September 30, 2017, we did not separate the roles of Chief Executive Officer and Chairman of the Board because we believe that Benjamin Beaulieu adequately performs such roles. The benefits of Mr. Beaulieu’s leadership of the Board stem from his experience in managing small to medium sized businesses and his involvement in the legal cannabis industry, which provide a unique understanding of our culture and business. Also, serving as both the Chief Executive Officer and Chairman of the Board ensures that a constant flow of Company related information is available between the Board and our senior management. This flow of communication enables Mr. Beaulieu to identify issues, proposals, strategies and other considerations for future Board discussions and to assume the lead in many of the resulting discussions during Board meetings. Our Board has responsibility for the oversight of risk management. A fundamental part of risk management is not only understanding the risks we face and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for us. The involvement of the Board in setting our business strategy is a key part of its assessment of risk management and the determination of what constitutes our appropriate level of risk. The Board regularly discusses with management our major risk exposures, their potential impact on us, and the steps taken to manage these risks. In addition, the Board may retain, on such terms as determined by the Board, in its sole discretion, independent legal, financial, and other consultants and advisors to advise and assist the Board in fulfilling its oversight responsibilities.

 

Code of Ethics

 

The executive officers of Vape are held to the highest standards of honest and ethical conduct when conducting the affairs of Vape. All such individuals must act ethically at all times in connection with services provided to the Company. We have adopted a formal, written corporate code of ethics that applies to our executive officers as of May 11, 2015.

 

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Item 11. Executive Compensation

 

EXECUTIVE COMPENSATION

 

The following table sets forth information concerning the annual and long-term compensation of the Named Executive Officers (as defined below) for services in all capacities to Vape for the years ended September 30, 2017 and 2016. The Named Executive Officers are (1) Allan Viernes, Chief Financial Officer, (2) Benjamin Beaulieu, Chief Operating Officer, and (3) former Chief Executive Officer, Justin Braune (the “Named Executive Officers”).

 

2017 and 2016 SUMMARY COMPENSATION TABLE
Name and Principal Position  Year  Salary
($)
   Bonus
($)
   Stock Awards
($)
   Option Awards
($) (1)
   Non-Equity Incentive Plan Compensation
($)
   Nonqualified Deferred Compensation Earnings
($)
   All Other Compensation
($)
   Total
($)
 
                                    
Allan  2016  $91,975   $      -   $    -   $     -   $            -   $            -   $         -   $91,975 
Viernes, Chief Financial Officer (2)  2017  $91,975   $-   $-   $-   $-   $-   $-   $91,975 
                                            
Benjamin  2016  $91,975   $-   $-   $-   $-   $-   $-   $91,975 

Beaulieu, Chief Executive Officer (3)

  2017  $91,975   $-   $-   $-   $-   $-   $-   $91,975 
                                            
Michael  2016  $56,837   $-   $-   $-   $-   $-   $-   $56,837 

Cook, Director of Business Development (4)

  2017  $20,000   $-   $-   $-   $-   $-   $-   $20,000 
                                            
Justin Braune,  2016  $40,667   $-   $-   $-   $-   $-   $-   $40,667 
Former Chief Executive
Officer (5)
  2017  $-   $-   $-   $-   $-   $-   $-   $- 

 

(1) The amounts in this column reflect the dollar amount recognized for financial statement reporting purposes for the years ended September 30, 2017 and 2016 in accordance with ASC 718, of stock option awards pursuant to the Equity Incentive Plan (as defined below). The fair value of each option award is estimated on the date of grant using the Black-Scholes model.  Assumptions used in the calculation of these amounts are included in the footnotes to VAPE’s audited financial statements furnished herewith. All issued and outstanding options were cancelled as of September 30, 2015.
   
(2) As of September 30, 2017 and 2016, $175,881 and $56,381 of Mr. Viernes’ salary remained unpaid, respectively. On December 21, 2015, Mr. Viernes surrendered 30,000 shares of stock valued at $18,300 that were issued on March 12, 2015. All issued and outstanding options were cancelled as of September 30, 2015.
   
(3) As of September 30, 2017 and 2016, $183,048 and $58,048 of Mr. Beaulieu’s salary remained unpaid, respectively. On December 21, 2015, Mr. Beaulieu surrendered 30,000 shares of stock valued at $18,300 that were issued on March 12, 2015. All issued and outstanding options were cancelled as of September 30, 2015.
   
(4)  As of September 30, 2017 and 2016, $103,742 and $43,742 of Mr. Cook’s salary remains unpaid. As of May 2015, Mr. Cook was removed as an officer and refocused as a Product Development Manager. All issued and outstanding options were cancelled as of September 30, 2015.

   
(5)  On June 20, 2016, Justin Braune submitted his resignation as Chief Executive Officer and a member of our Board of Directors. As of September 30, 2017 and 2016, $45,000, of Mr. Braune’s salary remains unpaid

 

16 

 

 

Outstanding Equity Awards at Fiscal Year End

 

All issued and outstanding options were cancelled as of September 30, 2015.

 

Risk Management

 

The Board of Directors does not believe that Vape’s executive compensation program gives rise to any risks that are reasonably likely to have a material adverse effect on Vape.  Executive officers are compensated on a salary basis and have not been awarded any bonuses or other compensation in 2017 and 2016 that might encourage the taking of unnecessary or excessive risks that threaten the long-term value of Vape.

 

DIRECTOR COMPENSATION

 

There was no compensation of the directors of Vape for the years ended September 30, 2017 and 2016.

  

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Principal Stockholders and Security Ownership of Management

 

The following table sets forth information as of March 7, 2018 with respect to the beneficial ownership (as defined in Rule 13d-3 of the Exchange Act) of Vape’s Common Stock by (1) each director of Vape, (2) the Named Executive Officers of Vape, (3) each person or group of persons known by Vape to be the beneficial owner of greater than 5% of Vape’s outstanding Common Stock, and (4) all directors and officers of Vape as a group: 

 

BENEFICIAL OWNERSHIP OF COMMON STOCK

 

Name and Address of Beneficial Owner(1)(2)  Amount and Nature of Beneficial Ownership   Percent of
Class(3)
 
Benjamin Beaulieu(4)           -    * 
Allan Viernes(5)   -    * 
All Officers and Directors as a Group   -    * 
           

Shares issued and outstanding as of November 1, 2018

   1,000,000,000      
Options issued to Officers and Directors   -      
Shares of Preferred Stock issued to Officers and Directors   -      
    1,000,000,000      

 

* Indicates shareholdings of less than 1%
   
(1) In accordance with Rule 13d-3 of the Exchange Act, a person is deemed to be the beneficial owner, for purposes of this table, of any shares of Vape’s Common Stock if he or she has voting or investment power with respect to such security. This includes shares (a) subject to options exercisable within sixty (60) days, and (b)(1) owned by a spouse, (2) owned by other immediate family members, or (3) held in trust or held in retirement accounts or funds for the benefit of the named individuals, over which shares the person named in the table may possess voting and/or investment power.
   
(2) Except as otherwise noted, the address of each person is c/o the Company at 5304 Derry Avenue, Suite C, CA 91301.
   
(3) The percentage of class is calculated pursuant to Rule 13d-3(d) of the Exchange Act.
   
(4) Mr. Beaulieu is the Chief Executive Officer of the Company.
   
(5) Mr. Viernes is the Chief Financial Officer of the Company.

 

17 

 

 

Item 13. Certain Relationships and Related Transactions and Director Independence

 

Related Party Transactions

 

Related Party Note Payable

 

The Company had outstanding accounts payable balance to a related party (shareholder of the Company) in the amount of $15,000 as of September 30, 2013. This payable was converted into a note payable on December 7, 2013. The note payable bears interest of 6% per annum with a maturity date of December 1, 2016. As of September 30, 2017, there is $3,473 in accrued interest expense related to this note and the Company recorded $913 in interest expense related to this note during the year ended September 30, 2017.

 

Related Party Convertible Notes Payable

 

On December 10, 2015, the Company entered into two Secured Series B Preferred Stock Convertible Notes (the “Series B Notes”) for an aggregate principal of $300,000 including 1) $50,000 from Hive Ceramics, LLC in new capital to the Company and 2) an amended and restated note for Hive Ceramics LLC in the amount of $250,000 for capital previously contributed which is soon to be due and payable.

 

The Company failed to pay the Series B Note and the Amended Note on the Maturity Date (December 10, 2016). On December 15, 2016, the Company received a Notice of Default from counsel for Holder. Holder’s counsel demanded that all amounts owed under the Series B Note and the Amended Note be paid no later than December 20, 2016. The Company was unable to pay the demanded amounts by December 20, 2016. The Company believes that the Holder intends to execute on the security for the Series B Note and the Amended Note, namely, all of the assets of the Company. The Company is attempting to negotiate a resolution that does not include seizure of the Company’s assets however there is no guarantee that the Company will be able to work out a satisfactory resolution that does not include seizure of the Company’s assets.

 

The Series B Notes accrue interest at eight percent (8%) per annum, mature one (1) year from issuance and are secured by all of the assets and property of the Company. Upon the election of the note holder, the Series B Notes are convertible into newly created Series B Preferred Stock on a one-for-one (1:1) basis into shares of common stock of the Company at a fixed price per share of $0.01.

 

Concurrently, the Company filed a Certificate of Designation with the Delaware Secretary of State on the Series B Preferred Stock which provides, in pertinent part, for the following rights and privileges:

 

Authorized Amount of Series B Preferred Stock: There are authorized 30,000,000 shares of Series B Preferred Stock, subject to the Certificate of Designation. There shall be no additional Series B Shares authorized or issued.

 

Voting Rights: Each share of Series B shall be entitled to five (5) votes for every one (1) vote entitled to each share of Common Stock.

 

Rank : All shares of Series B shall rank (i) senior to the Company’s Common Stock, (ii) pari passu with all other series of preferred stock whether currently outstanding or hereafter created, including the Series A Preferred Stock, and specifically ranking, by its terms, on par with Series B, and (iii) junior to any class or series of capital stock of the Company hereafter created specifically ranking, by its terms, senior to the Series B, in each case as to the distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.

 

On May 24, 2017, Iliad Research and Trading purchased $100,000 of the Series B convertible note payable for $125,000 with the reserve to convert into common stock at 58% of the lowest trading price of the previous thirteen (13) days. During the year ended September 30, 2017, $126,826 of the note and accrued interest were converted into 87,302,137 shares of common stock. See Note 4 for the principal, accrued interest, and interest expense related to the convertible note payable.

 

During the year ended September 30, 2017, the Company recorded $15,700 of interest expense related to the Series B Notes. As of September 30, 2017, $200,000 of the Series B Notes along with $56,302 of accrued interest are outstanding. The Board of Directors authorized the designation of the Series B Preferred Stock pursuant to the authority of the Certificate of Incorporation, which confers said authority on the Board, and the issuance of the Series B Notes pursuant to a unanimous written consent of the Board dated December 10, 2015. The value ascribed to the Series B Notes were based on the fixed conversion price of the instruments into common stock and such no beneficial conversion feature was recorded. 

 

18 

 

  

Item 14. Principal Accounting Fees and Services.

 

Audit Fees

 

Vape incurred audit and review fees of $39,000 and $75,000 for the periods ended September 30, 2017 and 2016 to dbbmckennon.

 

Audit Related Fees

 

As of September 30, 2017 and 2016, Vape has not paid any fees associated with audit related services to dbbmckennon, or any other accounting firm. 

   

Tax Fees

 

During the years ended September 30, 2017 and 2016, Vape paid no amounts for tax services.

 

All Other Fees

 

As of September 30, 2017 and 2016, Vape has not paid any fees associated with non-audit services to dbbmckennon, or any other accounting firm. 

 

Policy on Pre-Approval of Audit and Permissible Non-Audit Services

 

The Board (functioning in the capacity of an audit committee as discussed in Item 10 above) is responsible for appointing and setting compensation and overseeing the work of the independent registered public accounting firm. The Board approves, in advance, all audit and permissible non-audit services to be performed by the independent registered public accounting firm. Such approval process ensures that the independent registered public accounting firm does not provide any non-audit services to Vape that are prohibited by law or regulation.

 

Item 15. Exhibits and Financial Statement Schedules.

 

(a)       Exhibits

 

Reference is made to the Index of Exhibits beginning on page E-1 herein.

 

(b)       Financial Statements

 

Reference is made to the Index to Consolidated Financial Statements on page F-1. 

 

19 

 

  

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  VAPE HOLDINGS, INC.
     
Date:  November 15, 2018 By: /s/ Benjamin Beaulieu
    Benjamin Beaulieu
    Chief Executive Officer
     
Date:  November 15, 2018 By: /s/ Allan Viernes
    Allan Viernes
    Chief Financial Officer

  

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed by the following persons in the capacities and on the dates stated.

 

Signatures   Title   Date
         
/s/ Benjamin Beaulieu   Chief Executive Officer and Chairman, Director   November 15, 2018
Benjamin Beaulieu   (Principal Executive Officer)    
         
/s/ Allan Viernes   Chief Financial Officer, Director   November 15, 2018
Allan Viernes   (Principal Financial and Accounting Officer)    

 

20 

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

VAPE HOLDINGS, INC.

 

Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets at September 30, 2017 and 2016 F-3
Consolidated Statements of Operations for the years ended September 30, 2017 and 2016 F-4
Consolidated Statements of Stockholders’ Deficit for the years ended September 30, 2017 and 2016 F-5
Consolidated Statements of Cash Flows for the years ended September 30, 2017 and 2016 F-6
Notes to Consolidated Financial Statements F-7

 

F-1

 

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

Vape Holdings, Inc.

 

We have audited the accompanying consolidated balance sheets of Vape Holdings, Inc. and subsidiaries (collectively, the “Company”) as of September 30, 2017 and 2016, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2017 and 2016, and the results of their operations and their cash flows for the periods then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As more fully explained in Note 2 to the consolidated financial statements, the Company has incurred losses and has a working capital deficit as of September 30, 2017.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans with respect to these factors are also described on Note 2.   The Company’s consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties should the Company be unable to continue as a going concern.

 

/s/ dbbmckennon  
Newport Beach, California  
November 15, 2018  

   

F-2

 

 

Vape Holdings, Inc.

Consolidated Balance Sheets

 

   September 30,
2017
   September 30,
2016
 
ASSETS        
Current assets:        
Cash  $5,360   $- 
Accounts receivable, net   -    2,010 
Inventory   -    18,254 
Other current assets   3,297    8,219 
Total current assets   8,657    28,483 
           
TOTAL ASSETS  $8,657   $28,483 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable  $397,999   $473,654 
Accrued expenses   1,060,023    555,994 
Related party convertible notes payable   200,000    300,000 
Convertible notes payable, net of unamortized discounts of $88,449 and $119,680, respectively   642,001    537,291 
Related party notes payable   15,000    15,000 
Settlement liability   100,000    422,000 
Derivative liabilities   1,405,728    2,755,544 
Total current liabilities   3,820,751    5,059,483 
           
Long term liabilities:          
Convertible notes payable, long-term, net of unamortized discounts of  $0   -    41,121 
           
Total liabilities   3,820,751    5,100,604 
           
Commitments and contingencies          
           
Stockholders’ deficit:          
Series A Convertible Preferred stock, $0.00001 par value - 90,000,000 authorized; 500,000 outstanding at September 30, 2017 and 2016   -    - 
Series B Convertible Preferred stock, $0.00001 par value - 10,000,000 authorized; 0 outstanding at September 30, 2017 and 2016   -    - 

Common stock, $0.00001 par value - authorized 1,000,000,000 shares; 867,887,137 issued at September 30, 2017, 866,861,512 outstanding at September 30, 2017 and 589,422,978 issued at September 30, 2016, 588,397,353 outstanding at September 30, 2016

   8,668    5,883 
Additional paid-in capital   32,903,267    30,319,265 
Treasury stock, 1,025,625 shares at September 30, 2017 and 2016   (372,601)   (372,601)
Accumulated deficit   (36,351,428)   (35,024,668)
Total stockholders’ deficit   (3,812,094)   (5,072,121)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT  $8,657   $28,483 

 

See notes to consolidated financial statements.

 

F-3

 

 

Vape Holdings, Inc.

ConsoliDated Statements of Operations

  

   For the Year Ended
September 30,
 
   2017   2016 
         
Revenue  $128,696   $890,514 
           
Cost of revenue   100,033    1,112,168 
           
Gross profit   28,663    (221,654)
           
Operating expenses:          
Sales and marketing [A]   88,202    375,807 
Research and development   -    47,648 
General and administrative [B]   515,173    1,028,736 
Impairment of intangible assets   -    123,150 
Total operating expenses   603,375    1,575,341 
           
Operating loss   (574,712)   (1,796,995)
           
Other income (expense):          
Interest expense   (549,860)   (1,945,231)
Interest expense - related party   (16,612)   (18,624)
Loss from effects of derivative liabilities   (185,576)   (2,507,067)
Gain on settlements , net   -    175,769 
Total other income (expense), net   (752,048)   (4,295,153)
           
Loss before provision for income taxes   (1,326,760)   (6,092,148)
           
Provision for income taxes   -    1,800 
           
Net loss  $(1,326,760)  $(6,093,948)
           
Net loss available to common shareholders:          
Loss per common share - basic  $(0.00)  $(0.02)
Loss per common share - diluted  $(0.00)  $(0.02)
           
Weighted average shares - basic   685,124,688    380,654,922 
Weighted average shares - diluted   685,124,688    380,654,922 

  

[A] Stock-based compensation was $0 and $34,800 for the years ended September 30, 2017 and 2016, respectively.

 

[B] Stock-based compensation was $0 and $32,889 for the years ended September 30, 2017 and 2016, respectively.

 

 See notes to consolidated financial statements.

 

F-4

 

 

VAPE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

  

   Series A
Preferred Stock
   Series B
Preferred Stock
   Common Stock   Additional
Paid-in
   Accumulated   Treasury   Total
Stockholders'
 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Stock   Deficit 
Balance at September 30, 2015 (Restated)   500,000   $-    -   $-    19,205,896   $192   $25,814,829   $(28,930,720)  $(367,531)  $(3,483,230)
Conversion of notes payable and accrued interest   -    -    -    -    562,444,952    5,624    4,336,036    -    -    4,341,660 
Conversion of unpaid wages   -    -    -    -    4,138,888    41    95,667    -    -    95,708 
Common stock issued for services   -    -    -    -    1,442,617    14    31,675    -    -    31,689 
Common stock issued for bonuses   -    -    -    -    1,500,000    15    35,985    -    -    36,000 
Surrender of common stock   -    -    -    -    (335,000)   (3)   5,073    -    (5,070)   - 
Net loss   -    -    -    -    -    -    -    (6,093,948)   -    (6,093,948)
Balance at September 30, 2016   500,000    -    -    -    588,397,353    5,883    30,319,265    (35,024,668)   (372,601)   (5,072,121)
Conversion of notes payable and accrued interest   -    -    -    -    245,764,159    2,458    822,568    -    -    825,026 
Stock issued for settlement liability   -    -    -    -    32,700,000    327    150,673    -    -    151,000 
Discount on convertible note payable   -    -    -    -    -    -    1,610,761    -    -    1,610,761 
Net loss   -    -    -    -    -    -    -    (1,326,760)   -    (1,326,760)
Balance at September 30, 2017   500,000   $-    -   $-    866,861,512   $8,668   $32,903,267   $(36,351,428)  $(372,601)  $(3,812,094)

  

See notes to consolidated financial statements.

 

F-5

 

 

Vape Holdings, Inc.

Consolidated Statements of Cash Flows

  

   For the Year Ended
September 30,
 
   2017   2016 
Cash flows from operating activities:        
Net loss  $(1,326,760)  $(6,093,948)
Adjustments to reconcile net loss to net cash used in operating activities:          
Impairment on intangible assets   -    123,150 
Depreciation   -    161,427 
Accretion of debt discounts   515,404    1,752,743 
Loss from effects of derivative liabilities   185,576    2,507,067 
Gain on settlements, net   -    (175,769)
Common stock issued for services   -    67,689 
Other   -    (223,798)
Changes in operating assets and liabilities:          
Accounts receivable   2,010    70,391 
Inventory   18,254    240,762 
Other assets   4,922    32,460 
Accounts payable   (75,655)   357,716 
Accrued expenses   408,109    672,556 
Net cash used in operating activities   (268,140)   (507,554)
           
Cash flows from investing activities:          
Capital expenditures   -    (43,100)
Net cash used in investing activities   -    (43,100)
           
Cash flows from financing activities:          
Net proceeds from issuance of convertible notes payable   273,500    312,150 
Net proceeds from issuances of related party convertible notes payable   -    50,000 
Repayments on convertible notes payable   -    (85,400)
Net cash provided by financing activities   273,500    276,750 
           
Net change in cash   5,360    (273,904)
Cash, beginning of period   -    273,904 
Cash, end of period  $5,360   $- 
           
Supplemental disclosures of cash flow information          
Cash paid during the period for:          
Interest  $-   $- 
Taxes  $-   $800 
           
Non-cash investing and financing activities:          
Conversion of notes payable and accrued interest  $825,026   $4,341,660 
Stock issued for settlement liability  $151,000   $- 
Discount on convertible note payable  $1,610,761   $- 

  

See notes to consolidated financial statements.

 

F-6

 

 

VAPE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. DESCRIPTION OF BUSINESS, RECENT ACQUISITIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BUSINESS

 

Vape Holdings, Inc. (“VAPE,” the “Company,” “we,” “us,” “our,” “our company”) is a holding company with its primary focus in the manufacturing and distribution of healthy and sustainable vaporization products. The Company designs, markets and distributes ceramic vaporization products under a unique brand. The Company has introduced a nonporous, non-corrosive, chemically inert medical-grade ceramic vaporization element as a healthy, sustainable alternative to traditional titanium and quartz vaporization materials, as well as lower-grade ceramic found in traditional electronic cigarettes and vaporizers. This material can be used for a wide range of applications, including stand-alone vaporization products and “E-cigs.” Electronic cigarettes come in a variety of designs ranging from those that look vastly like traditional cigarettes, to larger vaporizer units which are capable of vaporizing liquid with varying viscosity. The process of vaporization is believed to eliminate the smoke, tar, ash, and other byproducts of traditional smoking by utilizing lower temperatures in a controlled electronic environment.

 

HIVE CERAMICS

 

HIVE Ceramics (“HIVE”) was the premier brand under the VAPE umbrella. HIVE outsource manufactures and distributes a proprietarily blended ceramic vaporization element for torched, electronic and portable vaporizers with countless design and product crossover capabilities in existing and emerging markets. HIVE is dedicated to bringing the healthiest and cleanest vaporization experience possible to the market.

 

HIVE Ceramics saw a significant decrease in sales due to competition in the market and restricted operations. While sales channels are still open, without an infusion, the revenues are not large enough to support HIVE Ceramics outside of its existing product line.

 

See Note 5 for discussion of HIVE activity and litigation.

 

BASIS OF PRESENTATION

 

The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and Generally Accepted Accounting Principles. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these consolidated financial statements have been included. Such adjustments consist of normal recurring adjustments.

 

CONSOLIDATION

 

The consolidated financial statements include the assets, liabilities, and operating results of the Company and its wholly-owned subsidiaries, HIVE Ceramics, Revival Offset, and Nouveau after elimination of all material inter-company accounts and transactions. No segment information is presented as the assets, liabilities, and results of HIVE represent over 95% of the Company’s operations.

 

USE OF ESTIMATES

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and assumptions include losses for warrant contingencies and the valuation of conversion features in notes.

 

F-7

 

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:

 

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.

 

Level 3 - Unobservable inputs which are supported by little or no market activity.

  

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Derivative instruments include the convertible notes payable derivative liability and warrant liability (Level 2). Derivative instruments are valued using standard calculations/models that are primarily based on observable inputs, including volatilities and interest rates. Therefore, derivative instruments are included in Level 2.

 

Fair-value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2017 and 2016. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, prepaid expenses, accounts payable, accrued liabilities, and notes payable. Fair values for these items were assumed to approximate carrying values because of their short-term nature or they are payable on demand.

 

The following table presents the Company’s fair value hierarchy for assets measured at fair value on a recurring basis at September 30, 2017:

 

   Level 1   Level 2   Level 3   Total 
Assets                    
Cash and cash equivalents  $5,360   $-   $         -   $5,360 
Total assets measured at fair value  $5,360   $-   $-   $5,360 
                     
Liabilities                    
Derivative instruments  $-   $1,405,728   $-   $1,405,728 
Total liabilities measured at fair value  $-   $1,405,728   $-   $1,405,728 

 

The following table presents the Company’s fair value hierarchy for assets measured at fair value on a recurring basis at September 30, 2016:

 

   Level 1   Level 2   Level 3   Total 
Assets                    
Cash and cash equivalents  $     -   $   -   $     -   $- 
Total assets measured at fair value  $-   $-   $-   $- 
                     
Liabilities                    
Derivative instruments  $-   $2,755,544   $-   $2,755,544 
Total liabilities measured at fair value  $-   $2,755,544   $-   $2,755,544 

  

F-8

 

 

CONCENTRATION

 

Credit Risk

 

At times, the Company maintains cash balances at a financial institution in excess of the FDIC insurance limit. In addition, at we extend credit to customers in the normal course of business, after we evaluate the credit worthiness. The Company does not expect to take any unnecessary credit risks causing significant write-offs of potentially uncollectible accounts. 

 

Customers

 

There were no customer concentrations during the years ended September 30, 2017 and 2016.

 

Suppliers

 

All purchases were from one (1) supplier during the years ended September 30, 2017 and 2016.

 

REVENUE RECOGNITION

 

The Company recognizes revenues from product sales when (a) persuasive evidence that an agreement exists; (b) the products have been delivered; (c) the prices are fixed and determinable and not subject to refund or adjustment; and (d) collection of the amounts due is reasonably assured. Revenue is recorded when sales orders are shipped.

 

ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. The Company considers the following factors when determining if collection of required payments is reasonably assured: customer credit-worthiness; past transaction history with the customer; current economic industry trends; changes in customer payment terms; and bank credit-worthiness for letters of credit. If the Company has no previous experience with the customer, the Company may request financial information, including financial statements or other documents, to determine that the customer has the means of making payment. The Company may also obtain reports from various credit organizations to determine that the customer has a history of paying its creditors. If these factors do not indicate collection is reasonably assured, revenue is deferred as a reduction to accounts receivable until collection becomes reasonably assured, which is generally upon receipt of cash. If the financial condition of the Company’s customers was to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.

 

INVENTORY

 

Inventory is valued at the lower of cost or market, as determined primarily by the average cost inventory method, and are stated using the first-in, first-out (FIFO) method. Management will record a provision for loss for obsolete or slow moving inventory to reduce carrying amounts to net realizable value.

 

F-9

 

 

IMPAIRMENT OF LONG-LIVED AND PURCHASED INTANGIBLE ASSETS

 

The Company has adopted Accounting Standards Codification (“ASC”) 350 “Intangibles - Goodwill and Other.” The Statement requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undercounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 350 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

 

Long-lived assets, such as fixed assets and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to undiscounted future net cash flows the asset is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair market value. Estimates of expected future cash flows represent management’s best estimate based on currently available information and reasonable and supportable assumptions. Any impairment recognized is permanent and may not be restored. During the years ended September 30, 2017 and 2016, the Company recorded impairments on $0 and $123,150 of its trademarks, respectively, as its expected cash flows did not exceed its carrying amounts and none towards its trademarks as its expected future cash flows are in excess of their carrying amounts.

 

RESEARCH AND DEVELOPMENT

 

Research and development costs are expensed as incurred. The costs of materials and equipment that will be acquired or constructed for research and development activities, and that have alternative future uses, both in research and development, marketing or sales, will be classified as fixed assets and depreciated over their estimated useful lives. To date, research and development costs include the research and development expenses related to prototypes of the Company’s products. During the years ended September 30, 2017 and 2016, research and development costs were $0 and $47,648, respectively.

 

CONVERTIBLE DEBT AND EMBEDDED DERIVATIVES

 

The Company accounts for embedded conversion features (“ECF”s) in convertible notes in accordance with ASC 815. ASC 815 generally requires companies to bifurcate ECFs in convertible notes from their host instruments and to account for them as free standing derivative financial instruments.

 

The Company has evaluated the terms and conditions of the convertible note under the guidance of ASC 815. The conversion features did not meet the definition of “indexed to a company’s own stock” provided for in ASC 815 since the conversion prices are adjustable based on the passage of time or certain events that are out of the Company’s control, including certain events of default. These convertible instruments have no explicit limit on the number of shares that the holder can convert into. When these ECF’s exist, we report the ECF as a derivative liability, at fair value under ASC 815 “Derivatives and Hedging”. The excess of fair value of the embedded conversion feature, together with the original issue discounts and issue costs over the face value of the debt, is recorded as an immediate charge in the accompanying statements of operations and cash flows. Each reporting period, the Company will compute the estimated fair value of derivatives and record changes to operations. The discounts are accreted over the term of the debt, which is generally nine months after the notes become convertible, using the effective interest method. We accounted for the ECFs in all of our convertible notes as derivative liabilities during the years presented.

 

 The Company estimates the fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with objectively measuring fair values. In selecting the appropriate technique, consideration is given to, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, the Company generally uses the Black-Scholes option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, the Company’s operating results will reflect the volatility in these estimate and assumption changes.

 

ASC 470-50, Extinguishments, require entities to record an extinguishment when the terms of the original note are significantly modified, defined as a greater than 10% change in expected cash flows. Significant modifications accounted for as extinguishments are reported as a loss in the accompanying statements of operations.

 

F-10

 

  

EARNINGS / LOSS PER COMMON SHARE

 

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed by dividing net income available to common shareholders by the combination of dilutive common share equivalents, comprised of shares issuable under the Company’s share-based compensation plans and the weighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money share equivalents, which are calculated, based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of an award, if any, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the estimated tax benefits that would be recorded in paid-in capital, if any, when an award is settled are assumed to be used to repurchase shares in the current period.

 

The following is a summary of outstanding securities that would have been included in the calculation of diluted shares outstanding since the exercise prices did not exceed the average market value of the Company’s common stock had the Company generated net income for the years ended September 30, 2017 and 2016:

  

   For the
Year Ended
   For the
Year Ended
 
   September 30,   September 30, 
   2017   2016 
Series A Preferred stock   500,000    500,000 
Convertible notes   131,612,863    878,368,698 
    132,112,863    878,868,698 

  

The Company does not have sufficient shares to accommodate the series A preferred stock and convertible notes, thus, the amounts reflected above are those that bring total to the amount authorized of one billion. If all holders were to convert, the Company would have outstanding shares in excess of two billion as of September 30, 2017. 

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers”, which supersedes most of the current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. This guidance is effective for the Company in the first quarter of fiscal year 2018 and early application is not permitted. Entities must adopt the new guidance using one of two retrospective application methods. The Company is currently evaluating the standard but does not expect it to have a material impact on our financial position, results of operations or cash flows.

 

The Financial Accounting Standards Board issues Accounting Standard Updates (“ASUs”) to amend the authoritative literature in Accounting Standards Codification (“ASC”). There have been a number of ASUs to date that amend the original text of ASC. The Company believes those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.

  

RISKS AND UNCERTAINTIES

 

The Company has issued several convertible notes which are generally convertible after 180 days. The notes have conversion features that adjustable over time or in the event of certain events of default, many of which are out of the control of the Company’s management. The adjustment provisions do not explicitly limit the number of shares the notes are convertible into. Each of the Company’s convertible note holders is entitled to a “share reserve” per their agreements with the Company which entitle them to reserve a certain allotment of common stock out of the authorized but unissued common stock of the Company for future conversions of their notes. The Company is further obligated under the agreements to increase the Company’s authorized share count to accommodate for a sufficient amount of share reserves. Due to the declining market price of the Company’s common stock, the note holders have reserve claims in excess of the common stock authorized at this time. The inability of the Company to meet its share reserve obligations may be considered a technical violation of their agreements with the note holders. The Company’s ability to issue common stock other than those presently allocated to note holders is restricted during this time, since we have lost the ability to increase the share reserves due to the significantly increased outstanding held by convertible note holders and a shareholder vote is required to increase the authorized amount of shares the Company may issue. Further, the combination of limited capital and depleted share reserves have severely damaged the Company’s ability to fund operations or enable us to seek mergers or acquisitions. Also, see Note 2 Going Concern below.

 

F-11

 

 

NOTE 2. GOING CONCERN

 

VAPE’s consolidated financial statements reflect a net loss of $1,326,760 during the year ended September 30, 2017. As of September 30, 2017, we had $5,360 of cash, a working capital deficit of $3,812,094, and an accumulated deficit of $36,351,428. In addition, the ongoing need to obtain financing to fund operations also raise substantial doubt about the ability of Vape to continue as a going concern. Management expects to obtain funding for the new operations for the foreseeable future; however, there are no assurances that the Company will obtain such funding. VAPE’s financial statements do not include any adjustments to reflect the possible effects on recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability to continue as a going concern. See Note 9 for subsequent events regarding financing activities.

 

NOTE 3. ACCRUED EXPENSES

 

The following is a summary of accrued expenses as of September 30, 2017 and 2016:

 

   September 30,
2017
   September 30,
2016
 
Accrued interest  $303,766   $183,390 
Accrued interest - related party   59,774    43,162 
Accrued wages and taxes   692,124    324,086 
Other   4,359    5,356 
   $1,060,023   $555,994 

 

As of September 30, 2017, $25,000 for Kyle Tracey, $16,667 for Joe Andreae, $63,742 for Mike Cook, $206,381 for Allan Viernes, $208,048 for Benjamin Beaulieu, $51,333 for Alex Viernes and $65,000 for Justin Braune are recorded in accrued wages.

 

NOTE 4. CONVERTIBLE NOTES PAYABLE

 

At September 30, 2017, convertible notes payable consisted of the following:

  

Counterparty  Principal Amount   Unamortized Discount   Carrying Value   Accrued Interest   Derivative Liability   Interest Expense 
GHS Investments  $281,284   $25,949   $255,335   $240,341   $590,552   $180,356 
Typenex   449,166    62,500    386,666    63,425    815,176    369,504 
   $730,450   $88,449   $642,001   $303,766   $1,405,728   $549,860 

   

During the year ended September 30, 2017, Typenex acquired the Adar Bays, JMJ, and Odyssey Research convertible notes payable.

 

At September 30, 2016, convertible notes payable consisted of the following:

 

Counterparty  Principal Amount   Unamortized Discount   Carrying Value   Accrued Interest   Derivative Liability   Interest Expense 
GHS Investments  $248,926   $88,075   $160,852   $

135,174 

   $1,255,774   $1,323,000 
Adar Bays   187,500    -    187,500    25,042    610,117    153,174 
JMJ Financial   171,666    16,605    155,060    23,174    578,288    211,790 
Union   -    -    -    -    -    90,909 
LG Capital   -    -    -    -    -    91,017 
Odyssey Research   90,000    15,000    75,000    -    311,365    75,341 
   $698,092   $119,680   $578,412   $183,390   $2,755,544   $1,945,231 

 

Redwood

 

On February 10, 2015, the Company issued an unsecured convertible promissory note in the principal amount of $2,000,000 less an OID of $182,000 and transaction expenses of $10,000 for a total purchase price of $1,808,000. The stated rate interest on the note was 10%, per annum and a default rate 22%, per annum. In 2015, the Company received $800,000 under the note with an original issue discount of $148,600 and transaction costs for net proceeds of $651,395.  The note was ultimately convertible into common stock at a discount of 55 % to the lowest trading price during the prior 15 days from the date of notice to convert, since certain events of default occurred. There was no explicit limit on the number of shares that the note is convertible into. During the year ended September 30, 2016, the note holder converted $498,150 of principal and accrued interest into 82,775,494 shares.

 

On February 23, 2016, the note was assigned to GHS Investments (“GHS”), and $36,038 was added to the principal balance and immediately charged to interest expense. The assigned note balance and accrued interest of $93,614 was fully converted into 77,722,625 shares during the year ended September 30, 2016.

   

F-12

 

 

Convertible Note Financings – August 2015

 

In 2015, the Company entered into a series of convertible note financings with an aggregate face value of $646,000 for net proceeds of $541,000. The stated rates of interest on the notes range from 8% to 12%, per annum; one note had a one-time charge of 12% on principal. The notes were subject to default rates of interest of up to 22%, per annum. In the event of default, the principal and accrued interest increased 150%. The notes were convertible into common stock based on a discount of 48% of lowest traded price due to events of default. There was no explicit limit on the number of shares that the note is convertible into.

 

 On March 7, 2016, an August 5, 2015 note with a face value of $112,000, together with accrued interest of $7,806 was assigned to GHS for a total of $119,706. Since the notes were not repaid at 180 days at a premium, the notes were convertible into common stock based on a discount of 45% of the lowest trading price over prior 20 days trading. The assigned note balance and accrued interest of $121,400 was fully converted into 48,223,268 shares during the year ended September 30, 2016.

 

On March 21, 2016, an August 5, 2015 note with a face value of $105,000, together with accrued interest, was assigned to GHS for a total of $125,000.   In the event the notes were not repaid at 180 days at a premium, the notes become convertible into common stock based on a discount of 45% of the lowest trading price over prior 20 days trading, subject to an additional 10% discount in certain events. In the event of default, the note increased 150% of the principal and accrued interest. During the years ended September 30, 2017 and 2016, the assigned note balance and accrued interest of $70,795 and $102,742, respectively, were converted into 36,398,894 and 144,242,185 shares, respectively.

 

See Note 6 for two notes (Union and LG Capital) that resulted in settlements and are included in Settlement Liabilities in the accompanying balance sheet at September 30, 2016 aggregating $322,000.

 

December 15, 2015 Convertible Note

 

On December 15, 2015, an accredited investor provided the Company with $50,000 in additional proceeds under the same terms of their original convertible note with a term of two years in August 2015. A one-time interest charge of 12% and an original issue discount of 10%, aggregating $11,600, was added to the principal of the note. The total face amount of the note was $61,600 as of December 15, 2015. The note was subject to a default rate of interest of 18%, per annum. The note had default penalty of 150% principal and accrued interest. In the event the notes were not repaid at 180 days, the notes become convertible into common stock based on a discount of 60% of the lowest trading price over the 20 days prior to notice of conversion, subject to further adjustment of up to 15% in certain events. There is no explicit limit on the number of shares that the note is convertible into.

 

Upon issuance of the note, the Company recorded the note as a derivative liability at fair value of $144,127, a derivative discount of $61,600, and the excess in fair value of $82,527 to loss from effects of derivatives during the year ended September 30, 2016. On November 1, 2017, the note, together with an August 5, 2015 note held by the same investor and accrued interest, was assigned to Typenex for a total of $128,100. During the years ended September 30, 2017 and 2016, no amounts of this note were converted into shares of common stock.

  

GHS Convertible Note

  

On April 19, 2016, the Company entered into convertible note financing transaction in the principal amount of $193,765, less fees and costs. The convertible note bears interest at the stated rate of 10%, per annum, subject to a default rate of 22%, per annum., and is convertible into common stock of the Company at any time after 180 days from issuance of the note at a conversion price per share equal to 55% of the lowest trading price in the 20 trading days immediately preceding the applicable conversion date. The conversion rate will decrease to 45% or 50% from 55% in certain conditions of default. The Company had the option to prepay the convertible note in the first 180 days from closing subject to a prepayment penalty of 150% of principal plus interest. The maturity date of the convertible note was January 19, 2017.

 

The Company recorded the prepayment penalty of $91,011 as a discount to the convertible note and fully amortized it to interest expense during the year ended September 30, 2016. Due to default, the principal and accrued interest increased by 150%, and the Company recorded $99,556 to interest expense during the year ended September 30, 2017. As of September 30, 2017, the entire amount was included within unpaid principal and accrued interest.

 

Upon issuance of the note, the Company recorded the note as a derivative liability at fair value of $566,977, a discount of $176,150, and the excess in fair value of the embedded conversion feature of $390,827 to loss from effects of derivatives during the year ended September 30, 2016. During the years ended September 30, 2017 and 2016, no amounts of this note were converted into shares of common stock.

  

Odyssey Investment

 

On December 10, 2015, an investor purchased $90,000 in common stock at a purchase price equal to 90% of the average of the closing prices of the common stock for the three (3) trading days immediately preceding the date that is six (6) months from the date of the agreement. As of June 7, 2016, the Company entered into an agreement for proceeds of $90,000 to be recorded as a convertible note payable with a conversion feature of 55% of the lowest trading price for the prior twenty (20) days. The Company recorded the ECF in the note as a derivative liability at estimated fair value of $118,722, a derivative discount of $90,000, and the excess in fair value of $28,722 to loss from effects of derivatives during the year ended September 30, 2016.

  

F-13

 

 

Securities Purchase Agreement with Typenex Co-Investment, LLC

 

On November 1, 2016, the Company closed a Securities Purchase Agreement (the “Typenex Agreement”) with Typenex. Pursuant to the Typenex Agreement, Typenex purchased a Convertible Promissory Note from the Company in the original principal amount of up to $1,413,000 (the “Typenex Note”), at an interest rate of ten percent (10%) per annum. The Typenex Note is unsecured. The principal amount of the Typenex Note included an original issue discount of $128,000 and a transaction fee of $5,000.

  

The investment from Typenex was scheduled to occur in a series of sixteen (16) tranches, represented each by a separate Secured Investor Promissory Note (the “Tranche Notes”) in varying amounts. The first Tranche Note of $40,000 was memorialized in Secured Promissory Note #1, the funding of which occurred on or immediately after the execution of the Typenex Agreement; net proceeds of $235,500 were received during the year ended September 30, 2017. As a result of the funding, the Company recorded a loss from effects of derivative liabilities of $374,665 during the year ended September 30, 2017. The Company recorded a derivative discount of $235,500 against the convertible note payable. The remaining discount will be amortized to interest expense during the year ended September 30, 2018.

  

Each Tranche Note, or any part of it, is convertible into common stock of the Company. The Conversion Price is as described in the Typenex Agreement and is based on at least a 45% discount, and up to 55% discount based on events of default, to the trading price during the prior 20 days of notice of intent to convert by the holder into the Company’s common stock.

 

As a part of the Typenex Agreement, the Company agreed to use its best efforts to cause its authorized but unissued stock to be increased in order for the Company to create a reserve sufficient to meet its conversion obligations under the Typenex Note. The Company is in the process of taking steps in order to increase its authorized but unissued stock to meet its obligations of approximately 450,000,000 shares as of September 30, 2017. The Company is in default and accrued interest at the default rate of twenty-two percent (22 %) per annum. Due to default, the principal and accrued interest increased by 115%. As a result of these default events, the Company recorded $118,187 to interest expense during the year ended September 30, 2017. As of September 30, 2017, the entire amount was included within unpaid principal and accrued interest.

  

During the years ended September 30, 2017 and 2016, Typenex converted original and assigned notes totaling $126,826 and $265,860, respectively, of principal and accrued interest into 87,302,137 and 72,136,082 shares of common stock, respectively.

  

Securities Purchase Agreement with GHS Investments, LLC 

 

On October 28, 2016, the Company closed a Securities Purchase Agreement (the “GHS Purchase Agreement”) with GHS. Pursuant to the GHS Purchase Agreement, GHS agreed to purchase and the Company agreed to sell up to $1,105,000 of convertible securities, in the form of a Convertible Promissory Note (the “GHS Note”), at an interest rate of ten percent (10%) per annum. The GHS Note included a ten percent (10%) original issuance discount (i.e., $100,000) and a $5,000 initial transaction fee, as defined in the GHS Purchase Agreement. Upon the closing of the GHS Purchase Agreement, GHS funded $40,000 to the Company (the “Initial Tranche”). Within 15 days of certain conditions being met, an additional $40,000 shall be disbursed by GHS to the Company, in its sole discretion (“Second Tranche”). Within 30 days from the Second Tranche’s issuance, so long as there are no defaults under the GHS Note, GHS in its discretion may fund an additional $50,000 to the Company every 30 days (“Subsequent Tranches”) until $1,000,000 has been funded to the Company. During the year ended September 30, 2017, GHS provided net proceeds of $38,000. As a result of the funding, the Company recorded a loss from effects of derivative liabilities of $363,010 during the year ended September 30, 2017. The Company recorded a derivative discount of $38,000 against the convertible note payable and amortized the entire amount to interest expense during the year ended September 30, 2017.

 

The principal sum and corresponding interest due to GHS shall be prorated based on the consideration actually paid by GHS to the Company in accordance with the GHS Purchase Agreement. 

 

Each Tranche Note, or any part of it, is convertible into common stock of the Company. The Conversion Price is as described in the GHS Purchase Agreement and is based on at least a 45% discount, and up to 55% discount based on events of default, to the lowest trading price during the prior 20 days of notice of intent to convert by the holder into the Company’s common stock.

 

As a part of the GHS Purchase Agreement, the Company agreed to use its best efforts to cause its authorized but unissued stock to be increased in order for the Company to create a reserve sufficient to meet its conversion obligations of approximately. The Company is in default and accrued interest at the default rate of twenty-two percent (20%) per annum.

 

There is no guarantee that GHS will fund the remainder of the Subsequent Tranches and in fact it is within GHS’s sole and absolute discretion whether it ultimately funds the Subsequent Tranches. Should GHS decide it won’t fund the Subsequent Tranches, the Company’s operating results will suffer and its ability to remain a going concern will be jeopardized.

  

During the years ended September 30, 2017 and 2016, GHS converted original and assigned notes totaling $214,846 and $549,583, respectively, of principal and accrued interest into 158,462,022 and 394,470,363 shares of common stock, respectively.

 

The following weighted average variables were used in the Black Scholes model for all the derivative liabilities as of September 30, 2017 and 2016:

 

Balance Sheet Date  Stock
Price at
Valuation Date
   Dividend
Yield
   Exercise
Price
   Risk Free
Interest
Rate
   Volatility   Average
Life
 
September 30, 2017  $0.002    -%  $0.001    1.47%   118%   0.5 
September 30, 2016  $0.004    -%  $0.001    0.45%   298%   0.5 

 

F-14

 

 

NOTE 5. RELATED PARTY DEBT

 

Related Party Note Payable

 

The Company had outstanding accounts payable balance to a related party (shareholder of the Company) in the amount of $15,000 as of September 30, 2013. This payable was converted into a note payable on December 7, 2013. The note payable bears interest of 6% per annum with a maturity date of December 1, 2016. As of September 30, 2017, there is $3,473 in accrued interest expense related to this note and the Company recorded $913 in interest expense related to this note during the years ended September 30, 2017 and 2016.

 

Related Party Convertible Notes Payable

 

On December 10, 2015, the Company entered into two Secured Series B Preferred Stock Convertible Notes (the “Series B Notes”) for an aggregate principal of $300,000 including 1) $50,000 from Hive Ceramics, LLC in new capital to the Company and 2) an amended and restated note for Hive Ceramics LLC in the amount of $250,000 for capital previously contributed which is soon to be due and payable.

 

The Company failed to pay the Series B Note and the Amended Note on the Maturity Date (December 10, 2016). On December 15, 2016, the Company received a Notice of Default from counsel for Holder. Holder’s counsel demanded that all amounts owed under the Series B Note and the Amended Note be paid no later than December 20, 2016. The Company was unable to pay the demanded amounts by December 20, 2016. The Company believes that the Holder intends to execute on the security for the Series B Note and the Amended Note, namely, all of the assets of the Company. The Company is attempting to negotiate a resolution that does not include seizure of the Company’s assets however there is no guarantee that the Company will be able to work out a satisfactory resolution that does not include seizure of the Company’s assets.

 

The Series B Notes accrue interest at eight percent (8%) per annum, mature one (1) year from issuance and are secured by all of the assets and property of the Company. Upon the election of the noteholder, the Series B Notes are convertible into newly created Series B Preferred Stock on a one-for-one (1:1) basis into shares of common stock of the Company at a fixed price per share of $0.01.

 

Concurrently, the Company filed a Certificate of Designation with the Delaware Secretary of State on the Series B Preferred Stock which provides, in pertinent part, for the following rights and privileges:

 

Authorized Amount of Series B Preferred Stock: There are authorized 30,000,000 shares of Series B Preferred Stock, subject to the Certificate of Designation. There shall be no additional Series B Shares authorized or issued.

 

Voting Rights: Each share of Series B shall be entitled to five (5) votes for every one (1) vote entitled to each share of Common Stock.

 

F-15

 

  

Rank: All shares of Series B shall rank (i) senior to the Company’s Common Stock, (ii) pari passu with all other series of preferred stock whether currently outstanding or hereafter created, including the Series A Preferred Stock, and specifically ranking, by its terms, on par with Series B, and (iii) junior to any class or series of capital stock of the Company hereafter created specifically ranking, by its terms, senior to the Series B, in each case as to the distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.

 

On May 24, 2017, Iliad Research and Trading purchased $100,000 of the Series B convertible note payable for $125,000 with the reserve to convert into common stock at 58% of the lowest trading price of the previous thirteen (13) days. During the year ended September 30, 2017, $126,826 of the note and accrued interest were converted into 87,302,137 shares of common stock. As a result of the purchase, the Company recorded a loss from effects of derivative liabilities of $93,325 during the year ended September 30, 2017. The Company recorded a derivative discount of $125,000 against the convertible note payable and amortized the entire amount to interest expense during the year ended September 30, 2017.

 

During the year ended September 30, 2017, the Company recorded $15,700 of interest expense related to the Series B Notes. As of September 30, 2017, $200,000 of the Series B Notes along with $56,302 of accrued interest are outstanding. The Board of Directors authorized the designation of the Series B Preferred Stock pursuant to the authority of the Certificate of Incorporation, which confers said authority on the Board, and the issuance of the Series B Notes pursuant to a unanimous written consent of the Board dated December 10, 2015. The value ascribed to the Series B Notes were based on the fixed conversion price of the instruments into common stock and such no beneficial conversion feature was recorded. 

 

Subsequent to the year ended September 30, 2017, on April 28, 2018, subsequent to the period covered by this filing, the Company received a Notice of Default from Hive Ceramics and Kyle Tracey (the “Notice”) with respect to the Company’s breach of the Settlement Agreement and Release, dated as of April 28, 2017. The breaches consist of failure to pay $234,000 owed under the Tracey Note and failure to pay the $7,000 monthly payment obligations set forth in the Settlement Agreement, and $216,222 owed for failure to repay the Hive Note. The Company has not been able to resolve the defaults set forth in the Notice and Hive/Tracey have been informed the Company will hand over possession of the Hive Assets when arrangements can be made. Concurrently, the Company has proposed to enter into a Sales Representative Agreement whereby the Company may continue to sell Hive products for a period of 12 months on a non-exclusive basis in exchange for a commission on net sales. The HIVE/Tracey Settlement Agreement and Release documents are qualified in their entirety by reference to the full text of the agreements, copies of which were filed on Company’s Current Report on Form 8-K May 3, 2017 as Exhibit 10.1.

  

Legal Fees

 

During the year ended September 30, 2017, the Company’s law firm waived fees of $122,000, which has been included as a reduction of general and administrative expenses. The law firm was a former shareholder of the Company.

  

NOTE 6. COMMITMENTS AND CONTINGENCIES

 

Settlement LiabilitIES

 

On or about December 1, 2016, LG Capital Funding, LLC (“LG Capital”) obtained a judgment in the amount of $151,000. On or about December 10, 2016, the Company learned that LG Capital had placed a judgment lien on the Company’s operating account. The effect of the lien was that the Company’s operating account was frozen for an amount twice the judgment, or approximately $300,000. As a result, during the year ended September 30, 2016, the Company recorded a settlement liability of $151,000. In or around December 2016 and continuing into early January 2017, GHS and LG Capital negotiated a transaction whereby GHS purchased the rights to the LG Capital Convertible Promissory Note and/or the right to collect on the LG Capital judgment. On or about January 10, 2017, GHS and the Company entered into a Convertible Promissory Note in the amount of $161,000 which represented that amount paid by GHS to LG Capital. On January 25, 2017, the Company issued 32,700,000 shares of common stock in satisfaction of the debt.

 

On February 22, 2016, a convertible promissory note holder, Union Capital, LLC (“Union”), filed suit against the Company in the United States District Court for the Southern District of New York claiming breach of contract and conversion and seeking specific performance, permanent injunction, and damages arising from the Company’s rejection of certain conversion notices submitted by Union. The Company and Union settled this matter in July 2017 without further court proceedings for $170,000.  On or about July 21, 2017, GHS purchased the settlement amount from Union, and entered into a Convertible Promissory Note with the Company in the amount of $170,000, which represented that amount paid by GHS to Union. During the year ended September 30, 2017, $144,051 of the note and accrued interest were converted into 122,063,128 shares of common stock. As a result of the purchase, the Company recorded a loss from effects of derivative liabilities of $221,260 during the year ended September 30, 2017. The Company recorded a derivative discount of $170,000 against the convertible note payable and amortized $144,051 to interest expense during the year ended September 30, 2017, resulting in an unamortized discount of $25,949 as of September 30, 2017.

F-16

 

  

Justin Braune v. Vape Holdings, Inc. et.al.

 

On May 16, 2017, Justin Braune, the Company’s former Chief Executive Officer filed a civil lawsuit in Los Angeles County Superior Court against the Company, Allan Viernes and Ben Beaulieu claiming breach of Mr. Braune’s employment contract, including, but not limited to failure to pay wages including deferred salary and commissions, and wages upon separation of employment and seeking damages arising from the Company’s breach. The Company and Justin Braune subsequently settled this matter without further court proceedings. On September 25, 2017, the parties participated in a full-day mediation and agreed to settle and resolve all matters including the lawsuit. On December 6, 2017, the parties entered into a Settlement Agreement whereby, the Allan Viernes and Ben Beaulieu 1) shall pay the sum of $15,000 by December 8, 2017 and the Company shall, 2) $40,000 on or before December 31, 2018, and 3) a convertible promissory note in the amount of $100,000. The convertible note and/or any shares issued in connection shall have a buyout cash value of no less than 125% of the cash value. The Company recorded a provision for loss of approximately $100,000 during the year ended September 30, 2016, which remained recorded in settlement liabilities at both September 30, 2017 and 2016 year end.

 

See Note 5 for discussion of Kyle Tracey and HIVE activity and litigation.

 

NOTE 7. INCOME TAXES

 

The following table presents the current and deferred income tax provision for federal and state income taxes for the years ended September 30, 2017 and 2016:

  

   2017   2016 
Current tax provision (benefit):        
Federal  $-   $- 
State   -    1,800 
Total   -    1,800 
Deferred tax provision (benefit)          
Federal   (399,000)   (790,000)
State   -    - 
Valuation allowance   399,000    790,000 
Total   -    - 
Total provision (benefit) for income taxes  $-   $1,800 

  

Reconciliations of the U.S. federal statutory rate to the actual tax rate for the years ended September 30, 2017 and 2016:

  

   2017   2016 
US federal statutory income tax rate   (34.0)%   (34.0)%
State tax net of benefit   (6.0)%   (6.0)%
    (40.0)%   (40.0)%
           
Permanent differences:          
Stock-based compensation   0.00%   0.03%
Amortization of debt discounts and non-cash interest   15.5%   12.1%
Non-deductible gains and losses   (5.6)%   12.2%
Increase in valuation allowance   30.1%   15.4%
Effective tax rate   -%   -%

  

The Company incurred certain non-cash transactions which are not includable or deductible for income tax reporting purposes, such the change in fair value of warrant liability, certain stock-based compensation and accretion of debt discounts.

 

F-17

 

 

The components of the Company’s deferred tax assets and (liabilities) for federal and state income taxes as of September 30, 2017 and 2016:

  

   As of September 30, 
   2017   2016 
Current deferred tax assets (liabilities):        
Accrued expenses and other  $-   $- 
Total current deferred tax assets   -    - 
Non-current deferred tax assets and liabilities:          
Property, plant and equipment   -    - 
Net operating losses   1,856,000    1,457,000 
Total non-current deferred tax assets   1,856,000    1,457,000 
Valuation allowance   (1,856,000)   (1,457,000)
Total non-current deferred tax assets   -    - 
Net deferred tax assets  $-   $- 

   

During the years ended September 30, 2017 and 2016 the valuation allowance decreased and increased by $399,000 and $790,000, respectively. At September 30, 2017, the Company had approximately $4,643,000 of federal and state gross net operating losses allocated to continuing operations available. The net operating loss carry forwards, if not utilized, will begin to expire in 2034 for federal purposes and 2032 for state purposes.

 

Based on the available objective evidence, including the Company’s limited operating history and current liabilities in excess of assets, management believes it is more likely than not that some of the net deferred tax assets, specifically certain net operating losses, at September 30, 2017 will not be fully realizable. In addition, subsequent to year end significant shares were issued to shareholders in connection with the conversion of notes payable and a subscription for the purchase of common stock. In connection, with these issuances the Company determined that the historical NOLs have probably been impaired due to IRS Section 382 limitations. Due to the uncertainty surrounding realization of the remaining deferred tax assets, specifically the NOLs, the Company has provided a valuation allowance of $1,856,000 and $1,457,000 against its net deferred tax assets at September 30, 2017 and 2016, respectively. We will continue to monitor the recoverability of our net deferred tax assets.

 

As of September 30, 2017 and 2016, the Company had a California minimum state tax liability of $800 per entity or approximately $2,400.

   

The Company has not filed all United States Federal and State tax returns since 2014. The Company has identified the United States Federal tax returns as its “major” tax jurisdiction. The United States Federal return years since the last ones that were filed are still subject to tax examination by the United States Internal Revenue Service; however, we do not currently have any ongoing tax examinations. The Company is subject to examination by the California Franchise Tax Board from 2014 on and currently does not have any ongoing tax examinations.

  

NOTE 8. STOCKHOLDERS’ DEFICIT

 

COMMON STOCK

 

On November 15, 2013, the Board and shareholders approved an increase in the authorized number of shares of common and preferred stock which may be issued by the Company to 1,000,000,000 shares and 100,000,000 shares, respectively.  On December 3, 2013, the certificate of amendment was filed with the Secretary of State of Delaware to reflect the increase in authorized.

 

F-18

 

 

PREFERRED STOCK

 

On April 1, 2014, the Board formally approved the filing of a Preferred Stock Designation in connection with the commitment of 500,000 Series A Shares to HIVE on March 27, 2014 pursuant to its authority to issue blank check preferred stock as provided in the Company’s Certificate of Incorporation.  Per the Certificate of Designation (the “Designation”), there are 100,000,000 shares of preferred stock authorized by the Company’s Certificate of Incorporation. The Company is authorized to issue 500,000 shares of Series A Shares pursuant to the Designation.  As provided in the Designation (and as set forth in the HIVE Asset Purchase Agreement), Series A Shares are entitled to vote at a 15-1 ratio to Common Stock.  Each share of preferred stock shall initially be convertible into one share of common stock (500,000 shares of common stock in the aggregate).  On the two-year anniversary of the transaction of HIVE, the preferred stock conversion ratio shall be adjusted as follows: a one-time pro rata adjustment of up to ten-for-one (10-1) based upon the Company generating aggregate gross revenues over the two years of at least $8,000,000 (e.g. If the Company generates only $4,000,000 in aggregate gross revenues over the two-year period then the convertible ratio will adjust to 5-1). In no event will the issuance convert into more than 5,000,000 shares of common stock of the Company.

 

On June 19, 2014, the Company formally issued the 500,000 Series A Shares to HIVE.

 

The value ascribed to the Series A Shares was based on the historical costs of the assets acquired on March 27, 2014 from HIVE since the transfer of assets was made among entities under common control.

  

On December 10, 2015, the Company approved the filing of a Preferred Stock Designation for up to 30,000,000 shares of Series B Preferred Stock. No Series B Preferred Stock are issued or outstanding. See discussion of designation of Series B Preferred Stock in Note 5.

  

The Company’s conversions of debt and accrued interest include derivative liabilities associated with the embedded conversion features.

 

NOTE 9. SUBSEQUENT EVENTS

 

HIVE

 

See Note 5 for discussion of Kyle Tracey and HIVE activity subsequent to year end.

 

Justin Braune

 

On April 4, 2018, Braune filed an Ex Parte Application for an Order to Enter Judgment Against the Company for breach of the Settlement Agreement for failure to pay under the terms of the Settlement Agreement, which the Court granted in favor of Braune. The Ex Parte Application was denied.

 

On May 23, 2018, Braune brought a different Ex Parte Application for Appointment of a Receiver. The hearing was held on May 23, 2018, during which the Company submitted papers opposing the appointment, and which ultimately resulted in the Court denying Braune’s application. The Ex Parte Application was denied. There is a motion to appoint receiver scheduled for November 13, 2018.

 

Common Stock Issued for Conversion of Debt

 

Subsequent to September 30, 2017, the Company issued 132,697,863 shares of common stock for conversion of $217,331 of notes payable and accrued interest. As of the date of this filing, the Company has 1,000,000,000 shares of common stock outstanding.

 

F-19

 

 

INDEX OF EXHIBITS

 

Exhibit No.   Description of Exhibit
3.1   Certificate of Incorporation of Vape Holdings, Inc., as amended, placed into effect on January 2, 2009, incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (Registration No. 333-163290) filed with the SEC on November 23, 2009.
3.2   Amended and Restated By-laws of Vape Holdings, Inc., incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (Registration No. 333-163290) filed with the SEC on November 23, 2009.
3.3   Certificate of Designation for Series A Preferred Stock, incorporated by reference to Exhibit 2.1(E) to the Company’s Current Report on Form 8-K filed with the SEC on February 28, 2014.
3.4   Certificate of Designation for Series B Preferred Stock, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 11, 2015.
10.1   Securities Purchase Agreement entered into by and between Vape Holdings, Inc. and Redwood Management, LLC dated February 10, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on February 17, 2015.
10.2   Unsecured Convertible Promissory Note entered into by and between Vape Holdings, Inc. and Redwood Management, LLC dated February 10, 2015, incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on February 17, 2015.
10.3   Executive Employment Agreement by and between Vape Holdings, Inc. and Dr. Mark Scialdone, dated May 1, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 5, 2015.
10.4   Form of Stock Surrender Agreement Stock, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 15, 2015.
10.5   Form of Option Surrender Agreement, incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 15, 2015.
10.6   Share Exchange Agreement by and between Vape Holdings, Inc. and BetterChem Consulting, Inc., dated July 1, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 1, 2015.
10.7   Intellectual Property Rights Transfer Agreement by and between Vape Holdings, Inc. and BetterChem Consulting, Inc., dated July 1, 2015, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 1, 2015.
10.8   Form of Securities Purchase Agreement, dated August 5, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 11, 2015.
10.9   Form of 8% Note, dated August 5, 2015, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 11, 2015.
10.10   Form of Back End Note, dated August 5, 2015, incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on August 11, 2015.
10.11   Form of Collateralized Note, dated August 5, 2015, incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on August 11, 2015.
10.12   12% Note I, dated August 5, 2015, incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on August 11, 2015.
10.13   12% Note II, dated August 5, 2015, incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the SEC on August 11, 2015.
10.14   Securities Purchase Agreement, dated August 12, 2015, by and between Darling Capital LLC and the Company, incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 14, 2015.

 

E-1

 

  

Exhibit No.   Description of Exhibit
10.15   8% Convertible Promissory Note, dated August 12, 2015, by and between Darling Capital LLC and the Company, incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 14, 2015.
10.16   Amendment, Waiver and Modification Agreement, dated August 13, 2015, by and among the Company and Redwood Management, LLC including any designees or assignees thereto, incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 14, 2015.
10.17   Amendment to Unsecured Convertible Promissory Note, dated August 26, 2015, by and between Vape Holdings, Inc. and Typenex Co-Investment, LLC, incorporated by reference to Exhibit 10.17 to Form 10-K for the year ended September 30, 2016 filed with SEC on March 7, 2018.
10.18   Form of Option Surrender Agreement, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 22, 2015.
10.19   Form of Stock Surrender Agreement Stock, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on October 22, 2015.
10.20   Secured Series B Preferred Stock Convertible Promissory Note by and between the Company and Hive Ceramics LLC, dated December 10, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 11, 2015.
10.21   Amended and Restated Secured Series B Preferred Stock Convertible Promissory Note by and between the Company and Hive Ceramics LLC, dated December 10, 2015, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on December 11, 2015.
10.22   Executive Employment Agreement, dated December 10, 2015, by and between the Company and Justin Braune, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 11, 2015.
10.23   Consulting Agreement, dated December 10, 2015, by and between the Company and Kyle Tracey, incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed with the SEC on December 11, 2015.
10.24   Common Stock Purchase Agreement, dated December 10, 2015, by and between Vape Holdings, Inc. and Odyssey Research and Trading, LLC. , incorporated by reference to Exhibit 10.24 to Form 10-K for the year ended September 30, 2016 filed with SEC on March 7, 2018.
10.25   Forbearance Agreement, dated December 10, 2015, by and between Vape Holdings, Inc. and Typenex Co-Investment, LLC, incorporated by reference to Exhibit 10.25 to Form 10-K for the Company’s Annual Report filed with the SEC on May 20, 2016.
10.26   Share Exchange Unwind Agreement, dated January 12, 2015, by and among Vape Holdings, Inc., BetterChem Consulting, Inc. and Mark Scialdone, incorporated by reference to Exhibit 10.25 to Form 10-K for the Company’s Annual Report filed with the SEC on May 20, 2016.
10.27 Settlement Agreement and Release dated April 28, 2017, entered into by and between Vape Holdings, Inc., HIVE Ceramics, LLC, and Kyle Tracey, filed  as exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the commission on May 3, 2017

 

E-2

 

  

Exhibit No.   Description of Exhibit
14.1   Code of Ethics, dated May 11, 2015, incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on May 15, 2015.
21.1   List of Subsidiaries of Vape Holdings, Inc., incorporated by reference to our Amendment No. 2 to Annual Report on Form 10-K filed with the SEC on May 24, 2016.
31.1   Section 302 Certification of Chief Executive Officer *
31.2   Section 302 Certification of Chief Financial Officer *
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 *
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 *
99.1   Audit Committee Charter, dated May 11, 2015, incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on May 15, 2015.
99.2   Compensation Committee Charter, dated May 11, 2015, incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on May 15, 2015.
99.3   Insider Trading Policy, dated May 11, 2015, incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on May 15, 2015.
101.INS   XBRL Instance Document
101.SCH    XBRL Taxonomy Schema
101.CAL    XBRL Taxonomy Calculation Linkbase
101.DEF    XBRL Taxonomy Definition Linkbase
101.LAB    XBRL Taxonomy Label Linkbase
101.PRE    XBRL Taxonomy Presentation Linkbase

 

*    Filed herewith

 

 

E-3